万科Ｂ(000002)2006年年度报告（英文版）

2006 Annual Report Important Notice: The Board, the Supervisory Committee, Directors, members of the Supervisory Committee and senior management of the Company warrant that in respect of the information contained in this Annual Report, there are no misrepresentations or misleading statements, or material omission, and individually and collectively accept full responsibility for the authenticity, accuracy and completeness of the information contained in this Annual Report. Chairman Wang Shi, Director Yu Liang, Director Chan Zhiyu, Director Shirley L. Xiao, Independent Director Sun Jianyi, Independent Director David Li Ka Fai, Independent Director Judy Tsui Lam Sin Lai attended the board meeting. Deputy Chairman Song Lin, Director Wang Yin, Director Jiang Wei was not able to attend the board meeting in person due to their business engagements and had authorised Director Yu Liang to represent them and vote on behalf of them at the board meeting. Independent Director Li Chi Wing was not able to attend the board meeting in person due to his business engagements and had authorised Independent Director David Li Ka Fai to represent him and vote on his behalf at the board meeting. The Company’s Chairman Wang Shi, Director and General Manager Yu Liang, and Supervisor of Finance Wang Wenjin, declare that the financial report contained in this Annual Report is warranted to be true and complete. To Shareholders…………………………………………………………… ………..… 2 Corporate Information…………………………………………………….……….….. 8 A Summary of Accounting and Operating Data...............…………….............….. 9 Change in Share Capital and Shareholders...…………………………….…………..11 Management and Employees.………………………………………………..……….. 16 Corporate Governance Structure....……………...…………………………………… 23 Introduction to Shareholders’ Meetings……………………….. ………………… … 26 Directors’ Report…………………………………………………………………..……. 27 Report of Supervisory Committee.……………………………………………..……. 58 Significant Events..………………………………………………………………….…… 61 A Chronology of 2006……………………………………………………………… .. …72 Financial Report….……………………………………………………………… …… 74 1 I. To Shareholders The year 2006 is an extraordinary year for China Vanke. The sales revenue, revenue from core business, net profit, area under construction and area completed of the Company increased by more than 50 per cent from that of the previous year, which set off a good start for the Company’s planned rapid development for the three years from 2006 to 2008.In 2006, China Vanke became the first real estate enterprise to be on the list of China’s top 100 taxpayers. The year 2006 was also “The First Corporate Citizen Year” of China Vanke. 2006 was a year of great advancement and missionary zeal. I am very honoured to take this opportunity to share with all the shareholders the progress of development and achievements of the Company during the year. The Secrets of Prosperity In 2006, most of the listed real estate enterprises in China achieved satisfactory results, and their share prices were in general reassessed in the capital market. What has contributed to the prosperity of this industry? Can this state of prosperity be sustained? Why did the capital market have this positive outlook on the industry and was there any ground for this optimism? Perhaps these are questions facing everyone who is concerned about the industry. There are different judgements on and interpretation of this state of prosperity and optimistic view. For China Vanke, the answer to all the questions related to the long-term prospects of the residential property industry lies in the change of demographics. Cutting through the creation and development history of modern economy, one would discover that demographic change is most likely the epitome of economic growth for any economic system institutionalised with a basic form of market economy and where resources are fundamentally free to move around. The development of commerce is actually the process of people gradually gathering and living in a city. Only when there is a high population density can the cost of business transactions be lowered effectively, and a high degree of social division of labour and co-operation can be achieved. Every step a modern economy takes can be traced back to three aspects, namely the upgrade of production technology, the reduction in transaction fee and the intensification of division of labour and co-operation. In the age of globalisation, production technology is actually a type of resources with free movement, while the other two factors are related to the progress of urbanisation. To a certain extent, the history of economy is the history of population and the history of property development is the history of population. Demographic bonus is a distinguished feature of the current population structure of China, and it has enabled China to sustain the world’s strongest economic growth for more than 20 years. Since 1980’s, the working population as a percentage of the total population in China has kept on rising, leading to a continued decline in the dependency rate. The 20 to 60 age range is the wealth creation period. This age group currently accounts for over 60 per cent of the total population in China. It is expected that there will not be any tremendous change in this special population structure for at least 10 2 years. Since the last century, there has been a tendency of the population, with the majority being young people, to move to the coastal areas, making the demographic bonus in the coastal cities to last even longer. Within a period of merely 25 years from 1981 to 2005, the urbanisation rate of China leapt from 20 per cent to 43 per cent. When compared with other developed countries, which have an urbanisation rate of over 80 per cent, there is more room for growth in the urbanisation rate of China. In the next 10-odd years, it is expected that the average annual growth rate of the urbanisation rate of China will remain at 1 percentage point. Needless to say, this projected growth rate in urbanisation will drive tremendous new housing demand. This is the direct impact urbanisation has on the residential property industry. However, demand alone is not enough. Only when demand is supported by people’s purchasing power can it be translated into effective demand in the market. The source of purchasing power is derived from the growth in economy and the wealth of people. Urbanisation drives economic growth, which in turn raises the purchasing power of people. This is how urbanisation indirectly affects the residential property industry. To a certain extent, this indirect impact is more crucial than the direct impact mentioned earlier. In 2006, there were two important signals that should not be ignored. One of them is the significant increase in the earnings of most of the companies in 2006. On examination, the increase in the earnings was mainly caused by enhanced labour productivity. The other signal is that the degree of fairness in income distribution has been raised to an unprecedented high level. Whether we notice it or not, we are living in an extraordinary time. We might have seen miracles, but the grandeur of history has just begun. The coastal area of China is the centre of three major economic circles. Here we witness the birth of the world’s largest urban area in history. Hundreds of millions of individuals or tens of millions of households are moving to this urban area. When they arrive, their bare hands and wisdom may be their only property, but some day, they will become the masters of the city. Provided that the residential property developers have respect for these newcomers and attached importance to them, there will be almost unlimited opportunities for development for the residential property developers during the process when the new arrivals become the masters of the city. This is the real secret of the continued prosperity of this industry. As such, the real estate industry, particularly the residential property market, remains as one of the industries with the greatest growth potential and room for development for at least 10 years in China in general and for at least 20 years in the coastal cities of China. Turning Points The residential property industry in China has a fairly short history of 20 years. Yet it has witnessed two major turning points. In 1998, the welfare-oriented allocation of public housing was abolished in China and the marketisation of housing, mainly commodity housing, commenced. This is the first turning point. Before that, the Chinese residential property industry could only be regarded as being at the 3 primitive development stage. After that, the industry entered into a stage of rapid growth. However, throughout the process of speedy growth, the residential property industry revealed a series of problems. After 1998, the residential property industry had not only grown fast but at a reckless speed. In the face of the problem of scarcity of land for a large population and an astounding rate of acceleration in the progress of urbanisation, and when this young industry suddenly found itself shouldering the responsibility of providing housing for hundreds of millions of urban families, including tens of millions of newly formed households, traditional operating methods, means of production and development model soon encountered the bottleneck problem. How do we satisfy the housing needs of the low and middle-income families at a time of economic transformation and rapid urbanisation? How do we ensure a balanced development and good interaction between investment and consumption and among the various types of consumption? How do we fully utilise financial instruments while ensuring financial security? How do we achieve the sustainable development of the residential property market, lower the consumption of resources and energy resources and promote harmony with the environment? How do we create a win-win situation for the market, generate social benefits, and safeguard the rights of all the related stakeholders? Developed countries have faced all these problems in the course of their development, yet these problems did not emerge all at once in the developed countries as in China. And it is due to this series of problems that the State took macroeconomic austere measures in 2005 and 2006, which in turn propelled the industry to reach the second turning point. After the first turning point, the industry made a breakthrough in quantity, but after the second turning point, the industry will have to improve on quality. What we saw after the first turning point was an industry booming like flowers bloom in the spring season, but after the second turning point, we expect to see the emergence of a market leader following the industry reshuffle. It is true that what emerged after the first turning point were opportunities. However, lying beyond the second turning point are challenges. When we are just about to witness prosperity, we should not only register opportunities, but also challenges; and when we are on the threshold of a turning point, we should not only be able to identify challenges, but also opportunities. If everyone can solve all the problems of a particular period of time, then there would not be any hero. If it had not been the uncharted seas that the crew of Christopher Columbus had explored, then they would not be the one who discovered the new continent. Only at the turning points that are full of challenges will there be the possibility of creating miracles. To achieve this goal, we need to uphold our beliefs and use our wisdom. Key to growth To China Vanke, to the Chinese residential property industry and even from the perspective of the history of the global residential property industry, which set a high benchmark for evaluation, the year 2006 is an epoch-making year. 4 There is a bizarre phenomenon in the global residential property market. As a fact known to everyone, residential property in general is considered to be the most expensive single commodity, as well as the largest single expenditure of most of the people in any market economy. However, no great company has come out of this industry, and never has there emerged any huge commercial giant as in the energy, automobile, home appliance, finance, IT, retail, beverage, and chemical-based daily products industries. Some people come to believe that: owing to the location factor and heterogeneous nature of real estate, the economies of scale enjoyed by the property industry is much less noticeable than that enjoyed by other industries, which explains why a property developer cannot become a great company. In fact, up till 2005, no specialist residential property developer has ever been named to the Fortune 500 list. Construction company and real estate management company had been on the list, but not a specialist residential property developer. However, in 2006, history was made when the top four property developers in the US were on the list. One of them was Pulte Homes, a company that Vanke has set as its goal for the next 10 years. Over the past decade, Pulte Homes has doubled its market share. Yet, this is just the beginning of its ambitious plan. Pulte Homes has recently set acquiring 20 per cent of the US market as its target. If the company achieves this objective, it will become an enterprise making an annual sales revenue of US$100 billion. In the next 10 years, there will be 70 million new families formed in the cities of China. This number is roughly the same as that in the entire country of the US, or the sum of the families in the UK, France and Germany, and is larger than that of the entire country of Japan. It is very likely that China will have the biggest residential property market in the world, and this possibility is basically almost rest assured. And so, what objective and vision should a first-class residential property developer in China have? The size of an enterprise is determined by the economies of scale it achieves and its management cost. The bigger the business, the greater economies of scale it achieves, but it also means that the company will have greater difficulty in management and operation. When the enterprise can no longer leverage its economies of scale to offset the cost incurred due to increasingly difficult managerial challenges, this enterprise has reached its expansion limit. Undoubtedly, residential property as a final product is immovable and cannot be produced in one place and sold in another place. The wide gap between different customers’ demands and different site’s topography and location also lead to the development of a small-scale property project, and even a tailor-made property project. However, an enterprise can achieve its economies of scale through three different ways and not merely from cost reduction through large-scale production. The other two methods include its brand power sustained by good reputation and financing capability supported by its credibility in the capital market. What was happening in the US during the time when the four big residential property developers were reviewed for including in the Fortune 500 list? We see at least three phenomena. First, the pace of industrialisation of the housing sector continues. Although houses are on the whole assembled on site, many elements of the house can be mass-produced in the factory. Second, with increasing demand for 5 quality and price/performance ratio, consumers are more aware of the residential property brand. Third, innovative financing methods keep coming up in the US real estate market after 1980’s. What’s happening in the market is that, big players usually finance their projects through low-cost source of financing such as the issue of bonds, while small companies continue to rely on bank borrowings which carry high interest rate. These three phenomena precisely address the three ways to achieve economies of scale mentioned earlier. At the same time, top-notch US residential property developers gradually become mature, with better skill to manage a large-scale business. Let’s take Pulte Homes as an example. We found that it has a complete set of well-developed customer-oriented management tools. Having learned from Pulte Homes, China Vanke has gradually incorporated these management tools into its own operational management. Compared with the US, China is still far behind in the industrialisation progress of its housing sector and innovation of source of financing in the real estate industry. Chinese residential property developers have not yet the skill to manage large-scale business as their US counterparts, but this will inevitably change after the industry’s second turning point. In 2005, China Vanke put forward that it would enter a stage of rapid growth from 2006 to 2008. This assertion was made not because of an impulse to develop into a big company; otherwise we would not insist on adopting a steady and healthy development strategy when the market last peaked in 2004. It is quality growth that China Vanke has always been pursuing; it had been our goal, and it is our goal, and it will remain our goal in the future. China Vanke made its decision based on the following rationales: first, China Vanke had made a significant improvement in managing its large-scale business after adapting itself to changes between 2001 and 2005; second, China Vanke has a large number of loyal customers, which the Company regards as one of the most important assets it acquired over the years since it has been in the residential property sector, and there has been increasing demand from home buyers for better products and services in recent years; third, although industrialisation in the China’s housing sector has just begun, China Vanke has basically implemented design standardisation; fourth, despite the fact that direct financing is yet available in the property market in China, China Vanke’s credibility in the capital market will be an advantage to the Company when compared with its counterparts in the same sector or even in other industries, and finally, macroeconomic austerity measures will help better regulate the industry and facilitate industry consolidation, making more room for growth of enterprises with an edge in the market. As will be disclosed in this Report, China Vanke, having followed the established plan, made a good start in 2006. An Era of Reforms China’s residential property industry has passed the second turning point, beyond which lies a brand new era. In this agitated era, the industry will undergo a complete restructuring. The industry landscape 6 in the future is expected to vary from that in the past and the present. With respect of the institutional framework, the industry witnesses a tight administrative control on the sale of land and an extremely loosely regulated development market. In the future, the sale, transfer and development of land will call for complete marketisation. A complete institutional system including various measures such as legislation, administration, currency and taxation will be established to address the market entry requirement, supply and demand, and trading activities. On the front of the type of housing, the industry has undergone a very different directional change, from the sudden abolition of allocation of public housing to the mushrooming of commodity housing. What it had witnessed was a polarisation of housing type. However, following the restructuring of the allocation mechanism and the security system, it is expected that various kinds of security-oriented housing and commodity housing will co-exist in the future. The leasing market, second-hand market and the primary market will become the three major markets in the future. From the perspective of the demand and supply relationship, the industry has seen the discrepancy between quantity demanded and quantity supplied, resulting from the consumers’ pursuit of living space and enthusiasm of developers for upmarket property. However, following the shift in focus towards smaller residential units and the implementation of the differentiated tax policy, home buyers in the future will shift their focus on residential floor area to quality of living and price/performance ratio. Premium small and medium residential properties will become the key to success in this market. With regard to competition, the industry was once highly fragmented, with tens of thousands of developers. However, with the emergence of consumers’ power of choice and their preference and the development of primary financing sourcing, industry concentration will continue to rise and leading developers in major markets will find themselves engaged in a brand-focused lean competition. From the perspective of production method, one-off design and workshop production were once the norm in the industry. This backward production method brought along the common problem of quality that was hard to overcome and the slow turnover of assets of companies, which had prompted the companies with an edge in the market to mass-produce their well-developed products. With the change in the series of market survival rules such as product orientation, economies of scale and turnover requirements, what we will see in the future will be residential products with standardised designs and industrialised production. From the point of view of a business model, the industry was once characterised by vertically integrated operation, from land acquisition to property management, by property developers, regardless of their size. However, with the continuous rise in the requirement for efficiency and professionalism, the emergence of joint development, merger, acquisition and restructuring as well as contracting of business, what we will see in the future will be a swift from “small and complete” to intensified division of labour, and from corporations’ internal integration to social integration, as well as a new market landscape marked by large integrated property developers, specialist manufacturing companies, financial institutions, intermediaries. 7 As early as 2004, China Vanke stated that the industry was on the verge of revolutionisation. After a lapse of two years from 2005 to 2006, the signs of the industry’s reform become clearer. Owing to this observation, the corporate mottos of China Vanke for the recent three years are all related to reforms. “Revolutionisation, Leadership, Co-existence” as the corporate motto for the year 2005, “A Reform Pioneer and A Corporate Citizen” for the year 2006, and “Follow the Right Principles, Pursue Meticulous Management” for the year 2007. China Vanke is a corporation that has laid its foundation on a well-defined ideology and core values. In this agitated era of reforms, China Vanke will take up the responsibility of a pioneer without hesitation. This responsibility does not only include that for the implementation of the change in business model and production method, but also includes the responsibility for leading the industry to assume corporate citizen’s social responsibility, for the facilitation of the harmony with society and gaining social respect. However, the walk of thousand miles has to start from this step. It is only by being down-to-earth, and dedicated and attentive to work can one build a lasting company. China Vanke also deeply believes that its dedicated efforts will finally be rewarded by a fair return from the market. Finally, I have to thank every shareholder of China Vanke. It is your trust and support that has made China Vanke glitter in the past. For now and in the future, it is also your trust and support that will encourage China Vanke to keep moving ahead in this agitated era. II. Corporate Information 1. Company Name (Chinese): 万科企业股份有限公司 Company Name (English): China Vanke Co., Ltd. (Vanke) 2. Legal Representative: Wang Shi 3. Secretary of the Company’s Board of Directors: Shirley L. Xiao E-mail Address: IR@vanke.com Securities Affairs Authorised Representative: Liang Jie E-mail Address: IR@vanke.com 4. Contact Address: Vanke Architecture Research Centre, No 63, Meilin Road, Futian District, Shenzhen, the People’s Republic of China 5. Telephone Number: 0755-25606666 Fax Number: 0755-25531696 6. Registered Company Address and Office Address: Vanke Architecture Research Centre, No 63, Meilin Road, Futian District, Shenzhen, the People’s Republic of China Postal Code: 518049 7. Home Page of the Company: http://www.vanke.com E-mail Address: IR@vanke.com 8. Media for Disclosure of Information: “China Securities Journal”, “Securities Times”, “Shanghai Securities News” and an English newspaper in Hong Kong Website for Posting Annual Report: www.cninfo.com.cn 9. Place for Annual Report Collection: The Office of the Company’s Board of Directors 10. Stock Exchange on which the Company’s shares are listed: Shenzhen Stock Exchange 11. Company’s Share Abbreviation and Stock Codes on the Stock Exchange: Vanke A, 000002 Vanke B, 200002 12. First registration date of the Company: 30 May 1984; location: Shenzhen Date of change in registration: 11 July 2006; location: Shenzhen 8 13. Corporate legal person business registration no.: 4403011019092 14. Taxation registration code: Local taxation registration code: 440304192181490 State taxation registration code: 440301192181490 15. The name and address of the Certified Public Accountants engaged by the Company: Name: KPMG Huazhen Certified Public Accountants Address: 8/F, Office Tower E2, Oriental Plaza, 1 East Chang An Avenue, Beijing Name: KPMG Certified Public Accountants Address: 8/F, Prince Building, 10 Charter Road, Central, Hong Kong III. Accounts and Financial Highlights 1、 Three-year financial information summary (Unit: RMB) 2006 2005 2004 Revenue 16,904,430,653 9,920,738,936 7,257,182,725 Operating profit 4,141,671,432 2,100,097,631 1,249,116,468 Share of losses less profits of associates and jointly controlled entities 60,098,192 (2,075,482) (3,840,986) Profit before tax 4,062,295,632 2,078,774,293 1,249,852,248 Taxation (1,639,298,581) (663,124,748) (340,844,929) Profit after tax 2,422,997,051 1,415,649,545 909,007,319 Minority interst (125,113,285) (50,959,692) (34,647,464) Net profit for the year 2,297,883,766 1,364,689,853 874,359,855 Basic earnings per share 0.58 0.39 0.26 Diluted earnings per share 0.57 0.37 0.25 Dividend 0.15 0.15 0.15 2、 Impact of IFRS Adjustments on Net Profit (Unit: RMB) Items Net profit for 2006 As determined pursuant to PRC accounting standards 2,154,639,315 Adjustments to align with IFRS: Recognition and amortisation of negative goodwill (778,683) Recognition and amortisation of goodwill 69,282,301 Deferred tax assets 76,580,139 Revaluation of properties 814,918 Capitalised borrowing costs released to cost of sales (2,654,224) As restated in conformity with IFRS 2,297,883,766 3、 Change in shareholders’ equity during the year under review (Unit: RMB) 9 Convertible Employee Capital Foreign bonds Share-based reserve Statutory Fair value Item Share capital Share premium exchange reserve compensation arising from reserves reserves reserve reserve stepped acquisition At the start of 3,722,687,670 1,102,612,584 15,304,585 2,862,371,514 36,838,020 the year Increase during the 647,211,081 4,447,434,097 6,442,516 1,511,817,730 692,134 80,570,000 43,265,034 eyar Decrease during the - 15,155,755 - - 37,530,154 178,732,940 year At the end of the 4,369,898,751 5,534,890,926 21,747,101 4,374,189,244 80,570,000 (178,732,940) 43,265,034 year Reasons for changes: ① Increase in share capital was due to the conversion of “Vanke Convertible Bonds 2” into shares and private pla ② Increase in capital surplus reserve was mainly due to the conversion price of “Vanke Convertible Bonds 2” and of A shares in 2006 exceeding the face value; , as well as the amortisation of the incentive fund under the Restricted capital surplus reserve was mainly due to the appropriation of the incentive fund under the Restricted Stock Incentiv in launching “Vanke Convertible Bonds 2” and the appropriation of the incentive fund under the Restricted Stock Ince ③ Increase in surplus reserves was due to the profit appropriation to th surplus reserves in accordance with the p 2006 by the Board; ④ Decrease in retained profits was due to the implementation of the profit appropriation and dividend distrib withdrawals made from surplus reserves in accordance with the profit appropriation proposal for the year 2006 by 10 IV. Change in Share Capital and Shareholders 1. Change in Share Capital (1) Change in the share capital of the Company (Unit: share, as at 31 December 2006) Balance, beginning of (+, -) Balance, end of the the year year Quantity Proporti Converted Quantity Proporti Class of shares on from Private Others on convertible placing (Notes 3 & bonds (note 2) 4) (note 1) a、Restricted Shares 1、State-owned and State-owned legal person 358,517,093 9.63% 0 +110,000,000 -193,186,649 275,330,444 6.30% shares 2、Shares held by domestic 138,754,890 3.73% 0 +290,000,000 -138,754,890 290,000,000 6.64% legal persons 3、Shares held by domestic 2,415,578 0.06% 0 0 0 2,415,578 0.05% natural persons 4 、 Shares held by foreign investors Total Number of Restricted 499,687,561 13.42% 0 +400,000,000 -331,941,539 567,746,022 12.99% Shares b、Non-restricted Shares 1、Ordinary RMB-denominated 2,675,101,997 71.86% +247,211,081 0 +331, 41,539 3,254,254,617 74.47% shares (A shares) 2 、 Domestic listed foreign 547,898,112 14.72% 0 0 0 547,898,112 12.54% invested shares (B shares) Total Number of 3,223,000,109 86.58% +247,211,081 0 +331,941,539 3,802,152,729 87.01% Non-restricted Shares c、Total Number of Shares 3,722,687,670 100.00% +247,211,081 +400,000,000 0 4,369,898,751 100.00% Notes: Details on the change in the Company’s share capital are as follows: (1) During the year under review, the number of A shares of the Company increased by 247,211,081 shares due to the conversion of “Vanke Convertible Bonds 2”; (2) During the year under review, the number of restricted tradable shares of the Company increased by 400,000,000 shares as a result of the Company’s private placing of 400,000,000 A shares； (3) During the year under review, some of the trading restrictions of the restricted tradable shares under the Company’s non-tradable share reform began to lapse. The number of restricted 11 tradable shares held by the State and State-owned legal person decreased by 193,202,602 shares, while that of other domestic legal persons decreased by 138,754,890 shares, and the number of non-restricted tradable shares increased by 331,957,492 shares accordingly； (4) During the year under review, due to the exercise of 15,953 “Vanke HRP1” options, the shareholding of China Resources Co., Limited (“CRC”) in the Company increased by 15,953 A shares, while the number of restricted tradable shares of the Company held by the State and State-owned legal persons also witnessed a corresponding increase; the number of non-restricted tradable shares on the other hand decreased accordingly. (2) Issue and listing of shares A. Issue of shares and derivative securities in the past three years “Vanke Convertible Bonds 2” On 24 September 2004, the Company issued 19.9 million convertible bonds to the public at a face value of RMB100 each. The term of the convertible bonds was five years. The amount of proceeds raised from the issue of the Company’s convertible bonds were RMB1.99 billion. Trading of the Company’s convertible bonds on the Shenzhen Stock Exchange commenced on 8 October 2004. Abbreviation and code of the convertible bonds are “Vanke Convertible Bonds 2” and “126002”, respectively. The initial conversion price of “Vanke Convertible Bonds 2” was RMB5.48 per share. On 29 June 2005, the Company implemented the proposals on dividend distribution and transfer from the capital surplus reserve to the share capital for the year 2004, pursuant to which dividends of RMB1.5 (including tax) were paid for every 10 existing shares held and five shares were transferred from the capital surplus reserve to the share capital for every 10 existing shares. After the implementation of the aforesaid proposals, the conversion price was adjusted to RMB3.55 per share accordingly. As the closing price of the Company’s A share between 4 January 2006 and 21 February 2006 was higher than 130 per cent (that is RMB4.615 per share) of the conversion price (RMB3.55 per share) for a total of 20 trading days during 28 consecutive trading days, the Company had met the related regulations and the relevant requirements of the “Convertible Bonds’ Offering Circular”, and had thus exercised its right to redeem “Vanke Convertible Bonds 2”. The Company had redeemed all of the RMB3,869,600 (38,696 bonds) “Vanke Convertible Bonds 2” still outstanding prior to 7 April 2006. “Vanke Convertible Bonds 2” was delisted on 14 April 2006. 12 Private placing of A shares Pursuant to the approval of the China Securities Regulatory Commission, the Company conducted a private placing of 400,000,000 A shares with 10 specific target investors, including CRC, at an issue price of RMB10.5 per share, thereby raising total proceeds of RMB4.2 billion. The net proceeds, after the deduction of administrative expenses, amounted to RMB4,196.7 million. On 27 December 2006, the A shares issued for the private placing were listed on the Shenzhen Stock Exchange. In accordance with the relevant requirements of the “Administrative Rules for Securities Offerings of Listed Companies”, the A shares issued for the private placing will be subject to a lock-up period. The A shares placed with CRC are subject to a lock-up period from 27 December 2006 to 26 December 2009; the shares placed with other investors are subject to a lock-up period from 27 December 2006 to 26 December 2007. B. During the year under review, owing to the conversion of the Company’s convertible bonds into shares, there had been changes in the total number of the Company’s shares and its share capital structure. Please refer to the notes under the table showing the change in the Company’s shares that is presented in the text above. C. As at the end of the year under review, the Company has not issued any shares held by workers and staff. 2. Information on Shareholders (as at 31 December 2006) (1) Information on shareholders Total number of 136,555（128,216 holders of A share and 8,339 holders of B share） shareholders Shareholdings of the top 10 shareholders Number of Total Number of Name of Classification Percentage of pledged number of restricted shareholder of shareholder shareholdings or shares held shares held lock-up shares State-owned CRC 14.54% 635,503,474 275,330,444 0 shareholder China Southern Quality Growth Equity Securities Investment Other 2.53% 110,718,639 32,000,000 0 Fund (南方绩优成长 股票型证券投资基金) Credit Lyonnais Securities (ASIA) Foreign 1.76% 76,830,876 0 0 Limited (“CLSA shareholder Limited) Liu Yuansheng Other 1.34% 58,446,317 0 0 13 China Life Insurance Company Limited–Dividend Distribution–Individual Dividend-005L-FH002 Other 1.29% 56,342,298 0 0 Shen (中国人寿保险 股份有限公司－分红 －个人分红 -005L-FH002 深) China Southern High Growth Equity Open-end Securities Investment Fund (南 Other 1.20% 52,501,224 0 0 方高增长股票型开放 式证券投资基金) UBS AG Other 1.15% 50,123,723 0 0 Shanghai Nandu Weifeng Investment Management Co., Other 1.14% 50,000,000 50,000,000 0 Ltd. (上海南都伟峰投 资管理有限公司) Toyo Securities Asia Foreign 1.08% 47,305,168 0 0 Limited-A/C Client shareholder E Fund Stable Growth Securities Investment Fund (易方达平稳增 Other 1.06% 46,352,127 0 0 长证券投资基金) Shareholdings of the top 10 shareholders of non-restricted shares Name of Number of non-restricted shares held Class of shares shareholder Ordinary RMB-denominated CRC 360,173,030 shares (A shares) China Southern Quality Growth Equity Securities Investment Ordinary RMB-denominated 78,718,639 Fund (南方绩优成长 shares (A shares) 股票型证券投资基金) Domestic listed foreign CLSA Limited 76,830,876 invested shares (B shares) Liu Yuansheng Ordinary RMB-denominated 58,446,317 shares (A shares) China Life Insurance Company Limited–Dividend Distribution–Individual Dividend-005L-FH002 Ordinary RMB-denominated 56,342,298 Shen(中国人寿保险股 shares (A shares) 份有限公司 －分红－ 个 人 分 红 -005L-FH002 深) China Southern High Growth Equity Open-end Securities Ordinary RMB-denominated Investment Fund (南 52,501,224 shares (A shares) 方高增长股票型开放 式证券投资基金) 14 Ordinary RMB-denominated UBS AG 50,123,723 shares (A shares) Toyo Securities Asia Domestic listed foreign 47,305,168 Limited-A/C Client invested shares (B shares) E Fund Stable Growth Securities Investment Ordinary RMB-denominated Fund (易方达平稳增 46,352,127 shares (A shares) 长证券投资基金) China Southern Risk-avoidance and Ordinary RMB-denominated value increase Fund 41,576,982 shares (A shares) (南方避险增值基金) Remarks on the 1. The 76,830,876 B shares held by CLSA Limited were beneficially connected owned by China Resources (Holdings) Company Limited (“CRHC”) in relationship or action Hong Kong; CRHC is a wholly-owned subsidiary of CRC; in concert of the 2. China Southern Quality Growth Equity Securities Investment Fund, aforementioned China Southern High Growth Equity Open-end Securities Investment shareholders Fund, China Southern Principal Protected Fund are funds managed by China Southern Fund Management Company Limited. （2）The Single Largest Shareholder As at the end of the year under review, CRC and CRHC, a wholly-owned subsidiary of CRC (together known as “CR”) is the single largest shareholder of the Company, holding an aggregate of 712,334,350 shares, which represented 16.30 per cent of the total number of the Company’s shares. Among the 712,334,350 shares, CRC held 635,503,474 A shares; in addition, CLSA Limited held 76,830,876 B shares, which were beneficially owned by CRHC. CRC was promoted and established by China Resources National Corporation (“CRNC”) in June 2003, with Mr Chen Xinhua as its legal representative. CRC’s major asset is its 100 per cent equity interests in CRHC and other assets in the PRC. Its core businesses include manufacturing and distribution of consumer goods, property and related industries, infrastructure facilities and public utilities. The registered address of CRC is China Resources Building, No. 8 Jianguomen Wai North Avenue, Dongcheng District of Beijing. CRC has a registered capital of approximately RMB16,467 million. CRNC holds 16,464,463,526 state-owned shares in CRC, representing 99.984211 per cent of CRC’s total share capital. The other four promoters, namely China National Cereals, Oils & Foodstuffs Corporation, China Minmetals Corporation, Sinochem Corporation and China Huaneng Group, each owns 650,000 state-owned shares in CRC, representing 0.003947 per cent of CRC’s total share capital respectively. CRNC has a registered capital of approximately RMB9,662 million. Its major asset is the equity interests in CRC. It is under the direct supervision of the State-owned Assets Supervision and Administration Commission of the State Council. Mr Chen Xinhua is the legal representative of CRNC. The following chart shows the equity relationship between the single largest shareholder and 15 the Company: 99.984212% CRNC CRC 14.54% The Company 100% 1.76% CRHC V. Management and Employees 1. Directors, members of the supervisory committee and senior management (1) Experience overview Brief introduction to directors Wang Shi, male, born in 1951. He joined the military force in 1968. Wang Shi changed his career in 1973 and worked in the Water and Electrical supply department of Zhengzhou Railway. Wang Shi graduated from Lanzhou Railway College in 1978 majoring in water supply studies. He had been working in Guangzhou Railway Bureau, Guangzhou Foreign Trade and Economic Cooperation Committee and Shenzhen Special Region Development Company. He formed “Shenzhen Exhibition Centre of Modern Science and Education Equipment”, the predecessor of China Vanke, in 1984, and acted as General Manager. The company was reorganised into China Vanke Co. Ltd., a shareholding company, in 1988, at which time Mr Wang became Chairman and General Manager. Mr Wang no longer acted as the General Manager with effect from 1999. At present, he is the Chairman of the Company. Song Lin, male, born in 1963. He graduated from Tongji University with bachelor of science degree in engineering mechanics in 1985. Mr Song joined CRH in 1986. In 1998, Mr Song became a Director of CRHC. In 2000, he became the Executive Director and the General Manager of CRHC, the Managing Director of China Resources Enterprise, Limited, as well as the Chairman of China Resources Logic Limited and China Resources Power Holdings Company Limited. He became a Director of CRC in 2003, and the Managing Director of CRC in 2005. He has been a Director of the Company since 2001. At present, Mr Song is the General Manager of CRHC, Managing Director of CRC, the Chairman of China Resources Enterprise, Limited and the Independent Non-executive Director of Geely Automobile Holdings Limited. He has been the Chairman of China Resources Land Limited (“CRL”) since 2006. Yu Liang, male, born in 1965. He graduated from the Peking University with a bachelor’s degree in international economics studies in 1988. Mr Yu obtained a master’s degree from the Economics Studies Department of the Beijing University in 1997. He had previously worked for Shenzhen Waimao Group. He joined the Company in 1990. He became the General Manager of Shenzhen Vanke Financial Consultancy Company Limited In 1993 and the Deputy General Manager of the Company in 1996, and the Executive Deputy General Manager and Supervisor of Finance of the Company in 1999. He has been the General Manager of the Company since 2001 and the Director of the Company since 1994. At present, Mr Yu is the General Manager of the Company. 16 Chen Zhiyu, male, born in 1954. He graduated from Chuangxing College in Hong Kong and obtained a diploma in Accounting from The London Chamber of Commerce and Industry and a diploma in corporate management from the Hong Kong Management Association. Mr Chen is an affiliate member (AMIA) of The Association of International Accountants and has embarked on the career of accounting, financial and executive management for over ten years. He has been the Director of Jenston International (HK) Limited since 1983. At present, he is also the Managing Director of Beijing Renda International Information Technology Co., Limited and Shanghai Renda Yunzhen Information Technology Co., Limited. He has been a director of the Company since 1997, and a member of the remuneration and nomination committee of the Board of the Company since 2005. Wang Yin, male, born in 1956. He graduated from Shandong University with a bachelor’s degree in economics studies. He also obtained a master’s degree in Business Administration from the University of San Francisco. Mr Wang had worked in the Foreign Economic and Trade Cooperation Department. He became the Deputy Officer of the CRNC in 1984, Deputy General Manager of the Human Resources Department of CRHC in 1988, and the General Manager of Max Share Limited, a subsidiary of CRHC, in 1995. Mr Wang has been the Director and Assistant General Manager of CRHC since 2000. He became Managing Director of CRL since 2001 and is Director and Deputy General Manager of CRHC. He has been a Director of the Company since 2002. Shirley L. Xiao, female, born in 1964. She graduated from Wuhan University, majoring in English Literature in 1984. She obtained a master’s degree in Business Administration from China Europe International Business School in 2000. She had worked in Central South University of Technology, China Technology Data Import & Export Co. and Mitsubishi Corporation Shenzhen Office. She joined China Vanke in 1994 as the Deputy Director of the General Manager’s Office. She became the Director of the General Manager’s Office in 1996 and the Director of the General Office of the Board in 2004. She has also been the Secretary to the Board of Directors since 1995. She has been the Director of the Company since 2004, and a member of the investment and decision-making committee of the Board of the Company since 2005. Jiang Wei, male, born in 1963. He graduated from Foreign Economy and Trade University and obtained a master’s degree in international business and finance. He joined China Resources National Corporation in 1988 and CRHC in 1990. He became the General Manager of the Financial Department of CRHC in 1999 and a Director of CRHC in 2000. Mr Jiang became a Director and Financial Controller of CRHC in 2002, the Financial Controller of CRC in 2003 and a Director of CRC in 2005. At present, Mr Jiang is a Director and the Financial Controller of CRHC, a Director and Financial Controller of CRC, a Non-executive Director of China Resources Enterprise, Limited, China Resources Power Holdings Company Limited, CRL, China Resources Logic Limited and China Asset (Holdings) Limited, and an Independent Director of Greentown China Holdings Limited. He became a member of the Supervisory Committee of the Company in 2001 and has been a director of the Company since 2005. He has been a member of the audit committee and a member of the investment and decision-making committee of the Board of the Company since July 2005. Brief introduction to independent directors 17 Sun Jianyi, male, born in 1953. He graduated from Zhongnan University of Finance and Economics, majoring in finance studies. He is a senior economist. He worked at the Qiu Chang Road Office, Wuhan branch, the People’s Bank of China in 1971 and became vice division head of the credit division of Jiang An District, Wuhan Branch, the People’s Bank of China in 1978. In 1982, Mr Sun became the Division Head of 27 Road Office, Wuhan Branch, the People’s Bank of China as well as the Secretary of Communist Party Branch Committee. He became Deputy General Manager of Wuhan Branch, the People's Insurance Company of China, Limited and the committee member of the Communist Party Committee in 1985. He was appointed the General Manager of Management Department of Ping An Insurance Company of China in 1990, Assistant to General Manager in 1991, Deputy General Manager in 1992, the Executive Deputy General Manager in 1994 and an Executive Director of the same company in 1995. He has been an Executive Director and Executive Deputy General Manager of Ping An Insurance Company of China, Limited since 1997. He has been an Executive Director, Executive Deputy General Manager and Deputy Chief Executive Officer of Ping An Insurance (Group) Company of China, Limited since 2003. He also acted as a Director of Ping An Life Insurance Company of China, Limited, Ping An Property & Casualty Insurance Company of China, Limited, China Ping An Trust & Investment Co., Limited, Ping An Annuity Insurance Company of China, Limited and Ping An Bank Limited. He has been a Director of the Company since 1995. He became an Executive Director in 1997 and Deputy Chairman of the Company in 1998. He has been an Independent Director of the Company since 2001. He became the convenor of the remuneration and nomination committee of the Board of the Company, and a member of the audit committee since 2005. Li Chi Wing, male, born in 1959. He graduated in 1985 from the Hong Kong Polytechnic University, majoring in real estate management. Mr Li is a registered professional surveyor in Hong Kong, a registered professional housing manager in Hong Kong and a registered real estate valuer in the PRC. He worked in the agency department of Jones Lang LaSalle in 1985 and became the Director of the Industrial Department before leaving Jones Lang LaSalle in 1993. He has been an Executive Director of DTZ Debenham Tie Leung since 1993, and the Deputy Chairman and Director of the Investment Department of DTZ Debenham Tie Leung, North Asian region since December 2006. He has been an Independent Director of the Company since 2002. He became the convenor of the investment and decision-making committee of the Board of the Company, and a member of the remuneration and nomination committee since 2005. David Li Ka Fai, male, born in 1955. He graduated from London Metropolitan University in the UK in 1978. He is a FCPA of Hong Kong Institute of Certified Public Accountants and a member of the Institute of Chartered Accountants in England & Wales, a fellow member of the Association of Chartered Certified Accountants. At present, he is the Deputy Managing Partner of Li, Tang, Chen & Co. Certified Public Accountants, Tutor of the School of Continuing and Professional Studies of The Chinese University of Hong Kong and Independent Non-executive Director, a designated member of Consultation Committee of Accountancy Courses of Lingnan University of Hong Kong, and member of the audit committee of China-Hongkong Photo Products Holdings Ltd., and an independent non-executive director and Chairman of the audit committee of Cosmopolitan International Holdings Ltd. He was an Independent Non-executive Director and the Chairman of the audit committee of Wanji Pharmaceutical Holdings Ltd. from 2002 to 2005. Due to his dedication to the promotion of the accounting profession in Hong Kong, he had been awarded The Medal of Honour by the Government of the Hong Kong Special Administrative Region in July 2004. He has 18 been an Independent Director of the Company, and the convenor of the audit committee of the Board of the Company since 2005. Judy Tsui Lam Sin Lai, female, born in 1955. She had studied in University of British Columbia in Canada, London School of Economics and Political Science, and the Chinese University of Hong Kong. She has a PhD degree in accounting. Mrs Tsui is a fellow member of Hong Kong Institute of Certified Public Accountants, honorary fellow of CPA Australia and fellow member of the Hong Kong Institute of Directors. She is the first non-US member and the first Hong Kong academic to be appointed as the Vice President-international of the American Accounting Association. She was a council member of Hong Kong Institute of Certified Public Accountants, Deputy Chairman of the Corporate Governance Committee and Chairman of the PR Strategy Steering Committee etc. At present, she is the Dean of the Faculty of Business, Director of the Graduate School of Business and Chair Professor of Accounting at the Hong Kong Polytechnic University, Honorary Professor and Guest Professor at Sun Yat-sen University, Guest Professor at Renmin University of China and executive council member of Higher Business Education Society of China Higher Education Association. She has been an Independent Director of the Company since 2005. Brief introduction to members of the Supervisory Committee Ding Fuyuan, male, born in 1950. He holds a tertiary qualification. He had worked in Guangdong Tour Department, South China Sea Oil Joint Service Corporation, South China Petroleum Shenzhen Development Service Corporation and Nanhai Huaxin Group. He joined China Vanke in 1990 and became the Deputy Director of the General Manger’s Office in February 1991. In October 1991, he became the Manager of the Human Resources Department of the Company. He has been the Secretary of the Communist Party Committee of the Company since 1995. He became a member of the first Supervisory Committee of the Company in 1993 and has been the Chairman of the Supervisory Committee of the Company since 1995. Zhang Li, male, born in 1959. He graduated from Jiangxi University majoring in political economics in 1985. He had worked in Jiangxi No. 2 Chemical Fertilizer Factory, Jiangxi University and Jiangxi Labour Bureau. He joined the Company in November 1992. He became the General Manager of Shanghai Vanke Property Management Company Limited in 1995, Deputy General Manager of Shanghai Vanke Real Estate Company Limited in 1996, Manager of the Company’s Corporate Planning Department in November 1998, Chairman and General Manager of Shenzhen Vanke Gift Manufacturing Co., Ltd in 1999. He resigned from the Company in 2000 and became the General Manager of Yuanda Real Estate Co., Ltd. In 2001, he joined the Company again as the General Manager of Beijing Vanke. He became the Director of the Property Management Department of the Company since 2002. He became a member of the Supervisory Committee of the Company on behalf of the Staff Committee in 2004. Fang Ming, male, born in 1958, was graduated with a bachelor’s degree in economics from Shandong University. Mr Fang also received an LLM degree from Nankai University and an SJD degree from the Chinese Academy of Social Sciences. He had worked as a Deputy Researcher at the Chinese Academy of Social Sciences. Mr Fang joined CRHC in 1993. He had been the Senior Manager of the Research Department of CRHC, the General Manager of the Capital Operation Department of CRNC, and the Assistant General Manager of the Corporate Development Department of CRHC. Mr Fang is currently the Deputy General Manager of the Corporate 19 Development Department of CRHC, and the Secretary to the Board of Directors of CRC. Since December 2005, he has been a member of the Supervisory Committee of China Vanke. Brief introduction to senior management Yu Liang: For biography of Yu Liang, please refer to the “Brief introduction to directors”. Liu Aiming, male, born in 1969. He was graduated in 1993 from Tsinghua University with a master‘s degree in architecture materials faculty. He had worked in China Overseas Construction (Shenzhen) Co., Ltd as the Director, Assistant General Manager as well as the Manager of the Property Department. He was the Managing Director of China Overseas Construction (Shenzhen) Co., Ltd in 2001 and the Deputy General Manager of Zhonghai Real Estates Co., Ltd. in 2002. He joined the Company in 2002 as the Deputy General Manager. He has since November 2005 also acted as the General Manager of Shanghai Vanke Real Estate Company Limited. Ding Changfeng, male, born in 1970. He graduated from Peking University with bachelor’s degree in international politics in July 1991. He obtained a master’s degree in global economics from Peking University in 1998. He had worked Jiangsu Yancheng Party School. He joined China Vanke in 1992 and became Deputy Director of the Research Centre of the General Manager’s Office of the Company in August 1994. He was the Chief Editor of “Vanke Periodical” in 1995 and the Assistant General Manager of Northeast Operation and Management Department of the Company in January 1996. He was the Deputy General Manager of Northeast Department of the Company and the Deputy General Manager Shanghai Vanke Real Estate Co., Ltd. in 1997 and 1998 respectively. He became the Manager of the Company’s Corporate Planning Department in 1999, and the General Manager of Shanghai Vanke Real Estate Company Limited in 2000. He has been the Deputy General Manager of the Company since 2001. Xie Dong, male, born in 1965. He was graduated from Nanjing Engineering Institution in 1987 with a bachelor’s degree in wireless electricity. He received a master’s degree in business administration from Shanghai Jiao Tong University in 1997. He had worked in Shenzhen RGB Electronic Co., Ltd., the headquarters of China Shenzhen TV Company. He joined the Company in 1992. He became the manager of the Company’s Personnel Management Department in 1996, and the General Manager and Director of the Company’s Human Resources Department in 2000 and 2001 respectively. He has been the Deputy General Manager of the Company since 2004. Zhang Jiwen, male, born in 1967. He graduated from the School of Architecture of Tsinghua University in 1994 with a master’s degree in engineering. He had worked in Guizhou Architecture and Design Institute, Shenzhen Jin Xiu Zhong Hua Development Co., Ltd., Shenzhen Window of the World Co., Ltd., Guangzhou Hua Heng Design Company and Ho & Partners Architects Engineers & Development Consultants Ltd. in Hong Kong. He joined Shanghai Vanke Real Estate Co., Ltd. in 2001 as the Deputy General Manager and became the Art Director of the Company in 2003. He has been the Deputy General Manager of the Company since 2004. Mo Jun, male, born in 1967. He graduated from Tsinghua University in 1991 with a bachelor’s degree in architecture. He obtained an MBA degree from the China Europe International Business 20 School in 2004. He joined the Company in 1991. He was the Manager of Shenzhen Wanchuang Construction and Design Consultants Co., Ltd. in 1996, the General Manager of Shenzhen Vanke Real Estate Co., Ltd. in 1999, the General Manager of Beijing Vanke in 2000, the Deputy General Manager of the Company in March 2000, and the Executive Deputy General Manager of the Company in 2001. He resigned from the Company and became the Executive Deputy General Manager of Beijing Rongke Zhidi Real Estate Co., Ltd. in March 2003. He joined the Company again as the Deputy General Manager in October 2004. Xu Hongge, male, born in 1971. He graduated from Southeast University in 1994 with a bachelor’s degree in architecture. He joined Vanke in 1994. He had been the Deputy Manager of Shenzhen Wanchuang Architecture and Design Consultancy Co. Ltd., the Executive Deputy General Manager of Shenzhen Vanke Real Estate Co., Ltd. and the General Manager of Shenzhen Vanke Real Estate Co., Ltd. He has been the Deputy General Manager of the Company since August 2005. Shirley L. Xiao: for biography of Shirley L. Xiao, please refer to the “Brief introduction to directors”. Wang Wenjin, male, born in 1966. He graduated from Zhongnan University of Economics and Law in 1994 with a master’s degree. He is a registered accountant in the PRC. He had worked for a plastic factory in Hefei and Anhui Optical Sophisticated Mechanic Research Centre of China Academy of Sciences. He joined the Company in 1993 and became the Deputy Manager of the Company ’s Finance Department in 1998. He was the General Manager of Vanke ’s Finance Department in 1999, and was the Financial Controller in 2002. Since 2004 he has been the Finance Supervisor of the Company. (2) Changes in Shareholdings of Existing Directors, Members of Supervisory Committee and Senior Management During the Year under review (Unit: shares) Name Number of Number of shares held at shares held at the beginning of the end of 2006 2006 Wang Shi 628,016 628,016 Yu Liang 175,113 175,113 Ding Fuyuan 185,423 185,423 Sun Jianyi 288,432 288,432 (3) The Remuneration of Directors, Members of Supervisory Committee and Senior Management During the Year The Company continued to follow the principle of its remuneration policy, which is “to offer competitive salaries according to market principles to retain and attract high-calibre professionals”. The remuneration of the Company’s senior management members was determined not only with 21 reference to market level but also in accordance with the growth in the overall operating results of the Company. In 2006, the business of the Company realised rapid growth, and the remuneration of the Company’s senior management staff had also been increased accordingly. Remuneration of the directors and members of the Supervisory Committee of the Company is as follows: Any Total remunerations remunerations received from the received from Name Capacity Company during shareholders the year under or other review (RMB ’000) connected entities? Wang Shi Chairman 4,220 No Yu Liang Director 3,740 No Convenor of the Ding Supervisory No Fuyuan Committee, 2,330 Shirley L. Director 2,200 No Xiao Member of the Zhang Li Supervisory 1,500 No Committee The aggregate amount of remunerations of other senior management staff of the Company was RMB16.11 million, with the average remuneration amount per capita of RMB2.30 million. Among the directors and supervisors who did not hold a post in the Company, the four directors namely Song Lin, Chen Zhiyu, Wang Yin and Jiang Wei, each received from the Company a director’s remuneration of RMB60,000 (including tax) during the year under review; the four independent directors namely Sun Jianyi, Li Chi Wing, David Li Ka Fai, Judy Tsui Lam Sin Lai each received from the Company a director’s remuneration of RMB120,000 (including tax) during the year under review; Supervisor Fang Ming received from the Company a supervisor’s remuneration of RMB60,000 (including tax). Song Lin, Wang Yin, Jiang Wei and Fang Ming received remunerations from CRHC, a connected party of CRC. The aforesaid directors and supervisors have not received other types of remuneration or allowance from the Company. (4) Change and Reasons for the Change in Directors, Members of the Supervisory Committee and Senior Management During the Year under review During the year under review, there had not been any change in the Company’s directors, members of the Supervisory Committee and senior management. 22 2. Number and Composition of Employees As at 31 December 2006, there were 13,402 employees on the Company’s payroll, representing an increase of 22.3 per cent from that of the previous year. The average age of the employees was 29. Among the entire workforce, there were 2,602 employees engaged in the property development division, representing an increase of 35.2 per cent from the previous year. The average age of the staff working for this division was 30.7 and the average years of service were 3.3; in terms of education level, 0.3 per cent held doctoral degree, 11.9 per cent with master’s degree, 66.4 per cent were graduates, 18.2 per cent with tertiary education and 3.2 per cent with education below tertiary level. Employees with university degree or above accounted for 78.6 per cent of the total staff in the property development division. The composition of employees in the property development division by job classification is as follows: 454 marketing and sales staff, accounting for 17.4 per cent and up by 26.1 per cent from the previous year; 1,458 professional technicians, accounting for 56.0 per cent and up by 51.7 per cent from the previous year; among the professional technicians, 773 were construction staff, accounting for 29.7 per cent, 341 were designers, accounting for 13.1 per cent and 183 were cost management staff, accounting for 7.0 per cent; there were 161 project development staff, accounting for 6.2 per cent. The number of management staff, including senior management staff such as those working in the departments of finance, audit, IT, legal, human resources, customer relations and data analysis, was 626, accounting for 24.0 per cent and up by 3.8 per cent from the previous year. There were 10,800 employees engaged in property management, up by 20.0 per cent from the previous year. The average age was 28 and the average years of service was 1.9. In terms of education level, 0.1 per cent held master’s degree, 6.8 per cent were graduates, 10.4 per cent with tertiary education and 82.7 per cent with education below tertiary level. Employees with tertiary education or above accounted for 17.3 per cent of the total staff in the property management division. VI. Corporate Governance Structure 1. Elaboration on the Company’s compliance with the requirements set out in the regulatory documents of corporate governance of listed companies The Company abides by its philosophy to pursue simplicity and not complexity, to be transparent and not close, to be regulated and not scheming. It strictly adheres to the requirements of the laws and regulations, and continues to fine-tune its corporate governance structure and regulate its operation. There was no discrepancy between the Company’s actual corporate governance structure and the regulations and requirements set out in the regulatory documents of listed companies. In accordance with the “Company Law” (2005 revised version) and “Securities Law” of the PRC, as well as the “Rules for the General Meetings of Shareholders of Listed Companies” and “Guidelines on the Articles of Association of Listed Companies” (2006 revised version) promulgated by the China Securities Regulatory Commission (“CSRC”) in 2006, and according to the Company’s actual situation, the Company made amendments to various aspects of its “Articles of Association” during the year, with the aim of further enhancing its corporate governance level under the guidelines of the new laws and regulations. In 2006, with the operation of the Board’s three specialised committees, namely audit committee, remuneration and nomination committee, investment and decision-making committee stepped up, the Board’s efficiency was further enhanced. The independent directors also assumed the position as the convenor of each of the specialised committees. For those decisions that involve the 23 specialised committees will first be subject to the approval of the specialised committees before they are submitted to the Board for consideration. The functions of independent directors have thus been beefed up. During the year, the Company’s Phase One (2006 - 2008) of The Restricted Stock Incentive Plan had been passed at the shareholders’ meeting. The implementation of the restricted stock incentive plan will ensure that a control mechanism between the shareholders and professional management team built upon common interest is established, high-calibre managerial talent and core staff will be attracted and retained, the Company’s mid to long-term incentive mechanism will be fine-tuned, the corporate governance and the Company’s competitiveness will be strengthened. To strengthen the internal risk control of the Company, the Board approved in December 2004 the Company’s internal control system, which was gradually improved to become a comprehensive system. In 2006, in view of the significant increase in collaborative projects, , the substantial rise in the number of legal person subsidiaries of the Company, the Company had formulated legal person affairs management methods, in order to beef up the centralised management of its legal persons. The Company had initiated to appoint a third-party audit firm, which is independent from the Company’s auditors, to conduct audit, and established a related system, to increase the awareness of risk control. During the year, the Company was assigned the highest “AAA-” rating by the corporate governance rating system set up by Sino-Hawk Credit Rating Co., Ltd., “Securities Times”, and Shenzhen Securities Information Co., Ltd. The assignment of the “AAA-” rating reflects further recognition of the Company’s corporate governance practice. The rating system is the first in the PRC that has practical applications. 2. The Company’s Business Operation, Employees, Assets, Organisation and Finance Independent from those of the Company's Controlling Shareholder The Company continued to insist to have its business operation, employees, assets, organisation and finance completely independent from those of its single largest shareholder, CRC, and connected companies. This allows the Company to maintain independence with regard to business integrity and operation autonomy. 3. Performance of the Independent Directors In 2006, Sun Jianyi, Li Chi Wing, David Li Ka Fai and Judy Tsui Lam Sin Lai, the four Independent Directors of the Company, gave tremendous valuable advice to the Company on significant matters relating to operation and management, issues related to project development, matters in relation to collaborative development and the formulation of important rules. The relevant advice of the directors had been well-received and applied in the operation of the Company. In order to realise the functions of the specialised committees, the Company’s independent directors had initiated numerous meetings with the three specialised committees during the year, examined each resolution submitted by the management with due diligence, and gave professional advice to the resolutions, resulting in greater efficiency in decision making of the Board and more effective operation process during the year. 24 In the past year, the independent directors and directors made tours organised by the Supervisory Committee of the China Vanke’s subsidiaries in Shenzhen, Dongguan, Guangzhou, Wuhan, Tianjin, Suzhou and Hangzhou and their respective development projects, and in particular paid attention to the Company’s risk control system and decision-making process mechanism, and alerted the management to strengthen risk control. In view of the aforesaid, the independent directors in the past year not only diligently performed their duties, but also actively monitored changes in the Company and gave warning of risk. Through their work, which had ensured the satisfactory operation of the Company’s decision-making process mechanism, there had been substantial increase in the Company’s shareholders’ value. Details on the attendance of independent directors to Board Meetings and specialised committees’ meetings, as well as their participation in the voting by communication means at the Board Meetings and specialised committees’ meetings in the past year are as follows: Attendance of Independent Directors to Board Meetings is as follows: Number of Number of Number of Number of Specialised Specialised Name of Attendance in Attendance Board Absent resolutions on Committee Committee Independent person by proxy Meetings to be (times) which votes had Meetings to be Meetings Directors (times) (times) attended been cast attended (times) attended (times) Sun Jianyi 5 3 2 0 31 6 4 Li Chi Wing 5 4 1 0 54 2 3 David Li Ka Fai 5 4 1 0 30 5 5 Judy Tsui Lam 5 30 0 3 2 0 1 Sin Lai 4. The Establishment and Implementation of Appraisal and Incentive Mechanism for Senior Management The Company implemented a balanced scorecard as its major performance management system. In accordance with the concept of a balanced scorecard, senior management’s performance is evaluated basing on the achievements of business objectives in each operating year, which in turn are governed by the objectives of the Company’s medium to long-term development strategies. The review will cover different categories including the Company’s finance, customers, internal logistics, staff training and development and the Company’s sustainable growth. The Company has established objective benchmark to measure performance in each category. In order to obtain objective statistics on staff and customers’ satisfaction, the Company had appointed an independent third party to conduct survey. The remuneration and nomination committee of the Board is responsible to study and supervise the establishment and implementation of appraisal and incentive systems for senior management. The performance of the Company’s General Manager is reviewed by the Board. The remunerations of other senior management staff are determined in accordance with the operating results of the Company for that particular year, their overall management performance indicators, their assessment and evaluation results, and with reference to the industry salary level. In each of the 25 management year, performance review on senior management is conducted through the Company’s work report meeting. The major factors to be considered in reviewing the Company’s senior management include the Company’s overall performance, the value of the management staff’s role in the Company and their achievements as required by their positions. With regard to all those in charge of front-line companies, the review is based on the performance of those front-line companies for which they are held accountable, the value of their roles and their achievements as required by their positions. In 2005, when a medium to long-term incentive plan was yet to establish, the Company replaced its preferential housing purchase policy, which targeted at medium to high-level management and staff with significant contribution, with a special incentive policy for achieving outstanding profitability, in order to encourage the medium to high-level management to further enhance its profitability. The new policy was approved by the 14th Board of Directors. Return on equity (ROE) is the benchmark for performance evaluation under the special incentive policy for achieving outstanding profitability. If the ROE for a particular year exceeds 15 per cent, 10 per cent of the portion of net profit derived from the difference in ROE will be appropriated as an incentive fund which, after a one-year waiting period, will be granted to the Company’s medium to high-level management and employees with significant contribution. According to the operating results achieved in 2005, the Company appropriated RMB10.73 million for its incentive scheme at the end of 2005. After a one-year waiting period, the incentive fund had been allotted to the respective incentive targets in early 2007. The incentive policy was abolished at the time when the Company launched its “Phase One (2006-2008) of The Restricted Stock Incentive Plan”. The promulgation of “Listed Companies’ Stock Incentives Management Methods (Trial)” in 2006 provides a basis for the Company to fine-tune its incentive and control mechanism. By referring to the stock incentive schemes implemented by other companies at home and abroad, and taking into account the Company’s unique conditions, the Company formulated Phase One (2006-2008) of The Restricted Stock Incentive Plan. The incentive plan started to operate following the approval at the 2005 Annual General Meeting (18th). The implementation of the restricted stock incentive plan establishes a control mechanism between the shareholders and management team that is built upon common interest, linking the interests of the Company, shareholders and management team and further optimising the Company’s corporate governance structure. The execution of the plan assists the Company in balancing its short-term objectives and long-term objectives, stimulates continuity in value creation, helps the Company to attract and retain high-calibre talent, enhances the Company’s competitiveness, and ensures the Company’s long-term stable development. VII. Introduction to Shareholders’ Meetings 1.The 2005 Annual General Meeting (18th) The 2005 Annual General Meeting (“AGM”) was held at the Vanke Architecture Research Centre, 26 63 Meilin Road of Shenzhen, on 30 May 2006. The notice of AGM was published in China Securities Journal, Securities Times, Shanghai Securities Journal and The Standard of Hong Kong on 27 April 2006. The last day for verifying the qualification of shareholders was 19 May 2006. A total of 123 proxies and shareholders, representing 1,333,160,935 shares in the Company or 33.58 per cent of the Company’s total share capital, attended the AGM. The announcement of the resolutions of the AGM was published in China Securities Journal, Securities Times, Shanghai Securities Journal and The Standard of Hong Kong on 31 May 2006. 2. The 1st Special General Meeting of 2006 The notice of the 1st Special General Meeting of 2006 (“SGM”) was published in China Securities Journal, Securities Times, Shanghai Securities Journal and The Standard of Hong Kong on 18 July 2006. The last day for verifying the qualification of shareholders was 28 July 2006. The SGM was held at the Vanke Architecture Research Centre, 63 Meilin Road of Shenzhen, on 4 August 2006. A total of 64 proxies and/or shareholders, representing 1,136,988,980 shares in the Company or 30.56 per cent of the Company’s total share capital, attended the SGM. The following resolutions were approved at the meeting: (1) the resolution regarding the application for the issue of short-term financing bills and (2) the by-election of Fang Ming as a member of the Supervisory Committee. The above resolutions were published in China Securities Journal, Securities Times, Shanghai Securities Journal and The Standard of Hong Kong on 2 December 2005. The time for online voting of the SGM through the trading system of Shenzhen Stock Exchange (“SSE”) was 9:30 – 11:30 and 13:00 – 15:00 on 4 August 2006; the time for voting through the internet voting system of SSE started from 15:00 on 3 August 2006 and ended at 15:00 on 4 August 2006. The total number of shareholders and proxies attended the on-site meeting and participated in the online voting was 446, holding 858,645,196 shares, representing 21.63 per cent of the Company’s total shares with voting right. There were 435 holders and proxies of holders of A shares, holding 823,425,400 shares, representing 24.06 per cent of the Company’s total A shares with voting right. There were 11 holders and proxies of holders of B shares, holding 35,219,796 shares, representing 6.43 per cent of the Company’s total B shares with voting right. The announcement of the resolutions of the SGM was published in China Securities Journal, Securities Times, Shanghai Securities Journal and The Standard of Hong Kong on 7 August 2006. VIII. Directors’ Report 1. Management’s Discussion and Analysis 27 Management’s Discussion and Analysis Changes in market environment and management’s opinions Taking a long-term perspective, the Company still believes that demographic change has a crucial impact on the property industry. Urbanisation, on the one hand, drives enormous demand for housing, and on the other hand, economic development, which benefits from as well as contributes to urbanisation, leads to steady growth in public wealth, thereby transforming this demand into effective market demand. For a fairly long period of time in the future, the housing market in the Chinese cities, especially along the coastal areas, will still possess tremendous room for development. Since the end of 2004, the Company’s management has made the point that the property industry is reaching a turning point, with significant restructuring in institutional framework, the type of housing, demand-supply relationship, competitive situation, and even production method and business model. Big changes with far-reaching impact on the operating environment of the Company are about to take place. To the Company, such changes would bring forth both challenges and valuable opportunities for development. Whether the Company can grasp these opportunities within the next few years to sustain rapid and quality growth depends on its ability to make early precise judgment and effective response. The Company recognised during the industry’s transformation, the continued promulgation of macroeconomic austerity measures will become the norm of the industry. The measures will facilitate a more rational and disciplined development of the industry. Against such a backdrop, it is expected that there will be reallocation of resources in the industry, with gradual improvement in the “survival of the fittest” mechanism and continued rise in industry concentration. During the year under review, the government work report recognised the property industry as the pillar industry, while indicating that the macroeconomic austerity policies will continue to be strictly implemented to rein in excessive property investment in certain cities and to control rapid growth in property prices, and to further fine-tune the policies on finance, credit and borrowing, land, taxation and sales, in order to continue to regulate the order of the property market. At the end of May, nine ministries jointly promulgated the “Opinions on adjustment to housing supply structure to stabilise housing prices” (《关于调整住房供应结构稳定住房价格意见》), followed by the promulgation of “Certain opinions on the implementation of the requirements for the size and proportion of newly constructed residential buildings” (《关于落实新建住房结构比例要求的若干意见》), “Opinions on the regulation of foreign investors’ entry to the property market and their management” (《关于规范房地产市场外资准入和管理的 意见》), “Notice On the Matters Regarding the Collection of Personal Income Tax on the Personal Income from the Transfer of Apartments” (《关于个人住房转让所得征收个人所得税有关问题的通知》), “Notice on Advancing Rectification and Orderly Regulation of Trading in the Real Estate Market” (《关于进一步整顿 规范房地产交易秩序的通知》), “Notice on Relevant Issues Concerning Strengthening the Land Control” (《关于加强土地调控有关问题的通知》). The promulgation of this series of policies will have far-reaching impact on the operating environment of the industry. This echoes with the Company’s judgement. 28 According to the “Opinions on adjustment to housing supply structure to stabilise housing prices” promulgated by nine ministries, the objective of “Size less than 90 sq m will account for 70 per cent” will entirely change the market supply structure in the future and pose a new question on how to meet customers’ residential needs through fully utilising limited area for development. But fortunately, the shift in focus towards smaller residential units is what the Company has predicted since 1997, and since 2001, the Company’s product research and development department has also given priority to “small and medium residential properties” in their research. Hence, the Company’s management believes that China Vanke will be the first to be able to adapt to the market changes, and the Company’s realisation of its operating results and growth targets for the years 2006 and 2007 will not be significantly affected. When the Company acquires it project resources in the future, it will gradually enjoy the first-mover advantage in its research on small and medium residential properties. During the year under review, the implementation of the low-priced commodity housing system gained widespread attention. The Company’s management believes that with the continued launch of low-priced commodity housing, its proportion to the total market share is expected to rise. Since land sale is now a completely open and transparent process, the restrictions on housing prices are shifted to land transfer prices. Consequently, whether or not a price restriction is imposed, the property developer will get a fair return in a mature market. The main feature of low-priced commodity housing is that the price has been pre-determined, and therefore the profit of the residential projects has been determined on the onset and will not be affected by any fluctuation in the market price from the moment the land was acquired. Since China Vanke has devoted to raising its operating efficiency in recent years, the Company’s assets turnover has far surpassed the industry average. This implies that with the same profit margin, China Vanke can achieve a return on assets much higher than the industry average. As such, China Vanke possesses a strong competitive edge even in the market for low-priced commodity housing. In January, the State Administration of Taxation issued the “Notice on issues regarding the administration of the collection of the land value appreciation tax from property developers” (《关于房地 产开发企业土地增值税清算管理有关问题的通知》), further strengthening land value appreciation tax collection. The land value appreciation tax is levied on the gain on the property project. Properties, in general, and particularly medium-end residential properties will move into higher tax brackets. The management believed that the land value appreciation tax collection will further promote the development of medium-end residential properties, facilitate the enhancement of property developers’ efficiency, and curb land speculation. Since medium-end residential properties are the principal products developed by the Company, the land value appreciation tax collection will basically have no impact on the Company’s profitability nor its long-term development. The Company has always emphasised disciplined operation. When the Company prepays its land value appreciation tax, it will, in accordance with relevant regulations, make corresponding appropriation for the land value appreciation tax to be collected. The Company expects that it will gain more development opportunities under the macroeconomic austerity measures in the future, as its practice has always complied with the regulations. 29 Company’s response and business review Compared with 2005, the Company made a significant improvement in its operating results during the year under review. During the year under review, the Company realised a sales area of 3,228,000 sq m and a sales revenue of RMB21.23 billion, representing increases of 39.3 per cent and 52.2 per cent respectively from those of the previous year. In 2006, the Company’s booked area amounted to 2,896,000 sq m, representing an increase of 63.8 per cent from that of the previous year, with a booked revenue of RMB16.71 billion, representing an increase of 71.8 per cent from that of the previous year; the area newly constructed amounted to 5,006,000 sq m and area completed was 3,275,000 sq m, representing increases of 93.0 per cent and 50.6 per cent respectively from those of 2005. In 2006, the Company’s revenue from principal operations was RMB16.90 billion and net profit amounted to RMB2.30 billion, representing increases of 70.4 per cent and 68.4 per cent from those of the previous year. The Pearl River Delta market reported a sales area of 977,000 sq m and a sales revenue of RMB7.54 billion, accounting for 30.3 per cent and 35.5 per cent of the Company’s total sales area and sales revenue respectively; this market generated a booked revenue of RMB4.81 billion, with a net profit of RMB969 million, accounting for 28.8 per cent and 41.8 per cent of the Company’s total booked revenue and net profit respectively. The Yangtze River Delta market reported a sales area of 871,000 sq m and a sales revenue of RMB6.32 billion, accounting for 27.0 per cent and 29.8 per cent of the Company’s total sales area and sales revenue respectively, this market generated a booked revenue of RMB6.51 billion, with a net profit of RMB853 million, accounting for 39.0 per cent and 36.8 per cent of the Company’s total booked revenue and net profit respectively. The Bohai-Rim market reported a sales area of 909,000 sq m and a sales revenue of RMB5.38 billion, accounting for 28.2 per cent and 25.3 per cent of the Company’s total sales area and sales revenue respectively; this market generated a booked revenue of RMB3.98 billion, with a net profit of RMB372 million, accounting for 23.8 per cent and 16.1 per cent of the Company’s total booked revenue and net profit respectively. Other markets reported a sales area of 471,000 sq m and a sales revenue of RMB1.99 billion, accounting for 14 per cent and 9 per cent of the Company’s total sales area and sales revenue respectively, and generated a booked revenue of RMB1.41 billion and net profit of RMB122 million, accounting for 8.4 per cent and 5.3 per cent of the Company’s total booked revenue and net profit respectively. The Shenzhen Company realised a total booked area of 236,000 sq m, which were mainly attributable to The Village project and The Dream Town project. The Shanghai Company realised a total booked area of 433,000 sq m, which were mainly attributable to the Holiday Town project and the Langrun Court project. In other cities, projects such as Guangzhou Wonderland, Wuxi Glamorous City] Suzhou Nimble Bay, Chengdu Glamorous City, Nanchang Wonderland and Tianjin Waterfront achieved satisfied sales results, with 163,000 sq m, 145,000 sq m, 117,000 sq m, 107,000 sq m, 102,000 sq m and 101,000 sq m sold respectively during the year. At the end of the year, the Company had an area of 1,190,000 sq m sold but not yet booked, which involved a contract amount of RMB9.66 billion as construction was yet to complete. 30 The Company’s results for the year have set off a good start for its planned rapid growth period from 2006 to 2008. The results also supported the judgment the Company made during the preparation of its development plan. As mentioned, between the end of year 2004 and year 2005, the management believed that the constantly intensified austerity measures would help better regulate the industry and facilitate industry consolidation, thereby providing more room for development for companies with an edge in the market. China Vanke, after continued upgrading and fine-tuning its operations in the past few years, has developed its niches in the area of organisational structure, expertise, customer loyalty, operating efficiency, credibility in the capital market, diversified financing sourcing, etc. As such, the management is confident that China Vanke could grasp the opportunity and enter the period of rapid growth from 2006 to 2008. During the year under review, the Company continued to emphasise its urban-economy-oriented strategy with Pearl River Delta, Yangtze River Delta and Bohai-Rim region being its core development areas, and further intensified its project development. With respect to the operational arrangement for 2006, the Company planned to increase a planned GFA of approximately 10 million sq m for projects under planning, with Shenzhen, Shanghai, Guangzhou, Beijing and Tianjin remaining as the core development areas. The Company also paid high regard to the acquisition of premium projects to improve its project portfolio, and through rapid development of a number of projects, it capitalised on its assets turnover and economies of scale, to enhance the efficiency of human resources and capital use, as well as to strengthen market dominance and brand influence. The management believed that more of the land reserves available on the market would be activated, thanks to the stringent management of lending and the minimisation of the requirements for handling idle land. Leveraging the Company’s edge in brand, credibility in the capital market and expertise in development, as well as its accurate prediction of the industry trend, the Company is able to acquire higher quality project resources in a more effective manner through cooperation. During the year under review, this strategy had been implemented smoothly. The total area of new projects under planning was 12.01 million sq m (the related transfer procedures of 1.63 million sq m is now being handled), of which resources accounting for about 60 per cent of the total area were acquired through various types of collaboration. During the year under review, the Company and State-owned Assets Supervision and Administration Commission of Chaoyang District joined hands, and successfully acquired equity interests in Chao Wan Centre. The Company also forged an alliance with Taida and Wantong for the co-development of Tianjin Fashion Square project. China Vanke acquired further equity interests in Zhejiang Nandu and Shanghai Nandu. The Company had also intensified its cooperation with the Government of Singapore Investment Corporation Pte Ltd, CITIC Capital Vanke China Property Development Fund, COFCO Group, Hypo Real Estate Bank International, etc. At the same time, China Vanke tapped new markets in the cities of Hangzhou, Xiamen, Changsha, Qingdao and Ningbo, thereby fine-tuning its strategic planning in the Pearl River Delta, Yangtze River Delta and Bohai-Rim region. In light of the expansion of its operating scale, the Company continued to adjust its management 31 structure to meet its rapid development requirements. During the year under review, China Vanke formally shifted from a two-tier management structure which comprised the headquarters and front-line companies to a three-tier management structure consisting a strategy headquarters, regional specialised centres and front-line execution offices. As such, the specialised management duties used to be performed by the headquarters in the area of design, construction and sale was gradually dedicated to the regional centres, with the aim of creating a highly efficient organisational structure. During the year under review, there were signs of contraction in the existing financing sourcing available in the property industry, and it became imperative to open up more direct financing sourcing. On the one hand, the development of a wider source of direct financing would pose challenges to the market’s ability to sustain supply in the future, but on the other hand, this would provide opportunities for listed companies to leverage the capital market to achieve rapid development. As such, the Company decided to implement a private placement in the A- share market in 2006. The private placing was completed by the end of 2006 and raised proceeds of RMB4.2 billion, enabling the Company to grab opportunities and lay a solid foundation for its rapid development. Management and innovation China Vanke’s corporate motto for the year 2006 was “A Reform Pioneer and A Corporate Citizen”. At the beginning of the year under review, the Company’s management, based on its assessment of the market trend, made it clear that the Company should keep intensifying the reforms it has been carrying out in the previous years, in order to gain a favourable foothold for development under a new business environment ahead. The management believes that the Company has to constantly enhance its product innovation capability, to reform its mode of production, to push ahead with standardisation and industrialisation, to speed up its project development progress, to fully utilise its assets turnover and economies of scale, to increase the efficiency of human resources and capital use, and to strengthen market dominance and brand influence. The Company should conduct extensive study of customers, intensify its implementation of customer segmentation strategy, and accelerate the pace of product categorisation, with the aim of satisfying customers’ needs more efficiently, which will become a source of the Company’s operating returns that will never dry up. The Company needs to refine its product mix to achieve better economies of scale and to shift to an operating model that has higher efficiency, in order to attain the strongest ability to make profit. The Company should develop a mature collaborative mentality, in order to become a preferred partner of all kinds of resources owners and controllers, and to be able to remain extremely flexible in collaboration, with the aim of becoming the nexus of industry resources integration. By making unrelenting efforts in various aspects, the Company’s edge in expertise had been further recognized during the year under review. An annual survey on China Vanke’s customer satisfaction level conducted by the independent third party Gallop showed that the levels of customer satisfaction and loyalty in 2006 rose from those of 2005. In the year 2006, on average, one China Vanke’s customer would refer 6.41 persons to buy the 32 Company’s projects, and the actual transaction rate was 23.7 per cent. During the year under review, Guangzhou Wonderland won the prestigious “Zhan Tianyou Civil Engineering Award”, after Tianjin Crystal City received the same award in 2005. Five projects of China Vanke also received the “Golden Prize of Excellent Residential Development of Zhan Tianyou Award” – another authoritative award – out of 20 golden prizes, accounting for a quarter of the total awards granted. The five projects were Vanke Wonderland, Shenzhen Vanke East Coast, Shanghai Vanke Wonderland, Tianjin Vanke Holiday Town and Chengdu Vanke Golden Home. In the competition of “2007 World Urban Development Congress and the First Apollo Urban Development Laureate” organised by the Ministry of Construction, China Vanke was named the “Apollo Urban Development Laureate” for its professional management, promotion of large-scale production and complete upgrade of its product quality and services, as well as the implementation of energy saving measures and stringent compliance with the State’s energy-saving design standards for buildings, with all the projects reducing energy consumption by 50%. During the year under review, The Dream Town in Shenzhen was approved as one of the 10 key national model projects of energy saving and was the only one integrated model project with green buildings. Tianjin Vanke Dongli Lake and Shanghai Vanke Langrun Court came first and second among the six special prizes of the national “2006 Double Savings and Double Outstanding Trophy of Residential Project Competition”, which aims at promoting energy saving and economical use of land. Apart from its expertise, maintaining the Company’s competitive edge in good corporate governance is also a necessary condition for building a lasting company. During the year under review, the Company’s Phase One (2006 - 2008) of The Restricted Stock Incentive Plan was passed at the shareholders’ meeting. The implementation of the restricted stock incentive plan will ensure that a control mechanism between the shareholders and professional management team built upon common interest is established, high-calibre managerial talent and core staff will be attracted and retained, the Company’s mid to long-term incentive mechanism will be fine-tuned, the corporate governance and the Company’s competitiveness will be enhanced. During the year under review, the Company’s corporate governance structure, moral standards and brand image gained increasing public recognition. During the year under review, the Company was named “The Most Respected Enterprise in the PRC” jointly by The Economic Observer Newspaper and the Management Case Center of Peking University for the fourth consecutive year and received the award of “The China’s Best Corporate Citizen” by 21st Century Business Herald for the third consecutive year. The Company was also given the first ranking among the “Top 100 Property Development Enterprises in the PRC” by the Enterprise Research Institute of the Development Research Center of the State Council of the PRC, the Institute of Real Estate Studies, Tsinghua University and the Institute of China Index for the third consecutive year. The Company was named “China’s Most Valuable Listed Companies” by CCTV. In the “2006 Investor Relations in China” naming organised by IR Magazine, an internationally renowned magazine, the Company was granted the awards for the “Grand Prix for Best Overall 33 Investor Relations- Non SOE” (Large-capnon-state-owned enterprise category), the “Best Annual Report and other Corporate Literature” and the “Best Investment Meeting”. The Company also received the “Best IR Large Enterprise” award, “Best Communications” award, “Best Non-tradable Share Reform” award, “Best Executive” award at the second year of naming for the “Best IR of Chinese A-Share Companies”. China Vanke was the only enterprise that was assigned the highest “AAA” rating by the corporate governance rating system set up by Sino-Hawk Credit Rating Co., Ltd, “Securities Times” and Shenzhen Securities Information Co. Ltd. The rating system is the first in the PRC that has practical applications. To ensure that the Company’s corporate citizen-related activities are more organised and target-oriented, the Company’s shareholders’ meeting considered and approved the appropriation of a corporate citizen’s special project development fund for use in the implementation of the Company’s corporate citizen development plan. The approval of the fund fully reflects that the Company’s shareholders share the common interest in the Company’s development as a corporate citizen, and lays a solid foundation for the Company’s further implementation of its “corporate citizen” mission. During the year under review, the State Administration of Taxation issued the list of “China’s top 100 taxpayers”. China Vanke ranked 97th with a tax payment of RMB1,324 million and became the only property developer on the list. The actual amount of taxation paid by China Vanke was RMB2.49 billion, representing an increase of approximately 80 per cent from that of 2005. During the year under review, under the guidance of the Housing and Real Estate Department of the Ministry of Construction of the PRC, the campaign on gathering “Solutions to Housing Problems of Low to Middle-income City Dwellers＂launched by the Company ended on high note, with positive response from society. At the same time, the Company achieved preliminary results from its research on “Housing suitable for low to middle-income city dwellers”. Leveraging over 10 years of experience in property development, the Company was the first in the industry to conduct an extensive research on such type of housing demand, and based on the study develops a series of prototype of “housing suitable for low to middle-income city dwellers”, with the aim of providing aid to enhancing the design of economy housing and quality of living of the lowest income group living in the urban areas. In December, the Company laid the foundations of a model building for “housing suitable for low to middle-income city dwellers” in Guangzhou. During the year under review, the Company and the “World Architecture” magazine jointly organised “WA – Vanke Possible Housing Design Competition”, which is held once every two years with the aim of incubating young architects. The theme of this session was “Possibility of 80 sq m”, which aimed at exploring the living space of small and medium residential properties and promoting intensive and efficient use of space. Future development prospects In 2007, the industry at its turning point will continue to undergo a restructuring process, while the macroeconomic austerity measures will remain in place. China Vanke will continue to be in the rapid development stage, adhering to the 3- year development strategies as planned. 34 The corporate motto for the year 2007 is “Follow the Right Principles, Pursue Meticulous Management”. The Company will continue to revolutionise itself, and bear the responsibility of a pioneer amid the industry restructuring. China Vanke will take a step towards developing into a lasting Company by being down-to-earth, and dedicated and attentive to work. China Vanke will push ahead with its prevailing strategy, and continue to focus on its urban-economy-oriented strategy with Pearl River Delta, Yangtze River Delta and Bohai-Rim region being its core development areas. The Company will continue to have medium-end housing as the core product for development, to further optimise the customer- oriented operating and managerial system, to facilitate housing industrialisation, and to implement meticulous management. In 2007, China Vanke will proceed with the implementation of furbished units, with the aim of increasing the proportion of furbished units. During the year, with the commencement of the Company’s base for housing industrialisation in Dongguan, the Company will further raise the proportion of industrial technology application. Through enhancing its product innovativeness, the Company can develop products with better quality and higher price/ performance ratio that can better satisfy customers’ needs. The Company’s planned area under construction and area to be completed in 2007 will be approximately 7.0 million sq m and approximately 6.0 million sq m respectively. The Company also plans to further increase project resources under planning by approximately 10 million sq m. As such, the Company will intensify its resources integration, fully utilise the advantages of its partners and augment its position as the nexus of industry resources integration. It is expected that the development of direct financing sourcing in the property industry will be on the State’s agenda for further discussion. However, there will not be any tremendous change in the trend for tightening financial sourcing in the property sector during the year. China Vanke will, on one hand, take an active role in exploring innovative financing methods, and on the other hand plan to conduct a financing exercise through a subsequent offering of A shares in the capital market. The new issue will not exceed 20 per cent of the total share capital of the Company. In order to cope with its rapid development, the Company will continue to press ahead with adjustment to its organisational structure. At the same time, the Company will further fine-tune the internal audit and risk management system, with the aim of increasing its ability to avert risk associated with rapid development. 2、Operations of the Company （1）The scope and operations of the Company’s core businesses A、 By sector (Unit: RMB’000) The Company specialises in property development with commodity housing as its major products. In 2006, the Company’s sales area and sales revenue were 3,228,000 sq m, and RMB21.23 billion respectively, representing increases of 39.3 per cent and 52.2 per cent respectively when compared with 35 those of the previous year. The total sales of commodity housing in China amounted to RMB1,703.8 billion. Based on the aforesaid amount, the Company accounted for 1.25 per cent of the domestic market share in terms of sales revenue, up by 0.31 percentage point from the previous year. As at the end of the year, the booked area, booked revenue and booked cost were 2,896,000 sq m, RMB16.71 billion and RMB11.24 billion respectively, representing increases of 63.8 per cent, 71.8 per cent and 67.7 per cent respectively when compared with those of the previous year. The gross profit margin for the year was approximately 32.74 per, down by 1.63 percentage points from that of the previous year. (Unit: RMB ‘000) Revenue Cost of sales Gross margin Net profit Sector Change Change Amount Amount % Change Amount Change (%) (%) Up by 1.63 Property percentage 16,711,365 71.80% 11,240,080 67.74% 32.74 points 2,316,423 76.75% Property Up by 13.06 management percentage and others 193,066 -0.34% 147,577 -14.88% 23.56 points (18,540) -134.24% Up by 1.93 Total percentage 16,904,431 70.39% 11,387,657 65.66% 32.64 points 2,297,884 68.38% Note: Tax and surcharge for core business have been included in calculating gross profit margin B. By investment region The Company adhered to its urban-economy-oriented strategy with Pearl River Delta, Yangtze River Delta and Bohai-Rim region being its core development areas. In 2006, core cities such as Shenzhen, Guangzhou, Shanghai, Beijing and Tianjin accounted for 61.2 per cent and 73.3 per cent of the total revenue and net profit from core businesses respectively. Booked Revenue Net Profit % % Area % (RMB 000) (RMB 000) (000 sq m) Pearl River Delta Region Shenzhen 2,357,482 14.11 667,646 28.82 236 8.1 Guangzhou 1,193,742 7.14 167,159 7.22 211 7.3 Dongguan 542,230 3.24 59,859 2.58 125 4.3 Zhongshan 360,228 2.16 30,931 1.34 95 3.3 Foshan 359,446 2.15 43,150 1.86 72 2.5 Sub-total 4,813,128 28.80 968,745 41.82 739 25.5 Yangtze River Delta Region Shanghai 3,973,846 23.78 600,622 25.93 433 15.0 Suzhou 112,313 0.67 14,461 0.62 25 0.9 Hangzhou 743,568 4.45 136,704 5.90 169 5.8 Nanjing 487,111 2.92 19,684 0.86 83 2.9 36 Nanchang 334,936 2.00 21,608 0.93 102 3.5 Wuxi 862,768 5.16 60,306 2.60 186 6.4 Sub-total 6,514,542 38.98 853,385 36.84 998 34.5 Bohai-rim Region Beijing 1,111,736 6.65 63,375 2.74 178 6.1 Tianjin 1,588,673 9.50 198,815 8.58 302 10.4 Shenyang 619,838 3.71 40,366 1.74 154 5.3 Dalian 211,688 1.27 18,801 0.81 43 1.5 Changchun 305,854 1.83 30,056 1.30 71 2.5 Anshan 139,545 0.84 20,714 0.89 45 1.6 Sub-total 3,977,334 23.80 372,127 16.06 793 27.4 Others Chengdu 809,631 4.84 70,651 3.05 224 7.7 Wuhan 596,730 3.58 51,515 2.22 142 4.9 Sub-total 1,406,361 8.42 122,166 5.27 366 12.6 Total 16,711,365 100.00 2,316,423 100.00 2896 100.00 (2). Operating results of the major subsidiaries of the Company (Unit: RMB ‘000) Net profit Sales attributable Total assets Name of company (including Major projects developed in % of shareholding revenue in to China at the end subsidiaries) 2006 2006 Vanke in of 2006 2006 Shenzhen Vanke Real Estate East Coast, The Dream Town, Company Limited 100% 2,357,482 682,674 9,710,965 17 Miles, The Village Guangzhou Vanke Real Wonderland, City Garden of 100% 1,193,741 169,421 3,357,545 Estate Company Limited Vanke, Casa de Sol Dongguan Vanke Real Estate 100% 542,230 65,523 1,961,857 Green View Company Limited Zhongshan Vanke Real 100% 360,228 30,936 756,786 City Scenery Estate Company Limited Foshan Vanke Property Company Limited 100% 359,446 42,948 1,842,526 Golden Home, Shunde project Blue Mountain, Vanke Holiday Town, Spring Dew Mansion, Shanghai Vanke Real Estate Group Company Limited 100% 3,973,846 627,809 9,487,946 Rancho Santa Fe, Swallow Court, Everest Town, Charming Garden, Wonderland Suzhou Nandu Jianwu Company Limited 60% 112,313 14,506 2,339,878 Nimble Bay Hangzhou Vanke Property Company Limited 100% 743,568 136,704 3,852,989 Liangzhu project Jiangxi Vanke Yida Real Estate Development Company 50% 334,936 51,644 432,925 Wonderland Limited Nanjing Vanke Property Company Limited 100% 487,110 22,776 599,993 Lakefront Apartment Wuxi Vanke Real Estate Company Limited 100% 862,768 89,327 1,319,031 Glamorous City Beijing Vanke Company Vanke West Hill, Wonderland, Limited 100% 1,111,736 43,640 4,399,103 Glorious Palace Tianjin Vanke Real Estate Crystal City, Waterfront, Company Limited 100% 1,588,673 228,530 2,525,353 Holiday Town Shenyang Vanke Real Estate Vanke Metropolitan Apartment, Development Company 100% 619,838 30,173 853,475 Wonderland, New Elm Mansion Limited Changchun Vanke Real Estate Development Company 100% 305,854 29,903 171,557 Vanke Upper East Side Limited Dalian Vanke Real Estate Development Company 100% 211,688 17,867 925,040 Vanke City Garden Limited 37 Anshan Vanke Real Estate Development Company 100% 139,545 20,412 115,653 City Garden Limited Wuhan Vanke Real Estate Vanke Garden City, West Company Limited 100% 596,730 47,304 1,381,642 Peninsula, Hong Kong Road Chengdu Vanke Real Estate Vanke City Garden, Twin Company Limited 100% 809,631 90,905 2,055,968 Riverside, A Glamorous City Note: Please refer to the notes to the relevant financial statements for details on the registered capital of the abovementioned companies. (3). Implementation of the business plan In 2006, the Company’s operations ran smoothly. In view of the projects on hand at the beginning of the year, the Company expected that the area to be newly constructed would be 3.995 million sq m, with area to be completed of 3.325 million sq m. Although affected by the macroeconomic austerity measures such as “Size less than 90 sq m will account for 70 per cent”, the Company still captured the opportunities arising from the implementation of the austerity measures and added projects under planning of 13.96 million sq m during the year. Meanwhile, the Company also restructured its mode of production, accelerated the pace of project development, and leveraged its assets turnover and economies of scale to enhance its operating efficiency. In 2006, the Company realised area newly constructed of 5.006 million sq m and area completed of 3.275 million sq m. The Group’s Major Projects in 2006 (Unit: sq m) Area Equity Area Accumulat Planned under Project Name Location Intere Site Area completed ed area GFA constructi st in 2006 completed on in 2006 Pearl River Delta Region The Dream Town, Shenzhen Longgang 100% 513,018 514,990 86,158 67,175 203,233 The Village, Shenzhen Longgang 100% 551,193 527,899 116,794 120,391 120,391 East Coast, Shenzhen Yantian 100% 342,984 264,947 39,861 25,325 170,357 17 Miles, Shenzhen Yantian 100% 67,571 50,177 23,579 50,177 The Paradiso, Shenzhen Futian 100% 40,234 233,866 172,530 The wonderland, Foshan Nanhai 100% 533,955 552,700 106,141 75,078 206,484 City Garden of Vanke, Guangzhou Huangpu 100% 117,198 192,817 4,012 115,126 188,805 Casa de Sol, Guangzhou Baiyun 100% 74,034 145,390 13,066 27,266 45,770 Dream Town, Guangzhou Luogang 70% 222,001 154,226 68,225 Tianjing Garden, Guangzhou Huadu 100% 62,315 146,908 58,700 Green View, Dongguan Liaobu Town 100% 301,711 451,071 200,537 107,584 232,758 The East Canal, Dongguan Guancheng 29% 83,157 239,752 135,181 55,045 77,143 Songshan Lake, Songshan Lake Dongguan Industrial Garden 60% 133,300 75,946 75,946 Changping Dream Changping Town 100% 579,984 324,791 69,937 35,837 95,784 38 Town, Dongguan City Scenery, Zhongshan Nanqu 100% 335,525 574,228 89,883 138,603 201,176 The Paradiso, Zhuhai Xiangzhou 100% 23,584 120,895 120,895 Shunde Project, Foshan Shunde 100% 187,475 328,508 90,965 13,879 13,879 The Victory City, Fosha Nanhai 100% 110,000 241,725 64,730 Golden Home, Foshan Nanhai 100% 74,600 219,589 83,189 76,920 76,920 West Street Garden, Changsha Furong 80% 358,779 486,964 86,754 The Paradiso, Xiamen Siming 100% 55,657 163,559 67,995 Sub-total ** 4,768,275 6,010,947 1,578,969 881,809 1,855,409 Yangtze River Delta Region Swallow Court, Shanghai Minhang 50% 192,000 123,304 53,241 31,979 31,979 Stratford Project, Shanghai Minhang 75% 60,880 61,522 29,113 Wonderland, Shanghai Baoshan 100% 383,678 472,732 77,852 257,736 Everest Town, Shanghai Pudong 90% 238,920 352,264 139,333 67,100 67,100 Spring Dew Mansion, Shanghai Minhang 100% 96,313 116,496 116,496 116,496 Blue Mountain, Shanghai Pudong 100% 430,530 283,540 37,840 - 109,145 Charming Garden, Shanghai Songjiang 100% 366,465 333,840 15,069 35,854 63,864 Vanke Holiday Town, Shanghai Minhang 100% 599,647 541,072 13,484 125,276 527,588 Rancho Santa Fe, Shanghai Minhang 100% 317,485 89,949 15,207 59,145 Liangzhu New Town, Hangzhou Yuhang 80% 3,354,214 2,475,967 47,020 180,748 180,748 Horizon Square, Hangzhou Binjiang 80% 98,198 174,301 - Venice City, Hangzhou Xiaoshan 44% 213,344 350,897 122,103 122,103 Yousheng Project, Hangzhou Shangcheng 48% 8,070 29,493 29,493 - Industrial Nimble Bay, Suzhou Garden 70% 384,044 844,899 148,289 111,877 387,825 Charming City, Wuxi Binhu 60% 960,000 1,346,800 125,968 234,081 354,732 Eastern Impression Changjiang Road Project, Wuxi North 70% 81,664 216,458 150,700 Wonderland, Nanchang (Northern District) Gaoxin 50% 358,734 445,024 186,282 88,350 259,100 Lakefront Apartment, Nanjing Hexi 100% 134,000 213,549 98,177 58,052 115,372 Glamorous City, Zhenjiang Runzhou 100% 770,903 821,575 28,984 Sub-total ** 9,049,089 9,293,682 1,118,200 1,249,768 2,652,933 Bohai-rim Region Vanke West Hill Courtyard, Beijing Haidian 100% 98,811 126,500 16,776 126,500 Wonderland, Beijing Shunyi 100% 195,817 230,000 83,975 80,595 80,595 Glorious Palace Project, Beijing Fengtai 100% 38,484 114,847 114,847 28,080 28,080 Special Zone 808, Beijing Chaoyang 60% 8,612 41,059 41,059 Parkfront Mansion Project, Beijing Chaoyang 60% 14,106 65,312 Crystal City, Tianjin Hexi 100% 384,142 385,049 72,043 25,351 338,357 Waterfront, Tianjin Dongli 100% 2,730,014 1,911,963 144,413 127,413 188,890 39 Holiday Town, Tianjin Xiqing 55% 228,534 297,103 119,778 130,732 130,732 Vanke Metropolitan Apartments, Tianjin Nankai 50% 58,400 105,113 91,707 The Paradiso, Tianjin Binhai New Zone 45% 60,208 282,978 113,007 New Miles, Shenyang Hunnan New Zone 100% 52,659 115,860 34,361 New Elm Mansion, Shenyang Hunnan New Zone 100% 182,139 128,324 55,379 51,517 51,517 Wonderland, Shenyang Yuhong 100% 387,471 544,484 83,544 99,892 456,553 Dream Town, Shenyang Heping 49% 365,566 908,881 170,595 101,306 101,306 Rancho Santa Fe, Shenyang Dongling 100% 344,365 153,462 12,683 12,683 12,683 Holiday View, Dalian Ganjingzi 100% 135,297 164,370 164,370 - - City Garden Project, Dalian Shahekou 100% 161,890 221,813 34,581 34,581 187,871 Vanke Rancho Santa Jingyue Fe Development Zone 100% 130,873 79,233 32,053 15,137 15,137 Vanke Upper East Side Erdao 100% 157,709 208,722 64,493 48,204 178,336 Golden Home, Anshan Tiedong 100% 48,874 98,430 43,228 - - City Garden, Anshan Tiedong 100% 161,444 180,885 41,193 22,019 139,692 Charming City, Qingdao Chengyang 80% 200,289 340,491 83,155 - - Sub-total ** 6,145,704 6,704,879 1,559,404 794,285 2,077,309 Others Jinjiang 100% 336,273 487,262 11,231 11,231 487,262 Twin Riverside, Chengdu Xindu 100% 261,760 339,633 91,666 91,666 91,666 Charming City, Chengdu Chenghua 60% 444,176 738,785 206,659 106,838 167,891 Californian Bay, Chengdu Jinniu 100% 28,183 190,362 190,362 - - Garden City, Wuhan Hongshan 100% 359,947 437,786 179,314 22,620 217,274 West Peninsula, Wuhan Dongxi Lake 100% 201,800 254,712 45,270 67,239 67,239 Dew Garden, Wuhan Wuchang 55% 36,390 87,129 24,762 No. 8 Hong Kong Road Jiangan 100% 6,943 49,059 49,059 49,059 Sub-total 1,675,472 2,584,728 749,264 348,653 1,080,391 Total ** ** ** 5,005,837 3,274,515 ** (4) Major suppliers and customers A. The aggregate purchase amount from the Company’s five largest suppliers as a percentage of its total purchase during the year Property development is the Company’s core business. Development projects are contracted out to construction companies and most of the building materials are supplied by construction companies. Some material and equipment, such as elevators, are directly procured from suppliers. In 2006, the aggregate purchase amount from the five largest material and equipment suppliers was about RMB300 million, accounting for 17.76 per cent of the total purchase of material and equipment for the year. The Company has established a centralised procurement system to achieve economies of scale, with procurement centralisation being intensified each year. The Company realised its development objective through resources integration, and started to establish a centralised supply chain management system, to implement supplier relationship management with the aim of serving its end customers and achieving mutual development. B. The aggregate sales amount to the Company’s five largest customers as a percentage of its total sales for the year 40 The Company mainly focuses on the development of commodity housing. Most of its customers are individual home buyers from various cities where the Company has launched its projects. The number of this type of customers of the Company is relatively large. As a result, sales to major customers only account for a small proportion of the annual turnover. Only for certain projects are there signs of a small number of institutional buyers or bulk purchasers. Sales to the five largest customers amounted to approximately RMB0.26 million, accounting for 0.14 per cent of the Company’s total sales revenue of the year. 3. Financial status of the Company During the year under review, the Company sustained steady growth in its operation, with enhanced assets quality. The Company’s financial position also remained healthy. The projects identified during the year as projects suitable for development laid a solid foundation for the continued development of the Company. (Unit: RMB ‘000) Financial 31 Dec 2006 31 Dec 2005 Change(+/-) Reasons for changes indicators Expansion in operation scale and growth in Total Assets 49,083,971 22,370,079 119.4% net assets and liabilities After the Company’s acquisition of further Long-term equity interests in Zhejiang Nandu and 1,110,992 1,293,326 -14.1% investment Suzhou Nandu, these two companies were consolidated in the Group Properties,plant 516,301 217,975 136.9% Increase along with acqusition of subsidiaries and equipment Properties held Enlargement of the company and increase in 16,439,381 7,637,080 115.3% for development resources of property development Properties under Enlargement of the company and increase in 13,882,247 5,612,914 147.3% development resources of property development Trade and other 3,321,311 1,883,799 76.3% Increase in deposit of tender receivable cash and cash Expansion in operation scale and increase in 10,743,695 3,249,035 230.7% equivalents preparation for operation Trade and other 17,513,633 9,182,068 90.7% Increase in deposit receivable of sales payable Increase in net profit, new ordinary share Share holders' 14,928,548 8,373,406 78.3% issued and conversion of certain of the equity Company's convertible bonds Financial Jan-Dec Jan-Dec Change(+/-) indicators 2006 2005 Expansion in the scale of development and Revenue 16,904,431 9,920,739 70.4% sales for property business Growth in the revenue generated from the Gross profit 5,516,773 3,046,605 81.1% property business Distribution Normal growth along with expanding 625,717 466,289 34.2% costs operation scale Administrative Normal growth along with expanding 878,153 506,301 73.4% expenses operation scale Income taxation 1,639,299 663,125 147.2% Due to the growth in total profit Profit attributable to equity 2,297,884 1,364,690 68.4% Growth in total profit shareholders of the company Other financial Jan-Dec Jan-Dec Change(+/-) indicators 2006 2005 Up by 4.3 Increase in the receipts in advance,long-term Gearing ratio 64.4% 60.1% percentage borrowings and long-term account payable 41 points Faster growth of receipts in advance in Current ratio 1.40 1.19 20.5 current liabilities Up by 16.9 per Faster growth of receipts in advance in Quick ratio 63.7% 46.7% centage points current liabilities Shareholders’ Down by 7 Increase in liabilities and increase in total 30.4% 37.4% percentage equity ratio assets points Account Increase in the speed of cash collection from receivable 8 14 -6 sales turnover (Day) Inventory Faster growth of land to be developed and 772 667 105 turnover (Day) land under development 4. Investment of the Company During the year under review, the Group’s net long-term investment amount decreased by RMB18.23 million representing an decrease of 14 per cent from that of the previous year. Please refer to note 4.1 to the financial statements for the name of the investments, their principal operating activities and percentage of the Company’s equity holding. (1) Use of proceeds from the capital market Having obtained the approval from the relevant authority, the Company issued 400 million shares of A shares (nominal value of RMB 1) through a private placing with specific target investors on 13 December 2006 at an issue of RMB10.5 per share. The private placing raised proceeds of RMB4.2 billion. The net proceeds, after deducting issue expenses, of RMB4,196.7 million, were received on 19 December 2006 and were verified and filed under the Document No 108, Shenhua (2006) by Shenzhen Dahua Tiancheng Certified Public Accountants. The aforesaid proceeds were used to invest in eight projects. Details on the investment amount, investment gain, development progress of the projects as on 31 December 2006 are as follows: (Unit: RMB ‘000) Actual use of the proceeds and Use of proceeds stated in that disclosed in the 2006 Annual Report the offering circular As of 31 December 2006 Amount of Amount of proceeds proceeds Return on Investment Projects to be Projected already investment Progress allocated return on applied to of the Note of projects to the investment the booked investment investment project project project The Paradiso Project, Xiamen (original 750,000 14.93% 596,500 - 3% 1 Lulinglu Project, Xiamen) Guicheng Victory City Project, Nanhai, Foshan 750,000 10.76% 253,600 - 1.60% 2 (original A7 project) Wonderland Project, 550,000 10.00% 306,990 13% 26.65% 3 Shunyi, Beijing 42 Vanke Glamorous City Project, Jianggan, 500,000 13.20% 212,850 - 5% 4 Hangzhou (Original Jiubao project) New Downtown Project, 500,000 12.30% 144,220 22% 13% 5 Shunde, Foshan Golden Home Project, Wuhan (original Jinghan 500,000 12.50% 214,710 - 3% 6 Avenue project) Jinchuan Project, Wujing 350,000 11.60% 60,910 - - 7 Town, Shanghai California Project, Jinniu, Chengdu 300,000 12.20% 175,030 - 44% 8 (Shawan project) Total 4,200,000 - 1,964,810 - - Up till 31 December 2006, the Company had used RMB1,964.81 million of the proceeds according to the Offering Circular, representing 46.82 per cent of the total proceeds of RMB4,196.7 million (after deducting the related issue expenses). The outstanding amount of proceeds of RMB2,231.89 million will be invested in the continued development of the projects. Pursuant to the relevant regulatory body’s approval, the Company on 24 September 2004 issued 19.9 million convertible bonds to the public The proceeds raised from the issue of the Company’s convertible bonds were received on 30 September 2004. As at the end of the year under review, save as the amount of proceeds of RMB107.88 million planned for investment in Shanghai Qibao 53# project not yet used, the remaining amount of proceeds intended to be used in other planned investments had been applied completely. The investments financed by the proceeds had displayed satisfactory performance, exceeding the results undertaken in the offering circular. The construction of Shanghai Qibao 53# project was delayed due to the construction of subway station. The overall development plan of the project would be adjusted according to the construction progress of the subway station. However, the construction of the subway can increase the value of the land at the same time. The return on this project is expected to reach the level undertaken in the offering circular. (2) Use of capital not from the capital market A Equity investment 1) The Group mainly promoted and established the following companies during the year under 43 review: Newly-established Registered No. Companies Currency Capital RMB Business Principally engaged in the real Hangzhou Vanke 1、 RMB 80,000,000.00 80,000,000.00 estate development and sales of Property Co., Ltd. commodity house etc. Beijing COFCO-Vanke Holiday Town Real Principally engaged in the real 2、 RMB 830,000,000.00 830,000,000.00 Estate Development estate development etc. Co., Ltd. Tianjin Wantai Principally engaged in property 3、 Fashion Property Co., RMB 80,000,000.00 80,000,000.00 development Ltd. Shanghai Jinhua Real Principally engaged in the 4、 Estate Development RMB 100,000,000.00 100,000,000.00 development and operation of Co., Ltd. Shanghai Wujing Town project Shanghai Jinchuan Principally engaged in the real 5、 Real Estate RMB 100,000,000.00 100,000,000.00 estate development and operation Development Co., Ltd. Principally engaged in the Wuhan Vanke Tiancheng 6、 US dollars 12,100,000.00 96,812,221.00 development and operation of Real Estate Co., Ltd. Putian project Tianjin Vanke Xinrui Principally engaged in the real 7、 RMB 120,000,000.00 120,000,000.00 Real Estate Co., Ltd. estate development and sales Wuxi Xinwan Real Principally engaged in the real 8、 RMB 120,000,000.00 120,000,000.00 Estate Co., Ltd. estate development and operation Foshan Vanke Property Principally engaged in the 9、 RMB 30,000,000.00 30,000,000.00 Management Co., Ltd. property management Guangzhou Vanke Star Principally engaged in the real 10、 US dollars 18,600,000.00 147,877,440.00 Real Estate Co., Ltd. estate development Suzhou Vanke Real Principally engaged in the real 11、 RMB 30,000,000.00 30,000,000.00 Estate Co., Ltd. estate development Suzhou Vanke Property Principally engaged in the real 12、 US dollars 42,500,000.00 336,128,462.50 Co., Ltd. estate development Ningbo Vanke Real Principally engaged in the real 13、 Estate Development RMB 150,000,000.00 150,000,000.00 estate development Co., Ltd. Tianjin Vanke New Principally engaged in the real 14、 Miles Real Estate Co., RMB 230,000,000.00 230,000,000.00 estate development Ltd. Qingdao Vanke Yinshengtai Real Principally engaged in the real 15、 RMB 100,000,000.00 100,000,000.00 Estate Development estate development Co., Ltd. Shenzhen Vanke New Principally engaged in the real 16、 City Real Estate US dollars 6,250,000.00 30,000,000.00 estate development Development Co., Ltd. Guangzhou Pengwan Principally engaged in the real 17、 RMB 200,000,000.00 200,000,000.00 Real Estate Co., Ltd. estate development Zhuhai Zhubin Principally engaged in the real 18、 Property Development RMB 109,000,000.00 109,000,000.00 estate development Co., Ltd. Vanke COFCO (Suzhou) Principally engaged in the real 19、 RMB 230,000,000.00 230,000,000.00 Property Co., Ltd. estate development 44 Dalian Dream Town Principally engaged in the real 20、 US dollars 42,000,000.00 252,045,920.00 Property Co., Ltd. estate development Total 3,371,864,043.50 Save as the aforesaid companies, the Group had promoted and established another 18 companies, , with a total amount of investment of RMB176.5 million. 2) The Group mainly acquired the following companies during the year A. On 18 January 2006, the Company and the State-owned Assets Supervision and Administration Commission of People's Government of Chaoyang District entered into an agreement for the transfer of the 60 per cent equity interests in Beijing Chao Wan Property Development Centre for a consideration of RMB389 million. For details, please refer to Note 37 to the financial statements. B. The Company further acquired partial interests in Shanghai Nandu, Suzhou Nandu and Zhejiang Nandu during the year under review for RMB1,765.66 million. For details, please refer to the section “Significant acquisition and disposal of assets”. C. The total amount of investment in another 10 companies acquired by the Group during the year under review was RMB161 million. 3）During the year, the Company increased the capital of Shanghai Vanke Rancho Property Company Limited by RMB193 million to facilitate the business development of the subsidiary. B. Other investments During the year under review, the Company had 47 new projects, with a total site area of approximately 9.10 million sq m and a planned GFA of approximately 12.22 million sq m, of which approximately 9.82 million sq m of planned GFA is in proportion to China Vanke’s equity holding. In addition, due to the change, occurred during the year under review, in the equity holding in some of the projects acquired by the Group prior to the year under review, the planned GFA in proportion to China Vanke’s equity holding increased by 559,000 sq m. Planned Site area GFA Equity (ten Region Project Location (ten Progress interest thousand thousand sq m) sq m) Shenzhe Pre-constr Pingshan Project Pingshan Town n 100% 2.6 7.9 uction Guangzh Pre-constr Lijing Home Yuexiu ou 100% 0.7 5.8 uction Under Tianjing Garden Huadu constructi 100% 6.2 14.7 on Jinshazhou Pre-constr Baiyun Project 50% 14.5 43.4 uction Pre-constr Dongping Project Huadu 50% 13.7 14.2 uction 45 Under South City Land Nanhai constructi Lot Project 100% 7.5 9.4 on Donggua Dream Town, Changping Launched n Changping Town 100% 58.0 32.5 to market Dalingshan Pre-constr Dalingshan Project 100% 14.7 9.2 uction Under The Paradiso Xiangzhou constructi Zhuhai 100% 2.4 12.1 on Zhuhai Hotel Pre-constr Xiangzhou Project 100% 11.1 25.2 uction Launched Shunde Project Shunde Foshan 100% 18.7 32.9 to market Under Nanhai, Victory City constructi Foshan 100% 11.0 24.2 on Chan City, Pre-constr Nanzhuang Foshan 100% 38.6 77.7 uction Under West Street Changsh Furong constructi Garden, Changsha a 80% 35.9 48.7 on Under The Paradiso Siming constructi Xiamen 100% 5.6 16.7 on Shangha Pujiang Town Pre-constr Minhang i Project 49% 29.6 22.9 uction Pre-constr Charming Garden Songjiang 100% 24.3 22.4 uction Pre-constr Binjiang Project Pudong 100% 3.9 10.7 uction Pre-disman Huacao 213# Minhang 100% 17.3 29.1 tling Pre-disman Qianshu Minhang 51% 31.6 41.9 tling Wujing Town Pre-constr Minhang Project 100% 14.1 24.4 uction Hangzho Glamorous City, Pre-constr Jianggan u Hangzhou 100% 8.4 19.0 uction Jiang Village Pre-constr Project, Xihu uction Hangzhou 51% 15.6 30.4 Liangzhu New Launched Yuhang Town, Hangzhou 80% 335.4 247.6 to market Horizon Square, Pre-constr Binjiang Hangzhou 80% 9.8 17.4 uction Venice City, Launched Xiaoshan Hangzhou 44% 21.3 35.1 to market Yousheng Under Project, Shangcheng constructi Hangzhou 48% 0.8 2.9 on Under Land Lot 4&5# of Industrial constructi East Lake Garden Suzhou 51% 15.6 12.5 on 46 Smelting factory Pre-constr Urban area project 55% 13.5 24.2 uction Changjiang Road Changjiang Launched Wuxi Project, Wuxi Road North 70% 8.2 21.6 to market Golden Home Pre-constr Yinzhou Ningbo (TBC) 100% 19.0 31.4 uction Pre-constr Holiday Town Fengtai Beijing 50% 22.4 41.7 uction Land Lot of Pre-constr Fengtai Sijiyuyang 100% 4.3 7.7 uction Shifoying Pre-constr Chaoyang Project 60% 1.3 1.7 uction Vanke Parkfront Pre-constr Chaoyang Mansion Project 60% 1.4 4.7 uction Phase III of Pre-constr Garden 5# Chaoyang uction project 60% 3.7 9.6 Under Binhai New The Paradiso constructi Zone Tianjin 45% 6.0 28.3 on Preliminar Ningfa Garden Nankai 55% 6.3 4.0 y stage Under Hunnan New Shenyan New Miles constructi Zone g 100% 5.3 11.6 on Hunnan New Pre-constr Phase II of Siku Zone 100% 8.8 16.1 uction Under Golden Home Tiedong constructi Anshan 100% 4.9 9.8 on Preliminar Glamorous City Chengyang Qingdao 80% 20.0 34.0 y stage Launched California Bay Jinniu Chengdu 100% 2.8 19.0 to market Spring Dew Preliminar Wenjiang Mansion 90% 2.5 13.8 y stage Pre-constr Jianshe Road Jianshe Road 100% 4.7 28.6 uction Under Dew Garden Wuchang constructi Wuhan 55% 3.6 8.7 on Preliminar Golden Home Jianghan 100% 2.5 15.0 y stage Total 910.1 1,222.3 Note: 1, The total land price of the above-mentioned new projects was RMB22.75 billion. As at the end of 2006, the Company had paid a total premium of RMB11.21 billion for the above-mentioned new projects. In addition, during the year under review, the Company added eight new projects, of which the related 47 transfer procedure is being handled. These eight projects have a total site area of 0.88 million sq m, of which 1.63 million sq m of planned GFA is in proportion to China Vanke’s equity holding. There is still uncertainty over the completion of the acquisition of these projects. 5. Business Development Plan for the Year 2007 (1) Project development plan As at the end of 2006, the total area of the projects under planning acquired by the Company amounted to approximately18.51 million sq m, of which approximately 15.36 million sq m constituting a total of 96 projects was in proportion to China Vanke’s equity holding. The planned area to be newly constructed and area to be completed in 2007 will be approximately 6.37 million sq m and 5.75 million sq m respectively. In addition, at the end of the reporting year, the Company was handling the related transfer procedure for 13 projects under planning, with a total site area of 2.04 million sq m, of which 2.76 miliion sq m of planned GFA is in proportion to China Vanke’s equity holding. Since there is still uncertainty over the completion of the acquisition of these projects, the construction and completion of the related projects remain uncertain. The Group’s Major Projects in 2007 (Unit: sq m) Planned Planned Project Equity Planned area under area to be resources as Project Location Site area interest GFA construction completed at the end of in 2007 in 2007 2006 (sq m) Pearl River Delta Region The Dream Town, 12.2 Shenzhen Longgang 100% 513,018 514,990 121,816 196,943 The Village, 28.9 Shenzhen Longgang 100% 551,193 527,899 159,697 79,077 East Coast, 2.0 Shenzhen Yantian 100% 342,984 264,947 20,275 78,775 17 Miles, Shenzhen Yantian 100% 67,571 50,177 - The Paradiso, Shenzhen Futian 100% 40,234 233,866 61,336 Vanke Center, 7.9 Shenzhen Yantian 100% 61,730 79,242 79,242 - Brooks Valley, 4.7 Shenzhen Baoan 60% 158,639 47,270 47,270 - Dajia Island, 23.5 Shenzhen Huizhou City 100% 364,450 234,975 - Pingshan Project, 7.8 Shenzhen Longgang 100% 26,218 77,624 77,624 - Golden Home, 3.5 Guangzhou Dongshan 100% 7,716 34,950 34,950 - Lucking Home, 5.8 Guangzhou Yuexiu 100% 6,576 57,736 57,736 - Tianjing Garden, 8.8 Guangzhou Huadu 100% 62,315 146,908 88,208 27,895 Jinshazhou Project, 43.4 Guangzhou Baiyun 50% 144,657 433,971 144,610 - Dongping Project, 6.2 Guangzhou Huadu 50% 137,334 142,119 61,571 - Dream Town, 8.6 Guangzhou Luogang 70% 222,001 154,226 86,000 93,571 Wonderland, Foshan Nanhai 100% 533,955 552,700 21,318 160,957 7.3 City Garden, Guangzhou Huangpu 100% 117,198 192,817 3,741 Casa de Sol, 8.7 Guangzhou Baiyun 100% 74,034 145,390 65,349 48 Green View, 8.3 Dongguan Liaobu Town 100% 301,711 451,071 62,867 66,024 The East Canal 2.7 Garden, Dongguan Guancheng 29% 83,156 239,752 27,428 - Songshan Lake Songshan Lake Garden, Dongguan Industrial Garden 60% 133,333 75,946 - 75,946 Dream Town, Changping, 22.9 Dongguan Changping Town 100% 579,984 324,791 80,800 33,795 Dalingshan Project, 14.7 Dongguan Dalingshan 100% 146,674 146,674 - - City Landscape, 26.5 Zhongshan Nanqu 100% 335,525 574,228 105,341 84,111 The Paradiso, Zhuhai Xiangzhou 100% 23,584 120,895 - 87,067 Zhubin Project, 25.2 Zhuhai Xiangzhou 100% 110,600 251,700 46,800 - Shunde Project, 23.8 Foshan Shunde 100% 187,475 328,508 134,063 134,063 Victory City, Foshan Nanhai 100% 110,000 241,725 92,220 64,730 17.7 Golden Home, 7.0 Foshan Nanhai 100% 74,600 219,589 70,357 83,198 Nanzhuang Project, 77.7 Foshan Chancheng 100% 386,400 776,824 60,960 60,960 West Street Garden, 40.0 Changsha Furong 80% 358,779 486,964 80,997 86,754 The Paradiso, 9.6 Xiamen Siming 100% 55,657 163,559 95,564 67,995 Sub-total 6,319,301 8,294,033 1,857,715 1,612,288 455.2 Yangtze River Delta Region Pujiang Town 22.9 Project, Shanghai Minhang 49% 296,295 229,221 45,122 - Binjiang Project, 10.7 Shanghai Pudong 100% 38,753 106,883 55,738 - Swallow Court, 2.3 Shanghai Minhang 50% 192,000 123,304 22,574 68,751 Huacao 213# project, 24.8 Shanghai Minhang 100% 172,668 247,955 247,955 157,792 Stratford Project, Shanghai Minhang 75% 60,880 61,522 61,522 Wonderland, 10.2 Shanghai Baoshan 100% 383,678 472,732 101,731 59,314 Qianshu Project, 36.8 Shanghai Minhang 51% 315,865 418,558 87,423 - Wujing Town Project, 24.4 Shanghai Minhang 100% 141,239 244,426 134,185 134,185 Everest Town, 10.6 Shanghai Pudong 90% 238,920 352,264 105,750 139,333 Qibao 53#, Shanghai Minhang 100% 57,900 170,000 30,000 - 17.0 Blue Mountain, 17.4 Shanghai Pudong 100% 430530 283,540 25,161 19,840 Charming Garden, 27.0 Shanghai Songjiang 100% 366,465 333,840 124,079 139,676 Holiday Town, Shanghai Minhang 100% 599647 541,072 - 13,484 Rancho Santa Fe, 1.0 Shanghai Minhang 100% 317,485 89,949 10,014 7,591 Qibao 187#, Shangha Minhang 100% 61,724 127,000 12.7 Glamorous City, 19.0 Hangzhou Jianggan 100% 84,438 190,109 190,109 - Jiangcunxixi Project, 30.4 Hangzhou Xihu 51% 155,838 304,340 146,810 - Liangzhu New Town, 229.5 Hangzhou Yuhang 80% 3,354,214 2,475,967 31,412 168,851 Horizon Square, 0.0 Hangzhou Binjiang 80% 98,198 174,301 174,301 49 Venice City, 0.0 Hangzhou Xiaoshan 44% 213,344 350,897 201,749 Yousheng Project, 2.9 Hangzhou Shangcheng 48% 8,070 29,493 - Hudong Project, 12.3 Suzhou Industrial Garden 51% 155,673 123,181 100,313 45,684 Smelting Factory 24.3 Project, Suzhou Canglang 55% 134,771 242,902 181,499 41,903 Nimble Bay, Suzhou Industrial Garden 70% 384,044 844,899 87,987 38.9 Golf Project, 33.0 Kunshan Bacheng Town 85% 560,000 330,000 - Glamorous City, 93.0 Wuxi Binhu 60% 960,000 1,346,800 144,850 172,550 Eastern Impression Changjiang Road 10.6 Project, Wuxi Norht 70% 81,664 216,458 106,346 78,441 Wonerland (North), 3.3 Nanchang Gaoxin 50% 358,734 445,024 33,373 128,058 Lakefront Apartment Hexi 100% 134,000 213,549 98,177 0.0 Glamorous City, 79.3 Zhenjiang Runzhou 100% 770,903 821,575 163,079 65,664 Golden Beach, 31.3 Ningbo Yinzhou 100% 190,369 312,537 142,152 - Sub-total 11,318,309 12,224,298 2,229,675 2,064,853 830.7 Bohai-rim Region Holiday Town, 41.7 Beijing Fengtai 50% 224,254 416,500 228,423 77,314 Wonderland, Beijing Shunyi 100% 195,817 316,610 232,635 61,479 23.3 Glorious Palace 0.0 Project, Beijing Fengtai 100% 38,484 114,847 86,767 Shifoying Project, 1.9 Beijing Chaoyang 60% 12,489 18,885 18,885 - Parkfront Mansion 0.0 Project, Beijing Chaoyang 60% 14,106 65,312 65,312 Beijing Garden 5# Chaoyang 60% 36,543 138,265 47,654 - 13.8 Crystal City, Tianjin Hexi 100% 384,142 385,049 46,692 0.0 Waterfront, Tianjin Dongli 100% 2,730,014 1,911,963 210,382 112,852 160.6 Holiday Town, 6.0 Tianjin Xiqing 55% 228,534 297,103 59,518 106,853 Golden Home, 1.3 Tianjin Nankai 50% 58,400 105,113 13,406 91,707 The Paradiso, Tianjin Binhai New Zone 45% 60,208 282,978 91,424 - 17.0 Ningfa Garden, 4.0 Tianjin Nankai 55% 62,671 39,728 39,728 39,728 New Miles, 8.1 Shenyang Hunnan New Zone 100% 52,659 115,860 81,499 34,361 New Elm Mansion, Shenyang Hunnan New Zone 100% 182,139 289,753 125,808 55,063 18.5 Wonderland, 4.7 Shenyang Yuhong 100% 387,471 544,484 46,621 60,310 Dream Town, 73.8 Shenyang Heping 49% 365,566 908,881 54,865 49,928 Rancho Santa Fe, 14.1 Shenyang Dongling 100% 344,365 153,462 44,394 21,776 Holiday Town, 0.0 Dalian Ganjingzi 100% 135,297 164,370 163,370 City Garden Project, 3.4 Dalian Shahekou 100% 161,890 221,813 33,942 Jingyue Vanke Rancho Santa Development 2.6 Fe Zone 100% 130,873 79,233 26,336 43,252 Vanke Shangdong Erdao 100% 157,709 208,722 30,386 Golden Home, 5.5 Anshan Tiedong 100% 48,874 98,430 44,046 43,228 50 City Garden, Anshan Tiedong 100% 161,444 180,885 - 41,193 Glamorous City, 25.7 Qingdao Chengyang 80% 200,289 340,491 83,155 Sub-total 6,374,238 7,398,737 1,399,566 1,314,726 426.0 Others Glamorous City, 36.5 Chengdu Chenghua 60% 444,176 738,785 50,496 61,452 Twin Riverside, 24.8 Chengdu Xindu 100% 261,760 339,633 120,000 120,000 Spring Dew 13.8 Mansion, Chengdu Wenjiang 90% 24,773 137,569 137,569 11,500 Jianshe Road Project, 23.5 Chengdu Chenghua 100% 46,943 234,824 234,824 - California Bay, Chengdu Jinniu 100% 28,183 190,362 - 190,362 City Garden, Wuhan Hongshan 100% 359,947 437,786 41,197 179,314 4.1 West Peninsula, 14.7 Wuhan Dongxi Lake 100% 201,800 254,712 81,985 143,268 Dew Garden, Wuhan Wuchang 55% 36,390 87,129 62,367 30,050 6.2 Golden Home, Wuhan Jianghan 100% 23,851 150,044 150,044 17,766 15.0 Sub-total 1,427,823 2,570,844 878,482 753,712 138.7 Total ** 25,439,671 30,487,912 6,365,437 5,745,578 1850.6 From the end of the year under review to 18 March 2007, the Company acquired 12 new projects, with a total site area of 891,000 sq m, a total planned GFA of 1.395 million sq m and total land value of RMB 4.44 billion. Details are as follows: 1) On 30 January 2007, the Company acquired the land lot situated in the north of Guangzhou Science City. The project has a site area of 88,000 sq m and a proposed planned GFA of 176,000 sq m. 2) On 2 February 2007, the Company acquired Lebainian project in Ganjingzi district, Dalian through tendering. The project has a site area of 368,000 sq m and a proposed planned GFA of 397,000 sq m. 3) On 9 February 2007, the Company acquired Huangjiawei project in Xiaguan district, Nanjing through public auction. The project has a site area of 36,000 sq m and a proposed planned GFA of 39,000 sq m. 4) On 15 February 2007, the Company acquired Longjin Middle Road project of Guangzhou through entering into agreement. The project has a site area of 6,000 sq m and a proposed planned GFA of 40,000 sq m. 5) In January 2007, the Company acquired Hengfeng project of Shenzhen through entering into agreement. The project has a site area of 72,000 sq m and a proposed planned GFA of 44,000 sq m. 6) In January 2007, the Company acquired Jiangwan project of Guangzhou through public auction. The project has a site area of 10,000 sq m and a proposed planned GFA of 59,000 sq m. 7) In January 2007, the Board approved the agreement entered between the Company and Shanghai Hengda Group Co., Ltd and Shanghai Jixin Property Development Co., Ltd.. The Company acquired projects in Chengshan Road project , Jiyang Road project, Wu Jiefang project, Qi Jiefang project, Zhonglin project and Yuntai Road project,in Pudong, Shanghai.In whicn, Sale of the Yuntai Road project is now in progress. The basic information on other projects is as follows: (Unit: sq m) Project Location Site Area Planned GFA Chengshanli Project Pudong 19,389 57,791 51 Jiyang Road Project Pudong 19,392 19,392 Wujiefang Project Pudong 121,405 125,183 Qijiefang Project Pudong 88,900 133,350 Zhonglin Project Pudong 54,831 87,730 Total 303,917 423,446 The total planned area to be newly constructed and planned area to be completed of the projects in 2007 are 877,000 sq m and 203,000 sq m, respectively. Details are as follows: Planned area Planned area to be Equity Site Area Planned GFA to be newly Project Location completed in Interests (sq m） (sq m) constructed 2007 in 2007 (sq m) (sq m) Lebainian project, Dalian Ganjingzi 55% 368,897 425,767 154,755 72,967 Huangjiawei project, Nanjing Xiaguan 100% 20,055 50,412 42,101 Yuntai Road project, Shanghai Pudong 100% 22,370 72,060 72,060 Chengshan Road project, Shanghai Pudong 100% 19,389 57,791 57,791 Jiyang Road project, Shanghai Pudong 100% 19,392 22,636 22,636 - Qi Jiefang project, Shanghai Pudong 100% 88,900 154,254 154,254 - Wu Jiefang project, Shanghai Pudong 100% 121,405 147,374 147,374 - Zhonglin project, Shanghai Pudong 100% 54,831 103,591 103,591 - The Dream Town H3 project, Guangzhou Luogang 100% 88,105 218,954 109,477 - Longjin Middle Road, Guangzhou Yuexiu 100% 5,734 40,435 40,435 Jiangwan project, Guangzhou Zhuhai 100% 9,629 58,624 58,624 Hengfeng project, Shenzhen Baoan 30% 72,499 43,500 43,500 Total 891,206 1,395,398 876,747 202,818 Special Remarks on Risk Factors: (1) The schedule for the commencement and completion of the above-mentioned projects may be adjusted due to the following factors: a) significant changes that may occur in the macro economy and the property market or changes in the sale of an individual project; b) further elaboration on and changes in the policy on the transfer of land use right may cause uncertainties to the Company’s projects held for development; c) approval requirements may be tightened by new rules and regulations such that the application progress for permits will be slowed down, thereby affecting the schedule of project development; d) unfavourable weather conditions may delay the progress of project development and affect the schedule for completion. 6. Work Report of the Board of Directors 52 （1）During 2006, the Board held a total of five board meetings. A. On 17 March 2006, the 4th Meeting of the 14th Board of Directors was held to consider and approve the following resolutions: the resolution regarding 2005 audited financial report; the resolution regarding profit appropriation and dividend distribution for the year 2005; the resolution regarding appropriation and write-off of the provision for diminution in asset value for 2005; “2005 Annual Report” and its summary; the resolution regarding amendments to the Company’s Articles of Association; the resolution regarding the establishment of Phase One of The Restricted Stock Incentive Plan; the resolution regarding the appointment of auditors for the year 2006; the resolution regarding the appropriation of the corporate citizen’s special project development fund; the resolution regarding the holding of the 2005 Annual General Meeting (18th) of the Company; the resolution regarding the determination of the scope of authority of the Board in relation to matters related to project development and the granting of authorisation for such matters; the resolution regarding the granting of the Chairman the mandate to engage in financing activities with banks and other financial institutions and to stand surety on behalf of the Board; the resolution regarding the transfer of equity interest in Shenzhen Vanke Film and Television Co., Ltd. The relevant resolutions were published in China Securities Journal, Securities Times, Shanghai Securities News and The Standard of Hong Kong on 21 March 2006. B. On 21 April 2006, the 5th Meeting of the 14th Board Meeting was held to consider and approve the following resolutions: 2006 First Quarterly Report and unaudited financial statements; the resolution regarding supplementary amendments to the Company’s Articles of Association; the resolution regarding the amendments to the Phase One (2006-2008) of The Restricted Stock Incentive Plan; the resolution regarding continuing purchasing liability insurance for the directors, members of the Supervisory Committee and senior management; the resolution regarding the adjustment to the convention of the 2005 Annual General Meeting; the resolution regarding the granting of authorisation to participate in the bidding for Wan Heng project in Fengtai, Beijing. The announcements of the relevant resolutions were published in China Securities Journal, Securities Times, Shanghai Securities News and The Standard of Hong Kong on 25 March 2006. C. The 6th Meeting of the 14th Board of Directors held on 28 July 2006 considered and approved the Company’s 2006 Interim Report, unaudited financial statements and Summary of the 2006 Interim Report; the resolution regarding no profit appropriation and no transfer of surplus reserve to share capital for the 2006 interim period; the resolution regarding the appropriation of the provision for diminution in asset value and treatment of loss for the 2006 interim period. The relevant report was published in China Securities Journal, Securities Times, Shanghai Securities News and The 53 Standard of Hong Kong on 1 August 2006. D. On 4 August 2006, the 7th Meeting of the 14th Board Meeting was held to consider and approve the following resolutions: the resolution regarding authorising the Chairman to handle all the matters related to the private placement of A shares in 2006; the resolution regarding acquisition of further interests in Zhejiang Nandu, Shanghai Nandu and other companies. The relevant report was published in China Securities Journal, Securities Times, Shanghai Securities News and The Standard of Hong Kong on 7 August 2006. E、On 27 October 2006, the 8th Meeting of the 14th Board Meeting was held to consider and approve the following resolutions: 2006 Third Quarterly Report and unaudited financial statements; the resolution regarding the application for liquidation by Shanghai Yunyuan Property Co., Ltd.; the resolution regarding the establishment of the Company’s base for housing industrialisation – “Dongguan Vanke Architecture Technology Research Centre Co., Ltd.”. The relevant announcements were published in China Securities Journal, Securities Times, Shanghai Securities News and The Standard of Hong Kong on 31 October 2006. (2) In 2006, the Board considered and approved the following resolutions through 16 voting by communication means: A. On 9 January 2006, the resolutions regarding the acquisition of Shenzhen Baoji project, the adjustment to the shareholding structure and shareholding of Shanghai Nandu, adjustment to the shareholding in Shanghai Nandu, Suzhou Nandu and equity interests in Shanghai Qingchen Property Development Co., Ltd. held by Shenzhen Vanke Real Estate Co., Ltd. were submitted for the Board of Directors’ approval through voting by communication means. B. On 13 January 2006, the resolution regarding the establishment of a Sino-foreign joint venture company in Wuxi was submitted for the Board of Directors’ approval through voting by communication means. C.On 25 January 2006, the resolution regarding the acquisition of the equity interests in Shenzhen Vanke East Coast Property Development Co., Ltd. was submitted for the Board of Directors’ approval through voting by communication means. D. On 20 February 2006, the resolution regarding the redemption of “Vanke Convertible Bonds 2” was submitted for the Board of Directors’ approval through voting by communication means. E. On 6 March 2006, the resolution regarding the charitable donations madeby the Shanghai Company was submitted for the Board of Directors’ approval through voting by communication means. F. On 14 March 2006, the resolution regarding the establishment of a Sino-foreign joint venture company in Wuhan was submitted for the Board of Directors’ approval through voting by communication means. 54 G. On 29 March 2006, the resolution regarding the amendment to Phase One (2006-2008) of The Restricted Stock Incentive Plan was submitted for the Board of Directors’ approval through voting by communication means. H. On 19 May 2006, the resolution regarding the transfer of the equity interests in Wuxi Xinwan Real Estate Co., Ltd. was submitted for the Board of Directors’ approval through voting by communication means. I. On 14 July 2006, the resolutions regarding the acquisition of “Xinlaoxicun” project in the Central City of Longgang, Shenzhen, the provision of guarantee for the banks loans made to Shenyang Vanke Yongda Property Development Co., Ltd., the elaborations on the use of proceeds from the latest fund-raising exercise, the Company’s meeting the requirements for conducting private placing of shares with specific targets, the conducting of a private placing of A shares with specific targets, the feasibility proposal on the use of proceeds raised from the private placing, the submission to the shareholders’ meeting to authorise the Board to handle all the matters related to the private placing of shares, the collaboration with CRC Group for the co-development of property projects, the holding of the 1st Special General Meeting of 2006 were submitted for the Board of Directors’ approval through voting by communication means. J. On 29 August 2006, the resolution regarding the acquisition of the Jinshazhou project in Guangzhou was submitted for the Board of Directors’ approval through voting by communication means. K. On 15 September 2006, the resolution regarding the formation of fund-raising management methods was submitted for the Board of Directors’ approval through voting by communication means. L. On 17 November 2006, the resolution regarding the acquisition of Shanghai Zhongfang Binjiang project was submitted for the Board of Directors’ approval through voting by communication means. M. On 18 November 2006, the resolution regarding the collaboration between the Zhuhai Binguan project and China Resources Real Estate Fund was submitted for the Board of Directors’ approval through voting by communication means. N. On 19 December 2006, the resolution regarding the acquisition of the project on No. 73 North Fourth Ring Road, Chaoyang, Beijing was submitted for the Board of Directors’ approval through voting by communication means. O. On 20 December 2006, the resolutions regarding the collaboration between the Yingguanshan project adjacent to Shenzhen Baoan International Airport and CITIC Capital Vanke China Property Development Fund], the transfer of 50 per cent equity interests in Yiwu Nandu Property Development Co., Ltd, the transfer of the equity interests in Shenzhen Vanke Film and Television Co., Ltd., the application for liquidation by Beijing Chaoyang Tennis Club Co., Ltd. were submitted for the Board of Directors’ approval through voting by communication means. P. On 29 December 2006, the resolution regarding the acquisition of five projects from Shanghai Hengda Property was submitted for the Board of Directors’ approval through voting by communication means. The progress of the relevant issues was disclosed in China Securities Journal, Securities Times, Shanghai Securities News and The Standard of Hong Kong on 22 February 2006, 27 April, 18 July, 22 55 July, 8 September and 8 January 2007. (3) The Board’s implementation of the resolutions approved at shareholders’ meetings A. The implementation of the dividend distribution plan for 2005 Following the resolutions passed at the 2005 Annual General Meeting (18th), the Board had proceeded with the implementation of the dividend distribution plan for 2005. The distribution plan for 2005 is as follows: for every 10 existing shares held, a cash dividend of RMB1.5 (including tax; a cash dividend of RMB1.35 (after tax) for every 10 existing shares held was actually paid to individual shareholders among public shareholders of A share and investment funds; B share was not subject to taxation) was paid. The record date for A shareholders for entitlement to dividend distribution was 20 July 2006. The last trading date for B share was 20 July 2006, while the ex-dividend date for A share and B share was 21 July 2006. The exchange rate for B share’s cash dividend was HK$1 = RMB1.0306, being the benchmark exchange rate of Hong Kong dollars for Renminbi published by the People’s Bank of China on the first working day after the approval of the dividend distribution plan at the Company’s 2005 Annual General Meeting (31 May 2006). B. The implementation of the Phase One Restricted Stock Incentive Plan Pursuant to the approval of the Company’s Phase One Restricted Stock Incentive Plan at the 2005 Annual General Meeting, the Company appropriated an incentive fund of RMB141,706,968.51 for the year 2006. According to the authorisation of incentive targets, the Company had appointed Shenzhen International Trust & Investment Co., Ltd. to use the accumulated fund to buy 25,452,018 A shares of the Company. C. Use of the corporate citizen’s special project development fund Pursuant to the approval of the resolution regarding the appropriation of the corporate citizen’s special project development fund at the 2005 Annual General Meeting, the Company and its subsidiaries in 2006 began to carry out activities in relation to the development of a corporate citizenship through their participation in charities and charitable donations including the organization of the campaign that called for “Solutions to Housing Problems of Low to Middle-income City Dwellers”, the development of pilot projects of “housing suitable for low to middle-income city dwellers” and Alashan SEE (“Society, Entrepreneur & Ecology”) Ecology Association, etc. D. Private Placing of A shares with specific targets The 1st Special General Meeting of 2006 approved the Company’s proposal on conducting private placing of A shares with specific targets in 2006. Pursuant to the proposal, the Company will place no more than 700 million A shares to up to 10 specific targets at a placing price not lower than RMB5.67 per share, to raise total proceeds of no more than RMB4.2 billion. According to the resolutions passed at the shareholders’ meeting, the Company filed an application regarding the placing to CSRC. On 8 December 56 2006, CSRC approved the Company’s private placing of no more than 700 million new A shares. On 12 December 2006, the Company sent to the prospective subscribers an invitation to bidding price. According to the results of the bidding price, the Company on 13 December determined the placing price at RMB10.5 per share, and finalised the 10 specific targets including CRC. The issue size of the private placing was 400 million shares, raising total proceeds of RMB4.2 billion. After deducting issuing expenses, the net proceeds were RMB4,196.7 million. On 19 December, the entire amount of the proceeds was received. On 22 December, the registration of shareholding in relation to the placing was completed. On 26 December 2006, the Company made an announcement regarding the report on its private placing of A shares in 2006 and the completion of the placing. On 27 December 2006, the A shares issued for this private placing became listed on the Shenzhen Stock Exchange (the trading of these shares is restricted during the lock-up period). E. The collaboration with CRC Group for the co-development of property projects The 1st Special General Meeting of 2006 considered and approved the resolution regarding the collaboration between the Company and CRC and its connected companies (together “CRC Group”) for the co-development of property projects. Up to the present, no detailed collaborative plan had been formed between the Company and CRC Group. 7. Profit Appropriation and Dividend Distribution Proposal Details on the profit available for appropriation of the Company in 2006 prepared in accordance with PRC accounting standards and International Financial Reporting Standards (“IFRS”) are as follows: (Unit: RMB) PRC accounting IFRS standards Profit available for appropriation after 2,176,786,013.45 2,339,727,662 taxation Include: Net profit for 2006 2,154,639,315.18 2,297,883,766 Profit available for appropriation 613,894,467.92 633,591,666 at the start of the year Allocation of dividend for 2005 (591,747,769.65) (591,747,770) The upper limit of profit available for distribution was based on the lower of the unappropriated profit calculated in accordance with PRC accounting standards and that calculated in accordance with IFRS. Therefore, the Company’s profit available for distribution in 2006 was RMB2,176,786,013.45. According to the relevant rules and requirements of the Company’s Articles of Association, and considering shareholders’ interest and the Company’s development requirements in the long run, the Board of the Directors submitted the following profit appropriation proposal for the year 2006: 57 1. to appropriate 10 per cent of the 2006 net profit calculated in accordance with the PRC accounting standards to statutory surplus reserve; 2. to appropriate 60 per cent of the 2006 net profit calculated in accordance with the PRC accounting standards to discretionary surplus reserve; 3. to retain 30 per cent of the 2006 net profit calculated in accordance with the PRC accounting standards as unappropriated profits at the end of 2006, and together with the profits for distribution brought forward from the previous year serves as the source for dividend distribution; Dividend distribution proposal: A cash dividend of RMB1.5 (including tax) will be distributed for every 10 shares held. Based on the total share capital of 4,369,898,751 shares as at 31 December 2006, the total amount for dividend distribution will be RMB655,484,812.65. The balance of the unappropriated profit will be brought forward to the following financial year. Transfer of capital surplus reserve to share capital proposal: there will be a transfer of the capital surplus serve to share capital on the basis of five shares transferred for every 10 shares held to all the shareholders. Based on the total share capital of 4,369,898,751 shares as at 31 December 2006, the transfer of capital surplus reserve to share capital will lead to an increase of 2,184,949,376 shares in the share capital, with a value of RMB2,184,949,376. Prior to the transfer, the capital surplus reserve amounted to RMB5,431,777,482.61; after the transfer, the outstanding balance of the capital surplus reserve will be RMB 3,246,828,106.61. The allocation of the profit available for appropriation for the year 2006 of RMB2,176,786,013.45 is as follows: Amount (RMB) As a percentage to profit available for appropriation Statutory surplus reserve 215,463,931.52 9.90% Discretionary surplus reserve 1,292,783,589.11 59.39% Profit for the year available for 29.69% The unappropriated appropriation for the profit retained for the following financial year 646,391,794.55 following financial year The unappropriated profit prepared in accordance retained and carried 1.02% with PRC accounting forward from the previous year 22,146,698.27 Total 668,538,492.82 30.72% Include: Dividend distribution for 2006 655,484,812.65 30.11% Profit available for appropriation for the 13,053,680.17 0.60% following financial year The unappropriated profit prepared in accordance with IFRS and brought forward to the following 831,480,141.37 35.54% financial year Include: Dividend distribution for 2006 655,484,812.65 28.02% Profit available for appropriation for the 175,995,328.72 7.52% following financial year The aforesaid proposal will be submitted to the Company’s 2006 Annual General Meeting for consideration. 8. Media for Disclosure of Information 58 The Company has chosen China Securities Journal, Securities Times, Shanghai Securities News and an English newspaper in Hong Kong as media for disclosure of information. IX. Report of Supervisory Committee In 2006, all the members of the Supervisory Committee complied with the relevant requirements of the Company Law, the Articles of Association of the Company, and rules governing the convention of the meetings of the Supervisory Committee, while having diligently performed their duties, actively safeguarded the interests of the Company, shareholders and staff. During the year under review, the Supervisory Committee performed the following tasks: 1. Supervisory Committee meetings and resolutions of such meetings A total of five meetings were held by the Supervisory Committee during the year under review: (1) The 9th Meeting of the 5th Supervisory Committee was held on 17 March 2006. The meeting considered and approved the Supervisory Committee’s 2005 work report; considered and confirmed the Company’s 2005 audited report; the Company’s 2005 annual report and its summary; the Company’s proposals on profit appropriation and dividend distribution for the year 2005; the resolution regarding the appropriation and write-off of the provision for diminution in asset value for the year 2005; the resolution regarding the establishment of Phase One (2006-2008) of The Restricted Stock Incentive Plan, and the resolution regarding amendments to the Company’s Articles of Association; (2) The 10th Meeting of the 5th Supervisory Committee was held on 21 April 2006. The meeting considered and confirmed the Company’s 2006 first quarterly report and its unaudited financial statements; the resolution regarding the supplementary amendments to the Company’s Articles of Association; (3) The 11th Meeting of the 5th Supervisory Committee was held on 28 July 2006. The meeting considered and confirmed the Company’s 2006 Interim Report, the unaudited financial statements and the summary of the Interim Report; the resolution regarding the proposals of no profit appropriation and transfer of surplus reserve to share capital for the 2006 interim period; the resolution regarding the appropriation of the provision for diminution in asset value and treatment of loss for the 2006 interim period. (4) The 12th Meeting of the 5th Supervisory Committee was held on 4 August 2006. The meeting considered and approved the resolution regarding the acquisition of further equity interests in Zhejiang Nandu, Shanghai Nandu and other companies; (5) The 13th Meeting of the 5th Supervisory Committee was held on 27 October 2006. The meeting considered and confirmed the Company’s 2006 Third Quarterly Report and unaudited financial statements. 2. Inspection tours by the Supervisory Committee 59 In 2006, the Supervisory Committee organised for its members and some of the independent directors, and directors three inspection tours, focusing on the inspection of 10 projects in seven cities including Shenzhen, Guangzhou, Dongguan, Tianjin, Wuhan, Hangzhou and Suzhou. Through the reports made by the management staff and observation from the field trips, the Supervisory Committee acquired further understanding of the Company’s operation and development progress in various parts of the country, and gave advice on strengthening risk control and safeguarding employees’ interests. 3. Independent opinions of the Supervisory Committee on certain issues relating to the Company (1) Statutory compliance: During the year under review, the Supervisory Committee supervised the Company’s operations according to the law. Members of the Supervisory Committee were present at all of the meetings of the Board and made inspection tours of the Company’s subsidiaries. The Supervisory Committee is of the view that all the decisions made by the Company were in compliance with applicable laws. In addition, the directors and management team of the Company performed their duties basing entirely on the interests of the Company and its shareholders and diligently carried out their duties, and none of their acts had violated the law, regulations, the Company’s Articles of Association, nor had they prejudiced the Company’s interests. The directors and management team of the Company had not abused their power, nor had their acts prejudiced the interests of the shareholders and employees. (2) Financial monitoring: During the year under review, the Supervisory Committee diligently performed its duty of monitoring the Company’s financial situation. In the opinion of the Supervisory Committee, the audit opinions from KPMG Huazhen Certified Public Accountants and KPMG Certified Public Accountants are prudent, non-biased and their financial reports reflect a true and fair view on the Company’s financial position and operating results. (3) Use of proceeds from fund raising exercises: Through reviewing financial statements, inspecting investment projects, etc, the Supervisory Committee kept monitoring the use of proceeds raised from “Vanke Convertible Bond 2” issued in 2004. The actual investments in various projects were in line with the amount earmarked for use in the designated investment projects, and there had been no change in the investment projects. The Supervisory Committee had also inspected the use of proceeds raised from the recently completed private placing of A shares in 2006. The use of proceeds from the private placing was in line with the undertaken investments. (4) Acquisition and disposal of assets: In 2006, the Company entered into agreements with Shanghai Zhongqiao Company Infrastructure (Group) Co., Ltd., Shanghai Nandu Industrial Investment Co., Ltd. and Nandu Group Holding Co., Ltd. for the acquisition of further equity interests in Nandu Property Group Co., Ltd., Shanghai Nandu Zhidi Co., Ltd, and other companies. The 60 acquisition of these equity interests enabled the Company to have a significant presence in the Zhejiang market, thereby further optimising its overall arrangement for the development of the Yangtze River Delta market. The Supervisory Committee had supervised the decision-making and implementation process in relation to the transaction, and is of the view that the transaction did not involve any insider trading and acts that prejudiced the shareholders’ interests. During the year under review, the relevant agreements had been performed in good faith. (5) Connected transaction of the Company: During the year under review, pursuant to the approval at the shareholders’ meeting, the Company planned to collaborate with CRC and its connected companies (together “CRC Group”) for the co-development of property projects. The Supervisory Committee is of the view that the co-development of property projects between the Company and CRC Group will facilitate better utilisation of shareholders’ resources and faster development. The collaboration is in the interests of the Company and the shareholders as a whole. The decision-making process in relation to the collaboration is in compliance with the relevant regulations of the Company Law and the Company’s Articles of Association. Up to the present, no detailed collaborative plan had been formed between the Company and CRC Group. (6) Operation of the Company: In 2006, the Company continued to sustain fast growth, with a larger market share and greater benefits from its competitive edge. However, rapid development also brought forth new challenges to the Company’s management and internal risk control. During the year under review, a child was drowned in the swimming pool of Nanjing Metropolitan Apartments The tragedy reminded the Company to enhance its ability to avert risk in the process of great expansion. In the new year, the Supervisory Committee will continue to act in good faith, diligently perform its duties and safeguard shareholders’ interest. X. Significant Events 1. Material litigation and arbitration During the year under review, the Company did not involve in any material litigation or arbitration. 2. Significant acquisition and disposal of assets On 3 March 2005, the Company entered into a series of agreements with Shanghai Zhongqiao Company Infrastructure (Group) Co., Ltd. (“Zhongqiao Company”), Shanghai Nandu Industrial Investment Co., Ltd. (“Nandu Industrial”) and Nandu Group Holding Co., Ltd. (“Nandu Group”). The aforesaid three companies together are regarded as “Zhongqiao Party”. Pursuant to the agreements, the Company acquired from Zhongqiao Party 20 per cent equity interests in Nandu Property Group Co., Ltd. (“Zhejiang Nandu”), 70 per cent equity interests in Shanghai Nandu Zhidi Co., Ltd. (“Shanghai Nandu”), Zhenjiang Runqiao Property Co., Ltd. (“Zhenjiang Runqiao”), Zhenjiang Runzhong Property Co., Ltd. (“Zhenjiang Runzhong”), 49 per cent equity interests in Suzhou Nandu Jianwu Co., Ltd. (“Suzhou Nandu”) for a total consideration of RMB1,857.85 million, 61 and therefore became a collaborative partner of Zhongqiao Party. During the year under review, the two parties decided to continue to expand their collaboration after negotiation. On 3 August 2006, the Company and Zhongqiao Party entered into a series of agreements, pursuant to which Zhongqiao Party would transfer its 60 per cent equity interests in Zhejiang Nandu, 30 per cent equity interests in Shanghai Nandu, 30 per cent equity interests in Zhenjiang Runqiao, 30 per cent equity interests in Zhenjiang Runzhong, 21 per cent equity interests in Suzhou Nandu and the shareholders’ equity commensurate with the aforesaid shareholding to the Company for a consideration of RMB1,765.66 million. On 4 August 2006, the 7th Meeting of the 14th Board approved the relevant transactions. The transaction did not constitute connected transaction. The consideration of the transaction had been determined mainly in accordance with the net assets value and valuation of all the projects of the offeree companies. The value of the brand name, management team and staff of the offeree companies had also been considered. The consideration would be paid by cash and by instalment within one year. The source of funding came from internal resources. Upon the completion of the Transaction, the Company will hold 80 per cent equity interests in Zhejiang Nandu, 100 per cent equity interests in Shanghai Nandu, 100 per cent equity interests in Zhenjiang Runqiao, 100 per cent equity interests in Zhenjiang Runzhong, 70 per cent equity interests in Suzhou Nandu, and Zhongqiao Party will still have 20 per cent equity interests in Zhejiang Nandu. Through the one-off Transaction, the Company obtained project resources with an aggregate area of 2.692 million sq m, of which 1.741 million sq m are attributable to the Hangzhou projects. The Company can thus intensify its effort in project development, taking an important step towards the goal of rapid growth. The cost of the projects acquired through the transaction is lower than the market price, which can further enhance the Company’s return on assets ratio. These projects are expected to become Vanke’s new source of profit growth. Most of the projects acquired through the transaction are now in the development stage. This stage has a relatively quick cash flow, which can further augment the Company’s efficient usage of capital. Given the Company’s current capability and arrangement of payment by instalment for the transaction, the Company is capable of completing the transaction with its internal resources. In view of the initial payment for part of the transaction amount and the remaining unpaid consideration that has been settled on credit and the impact of incorporating Zhejiang Nandu and Suzhou Nandu in the accounting statements, upon the completion of the Transaction, there would be some upward adjustment to the Company’s assets and liabilities ratio, which in turn would have impact on the Company’s ability to raise funds through debt financing. For details on the above-mentioned transaction, please refer to the announcement published in China Securities Journal, Securities Times, Shanghai Securities News and The Standard of Hong Kong on 8 February 2007. Subsequent event: On 16 March 2007, the Board of Directors considered and approved the agreement that the Company entered into with Zhongqiao Party for the acquisition of the remaining 20 per cent equity interests in Zhejiang Nandu for a consideration of RMB393.35 million. The agreement has come into effect. The Company currently has a 100 per cent equity interest in Zhejiang Nandu. 62 3. Major connected transactions During the year under review, the Company was not involved in any substantial connected transactions. With the aim to further enhance its ability to acquire projects, to escalate its development by fully leveraging the opportunities brought along by the changes in the industry, to enlarge the Company’s market share, and to increase the influential power of the brand, the Company’s 1st Special General Meeting of 2006 considered and approved the resolution regarding the collaboration with CRC and its connected companies (together “CRC Group”) for the co-development of property projects. The Company planned to join up with CRC Group in the co-development of property projects. The management of the project will follow the centralised management system of the Company, China Vanke will be responsible for the actual operational management of the project, China Vanke charges CRC Group a consolidated management fee. The valid period of the collaboration starts from the date on which the relevant resolution was passed and ends on 31 December 2007. For details on the collaborative proposal, please refer to the “Announcement of the Resolution Approved by the Board of Directors Regarding Collaboration with CRC Group for the Co-development of Property Projects” published in China Securities Journal, Securities Times, Shanghai Securities Journal and The Standard of Hong Kong on 18 July 2006. The independent directors of the Company are unanimously of the view that: The collaboration between the Company and CRC for the development of property projects enables the Company to better utilise shareholders’ resources, enhances its ability to raise funds and project development capability, which is beneficial to the Company’s expansion of its scale of operation, enhancement of the brand’s influential power and return on assets. The collaboration and the related decision-making process are in compliance with the relevant regulations of the “Company Law”, “Securities Law”, “Listing Rules Governing the Securities Listed on Shenzhen Stock Exchange” and “Articles of Association” of the Company. CRC has made an undertaking with regard to any horizontal competition that may arise from the collaboration. The collaboration is in the interest of the listed company and the shareholders as a whole, and has not prejudiced the interests of the Company and other shareholders, especially the minority shareholders and non-connected shareholders. During the year under review, no detailed collaborative plan had been formed between the Company and CRC Group. 4. Implementation of the Restricted Stock Incentive Plan The 2005 Annual General Meeting considered and approved Phase One (2006 - 2008) of The Restricted Stock Incentive Plan. Pursuant to the resolution passed at the shareholders’ meeting, the Company appropriated an incentive fund of RMB141,706,968.51 for the year 2006. According to the 63 authorisation of incentive targets, the Company had appointed Shenzhen International Trust & Investment Co., Ltd. to use the accumulated fund to buy 25,452,018 A shares of the Company. In 2006, the Company’s audited financial statements in accordance with PRC accounting standards showed that the Company’s net profit was RMB2,154,418,916.65, and net profit after deducting extraordinary gains/(losses) was RMB2,067,878,243.04, representing an increase of 54.68 per cent from that of 2005 respectively; fully diluted return on net assets was 13.89 per cent; fully diluted earnings per share rose by 31.77 per cent, which met the conditions set by the restricted stock incentive plan. According to the plan, the Company will, after the 2006 Annual Report and the aforementioned audited financial report at the Annual General Meeting, will appropriate an additional amount of RMB73,756,963.01, being the difference between the pre-appropriated amount and the actual amount that should be appropriated to the incentive fund for the year, and purchase China Vanke’s A shares in accordance with the requirements of the incentive plan. Upon the completion of the aforesaid appropriation, the Company will have appropriated an aggregate amount of RMB215,463,931.52 for the incentive fund under the stock incentive plan for the year 2006. The implementation of the restricted stock incentive plan establishes a control mechanism between the shareholders and management team that is built upon common interest, linking the interests of the Company, shareholders and management team and further optimising the Company’s corporate governance structure. The execution of the plan assists the Company in balancing its short-term objectives and long-term objectives, stimulates continuity in value creation, helps the Company to attract and retain high-calibre talent, enhances the Company’s competitiveness, and ensures the Company’s long-term stable development. 5. Elaboration on “Vanke Convertible Bonds 2” As the closing price of the Company’s A share between 4 January 2006 and 21 February 2006 was higher than 130 per cent (that is RMB4.615 per share) of the conversion price (RMB3.55 per share) for a total of 20 trading days during 28 consecutive trading days, the Company had met the related regulations and the relevant requirements of the “Convertible Bonds’ Offering Circular”, and had thus exercised its right to redeem “Vanke Convertible Bonds 2”. The Company had redeemed all of the RMB3,869,600 (38,696 bonds) “Vanke Convertible Bonds 2” still outstanding prior to 7 April 2006. “Vanke Convertible Bonds 2” was delisted on 14 April 2006. 6. Special note on “Vanke HRPI” In the course of the Company’s non-tradable share reform, CRC issued 2,140,286,008 “Vanke HRP1” put warrants, with a term of nine months and an exercise price of RMB3.73. “Vanke HRP1” put warrants were listed on 5 December 2005 on the Shenzhen Stock Exchange, with a stock code “038002”. Trading of “Vanke HRP1” put warrants ceased after 28 August 2006, being the last trading day of 64 the put warrants. “Vanke HRP1” put warrants became exercisable on 29 August 2006, and within the five trading days from 29 August 2006 and 4 September 2006, 15,953 “Vanke HRP1” put warrants were exercised, while the 2,140,270,054 “Vanke HRP1” put warrants not yet exercised had to be written off according to the relevant regulations. On 6 September 2006, “Vanke HRP1” put warrants had been de-listed. 7. Major contracts and their implementation (1) During the year under review, the Company did not put any material assets under substantial custodial management, sub-contract or lease any assets from other companies. Nor were the Company’s any material assets put under custodial management, subcontracted or leased by other companies. (2) During the year under review, the new amount of guarantees (including counter guarantees) made by the Company and its subsidiaries was RMB2,985 million, and the amount of guarantees terminated was RMB578 million. As at the end of the year under review, the outstanding amount of guarantees made by the Company was RMB3,436 million, accounting for 22.99 per cent of the Company’s net assets. The outstanding amount of bank loan guarantees made by the Company and its subsidiaries for other subsidiaries was RMB2,517 million, the outstanding amount of bank loan guarantees made by the Company and its subsidiaries for associated companies was RMB405 million, the outstanding amount of external guarantees made by the Company and its subsidiaries was RMB515 million. The Company’s external guarantees were mainly the guarantees made in relation to the transfer of the equity interests in Zhejiang Nandu and other companies. According to the relevant regulations, these guarantees had complied with the requirements for going through the relevant procedures for approval, and in accordance with the conditions set out in the equity transfer agreement, the party who transferred the equity interests will be responsible for handling any disputes and claims arising from the guarantees, as well as the relevant obligations and responsibility for claims. Currently, the party who transferred the equity interests and the Company are dealing with these guarantees, which is making progress. (3) Details on the new guarantees made by the Company during the year under review are as follows: No. Guarantor Company for which Guarantee Remarks Guarantee (% of equity guarantee was granted amount Period interest held by (% of equity interest China Vanke ) held by China Vanke ) 65 Shenzhen Branch of Bank of China provided guarantee for the principal and interest due of the China Vanke Co., Shanghai Vanke Real RMB172.8 trust loan of RMB160 3 April 2006 to 3 1 Ltd. Estate Group Co., Ltd. million million of Shanghai Vanke April 2008 Real Estate Group Co., Ltd; the Company provided a counter guarantee Since Vanke Real Estate (HK) Co., Ltd. took out a loan of HK$100 million from the Hong Kong China Vanke Co., Vanke Real Estate (HK) Branch of China 26 April 2006 to 2 HK$100 million Merchants Bank, the 21 April 2007 Ltd. Co., Ltd. Company provided a counter-guarantee to the Shenzhen Branch of China Merchants Bank Since Vanke Real Estate (HK) Co., Ltd. took out a loan of HK$100 million China Vanke Co., Vanke Real Estate (HK) from Wing Hang Bank 14 July 2006 to Limited in Hong Kong, the 3 HK$100 million Company provided a 14 January 2009 Ltd. Co., Ltd. counter-guarantee to Wing Hang Bank Limited in Shenzhen Since Vanke Real Estate (HK) Co., Ltd. took out a loan of HK$80 million from China Vanke Co., Vanke Real Estate (HK) the Hong Kong Branch of 26 July 2006 to Bank of Communications, 4 HK$80 million the Company provided a 26 July 2008 Ltd. Co., Ltd. counter-guarantee to the Shenzhen Branch of Bank of Communications Since Vanke Real Estate (HK) Co., Ltd. took out a loan of HK$80 million from China Vanke Co., Vanke Real Estate (HK) the Hong Kong Branch of 26 July 2006 to Bank of Communications, 5 HK$20 million the Company provided a 26 January 2009 Ltd. Co., Ltd. counter-guarantee to the Shenzhen Branch of Bank of Communications Since Vanke Real Estate (HK) Co., Ltd. took out a loan of HK$80 million from China Vanke Co., Vanke Real Estate (HK) the Hong Kong Branch of 25 September Bank of Communications, 2006 to 26 6 HK$60 million the Company provided a January 2009 Ltd. Co., Ltd. counter-guarantee to the Shenzhen Branch of Bank of Communications Since Vanke Real Estate (HK) Co., Ltd. took out a loan of HK$80 million from China Vanke Co., Vanke Real Estate (HK) the Hong Kong Branch of 25 September Bank of Communications, 2006 to 26 July 7 HK$40 million the Company provided a 2009 Ltd. Co., Ltd. counter-guarantee to the Shenzhen Branch of Bank of Communications 66 Provided a joint-liability guarantee in proportion to China Vanke Co., Wuxi Vanke Real Estate 29 March 2006 to RMB30 million the Company’s equity 8 Ltd. Co., Ltd. interests (60%) for a loan 28 March 2007 of RMB50 million Provided a joint-liability guarantee in proportion to China Vanke Co., Wuxi Vanke Real Estate 25 April 2006 to RMB30 million the Company’s equity 9 Ltd. Co., Ltd. interests (60%) for a loan 28 March 2007 of RMB50 million Provided a joint-liability guarantee in proportion to China Vanke Co., Wuxi Vanke Real Estate 30 April 2006 to RMB48 million the Company’s equity 10 Ltd. Co., Ltd. interests (60%) for a loan 28 March 2007 of RMB80 million Provided a joint-liability guarantee in proportion to 29 December China Vanke Co., Wuxi Vanke Real Estate RMB36 million the Company’s equity 2006 to 20 11 Ltd. Co., Ltd. interests (60%) for a loan December 2008 of RMB60 million Provided a joint-liability 29 December guarantee in proportion to 2006 to 20 China Vanke Co., Wuxi Vanke Real Estate RMB36 million the Company’s equity December 2008 12 Ltd. Co., Ltd. interests (60%) for a loan of RMB60 million Provided a joint-liability 29 December guarantee in proportion to 2006 to 20 China Vanke Co., Wuxi Vanke Real Estate RMB36 million the Company’s equity December 2008 13 Ltd. Co., Ltd. interests (60%) for a loan of RMB60 million Shanghai Nandu Provided a joint-liability 23 October 2006 Zhenjiang Runnan 14 Land Co., Ltd RMB13 million guarantee for a loan of to 22 October Property Co., Ltd. RMB13 million 2009 Shanghai Vanke Provided a joint-liability 29 December Shanghai Tianyi RMB270 guarantee for a loan of 2006 to 29 15 Real Estate Group million Co., Ltd. Property Co., Ltd. RMB270 million December 2008 Zhejiang Vanke Provided a joint-liability 18 May 2005 to 5 Zhejiang Nandu guarantee for a loan of March 2007 16 Nandu Real Estate RMB40 million Property Co., Ltd. RMB40 million Co., Ltd Zhejiang Vanke Provided a joint-liability 17 September Zhejiang Nandu guarantee for a loan of 2004 to 10 17 Nandu Real Estate RMB60 million Property Co., Ltd. RMB60 million January 2007 Co., Ltd Hangzhou Provided a joint-liability Liangzhu Cultural guarantee for a loan of Village RMB100 million 6 January 2006 Zhejiang Vanke Development Co., RMB100 to 15 January 18 Nandu Real Estate million 2008 Ltd Co., Ltd. Land was taken as Zhejiang Nandu collateral security for a Property Co., Ltd. loan of RMB100 million Provided a joint-liability Zhejiang Nandu guarantee for a loan of Property Co., Ltd RMB100 million Zhejiang Vanke Hangzhou Land was taken as 20 January 2006 Nandu Real Estate RMB100 19 Liangzhu Cultural million collateral security for a to 19 January Co., Ltd. 2008 Village loan of RMB100 million Development Co., Ltd Hangzhou Linlu Zhejiang Vanke Land was taken as 30 August 2006 Property Nandu Real Estate RMB200 collateral security for a to 28 August 20 million loan of RMB200 million 2008 Development Co., Co., Ltd. Ltd Hangzhou Linlu Zhejiang Vanke Land was taken as 21 February 2006 Property Nandu Real Estate collateral security for a to 20 February 21 RMB85 million loan of RMB85 million 2009 Development Co., Co., Ltd. Ltd 67 Hangzhou Linlu Zhejiang Vanke Land was taken as 23 May 2006 to Property Nandu Real Estate collateral security for a 30 January 2009 22 RMB50 million loan of RMB50 million Development Co., Co., Ltd. Ltd Hangzhou Linlu Zhejiang Vanke Land was taken as 28 February 2006 Property Nandu Real Estate collateral security for a to 20 October 23 RMB15 million loan of RMB15 million 2008 Development Co., Co., Ltd. Ltd Zhejiang Vanke Land was taken as 29 August 2006 Zhejiang Nandu collateral security for a to 29 August 24 Nandu Real Estate RMB45 million Property Co., Ltd loan of RMB45 million 2007 Co., Ltd. Zhejiang Vanke Hangzhou Provided a joint-liability 6 January 2005 RMB130 guarantee for a loan of to 3 January 25 Nandu Real Estate Changyuan Tourism million Co., Ltd Development Co., Ltd. RMB130 million 2013 Hangzhou Yindu Provided a joint-liability 20 June 2006 to Zhejiang Nandu Property Co., Ltd. RMB100 guarantee and gave land 20 November 26 million as collateral security for a 2007 Property Co., Ltd loan of RMB100 million Hangzhou Yindu Provided a joint-liability 20 June 2006 to Zhejiang Nandu Property Co., Ltd. guarantee and gave land 18 June 2008 27 RMB40 million as collateral security for a Property Co., Ltd loan of RMB40 million Zhejiang Vanke Hangzhou Nandu Provided a joint-liability 10 March 2006 to 28 Nandu Real Estate Songcheng Property RMB50 million guarantee for a loan of 20 January 2009 Co., Ltd Co., Ltd. RMB50 million Zhejiang Vanke Hangzhou Nandu Provided a joint-liability 24 February 2006 29 Nandu Real Estate Songcheng Property RMB30 million guarantee for a loan of to 20 February Co., Ltd Co., Ltd. RMB30 million 2009 Provided a joint-liability 12 April 2006 to Shenyang Vanke guarantee in proportion to 12 April 2009 China Vanke Co., RMB88.20 Yongda Real Estate the Company’s equity 30 Ltd. Development Co., Ltd. million interests (49%) for a loan of RMB180 million Provided a joint-liability 18 April 2006 to Shenyang Vanke guarantee in proportion to 18 April 2009 China Vanke Co., RMB34.30 31 Ltd. Yongda Real Estate million the Company’s equity Development Co., Ltd. interests (49%) for a loan of RMB70 million Provided a joint-liability 25 April 2006 to Shenyang Vanke guarantee in proportion to 25 April 2009 China Vanke Co., RMB12.25 32 Ltd. Yongda Real Estate million the Company’s equity Development Co., Ltd. interests (49%) for a loan of RMB25 million Provided a joint-liability 22 May 2006 to Shenyang Vanke guarantee in proportion to 22 November China Vanke Co., RMB7.35 33 Ltd. Yongda Real Estate million the Company’s equity 2006 Development Co., Ltd. interests (49%) for a loan of RMB15 million Provided a joint-liability 12 June 2006 to Shenyang Vanke guarantee in proportion to 12 December China Vanke Co., RMB19.6 34 Ltd. Yongda Real Estate million the Company’s equity 2006 Development Co., Ltd. interests (49%) for a loan of RMB40 million Zhejiang Vanke Provided a joint-liability 29 August 2006 Zhejiang Xihu Golf guarantee for a loan of to 31 December 35 Nandu Real Estate RMB20 million Property Co., Ltd. RMB52 million 2008 Co., Ltd Zhejiang Vanke Changsha Eastern Provided a joint-liability 31 January 2005 RMB110 guarantee for a loan of to 30 January 36 Nandu Real Estate City Real Estate million Co., Ltd Development Co., Ltd. RMB110 million 2008 Zhejiang Vanke Hangzhou Xinsheng Provided a joint-liability 27 February 2006 Nandu Real Estate guarantee for a loan of to 30 April 2007 37 Real Estate RMB60 million RMB60 million Co., Ltd Development Co., Ltd. 68 Zhejiang Vanke Hangzhou Hubin Provided a joint-liability 31 March 2005 to Nandu Real Estate Specialty Street and guarantee for a loan of 30 March 2007 RMB100 RMB100 million 38 Co., Ltd Housing Construction million and Redevelopment Command Zhejiang Vanke Hangzhou Hubin Provided a joint-liability 10 November Nandu Real Estate Specialty Street and guarantee for a loan of 2003 to 30 April 39 Co., Ltd Housing Construction RMB50 million RMB50 million 2007 and Redevelopment Command Zhejiang Vanke Hangzhou Hubin Provided a joint-liability 10 November Nandu Real Estate Specialty Street and guarantee for a loan of 2003 to 31 40 Co., Ltd Housing Construction RMB50 million RMB50 million October 2007 and Redevelopment Command Zhejiang Vanke Hangzhou Hubin Provided a joint-liability 10 November Nandu Real Estate Specialty Street and guarantee for a loan of 2003 to 30 April RMB100 RMB100 million 2008 41 Co., Ltd Housing Construction million and Redevelopment Command Zhejiang Vanke Hangzhou Hubin Provided a joint-liability 10 November Nandu Real Estate Specialty Street and guarantee for a loan of 2003 to 30 RMB200 RMB200 million November 2008 42 Co., Ltd Housing Construction million and Redevelopment Command Zhejiang Vanke Zhejiang Yuantong Provided a joint-liability 15 March 2006 to Nandu Real Estate Mechanical & RMB14.5 guarantee for a loan of 14 March 2007 43 million RMB14.5 million Co., Ltd Electrical Equipment (Group) Co., Ltd. (3) During the year under review, the Company did not have any entrustment of financial management. (4) During the year under review, the Company and Bank of China Limited entered into a “Strategic Collaboration Agreement”, pursuant to which both parties agree to establish a long-term strategic collaborative relationship, and the Company will be provided with a total credit line amount of no more than RMB5 billion within the next three years. For details, please refer to the announcement published in China Securities Journal, Securities Times, Shanghai Securities News and The Standard of Hong Kong on 22 July 2006. (5) For details on the projects acquired by the Company during the year under review, please refer to the “Project investment” of the “Use of capital not from the capital market” contained in this report. 8. Implementation of the undertakings given by the Company or shareholders holding 5% or more of the equity interests in the Company The dividend distribution policy for the year 2005 was disclosed in the announcement regarding the resolutions approved at the 4th meeting of the 14th Board of Directors. For details on the implementation, please refer to the section on “The Board’s Implementation of the Resolutions Approved at the 69 Shareholders’ Meeting” of this report. CRNC – the parent company of CRC, being the Company’s original single largest shareholder and the present single largest shareholder, gave a significant undertaking to the Company in 2001: CRNC would provide as much support to the Company as it did in the past, as long as such support was beneficial to the Company’s development, and that it would remain impartial in the event of any competition between the investment projects of the Company and that of CRNC and its subsidiaries, and in the event of any disagreements or disputes arising from horizontal competition. CRNC has fulfilled its undertaking. Under the Company’s non-tradable share reform, CRC has undertaken not to trade or transfer its non-tradable shares within the 12-month period from the date on which such non-tradable shares were granted the right to list on the stock exchange. After the expiry of the 12-month period, the original non-tradable shares could be sold through trading on the stock exchange. The amount of shares to be sold shall not exceed five per cent and 10 per cent of the Company’s total issued shares during the respective periods of 12 months and 24 months. In addition, the selling price shall not be less than 120 per cent of the exercise price of the put warrant (the selling price will be adjusted during the statutory share disposal restriction period and according to the adjustment methods for the exercise price of the put warrant). Other holders of the non-tradable shares of the Company have undertaken that their non-tradable shares shall not be traded or transferred within the period of 12 months from the date on which their non-tradable shares were granted the right to list on the stock exchange. The original holders of non-tradable shares of the Company had strictly abided by the aforesaid undertaking. Since 6 December 2006, the trading restriction of the restricted tradable shares under the Company’s non-tradable share reform began to lapse. The trading restriction of the restricted tradable shares, except for those held by CRC, under the Company’s non-tradable share reform had lapsed. Of the 351,340,871 restricted tradable shares of the Company originally held by CRC, the trading restriction of 186,026,380 shares was lifted on 6 December 2006. The number of the Company’s shares held by CRC has increased by 110 million shares as a result of its subscription for the shares of the Company during the Company’s 2006 private placement. As at the end of the year under review, CRC held 635,503,474 shares of the Company, representing an increase of 110 million shares when compared with the number of shares held by CRC as on 6 December 2006. 9. Interaction with investors The Company has always paid high regard to its investor relations. In addition to making timely, sufficient and detailed information disclosure, the Company has also strove to enhance its communication and interaction with investors through various methods. 70 During the year 2006, the Company’s headquarters received about 150 visits of various investors, including institutional investors and individual investors, from China and overseas. At the same time, in accordance with investors’ requests, the Company arranged its subsidiaries in Shenzhen, Shanghai, Beijing, Tianjin, Guangzhou, Chengdu and Wuhan etc. to receive about180 visits of investors with the aim of studying and project inspection. During the year under review, the Company, as disclosed in the Annual Report and Interim Report, organised a total of eight results presentations, two in each of Hong Kong, Shenzhen, Shanghai and Beijing, to walk the professional institutional investors through the Company’s operation; against the backdrop of policy change and in response to institutional investors’ requests, the Company held a teleconference with institutional investors in Shenzhen Guangzhou, Shanghai and Beijing to explain the Company’s view on the policy; in order to facilitate small and medium investors’ understanding of the latest development of the Company and its management’s assessment of the market and industry, the Company during the year made two online presentations using an “open-day” approach, giving detailed answers to the questions raised by participants, including shareholders and investors, and gathering their opinions. On and off, the Company also initiated visits to institutional investors, collecting their opinions and advice on the Company’s operation and management. During the year, the Company’s managementparticipated in approximately 20 large-scale forums organised by domestic and overseas securities intermediaries, thereby enhancing communication with investors. In addition, telephone and e-mail are important means of communication used by the Company to communicate with the general investors. By being patient during the process of communication and attentive to investors’ views, disclosing information on the Company, the Company has established a positive interaction with its investors. During the year, the Company received the “Best IR Large Enterprise” award at the naming for “Best IR of Chinese A-Share Companies” organised by “Securities Market Weekly” and School of Engineering Management of Nanjing University for the second consecutive year. The Company was also the winner for the first prize of the awards for the “Best Investor Relations”, “Best Communications”, “Best Non-tradable Share Reform” and the first prize of the award for the “Best Executive”. In the “2006 Investor Relations in China” selection organised by IR Magazine, the Company was granted the awards for “Grand Prix for Best Overall Investor Relations – Non SOE” (Large-cap, non-state-owned enterprise category), the “Best Annual Report and Corporate Literature” and the “Best Investment Meeting”, the “Best Investor Relations President”, the “Best Chief Executive Officer” and the “Best Investor Relations Manager”. In the second session of the Top Secretary to the Board Selection organised by the New Fortune, the Company’s Secretary to the Board was once again given the honour, and was named institutional investors’ most favourite Secretary to the Board. 71 In the future, the Company will continue to abide by the principle of equal treatment to all the investors and to maintain effective communication with investors and transparency. 10. Appointment and termination of certified public accountants The 2005 Annual General Meeting resolved to confirm that KPMG Huazhen Certified Public Accountants and KPMG Certified Public Accountants as the Company’s auditors for the year 2006. The table below shows the details on the appointment of the certified public accountants of the Company s are as follows: Audited item 2006 2005 Auditors Audit fee Year of service Auditors Auditors RMB2,000,000.00 The Group’s consolidated KPMG financial report prepared in 6 KPMG Huazhen RMB1,000,000.00 Huazhen accordance with the PRC GAAP The Group’s consolidated HK$1,900,000.00 financial report prepared in KPMG 14 KPMG HK$1,500,000.00 accordance with the IFRS The above-mentioned audit fee included the travelling expenses incurred during the auditing period. In accordance with the actual workload of the auditors in the year 2006, the Board proposed to submit to the 2006 Annual General Meeting Company the resolution regarding paying an additional audit fee of a total of RMB600,000 to KPMG Huazhen Certified Public Accountants and KPMG Certified Public Accountants for consideration. 11. No disciplinary action was taken against the Company and the Company’s Directors, members of Supervisory Committee and senior management during the year under review. 12. Subsequent event Pursuant to the resolutions of the Board of Directors, the Company and China Aviation Industry Corporation I (“AVIC I”) have entered into a strategic collaborative agreement, according to which the Company will join hands with Beijing Raise Science Co., Ltd., a wholly-owned subsidiary of AVIC I, to set up a comprehensive property development company (“Joint Venture Company”) for the joint development of property projects. The registered capital of the Joint Venture Company amounted to RMB1,000 million. For details, please refer to the announcement published in China Securities Journal, Securities Times, Shanghai Securities News and The Standard of Hong Kong on 8 February 2007. XI. 2006 Chronology On 18 January 2006, the Company acquired 60 per cent state-owned equity interests in Beijing Chao Wan Property Development Centre for a consideration of RMB389 million, signifying that the Company has intensified its project acquisition through resources collaboration and taken a strategic step towards its development in Bohai Rim region. 72 On 21 March 2006, the Company announced its 2005 Annual Report and disclosed the draft of the Phase One (2006-2008) of The Restricted Stock Incentive Plan, which was the first standard stock incentive plan after the promulgation of the “Listed Companies’ Stock Incentives Management Methods (Trial)” by the State. On 7 April 2006, trading and conversion of “Vanke Convertible Bonds 2” ceased. The Company had redeemed all of the outstanding 38,696 “Vanke Convertible Bonds 2”, which was de-listed on 14 April 2006 and marked the completion of its mission. On 30 May 2006, the 2005 Annual General Meeting of the Company ended on high notes. Resolutions regarding the establishment of Phase One (2006-2008) of The Restricted Stock Incentive Plan of the Company and the appropriation of the corporate citizen’s special project development fund, etc. were approved, with most of the votes in favour. The implementation of The Restricted Stock Incentive Plan will ensure that a control mechanism between the shareholders and management team built upon common interest is established, which will link the interests of the Company, shareholders and management team, that the Company’s mid to long-term incentive mechanism will be fine-tuned by attracting and retaining high-calibre managerial talent and core staff, that the corporate governance will be enhanced and the Company’s competitiveness will be strengthened. The approval of the appropriation of the corporate citizen’s special project development fund for use in the development of the Company’s corporate citizenship fully reflects that the Company’s shareholders share the common interest in the Company’s development as a corporate citizen, and signifies that the Company’s corporate citizenship development is moving towards a more systematic and regulated direction. On 13 July 2006, the Company’s RMB500,000 campaign on gathering “Solutions to Housing Problems of Low to Middle-income City Dwellers” completed successfully. On 20 July 2006, the Company began to implement the dividend distribution proposal for the year 2005. On 21 July 2006, the Company and Bank of China Limited entered into a “Strategic Collaboration Agreement”, pursuant to which the Company will be provided with a total credit line amount of no more than RMB5 billion within the next three years. On 4 August 2006, the Company convened the 1st Special General Meeting of 2006, at which the resolutions regarding the Company’s plan for conducting a private placement of A shares and the collaboration with CRC Group for the co-development of property projects were approved. On 7 August 2006, the Company announced its acquisition of further interests in Nandu. The 73 collaboration between the Company and Nandu was in the full bloom. On 29 August 2006, the exercise period of “Vanke HRP1” commenced. This is the first exercised put warrant in Mainland China. On 2 September 2006, the State Administration of Taxation issued the list of “China’s top 100 taxpayers”. China Vanke ranked 97th with a tax payment of RMB1,324 million and became the only property developer on the list. On 12 September 2006, China Vanke Co., Ltd. was granted the qualification for first-class property development. On 25 November 2006, the Company laid the foundation of the pilot project of “housing suitable for low to middle-income city dwellers” in Guangzhou. On 6 December 2006, the trading restrictions of the restricted tradable shares under the non-tradable share reform of the Company began to lapse. The Company entered the period of complete floatation. On 26 December 2006, the Company made an announcement regarding the report on its private placing of A shares in 2006, signifying the completion of the private placing of A shares for the year 2006. The number of shares issued under the private placing is 400 million shares at an issue price of RMB10.5 per share. The net proceeds from the private placing, after deducting issue expenses, were RMB4,196.7 million. On 27 December 2006, the placing shares became listed on the Shenzhen Stock Exchange. The successful completion of the private placing laid a solid foundation for the Company to capture opportunities and further accelerate its development. XII. Financial Report 74 Independent auditor’s report to the shareholders of China Vanke Co., Ltd. (Established as a joint stock company in the People’s Republic of China with limited liability) We have audited the accompanying consolidated financial statements of China Vanke Co., Ltd. (the “Company”) and its subsidiaries (together with the Company referred to as the “Group”), which comprise the consolidated balance sheet as at 31 December 2006, and the consolidated income statement, the consolidated statement of changes in equity and the consolidated cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes. Directors’ responsibility for the financial statements The directors of the Company are responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards. This responsibility includes designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatements, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditor’s responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit and to report our opinion solely to you, as a body, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with relevant ethical requirements and plan and perform the audit to obtain reasonable assurance as to whether the financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting principles used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. 75 Opinion In our opinion, the consolidated financial statements give a true and fair view of the consolidated financial position of the Group as at 31 December 2006, and of its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards. Certified Public Accountants 8th Floor, Prince’s Building 10 Chater Road Central, Hong Kong 16 March 2007 76 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 Consolidated income statement for the year ended 31 December 2006 (Expressed in Renminbi Yuan) Note 2006 2005 Revenue 4 16,904,430,653 9,920,738,936 Cost of sales (11,387,657,344) (6,874,133,818) Gross profit 5,516,773,309 3,046,605,118 Other income 7 149,613,156 35,447,160 Distribution costs (625,716,845) (466,289,325) Administrative expenses (878,152,672) (506,300,671) Other expenses 8 (20,845,516) (9,364,651) Results from operating activities 4,141,671,432 2,100,097,631 -------------------- -------------------- Financial income 10 78,150,853 64,384,154 Financial expenses 10 (217,624,845) (83,632,010) Net finance costs 10 (139,473,992) (19,247,856) -------------------- -------------------- Share of profits less losses of associates 18 (27,409,133) 12,217,378 -------------------- -------------------- Share of profits less losses of jointly controlled entities 19 87,507,325 (14,292,860) -------------------- -------------------- Profit before taxation 4,062,295,632 2,078,774,293 Income tax 11(a) (1,639,298,581) (663,124,748) Profit for the year 2,422,997,051 1,415,649,545 The accompanying notes form part of these financial statements. 77 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 Consolidated income statement for the year ended 31 December 2006 (continued) (Expressed in Renminbi Yuan) Note 2006 2005 Attributable to: Equity shareholders of the Company 2,297,883,766 1,364,689,853 Minority interests 125,113,285 50,959,692 Profit for the year 2,422,997,051 1,415,649,545 Earnings per share 12 Basic 0.58 0.39 Diluted 0.57 0.37 The accompanying notes form part of these financial statements. 78 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 Consolidated balance sheet at 31 December 2006 (Expressed in Renminbi Yuan) Note 2006 2005 Non-current assets Property, plant and equipment 14 516,301,329 217,974,889 Investment properties 15 56,979,124 91,020,125 Construction in progress 16 3,272,023 19,699,697 Interest in associates 18 292,396,997 1,095,550,599 Interest in jointly controlled entities 19 449,958,315 158,367,843 Other financial assets 20 368,637,118 39,407,447 Deferred tax assets 21(a) 102,231,111 25,650,972 Properties held for development 22 16,439,381,366 7,637,079,936 Total non-current assets 18,229,157,383 9,284,751,508 -------------------- -------------------- Current assets Inventories 23 10,029,639 41,520,598 Completed properties for sale 22 2,897,530,164 2,298,059,418 Properties under development 22 13,882,247,400 5,612,914,315 Trade and other receivables 24 3,321,311,285 1,883,798,717 Cash and cash equivalents 25 10,743,695,198 3,249,034,710 Total current assets 30,854,813,686 13,085,327,758 -------------------- -------------------- TOTAL ASSETS 49,083,971,069 22,370,079,266 CAPITAL AND RESERVES Share capital 26 4,369,898,751 3,722,687,670 Reserves 27 10,704,092,991 4,650,718,366 Awarded Shares purchased for the Employees’ Share Award Scheme 34 (145,444,012) - Total equity attributable to equity shareholders of the Company 14,928,547,730 8,373,406,036 Minority interests 28 2,524,955,811 541,095,823 TOTAL EQUITY 17,453,503,541 8,914,501,859 -------------------- -------------------- The accompanying notes form part of these financial statements. 79 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 Consolidated balance sheet at 31 December 2006 (continued) (Expressed in Renminbi Yuan) Note 2006 2005 Non-current liabilities Interest-bearing borrowings 29 9,452,876,951 1,181,282,713 Convertible bonds 30 - 843,505,199 Deferred tax liabilities 21(b) 7,670,934 - Other long term liabilities 31 74,395,484 447,774,990 Total non-current liabilities 9,534,943,369 2,472,562,902 -------------------- -------------------- Current liabilities Interest-bearing borrowings 29 3,805,564,000 1,562,980,000 Trade and other payables 32 17,513,633,452 9,182,068,436 Current taxation 11(c) 744,649,436 213,987,058 Provisions 33 31,677,271 23,979,011 Total current liabilities 22,095,524,159 10,983,014,505 -------------------- -------------------- TOTAL LIABILITIES 31,630,467,528 13,455,577,407 -------------------- -------------------- TOTAL EQUITY AND LIABILITIES 49,083,971,069 22,370,079,266 Approved and authorised for issue by the board of directors on 16 March 2007 ) ) ) Directors ) ) The accompanying notes form part of these financial statements. 80 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 Consolidated statement of changes in equity for the year ended 31 December 2006 (Expressed in Renminbi Yuan) Note 2006 2005 Total equity at 1 January 8,914,501,859 6,388,289,362 -------------------- -------------------- Net income recognised directly in equity: Exchange differences on translation of financial statements of foreign subsidiaries 27 6,442,516 4,675,212 Change in fair value of available-for-sale securities, net of tax of RMB7,670,934 27 43,265,034 - Net income for the year recognised directly in equity 49,707,550 4,675,212 -------------------- -------------------- Net profit for the year 2,422,997,051 1,415,649,545 -------------------- -------------------- Total recognised income and expense for the year 2,472,704,601 1,420,324,757 -------------------- -------------------- Attributable to: - Equity shareholders of the Company 2,347,591,316 1,369,365,065 - Minority interests 28 125,113,285 50,959,692 2,472,704,601 1,420,324,757 -------------------- -------------------- Dividends: Declared or approved during the year 13 (595,484,813) (341,097,071) Less: Amount paid to Employees’ Share Award Scheme 13 3,737,043 - (591,747,770) (341,097,071) -------------------- -------------------- The accompanying notes form part of these financial statements. 81 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 Consolidated statement of changes in equity for the year ended 31 December 2006 (continued) (Expressed in Renminbi Yuan) Note 2006 2005 Movement in equity arising from capital transactions: Shares issued upon placing 26(ii) 4,200,000,000 - Share issuing costs upon placing 27 (3,300,000) - Shares issued upon conversion of convertible bonds 26(i) 840,487,784 1,061,648,898 Share issuing costs upon conversion of convertible bonds 27 (11,163,621) (15,345,816) Purchase of Awarded Shares for the Employees’ Share Award Scheme 34 (145,444,012) - Interest forfeited upon conversion of convertible bonds 27 4,561,639 958,774 Discount transferred to share premium upon conversion of convertible bonds 27 12,482,939 11,835,579 Redemption of convertible bonds 27 (163,641) - Fair value adjustments arising from stepped acquisition of interest in subsidiaries 27 (178,732,940) - Employee share-based compensation 27 80,570,000 - Dividend paid to minority interests 28 (82,487,084) (50,000,000) Capital injections from minority interests of subsidiaries 28 1,139,432,956 12,281,000 Acquisition of minority interests arising from non-wholly owned subsidiaries 28 982,152,252 425,606,376 Acquisition of minority interests 28 (345,909,188) - Disposal of partial interest in subsidiaries 28 165,557,767 - 6,658,044,851 1,446,984,811 -------------------- -------------------- Total equity at 31 December 17,453,503,541 8,914,501,859 The accompanying notes form part of these financial statements. 82 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 Consolidated cash flow statement for the year ended 31 December 2006 (Expressed in Renminbi Yuan) Note 2006 2005 Operating activities Profit before taxation 4,062,295,632 2,078,774,293 Adjustments for: - Depreciation 58,469,272 46,661,782 - Loss/(gain) on disposal of property, plant and equipment 785,012 (129,838) - Loss on disposal of investment properties 22,961 1,937,307 - Gain on disposal of interest in a subsidiary (51,182) - - Gain on disposal of partial interest in subsidiaries (67,575,564) (1,947,074) - Gain on disposal of interest in a jointly controlled entity (24,018,988) - - Gain on disposal of interest in associates (18,441,576) - -Personnel expenses in relation to equity-settled share-based compensation 80,570,000 - - Impairment loss of investment properties 750,000 10,753,203 - Provision for diminution in value of inventories - 2,474,304 - Impairment loss of trade and other receivables 33,296,238 21,767,497 - Write-down of completed properties for sale 620,000 - - Reversal of write-down of completed properties for sale (19,238,220) (7,195,134) - Interest income (77,473,253) (63,929,154) - Interest expense 212,498,119 82,149,837 - Dividend income (677,600) (455,000) - Share of profits less losses of associates 27,409,133 (12,217,378) - Share of profits less losses of jointly controlled entities (87,507,325) 14,292,860 Operating profit before changes in working capital and provisions 4,181,732,659 2,172,937,505 Increase in amounts due from associates (33,884,151) (96,270,971) Decrease/(increase) in amounts due from jointly controlled entities 54,681,192 (88,156,891) Increase in trade and other receivables (1,199,357,567) (179,003,933) Decrease in trade and other payables and other long term liabilities 3,236,052,240 2,085,609,792 Increase in inventories (8,166,223) (1,739,953) (Increase)/decrease in properties under development (1,013,429,584) 32,719,250 Increase in completed properties for sale (246,337,264) (565,032,684) Operating profit before changes in working capital and provisions carried forward 4,971,291,302 3,361,062,115 -------------------- -------------------- The accompanying notes form part of these financial statements. 83 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 Consolidated cash flow statement for the year ended 31 December 2006 (continued) (Expressed in Renminbi Yuan) Note 2006 2005 Operating profit before changes in working capital and provisions brought forward 4,971,291,302 3,361,062,115 Increase in properties held for development (6,555,947,260) (1,656,542,889) Increase in provisions 10,357,594 20,671,813 Provisions used (2,659,334) (11,743,012) (Decrease)/increase in amounts due to associates (7,384,015) 6,957,195 Increase/(decrease) in amounts due to jointly controlled entities 30,678,377 (87,894,535) Decrease in other tax payable (84,578,331) (191,881,512) Cash (used in)/generated from operations (1,638,241,667) 1,440,629,175 Income tax paid (907,758,576) (559,180,110) Land appreciation tax paid (277,457,766) (51,024,479) Net cash (used in)/from operating activities (2,823,458,009) 830,424,586 -------------------- -------------------- Investing activities Capital injection from minority interests of subsidiaries 1,304,990,723 9,000,000 Acquisition of subsidiaries, net of cash acquired 5 (631,928,854) (112,483,247) Payment for acquisition of subsidiaries and associates in previous year (557,355,000) - Acquisition of interests in associates (102,846,485) (368,029,968) Acquisition of interests in jointly controlled entities - (43,090,866) Acquisition of minority interest (282,968,000) - Disposal of a subsidiary, net of cash disposed of 6 6,895,655 98,717,571 Disposal of partial interest in subsidiaries 233,133,331 - Proceeds from disposal of property, plant and equipment 11,450,256 10,184,690 Proceeds from disposal of investment properties 27,656,646 25,992,766 Proceeds from disposal of an associate 25,236,454 - Proceeds from disposal of a jointly controlled entity 82,722,888 - Acquisition of property, plant and equipment (76,583,633) (27,109,276) Acquisition of construction in progress (68,481,048) (19,699,697) Acquisition of other investment (278,293,703) - Interest received 77,473,253 63,929,154 Dividend received from other investments and an associate 677,600 20,455,000 Net cash used in investing activities (228,219,917) (342,133,873) -------------------- -------------------- The accompanying notes form part of these financial statements. 84 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 Consolidated cash flow statement for the year ended 31 December 2006 (continued) (Expressed in Renminbi Yuan) Note 2006 2005 Financing activities Interest paid (571,819,054) (209,200,573) Proceeds from loans and borrowings 11,351,507,856 2,537,819,238 Repayment of loans and borrowings (3,681,696,980) (2,313,450,000) Purchase of Awarded Shares by trust for the Employees’ Share Award Scheme (145,444,012) - Net proceeds from issue of shares upon placing 4,196,700,000 - Cash refund for conversion of convertible bonds - (2,331) Redemption of convertible bonds (3,297,339) - Dividend paid to minority shareholder of a subsidiary (46,764,732) (50,000,000) Dividend paid to equity shareholders of the Company (559,289,841) (341,097,071) Net cash from/(used in) financing activities 10,539,895,898 (375,930,737) -------------------- -------------------- Net increase in cash and cash equivalents 7,488,217,972 112,359,976 Cash and cash equivalents at 1 January 3,249,034,710 3,131,999,522 Effect of foreign exchange rates 6,442,516 4,675,212 Cash and cash equivalents at 31 December 10,743,695,198 3,249,034,710 The accompanying notes form part of these financial statements. 85 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 Notes to the consolidated financial statements (Expressed in Renminbi Yuan) 1 Reporting entity China Vanke Co., Ltd (the “Company”) is a company domiciled in the People’s Republic of China (the “PRC”). The consolidated financial statements of the Company for the year ended 31 December 2006 comprise the Company and its subsidiaries (together with the Company referred to as the “Group”) and the Group’s interests in associates and jointly controlled entities. The Group primarily is involved in the development and sale of properties in the PRC (see note 4).The consolidated financial statements were approved and authorised for issue by the company’s board of directors on 16 March 2007. 2 Significant accounting policies (a) Statement of compliance The consolidated financial statements have been prepared in accordance with the International Financial Reporting Standards (“IFRSs”) adopted by the International Accounting Standards Board (“IASB”). A summary of the significant accounting policies adopted by the Group is set out below. The IASB has issued certain new and revised IFRSs that are first effective for the current accounting period of the Group. Note 3 provides information on the new and revised IFRSs to the extent that they are relevant to the Group for the current and prior accounting periods reflected in these financial statements. (b) Basis of preparation of the financial statements The consolidated financial statements are presented in Renminbi Yuan, which is the Company’s functional currency. The measurement basis used in the preparation of the consolidated financial statements is the historical cost basis, except for financial instruments classified as available-for-sale (see note 2(g)), which are stated at their fair value. The preparation of financial statements in conformity with IFRSs requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets, liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. Judgements made by management in the application of IFRSs that have significant effect on the financial statements and estimates with a significant risk of material adjustment in the next year are discussed in note 40. 86 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 2 Significant accounting policies (continued) (c) Subsidiaries and minority interests Subsidiaries are entities controlled by the Group. Control exists when the Group has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that presently are exercisable are taken into account. An investment in a subsidiary is consolidated into the consolidated financial statements from the date that control commences until the date that control ceases. Intra-group balances and transactions and any unrealised profits arising from intra-group transactions are eliminated in full in preparing the consolidated financial statements. Unrealised losses resulting from intra-group transactions are eliminated in the same way as unrealised gains but only to the extent that there is no evidence of impairment. Minority interests represent the portion of the net assets of subsidiaries attributable to interests that are not owned by the Company, whether directly or indirectly through subsidiaries, and in respect of which the Group has not agreed any additional terms with holders of those interests which would result in the Group as a whole having a contractual obligation in respect of those interests that meets the definition of a financial liability. Minority interests are presented in the consolidated balance sheet within equity, separately from equity attributable to the equity shareholders of the Company. Minority interests in the results of the Group are presented on the face of the consolidated income statement as an allocation of the total profit or loss for the year between minority interests and the equity shareholders of the Company. Where losses applicable to the minority exceed the minority’s interest in the equity of a subsidiary, the excess, and any further losses applicable to the minority, are charged against the Group’s interest except to the extent that the minority has a binding obligation to, and is able to, make additional investment to cover the losses. If the subsidiary subsequently reports profits, the Group’s interest is allocated all such profits until the minority’s share of losses previously absorbed by the Group has been recovered. Loans from holders of minority interests and other contractual obligations towards these holders are presented as financial liabilities in the consolidated balance sheet in accordance with notes 2(r), 2(s) and 2(t) depending on the nature of the liability. (d) Associates and jointly controlled entities An associate is an entity in which the Group or Company has significant influence, but not control or joint control, over its management, including participation in the financial and operating policy decisions. A jointly controlled entity is an entity which operated under a contractual arrangement between the Group or Company and other parties, where the contractual arrangement establishes that the Group or Company and one or more of the other parties share joint control over the economic activity of the entity. 87 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 2 Significant accounting policies (continued) (d) Associates and jointly controlled entities (continued) An investment in an associate or a jointly controlled entity is accounted for in the consolidated financial statements under the equity method and is initially recorded at cost and adjusted thereafter for the post acquisition change in the Group’s share of the associate’s or the jointly controlled entity’s net assets. The consolidated income statements includes the Group’s share of the post-acquisitions, post-tax results of the associates and jointly controlled entities for the year, including any impairment loss on goodwill relating to the investment in associates and jointly controlled entities recognised for the year (see notes 2(e) and 2(m)). When the Group’s share of losses exceeds its interest in the associate or the jointly controlled entity, the Group’s interest is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the associate or the jointly controlled entity. For this purpose, the Group’s interest in the associate or the jointly controlled entity is the carrying amount of the investment under the equity method together with the Group’s long-term interests that in substance form part of the Group’s net investment in the associate or the jointly controlled entity. Unrealised profits and losses resulting from transactions between the Group and its associates and jointly controlled entities are eliminated to the extent of the Group’s interest in the associate or jointly controlled entity, except where unrealised losses provide evidence of an impairment of the asset transferred, in which case they are recognised immediately in profit or loss. (e) Goodwill Goodwill represents the excess of the cost of a business combination or an investment in an associate or a jointly controlled entity over the Group’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities. Goodwill is stated at cost less accumulated impairment losses. Goodwill is allocated to cash- generating units and is tested annually for impairment as well as when there are indications of impairment (see note 2(m)). In respect of associates or jointly controlled entities, the carrying amount of goodwill is included in the carrying amount of the interest in the associate or jointly controlled entity. Any excess of the Group’s interest in the net fair value of the acquirer’s identifiable assets, liabilities and contingent liabilities over the cost of a business combination or an investment in an associate or a jointly controlled entity is recognised immediately in profit or loss. On disposal of a cash generating unit, an associate or a jointly controlled entity during the year, any attributable amount of purchased goodwill is included in the calculation of the profit or loss on disposal. 88 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 2 Significant accounting policies (continued) (f) Business combinations When an acquisition is completed by a series of successive transactions, each significant transaction is considered individually for the purpose of the determination of the fair value of the identifiable assets, liabilities and contingent liabilities acquired and hence for the goodwill associated with acquisition. The fair values of the identifiable assets and liabilities acquired can vary at the date of each transaction. When a transaction results in taking control over the entity, the interests previously held in that entity are revalued on the basis of the fair values of the identifiable assets and liabilities at the date. The contra posting for this revaluation is recorded directly in capital reserve arising from stepped acquisitions. When control already existed at the date of further acquisition, no fair value adjustment is made to identifiable net assets and any excess/deficit purchase price over the carrying value of the minorities acquired is accounted for in capital reserve arising from stepped acquisitions. Where the Group decrease its interest in a subsidiary without losing control, any gain or lose on the partial disposal is recognised in profit or loss. (g) Other investments in equity securities The Group’s policies for investments in equity securities, other than investment in subsidiaries, associates and jointly controlled entities are as follows: Investments in equity securities are initially stated at cost, which is their transaction price unless fair value can be more reliably estimated using valuation techniques whose variables include only data from observable markets. Cost includes attributable transaction costs, except where indicated otherwise below. These investments are subsequently accounted for as follows, depending on the classification: Investments in equity securities held for trading are classified as current assets. Any attributable transaction costs are recognised in profit or loss as incurred. At each balance sheet date the fair value is remeasured, with any resultant gain or loss being recognised in profit or loss. Investments in equity securities that do not have a quoted market price in an active market and whose fair value cannot be reliably measured are recognised in the balance sheet at cost less impairment losses (see note 2(m)). Investments in equity securities which do not fall into the above categories are classified as available-for-sale securities. At each balance sheet date the fair value is remeasured, with any resultant gain or loss being recognised directly in equity. When these investments are derecognised or impaired (see note 2(m)), the cumulative gain or loss previously recognised directly in equity is recognised in profit or loss. Investments are recognised/derecognised on the date the Group commits to purchase/sell the investments or they expire. 89 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 2 Significant accounting policies (continued) (h) Investment properties Investment properties are land and buildings which are owned or held under a leasehold interest (see note 2(k)) to earn rental income and/or for capital appreciation. These include land held for a currently undetermined future use. Investment properties are stated in the consolidated balance sheet at cost less accumulated depreciation and impairment losses (see note 2(m)). The cost of self-constructed assets includes the cost of materials, direct labour, the initial estimate, where relevant, of the costs of dismantling and removing the items and restoring the site on which they are located, and an appropriate proportion of production overheads and borrowing costs. Any gain or loss arising from the retirement or disposal of an investment property is recognised in profit or loss. Rental income from investment property is accounted for as described in note 2(y)(iv). Depreciation is calculated to write off the cost of items of investment properties, less their estimated residual value of 4% of costs, using straight line method, after taking into account the estimated residual value of 4% of costs, over their estimated useful lives of 25 years. (i) Property, plant and equipment Items of property, plant and equipment are initially recognised at cost less accumulated depreciation (see below) and impairment losses (see note 2(m)). The cost of self-constructed items of property, plant and equipment includes the cost of materials, direct labour, the initial estimate, where relevant, of the costs of dismantling and removing the items and restoring the site on which they are located, and an appropriate proportion of production overheads and borrowing costs (see note 2(aa)). Gains or losses arising from the retirement or disposal of an item of property, plant and equipment are determined as the difference between the net disposal proceeds and the carrying amount of the item and are recognised in profit or loss on the date of retirement or disposal. The cost of replacing part of an item of property, plant and equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Group and its cost can be measured reliably. The costs of the day-to-day servicing of property, plant and equipment are recognised in profit or loss as incurred. Depreciation is calculated to write off the cost of items of property, plant and equipment, less their estimated residual value, if any, using the straight line method over their estimated useful lives as follows: 90 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 2 Significant accounting policies (continued) (i) Property, plant and equipment (continued) Estimated residual value as a percentage Year of costs Buildings 12.5 – 25 4% Improvements to premises 5 years or over terms of leases - Plant and machinery 5 – 10 4% Furniture, fixtures and equipment 5 – 10 4% Motor vehicles 5 4% Where parts of an item of property, plant and equipment have different useful lives, the cost of the item is allocated on a reasonable basis between the parts and each part is depreciated separately. Both the useful life of an asset and its residual value, if any, are reviewed annually. (j) Construction in progress Construction in progress represents items of property, plant and equipment under construction and pending installation, and is stated at cost less impairment losses (see note 2(m)). Cost comprises cost of materials, direct labour, borrowing costs capitalised (see note 2(aa)), and an appropriate proportion of production overheads incurred during the periods of construction and installation. Capitalisation of those costs ceases and the construction in progress is transferred to property, plant and equipment when the asset is substantially ready for its intended use. No depreciation is provided in respect of construction in progress. (k) Leased assets An arrangement, comprising a transaction or a series of transactions, is or contains a lease if the Group determines that the arrangement conveys a right to use a specific asset or assets for an agreed period of time in return for a payment or a series of payments. Such a determination is made based on an evaluation of the substance of the arrangement and is regardless of whether the arrangement takes the legal form of a lease. (i) Classification of assets leased to the Group Leases which do not transfer substantially all the risks and rewards of ownership to the Group are classified as operating leases with the exception that property held under operating leases that would otherwise meet the definition of an investment property is classified as an investment property on a property-by-property basis and, if classified as investment property, is accounted for as if held under a finance lease (see note 2(h)). 91 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 2 Significant accounting policies (continued) (k) Leased assets (continued) (ii) Operating lease charges Where the Group has the use of assets held under operating leases, payments made under the leases are charged to profit or loss in equal instalments over the accounting periods covered by the lease term, except where an alternative basis is more representative of the pattern of benefits to be derived from the leased asset. Lease incentives received are recognised in profit or loss as an integral part of the aggregate net lease payments made. Contingent rentals are charged to profit or loss in the accounting period in which they are incurred. The cost of acquiring land held under an operating lease is amortised on a straight- line basis over the period of the lease term except where the property is held for development or under development (see notes 2(l) and 2(p)). (l) Properties held for development Properties held for development are stated at cost less impairment losses (see note 2(m)). (m) Impairment of assets (i) Impairment of investments in equity securities and other receivables Investments in equity securities and other current receivables that are stated at cost or amortised cost or are classified as available-for-sale securities are reviewed at each balance sheet date to determine whether there is objective evidence of impairment. If any such evidence exists, any impairment loss is determined and recognised as follows: - For unquoted equity securities that are carried at cost, the impairment loss is measured as the difference between the carrying amount of the financial asset and the estimated future cash flows, discounted at the current market rate of return for a similar financial asset where the effect of discounting is material. Impairment losses for equity securities are not reversed. - For trade and other current receivables and other financial assets carried at amortised cost, the impairment loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the financial asset’s original effective interest rate (i.e. the effective interest rate computed at initial recognition of these assets), where the effect of discounting is material. If in a subsequent period the amount of an impairment loss decreases and the decrease can be linked objectively to an event occurring after the impairment loss was recognised, the impairment loss is reversed through profit or loss. A reversal of an impairment loss shall not result in the asset’s carrying amount exceeding that which would have been determined had no impairment loss been recognised in prior years. 92 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 2 Significant accounting policies (continued) (m) Impairment of assets (continued) (i) Impairment of investments in equity securities and other receivables (continued) - For available-for-sale securities, the cumulative loss that has been recognised directly in equity is removed from equity and is recognised in profit or loss. The amount of the cumulative loss that is recognised in profit or loss is the difference between the acquisition cost (net of any principal repayment and amortisation) and current fair value, less any impairment loss on that asset previously recognised in profit or loss. Impairment losses recognised in profit or loss in respect of available-for-sale equity securities are not reversed through profit or loss. Any subsequent increase in the fair value of such assets is recognised directly in equity. Impairment losses in respect of available-for-sale debt securities are reversed if the subsequent increase in fair value can be objectively related to an event occurring after the impairment loss was recognised. Reversals of impairment losses in such circumstances are recognised in profit or loss (ii) Impairment of other assets Internal and external sources of information are reviewed at each balance sheet date to identify indications that the following assets may be impaired or, except in the case of goodwill, an impairment loss previously recognised no longer exists or may have decreased: - investment properties; - property, plant and equipment; - construction in progress; - interest in associates; - interest in jointly controlled entities; and - properties held for development. If any such indication exists, the asset’s recoverable amount is estimated. In addition, for goodwill, the recoverable amount is estimated annually whether or not there is any indication of impairment. - Calculation of recoverable amount The recoverable amount of an asset is the greater of its net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of time value of money and the risks specific to the asset. Where an asset does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the smallest group of assets that generates cash inflows independently (i.e. a cash-generating unit). 93 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 2 Significant accounting policies (continued) (m) Impairment of assets (continued) (ii) Impairment of other assets (continued) - Recognition of impairment losses An impairment loss is recognised in profit or loss whenever the carrying amount of an asset, or the cash-generating unit to which it belongs, exceeds its recoverable amount. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the cash-generating unit (or group of units) and then, to reduce the carrying amount of the other assets in the unit (or group of units) on a pro rata basis, except that the carrying value of an asset will not be reduced below its individual fair value less costs to sell, or value in use, if determinable. - Reversals of impairment losses In respect of assets other than goodwill, an impairment loss is reversed if there has been a favourable change in the estimates used to determine the recoverable amount. An impairment loss in respect of goodwill is not reversed. A reversal of an impairment loss is limited to the asset’s carrying amount that would have been determined had no impairment loss been recognised in prior years. Reversals of impairment losses are credited to profit or loss in the year in which the reversals are recognised. (n) Inventories Inventories are stated at the lower of cost and net realisable value. Cost is calculated using the weighted average cost formula and comprises all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale. When inventories are sold, the carrying amount of those inventories is recognised as an expense in the period in which the related revenue is recognised. The amount of any write- down of inventories to net realisable value and all losses of inventories are recognised as an expense in the period the write-down or loss occurs. The amount of any reversal of any write-down of inventories is recognised as a reduction in the amount of inventories recognised as an expense in the period in which the reversal occurs. (o) Completed properties for sale Completed properties for sale are stated at the lower of cost and net realisable value. Cost is determined by apportionment of the total development costs for that development project attributable to the unsold properties. Net realisable value represents the estimated selling price less the estimated costs to be incurred in selling the properties. 94 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 2 Significant accounting policies (continued) (o) Completed properties for sale (continued) When properties are sold, the carrying amount of those properties is recognised as an expense in the period in which the related revenue is recognised. The amount of any write- down of properties to net realisable value and all losses of properties are recognised as an expense in the period the write-down or loss occurs. The amount of any reversal of any write-down of properties is recognised as a reduction in the amount of properties recognised as an expense in the period in which the reversal occurs. (p) Properties under development Properties under development are stated at the lower of cost and net realisable value. The cost of properties under development comprises specifically identified cost, including the acquisition cost of land, aggregate cost of development, materials and supplies, wages and other direct expenses, an appropriate proportion of overheads and borrowing costs capitalised (see note 2(aa)). Net realisable value represents the estimated selling price less the estimated costs of completion and the estimated costs to be incurred in selling the properties. On completion, the properties are transferred to completed properties for sales. Properties under development are classified as current assets unless the construction period of the relevant property development project is expected to complete beyond 12 months from the balance sheet date. (q) Trade and other receivables Trade and other receivables are initially recognised at fair value and thereafter at amortised cost less impairment losses for bad and doubtful debts (see note 2(m)), except where the effect of discounting would be immaterial. In such cases, the receivables are stated at cost less impairment losses for bad and doubtful debts (see note 2(m)). (r) Convertible bonds Convertible bonds that can be converted to equity share capital at the option of the holder, where the number of shares that would be issued on conversion and the value of the consideration that would be received at that time do not vary, are accounted for as compound financial instruments which contain both a liability component and an equity component. At initial recognition the liability component of the convertible bonds is calculated as the present value of the future interest and principal payments, discounted at the market rate of interest applicable at the time of initial recognition to similar liabilities that do not have a conversion option. Any excess of proceeds over the amount initially recognised as the liability component is recognised as the equity component. Transaction costs that relate to the issue of a compound financial instrument are allocated to the liability and equity components in proportion to the allocation of proceeds. 95 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 2 Significant accounting policies (continued) (r) Convertible bonds (continued) The liability component is subsequently carried at amortised cost. The interest expense recognised in profit or loss on the liability component is calculated using the effective interest method. The equity component is recognised in the convertible bonds reserve until either the bond is converted or redeemed. If the bond is converted, the convertible bonds reserve, together with the carrying value of the liability component at the time of conversion, is transferred to share capital and share premium as consideration for the shares issued. If the bond is redeemed, the convertible bonds reserve is released directly to retained profits. (s) Interest-bearing borrowings Interest-bearing borrowings are recognised initially at fair value, less attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in the profit or loss over the period of the borrowings, together with any interest and fees payable, using the effective interest method. (t) Trade and other payables Trade and other payables are initially recognised at fair value. Except for financial guarantee liabilities measured in accordance with note 2(x), trade and other payables are subsequently stated at amortised cost unless the effect of discounting would be immaterial, in which case they are stated at cost. (u) Cash and cash equivalents Cash and cash equivalents comprise cash at bank and on hand, and demand deposits with banks. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are included as a component of cash and cash equivalents for the purpose of the consolidated cash flow statement. (v) Employee benefits (i) Short term employee benefits and contributions to defined contribution retirement plans Salaries, annual bonuses, paid annual leave and the cost of non-monetary benefits are accrued in the year in which the associated services are rendered by employees. Where payment or settlement is deferred and the effect would be material, these amounts are stated at their present values. The Group’s contributions to defined contribution retirement plans administrated by the PRC government are recognised as an expense when incurred according to the contribution defined by the plans. 96 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 2 Significant accounting policies (continued) (v) Employee benefits (continued) (ii) Share based payments The Group has adopted an equity-settled Employees’ Share Award Scheme (the “Scheme”) for its employees (details are set out in note 34) and the Group’s policy for the Scheme is set out below. The fair value of the shares granted to the employees (the “Awarded Shares”) is recognised as an employee cost with a corresponding increase in capital reserve within equity. The fair value is measured at grant date using the Monte-Carlo option pricing model, taking into account the terms and conditions upon which the Awarded Shares were granted. As the employees have to meet vesting conditions before becoming unconditionally entitle to the Awarded Shares, the total estimated fair value of the Awarded Shares is spread over the vesting period, taking into account the probability that the Awarded Shares will vest. As the duration of the vesting period depends on the market price of the Company’s A shares, the estimation on the vesting period is reviewed at each balance sheet date. Any adjustment to the employee cost recognised in prior years is charged/credited to the profit or loss for the year of review with a corresponding adjustment to the capital reserve. The Group’s contribution to the Scheme is stated at cost and is presented as a contra account within equity. (w) Income tax Income tax for the year comprises current tax and movements in deferred assets and liabilities. Current tax and movement in deferred tax assets and liabilities are recognised in profit or loss except to the extent that they relate to items recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Deferred tax assets and liabilities arise from deductible and taxable temporary differences respectively, being the differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax bases. Deferred tax assets also arise from unused tax losses and unused tax credits. 97 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 2 Significant accounting policies (continued) (w) Income tax (continued) Apart from certain limited exceptions, all deferred tax liabilities and all deferred tax assets to the extent that it is probable that future taxable profits will be available against which the asset can be utilised, are recognised. Future taxable profits that may support the recognition of deferred tax assets arising from deductible temporary differences include those that will arise from the reversal of existing taxable temporary differences, provided those differences relate to the same taxation authority and the same taxable entity, and are expected to reverse either in the same period as the expected reversal of the deductible temporary difference or in periods into which a tax loss arising from the deferred tax asset can be carried back or forward. The same criteria are adopted when determining whether existing taxable temporary differences support the recognition of deferred tax assets arising from unused tax losses and credits, that is, those differences are taken into account if they relate to the same taxation authority and the same taxable entity, and are expected to reverse in a period, or periods, in which the tax loss or credit can be utilised. No temporary differences are recognised on the initial recognition of goodwill. In addition, the following temporary differences are not provided for: the initial recognition of assets or liabilities that affect neither accounting nor taxable profit (provided they are not part of a business combination), and temporary differences relating to investments in subsidiaries to the extent, in the case of taxable differences, the Group controls the timing of the reversal and it is probable that the differences will not reverse in the foreseeable future, or in the case of deductible differences, unless it is probable that they will reverse in the future. The amount of deferred tax recognised is measured based on the expected manner of realisation or settlement of the carrying amount of the assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date. Deferred tax assets and liabilities are not discounted. The carrying amount of a deferred tax asset is reviewed at each balance sheet date and is reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow the related tax benefit to be utilised. Any such reduction is reversed to the extent that it becomes probable that sufficient taxable profits will be available. Additional income taxes that arise from the distribution of dividends are recognised when the liability to pay the related dividends is recognised. 98 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 2 Significant accounting policies (continued) (w) Income tax (continued) Current tax balances and deferred tax balances, and movements therein, are presented separately from each other and are not offset. Current tax assets are offset against current tax liabilities, and deferred tax assets against deferred tax liabilities, if the Company or the Group has the legally enforceable right to set off current tax assets against current and the following additional conditions are met: - in the case of current tax assets and liabilities, the Company or the Group intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously; or - in the case of deferred tax assets and liabilities, if they relate to income taxes levied by the same taxation authority on either: - the same taxable entity; or - different taxable entities, which, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered, intend to realise the current tax assets and settle the current tax liabilities on a net basis or realise and settle simultaneously. (x) Financial guarantees issued, provisions and contingent liabilities (i) Financial guarantees issued Financial guarantees are contracts that require the issuer (i.e. the guarantor) to make specified payments to reimburse the beneficiary of the guarantee (the “holder”) for a loss the holder incurs because a specified debtor fails to make payment when due in accordance with the terms of a debt instrument. Where the Group issues a financial guarantee, the fair value of the guarantee (being the transaction price, unless the fair value can otherwise be reliably estimated) is initially recognised as deferred income within trade and other payables. Where consideration is received or receivable for the issuance of the guarantee, the consideration is recognised in accordance with the Group’s policies applicable to that category of asset. Where no such consideration is received or receivable, an immediate expense is recognised in profit or loss on initial recognition of any deferred income. The amount of the guarantee initially recognised as deferred income is amortised in profit or loss over the term of the guarantee as income from financial guarantees issued. In addition, provisions are recognised in accordance with note 2(x)(iii) if and when (i) it becomes probable that the holder of the guarantee will call upon the group under the guarantee, and (ii) the amount of that claim on the Group is expected to exceed the amount currently carried in trade and other payables in respect of that guarantee i.e. the amount initially recognised, less accumulated amortisation. 99 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 2 Significant accounting policies (continued) (x) Financial guarantees issued, provisions and contingent liabilities (continued) (ii) Contingent liabilities acquired in business combinations Contingent liabilities acquired as part of a business combination are initially recognised at fair value, provided the fair value can be reliably measured. After their initial recognition at fair value, such contingent liabilities are recognised at the higher of the amount initially recognised, less accumulated amortisation where appropriate, and the amount that would be determined in accordance with note 2(x)(iii). Contingent liabilities acquired in a business combination that cannot be reliably fair valued are disclosed in accordance with note 2 (x)(iii). (iii) Other provisions and contingent liabilities Provisions are recognised for other liabilities of uncertain timing or amount when the Group has a legal or constructive obligation arising as a result of a past event, it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate can be made. Where the time value of money is material, provisions are stated at the present value of the expenditure expected to settle the obligation. Where it is not probable that an outflow of economic benefits will be required, or the amount cannot be estimated reliably, the obligation is disclosed as a contingent liability, unless the probability of outflow of economic benefits is remote. Possible obligations, whose existence will only be confirmed by the occurrence or non- occurrence of one or more future events are also disclosed as contingent liabilities unless the probability of outflow of economic benefits is remote. (y) Revenue recognition Provided it is probable that the economic benefits will flow to the Group and the revenue and costs, if applicable, can be measured reliably, revenue is recognised in profit or loss as follows: (i) Sale of properties Revenue from the sale of completed properties for sale is recognised upon the signing of the sale and purchase agreement and the receipt of the deposits pursuant to the sale and purchase agreement or the issue of a completion certificate by the relevant government authorities, whichever is the later. Deposits and instalments received on properties sold prior to the date of revenue recognition are included in the consolidated balance sheet under sales deposits received in advance. (ii) Sale of goods Revenue is recognised when goods are delivered to the customers which is taken to be the point in time when the customer has accepted the goods and the related risks and rewards of ownership. (iii) Provision of services Revenue from services is recognised when services are rendered. 100 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 2 Significant accounting policies (continued) (y) Revenue recognition (continued) (iv) Rental income from operating leases Rental income receivable under operating leases is recognised in profit or loss in equal instalments over the periods covered by the lease term, except where an alternative basis is more representative of the pattern of benefits to be derived from the use of the leased asset. Lease incentives granted are recognised in profit or loss as an integral part of the aggregate net lease payments receivable. Contingent rentals are recognised as income in the accounting period in which they are earned. (v) Interest income Interest income is recognised as it accrues using the effective interest method. (vi) Dividend income - Dividend income from unlisted investments is recognised when the shareholder’s right to receive payment is established. - Dividend income from listed investments is recognised when the share price of the investment goes ex-dividend. (vii) Government grants Government grants are recognised in the balance sheet initially when there is reasonable assurance that they will be received and that the Group will comply with the conditions attaching to them. Grants that compensate the Group for expenses incurred are recognised as other sundry income in profit or loss on a systematic basis in the same periods in which the expenses are incurred. Grants that compensate the Group for the cost of an asset are deducted in arriving at the carrying amount of the asset and consequently are recognised in profit or loss over the useful life of the asset. The above revenue is net of the relevant taxes and is after the deduction of any trade discounts. No revenue is recognised if there are significant uncertainties regarding recovery of the consideration due, associated costs or the possible return of goods. 101 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 2 Significant accounting policies (continued) (z) Translation of foreign currencies Foreign currency transactions during the year are translated at the foreign exchange rates ruling at the transaction dates. Monetary assets and liabilities denominated in foreign currencies are translated at the foreign exchange rates ruling at the balance sheet date. Exchange gains and losses are recognised in profit or loss. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the foreign exchange rates ruling at the transaction dates. Non- monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated using the foreign exchange rates ruling at the dates the fair value was determined. The results of foreign operations are translated into Renminbi Yuan at the exchange rates approximating the foreign exchange rates ruling at the dates of the transactions. Balance sheet items are translated into Renminbi Yuan at the foreign exchange rates ruling at the balance sheet date. The resulting exchange differences are recognised directly in a separate component of equity. On disposal of a foreign operation, the cumulative amount of the exchange differences recognised in equity which relate to that foreign operation is included in the calculation of the profit or loss on disposal. (aa) Borrowing costs Borrowing costs are expensed in profit or loss in the period in which they are incurred, except to the extent that they are capitalised as being directly attributable to the acquisition, construction or production of an asset which necessarily takes a substantial period of time to get ready for its intended use or sale. The capitalisation of borrowing costs as part of the cost of a qualifying asset commences when expenditure for the asset is being incurred, borrowing costs are being incurred and activities that are necessary to prepare the asset for its intended use or sale are in progress. Capitalisation of borrowing costs is suspended or ceases when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are interrupted or complete. 102 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 2 Significant accounting policies (continued) (ab) Related parties For the purposes of these financial statements, a party is considered to be related to the Group if: (i) the party has the ability, directly or indirectly through one or more intermediaries, to control the Group or exercise significant influence over the Group in making financial and operating policy decisions, or has joint control over the Group. (ii) the Group and the party are subject to common control; (iii) the party is an associate of the Group or a joint venture in which the Group is a venturer; (iv) the party is a member of key management personnel of the Group, or a close family member of such an individual, or is an entity under the control, joint control or significant influence of such individuals; (v) the party is close family member of a party referred to in (i) or is an entity under the control, joint control or significant influence of such individuals; or (vi) the party is a post-employment benefit plan which is for the benefit of employees of the Group or of any entity that is a related party of the Group. Close family members of an individual are those family members who may be expected to influence, or be influenced by, that individual in their dealings with the entity. (ac) Segment reporting A segment is a distinguishable component of the Group that is engaged either in providing products or services (business segment), or in providing products or services within a particular economic environment (geographical segment), which is subject to risks and rewards that are different from those of other segments. In accordance with the Group’s internal financial reporting system, the Group has chosen business segment information as the primary reporting format and geographical segment information as the secondary reporting format for the purposes of these financial statements. Segment revenue, expenses, results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis to that segment. For example, segment assets may include inventories, trade receivables and property, plant and equipment. Segment revenue, expenses, assets, and liabilities are determined before intra- group balances and intra-group transactions are eliminated as part of the consolidation process, except to the extent that such intra-group balances and transactions are between group entities within a single segment. Inter-segment pricing is based on similar terms as those available to other external parties. Segment capital expenditure is the total cost incurred during the period to acquire segment assets (both tangible and intangible) that are expected to be used for more than one period. Unallocated items mainly comprise financial and corporate assets, interest-bearing loans, borrowings, tax balances, corporate and financing expenses. 103 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 3 New and revised IFRSs Financial guarantees issued (Amendments to IAS 39, Financial instruments: Recognition and measurement: Financial guarantee contracts) In prior years, financial guarantees issued by the Group were disclosed as contingent liabilities in accordance with IAS 37, Provisions, contingent liabilities and contingent assets. No provisions were made in respect of these guarantees unless it was more likely than not the guarantee would be called upon. With effect from 1 January 2006, in order to comply with the amendments to IAS 39 in respect of financial guarantee contracts, the Group has changed its accounting policy for financial guarantees issued. Under the new policy, financial guarantees issued are measured at fair value and is initially recognised as deferred income within trade and other payables. The deferred income is amortised in profit or loss over the term of the guarantee as income from financial guarantees issued. In addition, provisions are recognised in accordance with IAS 37. Further details of the new policy are set out note 2(x)(i). The adoption of this revised IFRS did not result in significant impact to the Group’s consolidated financial statements for the periods presented. Details of the financial guarantees currently issued by the Group are set out in note 37. The Group has not applied any new standards or interpretations that are not yet effective for the current accounting period (see note 41). 104 4 Segment reporting The principal activities of the Group are property development, property management and property investment. The Group’s results for the year ended 31 property development in the PRC. Accordingly no analysis by business segments has been presented. Below is an analysis of the revenue, assets and capital expenditure of the Group according to the geographical location of the property development projects with Shenzhen, Dongguan and Zhongshan Tianjin Beijing Shanghai region Northeast region Guangzhou and (note (1)) (note (2)) 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 2006 Revenue Property sales 3,259,939,907 1,924,379,314 1,588,672,669 705,270,894 1,111,735,568 959,525,895 6,179,605,756 2,850,380,002 1,276,925,935 1,445,239,068 1,553,187,661 Property Management 35,272,370 22,626,991 9,177,691 12,564,581 33,434,401 36,728,872 62,359,705 43,430,330 18,680,602 16,653,880 1,441,943 Rental 9,730,840 6,464,575 818,168 1,120,723 4,682,742 2,985,699 9,979,731 12,878,240 864,496 2,545,882 152,337 Total revenue 3,304,943,117 1,953,470,880 1,598,668,528 718,956,198 1,149,852,711 999,240,466 6,251,945,192 2,906,688,572 1,296,471,033 1,464,438,830 1,554,781,941 Segment assets 12,429,607,071 6,793,882,243 2,525,353,175 1,684,718,092 4,399,103,304 1,101,009,765 17,599,836,754 8,347,583,835 2,078,006,521 1,490,185,046 5,200,071,114 2 Capital Expenditure 19,716,760 3,500,100 4,906,759 1,088,229 14,375,884 2,497,141 78,940,442 33,056,563 3,766,681 1,617,527 3,295,359 Revenue is based on the geographical location of the property development projects. Assets and capital expenditures are disclosed by the geographical location Capital expenditure is the total cost incurred during the year to acquire assets that are expected to be used for more than one year. Notes: (1) Shanghai region represents Shanghai, Nanjing, Wuxi, Suzhou, Zhejiang, Ningbo, Zhenjiang and Kunshan. (2) Northeast region represents Shenyang, Changchun, Dalian, and Anshan. (3) Other represents Chengdu, Nanchang, Wuhan and other non real estate companies. 105 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 5 Acquisition of subsidiaries and minority interests (i) Acquisition of subsidiaries and minority interests by the Group during the year ended 31 December 2006 are summarised as follows: Business combination (a) Pursuant to an equity transfer agreements dated 18 January 2006, the Company acquired 60% equity interests in Beijing Chao Wan Property Development Centre Company Limited (“Beijing Chao Wan”), which hold 100% interests of Dongguan Sunshine Real Estate Company Limited (“Dongguan Sunshine”) for a total consideration of RMB389 million satisfied in cash by 2 instalments, which were due on or before 18 January 2007. Subsequently, Beijing Chao Wan sold all its interests in Dongguan Sunshine to Dongguan Vanke Real Estate Company Limited, a wholly owned subsidiary of the Group, at the carrying value. As a result, Dongguan Sunshine became a wholly owned subsidiary of the Group. The principal activity of Beijing Chao Wan is principally engaged in property development in Beijing and Dongguan. During the year, Beijing Chao Wan contributed net loss of RMB 40 million to the Group. (b) Pursuant to an equity transfer agreement dated 4 August 2006, the Group acquired 60% equity interests in Nandu Property Group Co., Ltd. (“Zhejiang Nandu”), 21% equity interest in Suzhou Nandu Jianwu Co., Ltd. (“Suzhou Nandu”), at an aggregate consideration of RMB1,385 million (after discount) satisfied in cash by 4 instalments, which were due between August 2006 to July 2007. Suzhou Nandu and Zhejiang Nandu are principally engaged in property development in Suzhou city and Zhejiang province respectively . During the year, Suzhou Nandu and Zhejiang Nandu contributed net profit of RMB126 million to the Group in aggregate. (c) On 20 February 2006, the Group acquired 51% equity interest in Shenzhen Vanke East Coast Real Estate Development Company Limited (“Shenzhen East Coast”), which was previously a jointly controlled entity of the Group, for a consideration of RMB 5 million satisfied in cash. As a result of this acquisition, together with a further acquisition of 40% share from a minority shareholder, the Group’s effective interest in Dongguan Songshanju Property Company Limited (“Dongguan Songshanju”) increased to 100%. Shenzhen East Coast and Dongguan Songshanju are principally engaged in property development in Shenzhen and Dongguan respectively. During the year, Shenzhen East Coast and Dongguan Songshanju contributed net loss of RMB3 million and RMB 7 million to the Group respectively. (d) On 11 August 2006, the Group acquired 90% equity interest in Chengdu Bei Fu Property Company Limited (“Chengdu Bei Fu”), for a consideration of RMB9 million satisfied in cash. Chengdu Bei Fu is principally engaged in property development in Chengdu. During the year, Chengdu Bei Fu contributed net loss of RMB 1 million to the Group. 106 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 5 Acquisition of subsidiaries and minority interests (continued) (i) Acquisition of subsidiaries and minority interests by the Group during the year ended 31 December 2006 are summarised as follows (continued): Business combination (continued) (e) On 15 September 2006, Tianjin Xinghai Real Estate Development Company Limited (“Tianjin Xinghai”), in which the Group had 55% equity interest, was changed from a jointly controlled entity to a subsidiary of the Group as the Group obtained control over Tianjin Xinghai from the original joint venture partner. Tianjin Xinghai is principally engaged in property development in Tianjin. The change did not have any impact on the result of the Group. (f) On 30 May 2006, the Group acquired 90% equity interest in Shanghai Jinchuan Property Development Company Limited (“Jinchuan”) and Shanghai Jinhua Property Development Company Limited (“Jinhua”) respectively, for a total consideration of RMB18 million. Jinchuan and Jinhua both are principally engaged in property development in Shanghai. During the year, Jinchuan and Jinhua contributed an aggregate net loss of RMB2 million. (g) If these acquisitions had occurred on 1 January 2006, management estimates that consolidated revenue would have been RMB17,117 million and consolidated net profit attributable to equity shareholders of the Company for the year would have been RMB2,340 million. Effect of acquisitions The acquisitions had the following effect on the Group’s assets and liabilities. Combined net assets of the above acquired entities at the respective acquisition dates: Recognised Fair value Carrying values adjustments amounts Cash and cash equivalents 748,144,617 - 748,144,617 Property, plant and equipment 177,329,204 - 177,329,204 Properties held for development, properties under development and completed properties for sales 9,460,079,626 1,716,098,408 7,743,981,218 Trade and other receivables 527,419,361 - 527,419,361 Interest in jointly controlled entities 492,426,999 126,901,366 365,525,633 Interest in associates (753,824,937) (443,117,506) (310,707,431) Interest-bearing loans and borrowings (2,814,361,000) - (2,814,361,000) Minority interests (982,152,252) (396,911,247) (585,241,005) Trade and other payables (5,042,175,122) - (5,042,175,122) Net identifiable assets and liabilities 1,812,886,496 1,002,971,021 809,915,475 107 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 5 Acquisition of subsidiaries and minority interests (continued) (i) Acquisition of subsidiaries and minority interests by the Group during the year ended 31 December 2006 are summarised as follows (continued): Effect of acquisitions (continued) Recognised values Considerations paid during the year, satisfied in cash 1,812,886,496 Cash acquired (748,144,617) Considerations not yet paid (432,813,025) Net cash outflow 631,928,854 Acquisition of minority interests Pursuant to an equity transfer agreement dated 4 August 2006, the Group acquired an additional 30% equity interests in each of Shanghai Nandu Land Company Limited (“Shanghai Nandu”), Zhenjiang Runzhong Property Company Limited and Zhenjiang Runqiao Property Company Limited (collectively the “Shanghai Nandu Group”), increasing its ownership in each of these companies from 70% to 100%, for an aggregate consideration of RMB355 million satisfied in cash by 4 installments. The carrying amount of these companies’ combined net assets in the consolidated financial statements on the date of the acquisition was RMB1,246 million. The Group recognised a decrease in minority interests of RMB341 million. (ii) Acquisition of subsidiaries and minority interests by the Group during the year ended 31 December 2005 are summarised as follows: Business combination (a) Pursuant to an equity transfer agreement dated 3 March 2005 and certain supplementary agreements subsequently entered into in October 2005, the Group acquired 70% equity interest in Shanghai Nandu Group for an aggregate consideration of RMB 789 million satisfied in cash by 4 instalments, which are due between May 2005 to March 2007. The Shanghai Nandu Group is principally engaged in property development in Shanghai. In 2005 , Shanghai Nandu Group contributed net profit of RMB 19 million to the Group. (b) On 31 May 2005, the Group acquired 51% equity interest in Shenzhen Vanke Fifth Garden Company Limited (“Vanke Fifth Garden”), which was previously a 49% owned jointly controlled entity of the Group, for a consideration of RMB 5 million satisfied in cash. Vanke Fifth Garden is principally engaged in property development in Shenzhen. In 2005, Vanke Fifth Garden contributed net loss of RMB8.4 million to the Group. 108 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 5 Acquisition of subsidiaries and minority interests (continued) Business combination (continued) (c) On 22 July 2005, the Group acquired 70% equity interest in Dong Tai Industrial Development Company Limited (“Dong Tai”) for a consideration of RMB 39 million satisfied in cash. Dong Tai is principally engaged in property development in Guangzhou. In 2005, Dong Tai contributed net loss of RMB 0.3 million to the Group. (d) On 18 December 2005, Chengdu Vanke Property Company Limited (“Chengdu Vanke”), in which the Group had 60% equity interest, was changed from a jointly controlled entity to a subsidiary of the Group as the Group obtained control over Chengdu Vanke from the original joint venture partner. Chengdu Vanke is principally engaged in property development in Chengdu. The change did not have any impact on the result of the Group. (e) If these acquisitions had occurred on 1 January 2005, management estimates that consolidated revenue would have been RMB 9,921 million and consolidated net profit for the year ended 31 December 2005 would have been RMB 1,453 million. Effect of acquisitions The acquisitions had the following effect on the Group’s assets and liabilities. Combined net assets of the above acquired entities at the respective acquisition dates: Recognised Fair value Carrying values adjustments amounts Cash and cash equivalents 225,355,965 - 225,355,965 Property, plant and equipment 4,593,587 - 4,593,587 Properties held for development, properties under development and completed properties for sales 3,046,272,524 928,010,080 2,118,262,444 Trade and other receivables 306,061,067 - 306,061,067 Interest-bearing loans and borrowings (505,000,000) - (505,000,000) Interest in a jointly controlled entity (56,956,145) - (56,956,145) Minority interests (425,606,376) (301,578,355) (124,028,021) Trade and other payables (1,748,334,287) - (1,748,334,287) Net identifiable assets and liabilities 846,386,335 626,431,725 219,954,610 109 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 5 Acquisition of subsidiaries and minority interests (continued) (ii) Acquisition of subsidiaries and minority interests by the Group during the year ended 31 December 2005 are summarised as follows (continued): Effect of acquisitions (continued) Recognised Values Considerations satisfied in cash 846,386,335 Cash acquired (225,355,965) Prepayment of considerations in previous years (140,000,000) Considerations not yet paid (368,547,123) Net cash outflow 112,483,247 Acquisition of minority interests Pursuant to an equity transfer agreement dated 1 December 2005, the Group acquired an additional 32.81% equity interest in Shenyang Vanke Hunnan Real Estate Development Company Limited (“Shenyang Hunnan”), increasing its ownership from 67.19% to 100%, for a consideration of RMB 13 million satisfied in cash. Shenyang Hunnan is principally engaged in property development in Shenyang. The carrying amount of Shenyang Hunnan’s net assets in the consolidated financial statements on the date of the acquisition was RMB 14 million. The decrease in minority interests recognised by the Group is immaterial. 6 Disposal of a subsidiary (i) On 23 March 2006, the Group disposed of a 100% equity interest in Vanke Film & Television Co. Ltd., which was previously wholly owned by the Group, for a consideration of RMB7.86 million. A gain of RMB51,182 arose from the disposal. Effect of the disposal on individual assets and liabilities of the Group for the year ended 31 December 2006 Cash and cash equivalents 964,345 Property, plant and equipment 73,805 Inventories 39,657,182 Trade and other receivables 5,118,364 Trade and other payables (38,004,878) Net identifiable assets and liabilities 7,808,818 Gain on disposal of a subsidiary 51,182 Consideration received, satisfied in cash 7,860,000 Cash disposed of (964,345) Net cash inflow 6,895,655 110 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 6 Disposal of a subsidiary (continued) (ii) On 28 November 2005, the Group disposed of a 51% equity interest in Shenyang Vanke Yongda Real Estate Company Limited (“Shenyang Yongda”), which was previously wholly owned by the Group, for a consideration of US$12 million (RMB equivalent of 99.2 million). After the disposal, Shenyang Yongda was changed from a subsidiary to a jointly controlled entity. A gain of RMB 2 million arose from the disposal. Effect of the disposal on individual assets and liabilities of the Group for the year ended 31 December 2005 Cash and cash equivalents 473,257 Interest in a jointly controlled entity (93,431,370) Property, plant and equipment 131,563 Properties under development 219,322,195 Trade and other receivables 117,283 Trade and other payables (29,369,174) Net identifiable assets and liabilities 97,243,754 Gain on disposal of interest in a subsidiary 1,947,074 Consideration received, satisfied in cash 99,190,828 Cash disposed of (473,257) Net cash inflow 98,717,571 7 Other income 2006 2005 Consultancy fee income 13,071,863 4,746,511 Commission income 3,394,473 4,686 Forfeited deposits and compensation from customers 8,815,713 6,318,054 Gain on disposal of a subsidiary 51,182 - Gain on disposal of interest in associates 18,441,576 - Gain on disposal of interest in jointly controlled entities 24,018,988 - Gain on disposal of partial interest in subsidiaries 67,575,564 1,947,074 Gain on disposal of property, plant and equipment - 129,838 Government subsidy 9,100,000 16,125,555 Other sundry income 5,143,797 6,175,442 149,613,156 35,447,160 111 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 8 Other expenses 2006 2005 Compensation to customers 7,115,182 3,093,125 Loss on disposal of property, plant and equipment 785,012 - Loss on disposal of investment properties 22,961 1,937,307 Penalties 1,122,770 901,304 Other sundry expenses 11,799,591 3,432,915 20,845,516 9,364,651 9 Personnel expenses 2006 2005 Wages, salaries and other staff costs 836,727,984 500,032,784 Contributions to defined contribution plans 71,847,860 45,680,576 Equity-settled share-based compensation (note 34) 80,570,000 - 989,145,844 545,713,360 As stipulated by the regulations of the PRC, the Group participates in various defined contribution retirement plans organised by municipal and provincial governments for its employees. The Group is required to make contributions to the retirement plans at fixed rates of the salaries, bonuses and certain allowances of the employees. A member of the plan is entitled to a pension equal to a fixed proportion of the salary prevailing at the member’s retirement date. The Group has no other material obligation for the payment of pension benefits associated with these plans beyond the annual contributions described above. 10 Net finance costs 2006 2005 Interest income 77,473,253 63,929,154 Dividend income 677,600 455,000 Financial income 78,150,853 64,384,154 -------------------- -------------------- Interest expense and other borrowing costs 613,863,258 250,270,741 Less: Interest capitalised (401,365,139) (168,120,904) 212,498,119 82,149,837 Foreign exchange loss 5,126,726 1,482,173 Financial expenses 217,624,845 83,632,010 -------------------- -------------------- Net finance costs (139,473,992) (19,247,856) Interest expense and other borrowing costs have been capitalised at an average rate of 6.1% (2005: 5.7%) per annum. 112 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 11 Taxation (a) Taxation in the consolidated income statement represents: 2006 2005 Current tax Income tax Tax for the year 1,088,777,251 539,758,684 (Over)/under-provision in respect of prior years (699,503) 2,997,265 1,088,077,748 542,755,949 Land appreciation tax 627,800,972 138,137,741 1,715,878,720 680,893,690 -------------------- -------------------- Deferred tax Origination and reversal of temporary differences (58,815,045) 21,171,058 Utilisation of previously unrecognised tax losses (17,765,094) (38,940,000) Change in deferred taxation (note 21(a)) (76,580,139) (17,768,942) -------------------- -------------------- 1,639,298,581 663,124,748 The provision for PRC income tax is calculated based on the estimated taxable income at the rates applicable to each company in the Group. The income tax rates applicable to the principal subsidiaries in the PRC range between 15% and 33%. Land appreciation tax is levied on properties developed by the Group for sale, at progressive rates ranging from 30% to 60% on the appreciation of land value, which under the applicable regulations is calculated based on the proceeds of sales of properties less deductible expenditures including lease charges of land use rights, borrowing costs and relevant property development expenditures. The following is a reconciliation between tax expense and accounting profit at applicable tax rates: 2006 2005 Profit before taxation 4,062,295,632 2,078,774,293 Notional tax on profit before taxation calculated at the income tax rates applicable to profits in the cities concerned 898,853,258 495,580,741 Non-taxable income (7,766,585) (5,280,000) Non-deductible expenses 120,865,237 44,517,711 Effect of tax losses not recognised 18,010,296 26,111,290 Effect of tax losses utilised (17,765,094) (38,940,000) (Over)/under-provision in respect of prior years (699,503) 2,997,265 Actual income tax expense 1,011,497,609 524,987,007 Land appreciation tax 627,800,972 138,137,741 Actual total tax expense 1,639,298,581 663,124,748 113 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 11 Taxation (continued) (b) Taxation recognised directly in equity 2006 2005 Arising from fair value adjustments on available-for-sale securities (note 21(b)) 7,670,934 - (c) Current taxation in the consolidated balance sheet represents: 2006 2005 Income tax Brought forward balance 127,863,837 144,287,998 Provision for the year 1,088,077,748 542,755,949 Income tax paid (907,758,576) (559,180,110) 308,183,009 127,863,837 -------------------- -------------------- Land appreciation tax Brought forward balance 86,123,221 (990,041) Provision for the year 627,800,972 138,137,741 Land appreciation tax paid (277,457,766) (51,024,479) 436,466,427 86,123,221 -------------------- -------------------- 744,649,436 213,987,058 12 Earnings per share (a) Basic earnings per share The calculation of basic earnings per share is based on the net profit for the year attributable to equity shareholders of the Company of RMB2,297,883,766 (2005: RMB1,364,689,853) and on the weighted average number of ordinary shares outstanding during the year of 3,956,831,686 shares (2005: 3,462,943,078 shares). (b) Diluted earnings per share The calculation of diluted earnings per share is based on the net profit for the year attributable to equity shareholders of the Company of RMB2,298,836,704 (2005: RMB1,379,436,005) and on the weighted average number of ordinary shares of 3,999,090,327 (2005: 3,711,244,543 shares), calculated as follows: 114 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 12 Earnings per share (continued) (b) Diluted earnings per share (continued) Net profit attributable to ordinary shareholders (diluted): 2006 2005 Net profit attributable to shareholders 2,297,883,766 1,364,689,853 After tax effect of effective interest on liability component of convertible bonds 952,938 14,746,152 Net profit attributable to ordinary equity shareholders (diluted) 2,298,836,704 1,379,436,005 Weighted average number of ordinary shares (diluted): 2006 2005 Weighted average number of ordinary shares 3,956,831,686 3,462,943,078 Effect of conversion of convertible bonds 42,258,641 248,301,465 Weighted average number of ordinary shares (diluted) at 31 December 3,999,090,327 3,711,244,543 13 Dividends A cash dividend of RMB0.15 per share resulting in a total dividend payment of RMB595,484,813, in respect of the year ended 31 December 2005 was declared and paid out during the year ended 31 December 2006. RMB3,737,043 was re-invested in the Employees’ Share Award Scheme and has been credited to equity directly (note 34). A cash dividend of RMB0.15 per share, resulting in a total dividend payment of RMB341,097,071, in respect of the year ended 31 December 2004 was declared and paid out during the year ended 31 December 2005. A cash dividend of RMB0.15 per share, resulting in a total dividend payment of RMB655,484,812, in respect of the year ended 31 December 2006 are to be proposed at the Company’s forthcoming annual general meeting. The dividend has not been recognised as a liability at the balance sheet date. 115 Financial s 14 Property, plant and equipment Furniture, Improvements Plant and fixtures and Buildings to premises machinery equipment Cost: At 1 January 2005 202,201,542 58,589,166 6,028,084 86,999,214 Additions 242,271 3,232,824 375,809 19,614,263 Disposals (4,068,844) (7,006,669) (423,901) (12,421,307) At 31 December 2005 198,374,969 54,815,321 5,979,992 94,192,170 -------------------- -------------------- -------------------- -------------------- ----- At 1 January 2006 198,374,969 54,815,321 5,979,992 94,192,170 Additions: - via business combinations 157,829,600 - 1,719,020 7,317,028 - transfer from construction in progress (note 16) 84,908,722 - - - - transfer from completed properties for sale (i) 24,671,832 - - - - others 16,536,726 20,437,462 1,249,091 18,788,734 Disposals (7,286,987) (3,009,942) (301,227) (13,247,797) At 31 December 2006 475,034,862 72,242,841 8,646,876 107,050,135 -------------------- -------------------- -------------------- -------------------- ----- (i) During the year, the Group occupied certain completed properties for sale for own use. In this regard plant and equipment. 116 Financial s 14 Property, plant and equipment (continued) Furniture, Improvements Plant and fixtures and Buildings to premises machinery equipment Accumulated depreciation and impairment loss: At 1 January 2005 43,101,357 43,926,951 3,852,172 51,365,095 Charge for the year 9,200,244 6,742,857 541,493 14,248,930 Written back on disposals (1,888,433) (4,588,251) (406,413) (8,477,615) At 31 December 2005 50,413,168 46,081,557 3,987,252 57,136,410 -------------------- -------------------- -------------------- -------------------- ----- At 1 January 2006 50,413,168 46,081,557 3,987,252 57,136,410 Charge for the year 17,330,614 8,505,474 650,352 12,655,393 Written back on disposals (4,233,338) (2,889,292) (231,643) (11,291,314) At 31 December 2006 63,510,444 51,697,739 4,405,961 58,500,489 -------------------- -------------------- -------------------- -------------------- ----- Net book value: At 31 December 2006 411,524,418 20,545,102 4,240,915 48,549,646 At 31 December 2005 147,961,801 8,733,764 1,992,740 37,055,760 117 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 15 Investment properties 2006 2005 Cost: At 1 January 167,896,721 206,486,260 Disposals (60,291,966) (38,589,539) At 31 December 107,604,755 167,896,721 -------------------- -------------------- Accumulated depreciation and impairment loss: At 1 January 76,876,596 69,496,249 Charge for the year 5,611,394 7,286,610 Provision for impairment loss 750,000 10,753,203 Written back on disposals (32,612,359) (10,659,466) At 31 December 50,625,631 76,876,596 -------------------- -------------------- Net book value: At 31 December 56,979,124 91,020,125 Investment properties comprise certain commercial properties that are leased to external parties. The directors, having regard to recent market transactions of similar properties in the same location as the Group’s investment properties, consider the estimated fair value of the investment properties to be RMB137,000,000 (2005: RMB164,701,000). The Group leases out investment properties under operating leases. The leases typically run for an initial period of two to five years. None of the leases includes contingent rentals. The Group’s total future minimum lease payments under non-cancellable operating leases are receivable as follows: 2006 2005 Within 1 year 19,412,690 21,142,269 After 1 year but within 5 years 68,858,523 74,167,156 After 5 years 69,893,901 74,869,141 158,165,114 170,178,566 16 Construction in progress 2006 2005 At 1 January 19,699,697 - Additions 68,481,048 19,699,697 Transfer to property, plant and equipment (note 14) (84,908,722) - 3,272,023 19,699,697 Construction in progress comprises self-constructed office building for own use. 118 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 17 Principal subsidiaries Details of principal subsidiaries at 31 December 2006 are as follows: Percentage of equity held by the Group Principal Name of company 2006 2005 activities Shenzhen Vanke Real Estate 100% 100% Property Company Limited development Shenzhen Vanke Property Company 100% 100% Property Limited development Shenzhen Vanke Xizhigu Real Estate 60% 60% Property Company Limited development Shenzhen Vanke Nancheng Real Estate 90% 90% Property Company Limited development Shenzhen Vanke East Coast Real Estate 100% 49% Property Development Company Limited (note 5(i)(c)) development Shenzhen Vanke City Real Estate 100% 44% Property Development Company Limited development Shenzhen Vanke Fifth Garden Company 100% 100% Property Limited (note 5(ii)(b)) development Shenzhen Vanke City Scenery Property 100% - Property Company Limited development Shenzhen Vanke New City Property 100% - Property Company Limited development Shenzhen Vanke Xingye Property 90% - Property Company Limited development Shenzhen Vanke North City Property 100% - Property Company Limited development Shenzhen Vanke Jiuzhou Property 90% - Property Company Limited development Shenzhen Vanke Wenxin Garden Property 100% - Property Company Limited development 119 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 17 Principal subsidiaries (continued) Percentage of equity held by the Group Principal Name of company 2006 2005 activities Dongguan Songshanju Property 60% 39.6% Property Company Limited (note 5(i)(c)) development Dongguan Sunshine Real Estate 100% - Property Company Limited development Dongguan Vanke Real Estate 100% 100% Property Company Limited development Guangzhou Vanke Real Estate Company 100% 100% Property Limited development Guangzhou Vanke Property Company 100% 100% Property Limited development Guangzhou Vanke Star Property Company 50% - Property Limited (note (i)) development Guangzhou Vanke Pengwan Property 50% - Property Company Limited (note (i)) development Foshan Vanke Property Company 100% 100% Property Limited development Foshan Vanke Real Estate Company 100% 100% Property Limited development Huizhou Vanke Real Estate Company 100% 100% Property Limited development Zhongshan Vanke Real Estate Company 100% 100% Property Limited development Xiamen Vanke Property Company Limited 100% - Property development Shanghai Vanke Real Estate Group Limited 100% 100% Property development Shanghai Vanke Zhongshi Property 50% 50% Property Company Limited (note (i)) development 120 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 17 Principal subsidiaries (continued) Percentage of equity held by the Group Principal Name of company 2006 2005 activities Shanghai Huaou Real Estate 100% 100% Property Company Limited development Shanghai Vanke Pudong 100% 100% Property Property Company Limited development Shanghai Vanke Baoshan 100% 100% Property Property Company Limited development Shanghai Nandu Land Company 100% 70% Property Limited (note 5(i)) development Shanghai Blue Mountain Property 100% 100% Property Company Limited development Shanghai Vanke Rancho Property 75% 100% Property Company Limited development Shanghai Vanke Xiangnan Property 100% - Property Company Limted development Shanghai Vanke Baonan Property 100% - Property Company Limited development Shanghai Jinchuan Property Development 90% - Property Company Limited (note 5(i)(f)) development Shanghai Jinhua Property Development 90% - Property Company Limited (note 5(i)(f)) development Shanghai Dongyuan Meishu Property 51% - Property Company Limited development Nanjing Vanke Property Company 100% 100% Property Limted development Wuxi Xinvan Real Estate Company 100% - Property Limted development Wuxi Dingan Real Estate Company 100% - Property Limted development 121 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 17 Principal subsidiaries (continued) Percentage of equity held by the Group Principal Name of company 2006 2005 activities Wuxi Vanke Real Estate 60% 100% Property Company Limited development Kunshan Jiahua Investment 85% 85% Property Company Limited development Zhejiang Nandu Property Group Co., Ltd. 80% 20% Property (note 5(i)(b)) development Zhejiang Nandu Property Group 80% 20% Property Company Limited (note 5(i)(b)) development Zhenjiang Runzhong Property Company 100% 70% Property Limited (note 5(i)) development Zhenjiang Runqiao Property Company 100% 70% Property Limited (note 5(i)) development Zhenjiang Rundu Property Company 100% 70% Property Limited development Zhenjiang Runnan Property Company 100% 70% Property Limited development Changsha Hongcheng Real Estate 80% 16% Property Development Company Limited development Suzhou Nandu Jianwu Co., Ltd. 70% 49% Property (note 5(i)(b)) development Suzhou Vanke Real Estate Company 100% - Property Limted development Suzhou Vanke Property Company 55% - Property Limted development Suzhou Vanke Zhongliang Property 51% - Property Company Limited development Hangzhou Vanke Property Company 100% - Property Limited development 122 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 17 Principal subsidiaries (continued) Percentage of equity held by the Group Principal Name of company 2006 2005 activities Ningbo Vanke Real Estate Company 100% - Property Limted development Beijing Vanke Enterprises 100% 100% Property Shareholding Company Limited development Bejing ChaoWan Property Development 60% - Property Centre Company Limited (note 5(i)(a)) development Beijing Vanke Haikai Real Estate 100% 100% Property Development Company Limited development Beijing Vanke Property 100% 100% Property Company Limited development Beijing Vanke Wonderland Real Estate 100% 100% Property Development Company Limited development Beijing Vanke Zhongliang Jiarifengjing 50% - Property Real Estate Development Company development Limited (note (i)) Tianjin Vanke Real Estate 100% 100% Property Company Limited development Tianjin Xinghai Real Estate 55% 55% Property Development Company Limited development (note 5(i)(e)) Tianjin Vanke Xinye Development 100% 100% Property Company Limited development Tianjin Wantai Fashion Property 96% - Property Company Limited development Tianjin Vanke Xinhu Property 100% - Property Company Limited development Tianjin Vanke Xinrui Real Estate 50% - Property Company Limited (note (i)) development Tianjin Vanke Xinlicheng 55% - Property Company Limited development 123 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 17 Principal subsidiaries (continued) Percentage of equity held by the Group Principal Name of company 2006 2005 activities Qingdao Vanke Yinshentai Real Estate 80% - Property Development Company Limited development Chengdu Vanke Real Estate 100% 100% Property Company Limited development Chengdu Vanke Property 60% 60% Property Company Limited development Chengdu Bei Fu Property 90% - Property Company Limited (note 5(i)(d)) development Chengdu Vanke Chenghua Property 100% - Property Company Limited development Chengdu Vanke Gaoxin Investment 100% - Property Company Limited development Wuhan Vanke Real Estate 100% 100% Property Company Limited development Wuhan Vanke Tiancheng Real Estate 55% - Property Company Limited development Shenyang Vanke Real Estate 100% 100% Property Company Limited development Shenyang Vanke Wonderland Company 100% 100% Property Limited development Shenyang Vanke Metropolitan Company 100% 100% Property Limited development Shenyang Vanke City Garden 100% 100% Property Development Company Limited development Shenyang Vanke Xinshu Property 100% 100% Property Company Limited development Shenyang Huazi Fenshang Real 100% 100% Property Estate Development Company Limited development Shenyang East Property Development 60% - Property Company Limited development 124 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 17 Principal subsidiaries (continued) Percentage of equity held by the Group Principal Name of company 2006 2005 activities Shenyang Vanke Hunnan Real Estate 100% 100% Property Development Company Limited development (note 5(ii)) Dalian Vanke Property 100% 100% Property Development Company Limited development Dalian Vanke City Property 55% - Property Company Limited development Dalian Vanke Jinxiu Flower City 100% 100% Property Development Company Limited development Changchun Vanke Real Estate 100% 100% Property Company Limited development Anshan Vanke Property Development 100% 100% Property Company Limited development Jiangxi Vanke Yida property Development Property Company Limited (note (i)) 50% 50% development Top Glory International Property 70% 70% Property (Guangzhou) Company Limited development Shenzhen Vanke Property Management 100% 100% Property Company Limited management Shenzhen Vanke Financial 100% 100% Investment Consultancy Company Limited trading and consultancy services Guangzhou Vanke Property Management 100% 100% Property Limited management Shanghai Vanke Property Management 100% 100% Property Limited management Beijing Vanke Property Management 100% 100% Property Limited management Tianjin Vanke Property Management 100% 100% Property Limited management 125 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 17 Principal subsidiaries (continued) Percentage of equity held by the Group Principal Name of company 2006 2005 activities Chengdu Vanke Property Management 100% 100% Property Limited management Wuhan Vanke Property Management 100% 100% Property Limited management Shenyang Vanke Property Management 100% 100% Property Limited management Vanke Real Estate (Hong Kong) Company 100% 100% Investment Limited Shenzhen Longcheer Yacht Club Company 100% - Club Limited service Dongguan Vanke Construction Research 100% - Construction Company Limited research All the above companies were established and operated in the PRC. Note (i) The directors consider these entities as subsidiaries of the Group as the Group has the power to govern the financial and operating policies of these entities. 126 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 18 Interest in associates Details of the Group’s principal associates at 31 December 2006 are as follows: Percentage of interest held by the Group Principal Name of company 2006 2005 activities Shanghai Vansheng Real Estate 50% 50% In the process Company Limited (note) of liquidation Beihai Vanda Real Estate 40% 40% Property Company Limited development Beijing East New City Property 50% - Property Company Limited development Changsha East City Property Development 20% - Property Company Limited development Shanghai Jia Lai Property 29% - Property Company Limited development Hangzhou Xing Chen Property 20% - Property Development Company Limited development Dongguan Vanke Property 20% 44% Property Company Limited development Shanghai Zhongfang Binjiang 25% - Property Property Company Limited development All the above companies’ country of establishment and operation is the PRC. Note: Shanghai Vansheng Real Estate Company Limited was in the process of liquidation as at the date of this report. Summary financial information on associates: Equity Minority attributable Assets Liabilities Interests to parent Revenue (Loss) / profit 2006 100 per cent 3,385,492,190 2,360,005,643 - 1,025,486,547 1,478,063,137 (136,644,867) Group’s effective interest 844,314,348 551,917,351 - 292,396,997 295,991,803 (27,409,133) 2005 100 per cent 8,688,307,217 4,633,489,947 335,223,650 3,719,593,620 1,312,385,084 28,759,867 Group’s effective interest 2,527,261,490 1,364,666,161 67,044,730 1,095,550,599 606,855,097 12,217,378 127 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 19 Interest in jointly controlled entities Details of the Group’s principal jointly controlled entities at 31 December 2006 are as follows: Percentage of equity held by the Group Principal Name of company 2006 2005 Activities Hangzhou Song City Property 50% - Property Company Limited Development Zhejiang Xi Hu Golf Property Company Limited 49% - Property Development Shenyang Yong Da Property 49% 49% Property Company Limited Development Shanghai Qingchen Real Estate Company Limited - 35.7% Property Development All the above companies’ country of establishment and operation is the PRC. Summary financial information on jointly controlled entities – Group’s effective interest 2006 2005 Non-current assets 2,075,386 5,384,490 Current assets 937,015,152 585,678,138 Non-current liabilities (174,750,000) (73,500,000) Current liabilities (314,382,223) (359,194,785) Net assets 449,958,315 158,367,843 Income 780,281,211 - Expenses (692,773,886) (14,292,860) Profit / (loss) for the year 87,507,325 (14,292,860) 128 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 20 Other non-current financial assets 2006 2005 Available-for-sale equity securities in the PRC - Unlisted at cost less impairment loss of RMB8,460,000 (2005: RMB7,860,000) 86,763,950 39,407,447 - Listed in the PRC 71,143,168 - Loans and receivable 210,730,000 - 368,637,118 39,407,447 Loans and receivable are unquoted trust debts issued by a trustee company on behalf of an associate. During the year, the Group acquired these debts from third parties for a consideration according to their face value plus accrued interest, totalling RMB 210,730,000. The trust debts are unsecured, interest bearing at 8% per annum and will be matured in 2009. The directors designated the trust debts as loans and receivable upon the date of acquisition. 21 Deferred tax assets/liabilities (a) Deferred tax assets Deferred tax assets at 31 December 2006 and 2005 are attributable to the items detailed as follows: 2006 2005 Deferred tax assets: Tax losses 53,625,328 2,990,393 Accounting depreciation in excess of tax depreciation 2,446,099 732,226 Impairment loss of trade and other receivables 22,506,880 3,550,182 Provision for diminution in value of properties 6,260,181 11,895,293 Impairment loss of investment properties 3,549,072 6,482,878 Accruals for construction cost 13,843,551 - 102,231,111 25,650,972 Movements in deferred tax assets: 2006 2005 At 1 January 25,650,972 7,882,030 Transferred to consolidated income statement (note 11(a)) 76,580,139 17,768,942 At 31 December 102,231,111 25,650,972 129 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 21 Deferred tax assets/liabilities (continued) (a) Deferred tax assets (continued) Deferred tax assets have not been recognised in respect of the following items: 2006 2005 Deductible temporary differences 11,108,000 35,120,000 Tax losses 42,285,000 86,691,000 53,393,000 121,811,000 The tax losses will expire between 2007 and 2011. The deductible temporary differences will not expire under current tax legislation. The above deferred tax assets have not been recognised because it is not probable that future taxable profit will be available against which the Group can utilise the benefits there from. (b) Deferred tax liabilities Deferred tax liabilities at 31 December 2006 and 2005 are attributable to the items detailed as follows: 2006 2005 Deferred tax liabilities: Arising from fair value adjustments on available-for-sale securities 7,670,934 - Movements in deferred tax liabilities: At 1 January - - Recognised in equity (note 11(b)) 7,670,934 - At 31 December 7,670,934 - 22 Properties held for development / Properties under development / Completed properties for sale (a) The analysis of carrying value of land held for property development for sale is as follows: 2006 2005 With lease term of 50 years or more 23,690,299,175 10,703,200,572 With lease term of less than 50 years 1,363,903,598 541,010,729 25,054,202,773 11,244,211,301 130 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 22 Properties held for development / Properties under development / Completed properties for sale (continued) (b) The analysis of the amount of completed properties for sale recognised as an expense is as follows: 2006 2005 Carrying amount of properties sold 11,269,024,093 6,833,701,881 Write down of properties 620,000 - Reversal of write-down of properties (19,238,220) - 11,250,405,873 6,833,701,881 The reversal of write-down of inventories made in prior years arose due to an increase in the estimated net realisable value of certain completed properties as a result of recovery in certain regional property markets. 23 Inventories 2006 2005 Raw materials 8,410,386 1,945,000 Work in progress - 22,877,340 Finished goods 1,619,253 16,698,258 10,029,639 41,520,598 Inventories recognised as cost of sales for the year 8,451,555 19,952,820 Included in inventories recognised as cost of sales for the year is a provision of RMB Nil (2005: RMB2,474,304) made in order to state these inventories at the lower of their cost and net realisable value. 131 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 24 Trade and other receivables 2006 2005 Debtors, prepayments and other receivables 2,983,280,554 1,296,498,228 Amounts due from associates 159,153,541 123,689,390 Amounts due from jointly controlled entities - 367,552,956 Other prepaid tax 178,877,190 96,058,143 3,321,311,285 1,883,798,717 All of the trade and other receivables, apart from rental and utility deposits of RMB25,233,334 (2005: RMB4,337,208), are expected to be recovered within one year. Apart from the amounts due from associates of RMB25,308,644 (2005: RMB307,801,608 due from jointly controlled entities) which are interest bearing at market interest rate, trade and other receivables are interest free, unsecured and have no fixed terms of repayment. The interest income received from associates during the year amounted to RMB1,166,222 (2005: RMB13,259,008 received from jointly controlled entities). The Group’s credit policy is set out in note 38(b). Included in trade and other receivables are the following amounts denominated in a currency other than the functional currencies of subsidiaries to which they relate: 2006 2005 United States Dollars USD 5,065 USD 172,547 Hong Kong Dollars HKD 12,380 HKD 25,055,532 25 Cash and cash equivalents Cash and cash equivalents consist of cash on hand and balances with banks. The balance includes deposits with banks of RMB52,285,121 (2005: RMB19,201,126) with specific use. Included in cash and cash equivalents are the following amounts denominated in a currency other than the functional currency of the entity to which they relate: 2006 2005 United States Dollars USD 24,297,026 USD 9,356,116 Hong Kong Dollars HKD36,297,568 HKD 15,631,346 Japanese Yen YEN 3,751 YEN 3,751 Euro EUR 1,882 EUR 1,268 Australian Dollars AUD 3,186 AUD 3,186 132 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 26 Share capital Registered, issued and fully paid up capital consist of A and B shares of RMB1 each. The holders of A and B shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at general meetings of the Company. A share B share Total 2006 2005 2006 2005 2006 2005 At 1 January 3,174,789,558 1,908,362,463 547,898,112 365,265,408 3,722,687,670 2,273,627,871 Issue of shares upon conversion of convertible bonds (note (i)) 247,211,081 312,069,562 - - 247,211,081 312,069,562 Issue of shares upon placing (note (ii)) 400,000,000 - - - 400,000,000 - Issued out of share premium (note 27(a)) - 954,357,533 - 182,632,704 - 1,136,990,237 At 31 December 3,822,000,639 3,174,789,558 547,898,112 547,898,112 4,369,898,751 3,722,687,670 (i) Issue of shares upon conversion of convertible bonds During the year, 247,211,081 (2005: 312,069,562) A shares were issued on the conversion of convertible bonds with total carrying value of RMB877,600,600 (2005: RMB1,108,527,469) made up as follows: 2006 2005 Liability component 840,487,784 1,061,651,229 Equity component (note 27) 37,112,816 46,878,571 Cash refund to bondholders - (2,331) 877,600,600 1,108,527,469 Represented by: Share capital 247,211,081 312,069,562 Share premium (note 27) 630,389,519 796,457,907 877,600,600 1,108,527,469 (ii) Issue of shares upon placing During the year, 400,000,000 (2005: Nil) A shares were issued and placed to certain institutional investors at a subscription price of RMB10.5 per share. 133 Financi 27 Reserves Employee share-based Foreign Statutory Convertible compensation Revaluati Share premium exchange reserve reserves bonds reserve reserve reser (note (a)) (note (b)) (note (c)) (note (d)) (note( At 1 January 2005 1,446,570,637 10,629,373 2,052,153,824 82,842,331 - Profit for the year - - - - - Shares issued out of the share premium in the ratio 10:5 (note 26) (1,136,990,237) - - - - Adjustment on translation of foreign subsidiaries - 4,675,212 - - - Proposed transfer from retained profits - - 810,217,690 - - Shares issued upon conversion of convertible bonds (note 26) 796,457,907 - - (46,878,571) - Share issuing cost (16,220,076) - - 874,260 - Interest forfeited upon conversion of convertible bonds 958,774 - - - - Discount transferred to share premium upon conversion of convertible bonds 11,835,579 - - - - Dividend paid-2004 (note 13) - - - - - At 31 December 2005 1,102,612,584 15,304,585 2,862,371,514 36,838,020 - 134 Financi 27 Reserves Employee Foreign Share-based Share premium exchange Statutory Convertible compensation Revaluat reserve reserves bonds reserve reserve rese (note (a)) (note (b)) (note (c)) (note (d)) (note ( At 1 January 2006 1,102,612,584 15,304,585 2,862,371,514 36,838,020 - Equity settled share-based transactions (note 34) - - - - 80,570,000 Placing of A shares (note 26(ii)) 3,800,000,000 - - - - Share issuing cost upon placing (3,300,000) - - - - Profit for the year - - - - - Adjustment on translation of foreign Subsidiaries - 6,442,516 - - - Proposed transfer from retained profits - - 1,508,247,521 - - Shares issued upon conversion of convertible bonds (note 26(i)) 630,389,519 - - (37,112,816) - Redemption of convertible bonds - - - (417,338) - Share issuing cost upon conversion of convertible bonds (11,855,755) - - 692,134 - Interest forfeited upon conversion of convertible bonds 4,561,639 - - - - Discount transferred to share premium upon conversion of convertible bonds 12,482,939 - - - - Fair value adjustments arising from stepped acquisitions of interest in subsidiaries - - - - - Change in fair value of available-for- sale securities,net of tax of RMB7,670,934 - - - - - 43,265,0 Dividend paid – 2005 (note 13) - - - - - At 31 December 2006 5,534,890,926 21,747,101 4,370,619,035 - 80,570,000 43,265,0 135 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 27 Reserves (continued) Notes: (a) Share premium In 2005, the Company issued additional 1,136,990,237 shares of RMB 1 each out of the share premium in the ratio 10:5 to all shareholders. Subsequent to the year end, the Board of Directors of the Company proposed to issue additional shares out of the share premium in the ratio 10:5 to all shareholders. A total of 2,184,949,376 shares with a par value of RMB1 each will be issued in addition to the total share capital of 4,369,898,751 shares as at 31 December 2006. The proposed issue will be subject to shareholders’ approval at the forthcoming general meeting. A total of RMB2,184,949,376 will be expensed to the share premium account. (b) Statutory reserves Statutory reserves include the following items: (i) Statutory surplus reserve According to the PRC Company Law, the Company is required to transfer 10% of its profit after taxation, as determined under PRC Accounting Regulations, to statutory surplus reserve until the reserve balance reaches 50% of the registered capital. The transfer to this reserve must be made before distribution of a dividend to shareholders. Statutory surplus reserve can be used to make good previous years’ losses, if any, and may be converted into share capital by the issue of new shares to shareholders in proportion to their existing shareholdings or by increasing the par value of the shares currently held by them, provided that the balance after such issue is not less than 25% of the registered capital. For the year ended 31 December 2006, the Company transferred RMB215,463,932 (2005: RMB135,036,282), being 10% of the current year’s net profit as determined in according with the PRC Accounting Rules and Regulations, to this reserve. (ii) Statutory public welfare fund In prior years, according to the PRC Company Law, the Company was required to transfer 5% to 10% of its profit after taxation, as determined under PRC Accounting Regulations, to the statutory public welfare fund. This fund could only be utilised on capital items for the collective benefits of the Group’s employees such as the construction of dormitories, canteen and other staff welfare facilities. This fund was non-distributable other than in liquidation. The transfer to this reserve must be made before distribution of a dividend to shareholders. Starting from 1 January 2006, after the amendment of the PRC Company Law, the Company was not required to make appropriations to the statutory public welfare fund. The balance of statutory public welfare fund as at 1 January 2006 of RMB240,245,860, were transferred to statuary surplus reserve. 136 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 27 Reserves (continued) (b) Statutory reserves (continued) (iii) Discretionary surplus reserve The appropriation to the discretionary surplus reserve is subject to the shareholders’ approval. The utilisation of the reserve is similar to that of the statutory surplus reserve. For the year ended 31 December 2006, the Company transferred RMB1,292,783,589 (2005: RMB675,181,408), being 60% (2005: 50%) of the current year’s net profit as determined in accordance with the PRC Accounting Rules and Regulations, to this reserve. (c) Convertible bonds reserve Convertible bonds reserve comprises the value of unexercised equity components of convertible bonds issued by of the Company (see note 30) recognised in accordance with the accounting policy adopted for convertible bonds in note 2(r). (d) Employee share-based compensation reserve Employee share-based compensation reserve comprises the fair value of the shares awarded under the Employees’ Share Award Scheme (see note 34) to the employees of the Company recognised in accordance with the accounting policy adopted for equity compensation benefits in note 2(v)(ii). (e) Revaluation reserve Revaluation reserve comprises the cumulative net change in fair value of available-for-sale securities held at the balance sheet date and is dealt with in accordance with the accounting polices in notes 2(g) and 2(m). (f) Capital reserve arising from stepped acquisitions Capital reserve arising from stepped acquisitions represents the difference between fair value and book value of the acquiree’s net assets at the date of stepped acquisition. (g) Retained profits According to the PRC Company Law, the reserve available for distribution is the lower of the amount determined under PRC Accounting Regulations and the amount determined under IFRSs. As of 31 December 2006 the reserve available for distribution was RMB668,538,493 (2005: RMB613,894,468). 137 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 28 Minority interests 2006 2005 At 1 January 541,095,823 102,248,755 Profit attributable to minority interests for the year 125,113,285 50,959,692 Capital injection from minority interests of subsidiaries 1,139,432,956 12,281,000 Dividend paid to minority interests (82,487,084) (50,000,000) Acquisition of minority interests arising from non-wholly owned subsidiaries 982,152,252 425,606,376 Acquisition of minority interests (345,909,188) - Disposal of partial interest in subsidiaries 165,557,767 - At 31 December 2,524,955,811 541,095,823 29 Interest-bearing borrowings This note provides information about the contractual terms of the Group’s interest-bearing borrowings. For more information about the Group’s exposure to interest rate and foreign exchange risk, please refer to note 38. 2006 2005 Non-current Secured - bank loans 1,662,992,648 435,123,480 Unsecured - bank loans 5,930,226,333 359,765,700 - other borrowings 1,859,657,970 386,393,533 Total non-current 9,452,876,951 1,181,282,713 Other borrowings represents: Proceeds 1,917,660,000 400,000,000 Costs (58,002,030) (13,606,467) 1,859,657,970 386,393,533 Note: Transaction costs represented the costs for obtaining those other borrowings except for the borrowing costs. At 31 December 2006, bank loans and other borrowings were repayable as follows: 2006 2005 After 1 year but within 2 years 7,704,033,970 1,181,282,713 After 2 years but within 5 years 1,628,842,981 - Over 5 years 120,000,000 - 9,452,876,951 1,181,282,713 138 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 29 Interest-bearing borrowings (continued) 2006 2005 Current Secured - bank loans 240,000,000 - - current portion of long term bank loans 510,000,000 - 750,000,000 - -------------------- -------------------- Unsecured - bank loans 2,005,470,000 900,000,000 - current portion of long term bank loans 180,094,000 284,030,000 - current portion of long term other borrowings 400,000,000 378,950,000 - other borrowings 470,000,000 - 3,055,564,000 1,562,980,000 -------------------- -------------------- Total current 3,805,564,000 1,562,980,000 The secured bank loans of RMB 2,413 million as at 31 December 2006 (2005: RMB 435 million) are secured over certain properties held for development and properties under development with aggregate carrying value of RMB4,867 million (2005:RMB1,135 million), the Group’s interests in certain subsidiaries with total net asset value of RMB102 million (2005: RMB85 million). Included in unsecured bank loans as at 31 December 2006 is an amount of RMB 145 million which is pledged by certain asset of a minority shareholder. 139 Financial s 29 Interest-bearing borrowings (continued) The Group’s total bank loans outstanding at the end of 2006 and 2005 are analysed as follows: Type Amount Terms Fixe 2006 2005 2006 2005 2006 RMB denominated bank loans 1,485,000,000 550,000,000 1 to 6 months 1 to 6 months Fixe RMB denominated bank loans 1,330,000,000 530,000,000 7 to 12 months 7 to 12 months Fixe RMB denominated bank loans 6,624,000,000 554,000,000 1 to 2 years 1 to 2 years Fixe RMB denominated bank loans 283,000,000 - 2 to 3 years - Fix RMB denominated bank loans 120,000,000 - Over 5 years - Fixe HKD denominated bank loans 100,470,000 - 1 to 6 months - Fixe HKD denominated bank loans 20,094,000 104,030,000 7 to 12 months 7 to 12 months Floatin HKD denominated bank loans 80,376,000 19,765,700 1 to 2 years 1 to 2 years Floatin HKD denominated bank loans 221,034,000 - 2 to 3 years - Floatin USD denominated bank loans - 221,123,480 - 1 to 2 years USD denominated bank loans 264,808,981 - 3 to 4 years - Floatin RMB denominated other borrowing 870,000,000 198,950,000 1 to 6 months 1 to 6 months Fixe RMB denominated other borrowing - 180,000,000 - 7 to 12 months RMB denominated other borrowing 1,057,660,000 400,000,000 1 to 2 years 1 to 2 years Fixe RMB denominated other borrowing 860,000,000 - 2 to 3 years - Fixe 13,316,442,981 2,757,869,180 Less: transaction costs (58,002,030) (13,606,467) 13,258,440,951 2,744,262,713 Other borrowings represent borrowings from non-bank financial institutions, which are guaranteed by banks. 140 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 30 Convertible bonds 2006 2005 Convertible Convertible bonds bonds issued in 2004 issued in 2004 Proceeds from issue of 19,900,000 convertible bonds of RMB100 each 1,990,000,000 1,990,000,000 Transaction costs (37,112,421) (37,112,421) Net proceeds 1,952,887,579 1,952,887,579 Amount classified as equity (note) (82,585,582) (82,585,582) Conversion into A shares (1,902,139,013) (1,061,651,229) Redemption of convertible bonds (3,133,698) - Discount released to share premium upon conversion (24,318,518) (11,835,579) Transaction costs released to share premium upon conversion 26,508,530 15,345,816 Discount on convertible bonds amortised 24,384,192 23,284,839 Transaction costs amortised 8,396,510 8,059,355 Carrying value of liability at 31 December - 843,505,199 Note: The amount of the convertible bonds initially recognised in equity is net of attributable transaction costs of RMB3 million (2005: RMB3 million). On 24 September 2004, the Company issued convertible bonds (the “2004 Bonds”) amounting to RMB1,990 million. The 2004 Bonds are listed on the Shenzhen Stock Exchange (the “Stock Exchange”) and are guaranteed by the Agricultural Bank of China Shenzhen branch. Each 2004 Bond will, at the option of the holder, be convertible from 24 March 2005 to 24 September 2009 into A shares with a par value of RMB1 each of the Company (“A Shares”) at a conversion price of RMB5.48 per share. The conversion price of the 2004 Bonds will be adjusted accordingly if the Company distribute bonus issues, dividends, right issues and increase the share capital (not including the share issue upon conversion of the 2004 Bonds) which lead to change in equity of the Company. On 29 June 2005, the conversion price was adjusted to RMB3.55 per share upon distribution of dividends and additional ordinary shares issued out of share premium in the ratio 10:5. The 2004 Bonds are interest bearing at a rate of 1%, 1.375%, 1.75%, 2.125% and 2.5% per annum payable in arrears on 24 September 2005, 2006, 2007, 2008 and 2009 respectively. During the year, 247,211,081 A shares were issued on the conversion of convertible bonds with total carrying value of RMB 878 million. From 4 January 2006 to 21 February 2006, the closing prices of the Company’s A shares on the Stock Exchange were over 130% of the conversion price of RMB3.55 per share for 28 consecutive days. In accordance with the terms of the 2004 bonds, the Company decided to exercise the right to redeem all of the remaining convertible bonds with a carrying value of RMB3,869,600. On 7 April 2006 the redemption price was the par value plus accrued interest of 1.375%. 141 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 31 Other long term liabilities Other long term liabilities mainly represent consideration payable in connection with acquisition of subsidiaries (see note 5) and is due for settlement by instalments throughout the period to 2008 pursuant to the relevant agreements. 32 Trade and other payables 2006 2005 Trade payable 6,002,758,999 3,294,235,002 Bills payable - 3,781,990 Amounts due to associates 7,877,927 15,261,942 Amounts due to jointly controlled entities 30,678,377 - Deposits received in advance 8,836,350,970 4,664,152,791 Other payables and accrued expenses 2,628,163,721 1,195,073,969 Other taxes 7,803,458 9,562,742 17,513,633,452 9,182,068,436 All of the trade and other payables are expected to be settled within one year. Included in trade and other payables are the following amounts denominated in a currency other than the functional currency of the entity to which they relate: 2006 2005 United States Dollars USD 25,059,980 USD 11,999,980 Hong Kong Dollars HKD 1,369,100 HKD 9,981,912 142 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 33 Provisions Compensation Claims to customers Total Balance at 1 January 2005 19,000,000 141,566 19,141,566 Provisions (reversed) / made during the year (3,307,198) 23,979,011 20,671,813 Provisions used during the year (15,692,802) (141,566) (15,834,368) Balance at 31 December 2005 - 23,979,011 23,979,011 Balance at 1 January 2006 - 23,979,011 23,979,011 Provisions made during the year - 10,357,594 10,357,594 Provisions used during the year - (2,659,334) (2,659,334) Balance at 31 December 2006 - 31,677,271 31,677,271 Claims In 2002, a subsidiary was sued by a contractor (the “plaintiff”) in respect of payment of construction costs of a project in Tianjin No.1 Intermediate People’s Court (the “Intermediate Court”). On 24 December 2004, the Intermediate Court made a first judgement that the Group was required to pay RMB 28,674,786 to the plaintiff, including RMB 24,506,180 for the construction costs, RMB 30,000 for compensation, RMB538,606 for legal expenses and related interest expense which was estimated to be RMB 3,600,000. The Group appealed to the Tianjin People’s High Court on 6 January 2005. On 30 September 2005, Tianjin People’s High Court made a final judgement that the Group was required to pay RMB 11,601,446 and 3 properties with total area of 967 square metre to the plaintiff. As at 31 December 2005, the properties and RMB6 million were paid to the plaintiff and the remaining balance of RMB 5,601,446, which was recorded under “Trade and other payables” in 2005, was fully settled in 2006. Compensation to customers The balance represented the estimated losses to be borne by the Group in relation to the property management projects under remuneration scheme. 34 Employees’ Share Award Scheme Pursuant to a shareholders’ resolution passed on 30 May 2006, the Company adopted an Employees’ Share Award Scheme (the “Scheme”) under which certain employees of the Group, including certain directors of the Company, will be entitled to certain A shares of the Company if the vesting conditions as set out in the Scheme are met. 143 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 34 Employees’ Share Award Scheme (continued) (a) The terms and conditions of the Scheme that existed during the year ended 31 December 2006 are as follows: Under the Scheme, the Company is required to make an initial contribution of RMB141,706,969 to an independently-administrated trust based on certain historical performance indicators of the Group. The trust then purchases the Company’s A shares (the “Awarded Shares”) from the Shenzhen Stock Exchange and holds the Awarded Shares under trust. In respect of the Scheme adopted in 2006, the final amount to be contributed to the trust depends on the financial performance of the Group for year ended 31 December 2006 as compared with that of the year ended 31 December 2005 (as determined under the PRC Accounting Regulations) and is determined as follows: - if the growth rate of the audited net profit is less than or equal to 15%, no contribution is required. - if the growth rate of the audited net profit for 2006 is more than 15% but less than or equal to 30%, the total contribution equals to the net profit incremental multiplied by the growth rate. - if the growth rate of the audited net profit is more than 30%, the total contribution equals to the net profit incremental multiplied by 30%. Pursuant to the Scheme, the total contribution to the trust will not exceed 10% of the net profit for 2006. Duration of the vesting period depends on the market price of the Company’s A shares in 2006 through 2008. When the average closing price of Company’s A shares in 2007 is higher than that in 2006, the Scheme is vested and the trust is required to distribute the Awarded Shares to the designated employees by 5 January 2008. When the average closing price of the Company’s A shares in 2007 is lower than that in 2006, the vesting period is extended to 31 December 2008 whereby the Scheme is vested when the average closing price of the Company’s A shares in 2008 is higher than that in both 2007 and 2006. In the circumstance, the trust is required to distribute the Awarded Shares to the designated employees by 5 January 2009. Otherwise, the trust is terminated and the Awarded Shares will be resold in the Shenzhen Stock Exchange and the proceeds be refunded to the Company. (b) Details of the Awarded Shares purchased by the trust under the Scheme are as follows: Number of Aggregate shares amount purchased paid Outstanding at 1 January 2006 - - Purchased through the trust 24,913,618 141,706,969 Dividend reinvested through the trust (note) 538,400 3,737,043 Outstanding at 31 December 2006 25,452,018 145,444,012 144 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 34 Employees’ Share Awarded Scheme (continued) (b) Details of the Awarded Shares purchased by the trust under the Scheme are as follows: (continued) Note: On 21 July 2006, the Company paid a cash dividend of RMB 0.15 per share resulting in a total dividend received by the trust of RMB3,737,043. Pursuant to the Scheme, the trust acquired an additional 538,400 A shares of the Company. (c) Fair value of the Scheme and assumptions The fair value of the services received in return for the Scheme granted is measured by reference to the fair value of the Awarded Shares granted. The estimate of the fair value of the Awarded Shares is measured based on a Monte-Carlo option pricing model with the following key input assumptions at its grant date of 30 May 2006: 2006 A Share’s closing price at grant date (per share) RMB 5.97 Expected volatility 30% Risk-free interest rate 2.52% Expected rate of return 35% Expected vesting period 19 months Fair value of the Awarded Shares at grant date RMB 218,690,000 The directors consider that changes in the subjective input assumptions could materially affect the fair value estimate. Had all the Awarded Shares been fully vested on 31 December 2006, the theoretical benefits of the employees based on the A Share’s closing price of RMB15.44 per share on that date would have been RMB392,979,158. During the year, equity-based employee benefits charged to the income statement and credited to reserve amounted to RMB80,570,000 (note 27). 145 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 35 Material related party transactions (a) Reference should be made to the following notes regarding related parties: Associates (notes 18, 24, 32) Jointly controlled entities (notes 19, 24, 32) Key management personnel (see note (b) below) Post-employment benefit plans (note 9) (b) Key management personnel compensations The key management personnel compensations are as follows: 2006 2005 Short-term employee benefits 30,087,000 22,403,000 Post-employment benefits 510,000 334,000 Equity-settled share-based compensation 16,114,000 - 46,711,000 22,737,000 The above compensations are included in “personnel expenses” (see note 9). Save for the above, the Group also provides non-monetary employee benefits to the key management personnel in the form of purchase discount on sale of the Group’s properties to the key management personnel. The details of such transactions are as follows: 2006 2005 Sales of properties to the key management personnel 8,307,049 9,772,000 Related cost of sales (6,095,811) (6,241,000) Gross profit 2,211,238 3,531,000 Estimated fair value of the properties sold to the key management personnel 12,485,049 14,778,000 All the above were approved by the Board of Directors as a kind of employment benefits to the key management personnel. Apart from the above, during the year, certain key management personnel purchased properties from the Group at market price with total value of RMB1,576,206 (2005: RMB407,000). 146 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 36 Commitments (a) Commitments outstanding at 31 December not provided for in the financial statements were as follows: 2006 2005 Contracted for 11,956,924,000 5,622,000,000 Authorised but not contracted for 852,598,000 469,000,000 12,809,522,000 6,091,000,000 All the above commitments, except for RMB1,290 million included in “contracted for” in respect of the acquisition of a subsidiary subsequent to year end (see note 39(b)), were in relation to property development costs. (b) At 31 December 2006, the total future minimum lease payments under non-cancellable operating leases are payable as follows: 2006 2005 Within 1 year 8,450,257 6,427,558 After 1 year but within 5 years 10,389,240 7,975,748 After 5 years 4,411,536 2,113,312 23,251,033 16,516,618 The Group is the lessee in respect of a number of properties held under operating leases. The leases typically run for an initial period of two to ten years. None of the leases includes contingent rentals. During the year, the operating expense of the Group amounted to RMB18 million (2005: RMB13 million). 37 Contingent liabilities Financial guarantees issued (i) As at the balance sheet date, the Group has issued guarantees to banks to secure the mortgage arrangement of property buyers. The outstanding guarantees to the banks amounted to RMB11,371 million (2005: RMB6,748 million), including guarantees of RMB10,469 million (2005: RMB4,930 million) which will be terminated upon the completion of the transfer procedures with the buyers in respect of the legal title of the properties, and guarantees of RMB902 million (2005: RMB1,818 million) which will be terminated upon full repayment of mortgage loans by buyers to the banks. The directors do not consider it probable that the Group will sustain a loss under these guarantees as the bank has the authority to sell the property and recover the outstanding loan balance from the sale proceeds if the property buyers default payment. The Group has not recognised any deferred income in respect of these guarantees as its fair value is considered to be minimal by the directors. 147 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 37 Contingent liabilities (continued) Financial guarantees issued (continued) (ii) As at 31 December 2006, a subsidiary of the Group issued guarantees in respect of certain bank loans to third parties prior to its acquisition by the Group. As part of the terms of the acquisition, the seller has undertaken to bear any possible financial losses in association with such guarantees. Accordingly, the directors consider such guarantees do not have any financial impact on the Group. 38 Financial instruments Exposure to interest rate, credit, liquidity and currency risks arises in the normal course of the Group’s business. The risks are limited by the Group’s financial management policies and practices described below. (a) Interest rate risk The interest rates and terms of repayment of bank loans and other borrowings of the Group are disclosed in note 29 to the financial statements. The interest rates and terms of the convertible bonds are disclosed in note 30 to the financial statements. (b) Credit risk The Group’s credit risk is primarily attributable to trade and other receivables and other financial assets. Management has a credit policy in place and the exposures to these credit risks are monitored on an ongoing basis. In respect of trade receivables, credit risk is minimised as the Group normally receives full payment from buyers before transfer of property legal title. In respect of other receivables, the Group reviews the exposures and closely monitor the recoverability of the balances on an ongoing basis. Normally, the Group does not obtain collateral from debtors. The impairment losses on bad and doubtful accounts are within management’s expectation. Investments are normally made on securities that are listed or with good credit standing. The maximum exposure to credit risk is represented by the carrying amount of each financial asset in the consolidated balance sheet. Except for the financial guarantees given by the Group as set out in note 37, the Group does not provide any other guarantees which would expose the Group to credit risk. The maximum exposure to credit risk in respect of these financial guarantees at the balance sheet date is disclosed in note 37. (c) Liquidity risk The Group’s policy is to regularly monitor current and expected liquidity requirements and its compliance with lending covenants, to ensure that it maintains sufficient reserves of cash and adequate committed lines of funding from major financial institutions to meet its liquidity requirements in the short and longer terms. 148 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 38 Financial instruments (continued) (d) Foreign exchange risk The Group is exposed to foreign currency risk primarily on borrowings that are denominated in a currency other than the functional currency of the operations to which they relate. The currencies giving rise to this risk are primarily United States dollars and Hong Kong dollars. Details of these foreign currency exposures are disclosed in note 29. (e) Fair value All financial instruments are carried at amounts not materially different from their fair values. (f) Estimation of fair values The following summarises the major methods and assumptions used in estimating the fair values of financial instruments of the Group. (i) Securities Fair value is based on quoted market price at the balance sheet date without any deduction for transaction costs. Fair values for the unquoted equity investments are estimated using the applicable price / earning ratios for similar listed companies adjusted for the specific circumstances of the issuer. (ii) Interest-bearing borrowings The fair value is estimated as the present value of future cash flows, discounted at current market interest rates for similar financial instruments. The interest rates used are as follows: 2006 2005 Interest-bearing borrowings 4.00% - 7.344% 3.56% - 5.76% 39 Non-adjusting post balance sheet events (a) After the balance sheet date the directors proposed a final dividend and a capitalisation issue, further details of which are disclosed in note 13 and note 27(a). (b) On 15 December 2006, the Group entered into agreements with two independent third parties to acquire entire shares in Shanghai Hengda Real Estate Limited which is principally engaged in real estate development in Shanghai for a total consideration of RMB1,290 million, payable by cash. The acquisition was completed in January 2007 after payment of the consideration by the Group. 149 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 39 Non-adjusting post balance sheet events (continued) (c) On 29 December 2006, the Standing Committee of the Tenth National People’s Congress (“NPC”) passed a resolution to submit the draft corporate income tax law to the Tenth NPC plenary session for voting. According to the income tax law that was passed by NPC on 16 March 2007, corporate income tax rate will be revised to 25% with effect from 1 January 2008. Since implementation measure on transitional policy of preferential tax rate granted according to current tax law and administration regulations was not yet announced, financial impact of the new tax law cannot be reasonably estimated at this stage. 40 Accounting estimates and judgments Key sources of estimation uncertainty Notes 34 and 38 contains information about the assumptions and the risk factors relating to valuation of share incentive scheme and the financial instruments respectively. Other key sources of estimation uncertainty are as follows: (i) Development costs directly attributable to property development activities The Group allocates portions of development costs to properties under development and completed properties for sale. As majority of the Group’s property development projects is developed and completed by phases over one year, the budgeted development costs of the whole project are dependent on estimating the total outcome of the constructions, based on the work done to date. Based on the Group’s experience and the nature of the constructions undertaken by the Group, the Group makes estimates and assumptions concerning the future events that are believed to be reasonable under the circumstances. Given the uncertainties involved in property development activities, the related actual results may be higher or lower than that estimated at the balance sheet date. Any change in estimates and assumptions would affect the profit or loss in future years as an adjustment to the amounts recorded to date. (ii) Impairment provision for investment properties and properties held for development As explained in note 2(h) and 2(l), the Group makes impairment provision for the above properties taking into account the Group’s estimates of the recoverable amount from such properties. Given the volatility of the PRC property market, the actual recoverable amount may be higher or lower than that estimated at the balance sheet date. Any increase or decrease in the provision would affect profit or loss in future years. 150 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 40 Accounting estimates and judgments (continued) Key sources of estimation uncertainty (continued) (iii) Provision for completed properties for sale and properties under development As explained in notes 2(o) and 2(p), the Group’s completed properties for sale and properties under development are stated at the lower of cost and net realisable value. Based on the Group’s recent experience and the nature of the subject properties, the Group makes estimates of the selling prices, the costs of completion in case for properties under development, and the costs to be incurred in selling the properties. Given the volatility of the PRC property market and the unique nature of individual properties, the actual outcomes in terms of costs and revenue may be higher or lower than that estimated at the balance sheet date. Any increase or decrease in the provision would affect profit or loss in future years. (iv) Land appreciation tax As explained in note 11(a), land appreciation tax is levied on properties developed by the Group for sale, at progressive rates ranging from 30% to 60% on the appreciation of land value, which under the applicable regulations is calculated based on the proceeds of sales of properties less deductible expenditures including lease charges of land use rights, borrowing cost and relevant property development expenditures. Given the uncertainties of the calculation basis of land appreciation tax to be interpreted local tax bureau, the actual outcomes may be higher or lower than that estimated at the balance sheet date. Any increase or decrease in estimates would affect profit or loss in future years. 151 China Vanke Co., Ltd. Financial statements for the year ended 31 December 2006 41 Possible impact of amendments, new standards and interpretations issued but not yet effective for the annual accounting period ended 31 December 2006 Up to the date of issue of these financial statements, the IASB has issued a number of amendments, new standards and interpretations which are not yet effective for the accounting period ended 31 December 2006 and which have not been adopted in these financial statements: Effective for accounting periods beginning on or after IFRS 7, Financial instruments: disclosures 1 January 2007 IFRS 8, Operating segments 1 January 2009 Amendment to IAS 1, Presentation of financial statements: Capital disclosures 1 January 2007 IFRIC-7, Applying the restatement approach under IAS 29 Financial reporting in hyperinflationany economies 1 March 2006 IFRIC-8, Scope of IFRS 2 1 May 2006 IFRIC-9, Reassessment of embedded derivatives 1 June 2006 IFRIC-10, Interim financial reporting and impairment 1 November 2006 IFRIC-11, IFRS-2 Group and treasury share transactions 1 March 2007 IFRIC-12, Service concession arrangements 1 January 2008 The Group is in the process of making an assessment of what the impact of these amendments, new standards and new interpretations is expected to be in the period of initial application. So far it has concluded that the adoption of them is unlikely to have a significant impact on the Group’s result of operations and financial position. 42 Comparative figures Certain comparative figures have been reclassified to confirm with the current year’s presentation. 152 China Vanke Co., Ltd. Year ended 31 December 2006 (for management purpose only) Net impact of IFRS adjustments on the results and net assets for the year ended 31 December 2006 (Expressed in Renminbi Yuan) Profit attributable Net assets to equity shareholders attributable to of the Company equity shareholders for the year ended of the Company at 31 December 31 December 2006 2006 As determined pursuant to PRC accounting regulations 2,154,639,315 14,882,371,310 Adjustments to align with IFRSs: Recognition and amortisation of negative goodwill (778,683) 2,200,217 Recognition and amortisation of goodwill 69,282,301 (102,111,280) Deferred tax assets 76,580,139 102,231,111 Revaluation of properties 814,918 (15,947,929) Capitalised borrowing costs released to cost of sales (2,654,224) (46,914,259) Revaluation reserve for available for sale securities - 43,265,034 Transaction costs released to share premium upon conversion of convertible bonds - (1,180,380) Discount released to share premium upon conversion of convertible bonds - 64,380,209 Redemption of convertible bonds - 253,697 As restated in conformity with IFRSs 2,297,883,766 14,928,547,730