晨鸣纸业(000488)2006年年度报告摘要（英文版）

Shandong Chenming Paper Holdings Ltd. Summary of Annual Report 2006 Stock ID: Chenming Paper, Chenming B, Stock Code: 000488 200488 Bond ID: Chenming Convertible Bond Bond Code: 125488 Announcement No. 2007-011 SHANDONG CHENMING PAPER HOLDINGS LIMITED Summary of Annual Report 2006 §1 Important Declaration 1.1 The Board of Directors and the directors of the Company guarantee that there are no significant omissions, fictitious or misleading statements carried in the Report and we will accept individual and joint responsibilities for the truthfulness, accuracy and completeness of the Report. This summary is abstracted from the completed text of Annual Report 2005, for details of the report please go to the complete version. 1.2 None of the directors, supervisors, nor senior executives is holding uncertain opinion or disagreement over the truthfulness, accuracy, and completeness over the Annual Report. 1.3 All of the directors presented the board meeting. 1.4 Deloitte Touche Tohmatsu CPA Ltd. has issued the standard auditing report without qualified opinion. 1.5 Mr. Chen Hongguo, the Chairman of Board, Mr. Liu Junwu, the Chief Financial Officer, and Mr. Wang Chunfang, the Financial Manager declares the truthfulness and completeness of the financial statements carried in this report. §2 Company Profile 2.1 Company Profile Stock ID Chenming Paper , Chenming B Stock Code 000488、200488 Bond ID Chenming Bond Bond Code 125488 Stock Exchange Shenzhen Stock Exchange Reg. Add. No. 595 Shencheng Rd., Shouguang City, Shandong Province Post Code 262700 Office address No. 595 Shencheng Rd., Shouguang City, Shandong Province Post Code: 262700 Website http://www.chenmingpaper.com Email. chenmmingpaper@163.com 2.2 Liaison People Secretary of the Board Representative of Stock Affairs Name Hao Yun Fan Yingjie, Sun Wenke No. 595 Shencheng Rd., Shouguang City, No. 595 Shencheng Rd., Shouguang City, Address Shandong Province Shandong Province Tel. 0536－2158977 0536－2158011、2156488 1 Shandong Chenming Paper Holdings Ltd. Summary of Annual Report 2006 Fax. 0536－2158640 0536－2158640 Email. chenmmingpaper@163.com chenmmingpaper@163.com §3 Financial Highlights 3.1 Major accounting data In RMB Yuan Year 2006 Year 2005 Increase/decrease (%) 2004 Major business income 11,814,092,426.36 9,722,346,097.72 21.51% 7,064,613,089.05 Total profit 891,269,259.51 863,409,212.92 3.23% 847,436,670.72 Net profit 602,967,195.37 602,433,342.24 0.09% 503,721,298.14 Net profit deducted 436,232,957.51 531,906,232.30 -17.99% 455,950,828.12 non-recurring gain/loss Cash flow generated by 1,008,558,176.84 1,013,718,841.30 -0.51% 406,238,392.59 business operation, net End of 2006 End of 2005 Increase/decrease (%) End of 2004 Gross Assets 20,547,990,949.39 17,969,414,107.77 14.35% 15,850,290,151.74 Shareholders’ Equity (Exclude 6,010,124,970.09 5,465,605,443.09 9.96% 4,839,068,873.63 Minority Shareholders’ Equity) In case of adjusted the accounting data of previous year retrospectively, the original data shall be provided otherwise in the Word file. 3.2 Major financial indices In RMB Yuan Year 2006 Year 2005 Increase/decrease (%) 2004 Earnings per share 0.4415 0.4451 -0.81% 0.5611 Earnings per share (Note) 0.42 - - - Net earnings / asset 10.03% 11.02% -0.99% 10.41% Net earnings / capital ratio basing on net profit after 7.26% 9.73% -2.47% 9.58% deducting of non-recurring gain/loss (%) Net Cash flow per share 0.7385 0.7489 -1.39% 0.4525 generated by business operation End of 2006 End of 2005 Increase/decrease (%) End of 2004 Net asset per share 4.4009 4.0380 8.99% 5.3904 Net asset per share, adjusted 4.3328 3.9597 9.42% 5.3257 Note: For converting of shares from the convertible bonds, the capital shares has increased by 85,651,852 shares as of March 31st 2007. The earning per share is RMB0.42 upon the latest capital share. 2 Shandong Chenming Paper Holdings Ltd. Summary of Annual Report 2006 Non-recurring gain and loss items √ applicable □ not applicable In RMB Yuan Non-recurring gain and loss items Amount Non-business income 19,406,564.24 Non-business expenditure -2,779,557.98 Loss from fixed asset disposal -4,376,293.41 Tax returned and allowance income 142,185,569.48 Short-term inventory impairment provision written back 31,038.60 Bad debt provision written back 19,095,320.78 Income from disposal of share equity 80,268,170.26 Influence of income tax of non-recurring gain/loss -62,939,559.80 Influence of minor shareholders of non-recurring gain/loss -24,157,014.31 Total 166,734,237.86 3.3 Diversity between the international and domestic accounting standards √ applicable □ not applicable In RMB Yuan Domestic Accounting Standard Overseas accounting standard: Net profit 602,967,195.37 585,274,874.16 Net profit (consolidated) audited by the domestic auditor was RMB602,967,200.00, while the net profit (consolidated) audited by the overseas auditor was RMB585,274,900.00. Namely the overseas result was lower than the domestic one by RMB17,692,000.00. This was caused by: (1) Adjustment of booked value of trademarks and intangible assets revaluation and relative amortizes has increased the net profit by RMB1,460,000.00. (2) Governmental special financial aids regarding purchasing/construction of fixed assets was transferred from capital reserves and special payable accounts to the differed income account, which increased by net profit by Statement about the RMB35,219,500.00. diversity (3) Writing back of value increase in fixed asset evaluation, increased by net profit by RMB1,749,300.00 (4) Adjustment on booking value of difference in share equity investment debit account and related adjustment has decreased the net profit by RMB5,574,900.00. (5) Debt restructuring gains has increased the net profit by RMB24,595,600.00 (6) Influence of financing for L/C trades has increased the net profit by RMB2,966,900.00 (7) Adjustment of convertible bonds decreased the net profit by RMB89,481,600.00 (8) Diferred taxes increased the net profit by RMB11,266,600.00; and other increases totaled to RMB106,600.00 Note: According to the “Proposal of decrease the covert price of the convertible bonds” adopted by the Board of Directors, the convert price was decreased from RMB6.47 to RMB5.50. The Company employed overseas accountant to assess the convertible bonds in view of fairly reflecting the value of convertible bonds. According to the result of assessment, the initial figures of B share financial statements on IAS were adjusted. Deloitte Touche Tohmatsu CPA issued special statement saying that: the adjustment made upon the aforesaid assessment results make no influence on the A share financial statements produced under Enterprise Accounting Standard and Enterprise Accounting System. It is complying with the related provisions of International Accounting Standard. For details please go to the special statement made by the Board of Directors, Supervisory Committee, Independent Directors, and the CPA as well. 3 Shandong Chenming Paper Holdings Ltd. Summary of Annual Report 2006 §4 Changes in Share Capital & Particulars about Shareholders 4.1. Statement of Changes in Shares (in Shares) Before the change Changed (+,-) After the change Shares allotted in Proportion Proportion Amount share equity Others Sub-total Amount % % relocation I. Shares with conditional 437,748,844 32.34 -96,308,953 +13,369,250 -82,939,703 354,809,141 25.98 subscription State-owned shares 422,843,176 31.24 -94,269,519 -328,573,657 -422,843,176 National legal +328,573,657 +328,573,657 328,573,657 24.06 person shares Other domestic shares Including: Domestic legal person 12,247,656 0.90 -2,730,517 -2,730,517 9,517,139 0.70 shares Management 2,658,012 0.20 +691,083 +13,369,250 +14,060,333 16,718,345 1.22 shares II. Shares with unconditional 915,791,076 67.66 +96,308,953 -1,239,015 +95,069,938 1,010,861,014 74.02 subscription RMB common 358,293,591 26.47 +96,308,953 -1,239,015 +95,069,938 453,363,529 33.20 shares Foreign shares listed 557,497,485 41.19 557,497,485 40.82 at home III. Total of capital 1,353,539,920 100.00 +12,130,235 +12,130,235 1,365,670,155 100.00 shares Notes: 1. In the report term, Shouguang State-owned Assets Administrative Bureau was replaced by Shouguang Chenming Share Controlling Ltd. as the controlling shareholder of the Company. The stated-owned shares was converted into state-owned legal person shares thereof. 2. The share relocation plan has been accomplished on March 29th 2006, Shouguang State-owned Asset Administration Bureau and other holders of non-negotiable shares allotted part of their shares to A-share holders at 2.6 shares upon each 10 shares. 3. In the report term, the Company used the share equity motivation fund provided in previous years to purchase A shares of the Company for the senior executives of the Company and its subsidiaries, these shares were frozen. Chenming Bond has entered the convertible period since March 15th 2005. As of December 31st 2006, there were accumulatively 19,078,301 shares converted into “Chenming Paper”, including 12,130,235 shares converted in the report term.Date of conditional subscription shares start to be traded in the market: In shares Newly added tradable Balance of shares with Balance of Date Remarks shares conditional subscription unconditional shares Not to be transferred in 12 months 2007-03-29 9,517,139 328,573,657 1,020,378,153 since implementation of the share equity relocation program 4 Shandong Chenming Paper Holdings Ltd. Summary of Annual Report 2006 Top 10 holders of conditional shares In shares Date when Conditional Newly added No. Name of the holder trading is Conditions shares tradable shares allowed Not placed in the market in 48 months since Shouguang Chenming Share 1 328，573，657 Mar. 29 2010 0 implementing of the share equity relocation Holding Co., Ltd. plan Shanghai Xinglong 2 3,303,671 Mar. 29 2007 3,303,671 Investment Co., Ltd. 3 People’s Post Press 3,053,302 Mar. 29 2007 3,053,302 Meilin Zhengda Investment 4 1,221,321 Mar. 29 2007 1,221,321 Group Co., Ltd. Shouguang Huadong Not transferred in 12 months since 5 Construction Materials Co., 1,022,855 Mar. 29 2007 1,022,855 implementing of the share equity relocation Ltd. plan Shandong Chenming Power 6 732,790 Mar. 29 2007 732,790 Plant Ltd. Weifang New Continental 7 122,133 Mar. 29 2007 122,133 Investment Consultants Ltd. Weifang Shenzhou Tech. 8 61,067 Mar. 29 2007 61,067 Ltd. 4.2 Top 10 shareholders, and top 10 holders of unconditional shares In share Total of shareholders 72,381 Top 10 Shareholders Properties of Share Conditional Pledged or Name of the shareholder Total shares shareholder proportion % shares frozen Shouguang Chenming Share Holding Co., Ltd. State-owned 24.06% 328,573,657 328,573,657 18,653,854 BBH BOS S/A FIDELITY FD-CHINA FOCUS Foreign shares 2.52% 34,429,000 0 0 FD DBS VICKERS（HONG KONG）LTD A/C Foreign shares 1.52% 20,817,457 0 0 CLIENTS PLATINUM ASIA FUND Foreign shares 1.19% 16,234,459 0 0 SUN HUNG KAI INVESTMENTSERVICES Foreign shares 1.03% 14,026,562 0 0 LTD-CUSTOMERS A/C CREDIT SUISSE HONG KONG Foreign shares 0.83% 11,343,889 0 0 BONY-DREYFUS PIFI-DREYFUS PREMIER Foreign shares 0.77% 10,541,450 0 0 GREATER CHINA FTIF TEMPLETON BRIC FUND Foreign shares 0.76% 10,448,400 0 0 Yinfeng Securities Investment Foundation Others 0.68% 9,325,800 0 0 JPMBLSA RE FTIF TEMPLETON CHINA Foreign shares 0.66% 8,976,400 0 0 FUND GTI5497 5 Shandong Chenming Paper Holdings Ltd. Summary of Annual Report 2006 Top 10 holders of unconditional shares Name of the shareholder Unconditional shares Category of shares BBH BOS S/A FIDELITY FD-CHINA FOCUS FD 34,429,000 Foreign shares placed in domestic exchange DBS VICKERS（HONG KONG）LTD A/C CLIENTS 20,817,457 Foreign shares placed in domestic exchange PLATINUM ASIA FUND 16,234,459 Foreign shares placed in domestic exchange SUN HUNG KAI INVESTMENTSERVICES 14,026,562 Foreign shares placed in domestic exchange LTD-CUSTOMERS A/C CREDIT SUISSE HONG KONG 11,343,889 Foreign shares placed in domestic exchange BONY-DREYFUS PIFI-DREYFUS PREMIER 10,541,450 Foreign shares placed in domestic exchange GREATER CHINA FTIF TEMPLETON BRIC FUND 10,448,400 Foreign shares placed in domestic exchange Yinfeng Securities Investment Foundation 9,325,800 RMB common shares JPMBLSA RE FTIF TEMPLETON CHINA FUND 8,976,400 Foreign shares placed in domestic exchange GTI5497 UBS WARBURG CUSTODY PTE LTD. 8,697,705 Foreign shares placed in domestic exchange Notes to relationship or “action in concert” among the The Company is not informed whether there is relationship between the top ten shareholders. above parties regarding action in concert. 4.3 Particulars about the holding shareholder and the substantial holder 4.3.1 Change in holding shareholder and the substantial holder √ applicable □ not applicable Name of the new controlling shareholder Shouguang Chenming Share Holding Co., Ltd. Date when the controlling shareholder 2006-9 -8 was replaced Information disclosing date of the replacing of controlling shareholder 2006-9 -12 News presses disclosed the information about replacing of controlling China Securities Journal, Hong Kong Commercial Daily shareholders 4.3.2 Particulars about Controlling Shareholder and the Substantial Controller Shouguang Chenming Share Holding Co., Ltd. is the controlling shareholder of the Company which is holding more than 5% of the capital shares. It was incorporated on December 30th 2005 with registered capital of RMB1.685 billion. Mr. Chen Hongguo is the legal representative of the company. Its business range is investment in industries of paper-making, power plant, thermal power, and forestry. It was holding 328,573,657 of state-owned shares at the end of the report term, which was 24.06% of the total share capital. The 18,653,854 shares used as supplementary shares in share equity relocation program were temporarily managed by Shenzhen Branch of China Securities Depository & Clearing Corporation Ltd. None of other shares was put into amortizing or freezing. 6 Shandong Chenming Paper Holdings Ltd. Summary of Annual Report 2006 4.3.3 Holding relationship chart Shouguang State-owned Asset Administrative Bureau ↓75.73% Shouguang Chenming Share Holding Co., Ltd. ↓24.06％ SHANDONG CHENMING PAPER HOLDINGS LIMITED §5 Directors, Supervisors and Senior Executives 5.1 Changing in shareholding and remuneration of the directors, supervisors and senior executives Remuneration Accept Shares held Expiring Shares held Cause accepted from the remuneration Service at the Name Position Sex Age date of job at the end of of company in from started from beginning term term change report term shareholding or of term (RMB0’000) related parties Chen Chairman M 42 2004-09-01 2007-09-01 824,691 6,334,527 154.06 No Hongguo Yin Chairman, M 49 2004-09-01 2007-09-01 463,782 3,231,520 149.44 No Tongyuan GM Li Feng Director M 34 2006-05-11 2007-09-01 78,586 471,818 85.10 No Xing Director M 41 2005-10-25 2007-09-01 37,350 355,561 85.69 No Fangtong Wu Bingyu Director M 41 2004-09-01 2007-09-01 99,450 428,107 39.03 No Hou Director M 45 2004-09-01 2007-09-01 146,599 628,915 80.80 No Huancai Zhou Director M 45 2004-09-01 2007-09-01 99,450 125,307 58.05 No Shaohua Hu Wenhe Director M 61 2004-09-01 2007-09-01 115,167 496,510 30.00 No Liu Director M 37 2004-09-01 2007-09-01 99,450 363,707 12.00 No Chengzhen Guo Director M 41 2004-09-01 2007-09-01 149,250 1,199,655 42.99 No Xiucheng Zhao Independent M 45 2004-09-01 2007-09-01 0 0 4.00 No Jinghua Director Independent Liu Xueyan M 68 2004-09-01 2007-09-01 0 0 4.00 No Director Diao Independent M 42 2004-09-01 2007-09-01 0 0 4.00 No Yuntao Director Wang Independent M 48 2004-09-01 2007-09-01 0 0 4.00 No Zhihua Director Zhou Independent F 43 2004-09-01 2007-09-01 0 0 4.00 No Chengjuan Director 7 Shandong Chenming Paper Holdings Ltd. Summary of Annual Report 2006 Chairman of Zheng the M 39 2004-09-01 2007-09-01 31,434 39,607 9.46 No Liyong supervisory comission Gao Junjie Supervisor M 36 2004-05-11 2007-09-01 31,433 39,606 9.47 No Wang Ju Supervisor F 41 2006-05-11 2007-09-01 0 0 9.69 No Liu Supervisor M 35 2004-09-01 2007-09-01 0 0 6.90 No Wenzheng Ren Supervisor M 39 2004-09-01 2007-09-01 0 0 6.35 No Guang’ai Wang Vice General M 33 2004-09-01 2007-09-01 0 209,200 31.20 No Baoliang Manager Vice General Ren Wei M 45 2004-09-01 2007-09-01 0 92,800 24.00 No Manager Geng Vice General M 33 2004-09-01 2007-09-01 74,550 437,433 58.87 No Guanglin Manager Vice General Fang Lijun M 37 2004-09-01 2007-09-01 73,374 436,851 40.80 No Manager Vice General Li Xueqin F 41 2004-09-01 2007-09-01 57,657 429,348 28.80 No Manager Vice GM, Hao Yun secretary of M 44 2004-09-01 2007-09-01 121,699 708,441 60.00 No the board Xia Vice General M 42 2005-06-27 2007-09-01 0 70,700 21.60 No Guangchun Manager Wang Vice General M 44 2004-09-01 2007-09-01 7,857 195,600 24.00 No Zaiguo Manager Liu Junwu CFO M 45 2006-09-17 2007-09-01 0 00 16.80 No Total - - - - - 2,511,779 16,295,213 - 1,105.10 - Note: Change of shareholding status of directors and senior executives (1) The Company implemented share equity relocation plan in March 2006, upon the registration date of March 28th 2006, the non-negotiable-share holders allotted 2.6 shares upon each 10 shares to the negotiable A share holders. (2) In the report term, the Company used the share equity motivation fund provided in previous years to purchase A shares of the Company for the senior executives of the Company and its subsidiaries, these shares were frozen. §6 Report of the Board 6.1 Report of the Executives I. Business review of the report term (I) Business operation in the report term In year 2006, facing the more and more severe market competition in domestic and overseas market, the whole staffs of the Company were working aggressively by fully developing the potentials and improving the management. The production was in steady operation and the business performance kept growing. In the report term, the Company achieved output of machine-make paper up to 2.43 million ton, which increased by 17.96% over previous year; the major business income of RMB11,814,092,400 which increased by 21.51% over the previous year; the major business profit of RMB2,213,998,900 which increased by 13.80% over the previous year. Details of each business are as the followings: 1. Production and sales (1) According to the market demand, the Company successfully developed some 50 new products such as light-yellow light coating paper, register paper, base paper for diazotype, cigarette packing paper, Snow-Shark CFS, Matt CFS, high-class light paper, class A kraft liner board, high strength complex packing base paper, high density fiber board, and wooden floor board. The new products are expected to become the new profit-making points of the company. (2) Through technical innovation, Jinlin Chenming started to use sulfate method to replace coniferous chemical method; Yanbian 8 Shandong Chenming Paper Holdings Ltd. Summary of Annual Report 2006 Chenming has successfully increased the quality through adopting of sulfate method and sodium method. After replacing of the imported raw materials by home-made raw materials in producing of white cartoon paper, Shouguang Chenming, Wuhan Chenming, Jilin Chenming and Yanbian Chenming have resolved the problems regarding strength and whiteness of the self-made pulp. This has significantly increased the quality of self-made pulp, and replaced the imported hardwood pulp. (3) The Company kept focusing on the energy saving, water saving, and economical raw materials, fully promote resource efficiency, and working hard to obtain new economical benefit from developing of recycling economy and resource saving. (4) Along with the increasing of domestic market share, the Company fully accelerated the operation in overseas market. Chenming brand has already gain good reputation in the market of the US and Japan. For the year, the export of paper products has reached up to 424 K ton, and realized USD300 million in sales, which was the highest in its history. This has been a historical breakthrough in the global market. (5) To satisfy the Company’s needs in international operation, an inland international container hub has been constructed. It has been accomplished and put into operation. It’s the largest in the province. The hub was lifting up the efficiency of customs clearing and provided an “express channel” for the Company to move to the global market. 2. Constructions in process (1) Through one year and five months of construction, the 300 KT super clender paper project and supporting facilities had been accomplished, and the first testing operation was successful. It created the new world record of 1800 meter per minute in paper machine speed. The project has brought the Company a 480 KT of productivity. Its products have been put into the market at present. (2) The 180 KT light-weight coated paper project has passed the overall testing, and was put into trial operation in January 2007. (3) Juancheng Chenming board project has been fully put into production in April 2006, which created a productivity of 50 thousand ton of flakeboard. (4) The 100 KT special paper project, the joint venture with Arjowiggins from France, was in equipment installation stage at present, and will be put into production in May 2007. (5) The 700 KT wood pulp project has been launched by Zhangjiang Chenming. At present 200 thousand MU (133.3 km2) of forest base has been developed. The project design and bidding of equipment suppliers have been finished. A corner stone laying ceremony was held in November 2006. It was greatly supported by the central government, such as National Development & Reformation Commission, and the local government. A sound environment has been formed for the full launching of the project. Along with the starting of production of the above projects, the Company’s productivity of paper products has been lifted up to over 3 million ton annually, fiber board products up to 650 cube meter, and wooden floor products up to 5 million square meters. They’ve further enforced the Company in market competition. 3. Interior administration (1) With reference to the experiences of international leaders in the industry, the Company produced 259 standardizing documents regarding production, purchasing, logistics, and secrecy, accepting of technical reconstruction projects. All of these criteria were ensured to be exercised under inspection. (2) Break the original operation, enforced the assessment on the leaderships in aspects of achieving of monthly targets, problem resolving capability, and major performances. (3) Actively expand financial resources, the Company issued totally RMB2 billion of short-term bonds in two batches. It has decreased financial expenses and satisfied the capital requirement of the Company at the same time. (4) Speed up the construction of raw material bases, improved material purchasing network, reformed raw material assessment, and enforced rewarding and punishment rules on raw material consuming management. (5) Equipment management was also enhanced with focus on normal operation rate and backup parts. Management criteria were established and improved to fully enforce team management and motivate the teamwork. Whole-staff training programs were carried out on every level and in every form. In the report year, there were totally 466 training programs provided, and almost all of the 30 thousand employees of the Company participated in these programs. Company culture activities such as sports games, parties, and speech competition were organized to enrich the after-work life of employees. 4. Major suppliers and clients The purchasing from the top 5 suppliers was amounted to 15.76% of the total purchasing of the year. The sales to the top 5 clients were amounted to 5.18% of the total sales of the year. 9 Shandong Chenming Paper Holdings Ltd. Summary of Annual Report 2006 (II) Statement on the major changing in company asset structure and expenses compare with the same period of last year In RMB Yuan Year 2006 Year 2005 Items Difference Portion in total assets of Portion in total assets of At the end of term At the end of term 2006 2005 Notes receivable 939,705,242.42 4.57% 510,125,716.95 2.84% 1.73% Account receivable 1,720,291,295.31 8.37% 1,424,647,094.65 7.93% 0.44% Other account 141,528,858.87 0.69% 218,849,821.70 1.22% -0.53% receivable Inventories 1,860,698,636.34 9.06% 2,174,779,264.45 12.10% -3.05% Long-term share 88,903,007.40 0.43% 5,843,440.51 0.03% 0.40% equity investment Original value of fixed 13,326,258,848.01 64.85% 13,141,351,140.78 73.13% -8.28% assets Net fixed assets 10,060,876,618.57 48.96% 10,738,991,767.88 59.76% -10.80% Construction in 4,134,036,858.09 20.12% 1,232,223,678.56 6.86% 13.26% progress Short-term loans 1,299,830,153.46 6.33% 4,463,141,400.00 24.84% -18.51% Long-term borrowings 5,035,160,067.69 24.50% 1,831,097,639.85 10.19% 14.31% Short-term bonds 2,026,019,444.42 9.86% 9.86% payable About the major factors of the changes (1) Notes receivable: accounted for 4.57% of the total assets of the report term, increased by 1.73% over the last year. The major reason was timely retrieving of trades, speeding up of capital circulation, thus released the returning of notes. (2) Account receivable: accounted for 8.37% of the total assets of the report term, increased by 0.44% over the last year. The major reason was the expanding of production scale and sales volume caused by completing and launching of the 300 KT coated white board project, Jiangxi Chenming art paper project, and Jilin Chenming project. (3) Other receivables: accounted for 0.69% of the total assets of the report term, decreased by 0.53% from the last year. The major reason was the decreasing of borrowings to the subsidiaries in the report term. (4) Inventory: accounted for 9.06% of the total assets of the report term, decreased by 3.05% from the last year. In the report term, the Company enforced marketing & sales, and the inventory was therefore decreased. (5) Long-term equity investment: accounted for 0.43% of the total asset in the report term, increased by 0.4% over the last year. The major reason was the investment made to Arjowiggins Chenming Special Paper Co., Ltd. in the report term. (6) Construction in process: accounted for 20.12% of the total asset in the report term, increased by 13.26% over the last year. The reason was the major investment in the 300 KT Super Clender Paper project and 180 KT lightweight coated paper project made in the report term. (7) Short term loans: accounted for 6.33% of the total asset in the report term, decreased by 18.51% from the last year. It was because the Company used the long-term loans to repay the short-term loans, which may improve the financial situation and lift up current ratio. (8) Long term loans: accounted for 24.50% of the total asset in the report term, increased by 14.31% over the last year. It was because 1) new bank loans raised to support the constructions in process of the term; 2)the Company used the long-term loans to repay the short-term loans, which may improve the financial situation and lift up current ratio. (9) Short-term financial bonds: accounted for 9.86% of the total asset. It was caused by issuing of short-term financial bonds during the period from July 24th 2006 to August 29th 2006. 10 Shandong Chenming Paper Holdings Ltd. Summary of Annual Report 2006 (III) Notes to major change in gain/loss comparing with the previous year in RMB Items Accumulated this year Accumulated last year Increase (+), decrease (-) % Major business income 11,814,092,426.36 9,722,346,097.72 21.51 Major business cost 9,580,565,820.78 7,753,621,043.16 23.56 Main business profit 2,213,998,867.28 1,945,491,131.52 13.80 Operational expenses 678,174,266.91 536,608,445.64 26.38 Administrative expense 544,880,856.14 495,438,620.50 9.98 Financial expenses 378,371,080.33 193,176,724.68 95.87 Investment income 83,549,433.21 5,134,984.68 1527.06 Major factors about the changes (1) The major business income has increased by RMB2,091.74 million and 21.51%; the major business costs increased by RMB1,826.94 million and 23.56%; the major business profit increased by RMB268.51 million and 13.80%. These were caused by launching of the 300 KT white cartoon paper project, Jiangxi 200 KT LWC paper project and projects of Jilin Chenming. The Company’s production scale was expanded. (2) The operational expenses increased by RMB141.56 million and 26.38% over the last year, which was caused by increasing of production and sales, and lead to increasing of shipping expenses. (3) The administrative expenses increased by 49.44 million and 9.98%, which was caused by increasing of annual remuneration drawing and newly occurred expenses with Jilin Chenming. (4) The finance expenses increased by RMB185.20 million in the report term, which was 95.87% over the last year. This was because: 1) The Company has enlarged in scale, major investments were made into the construction projects in the report term, the increasing of bank loans and issuing of 2 billion short-term bonds have brought up the interest expenses. 2) Increasing of bank interests incurred the increasing of finance expenses. 3) Current capital in the newly launched projects were not able to capitalize, that increased the finance expenses of the report term. (IV) Particulars about the cash flow composition in the report term. (1) Cash flow generated by business operation: RMB962.94 million of current term, RMB1,013.72 million of previous term. This was caused by the enforcing of sales and cash received from sales of goods has increased. (2) Cash flow from investment activities: RMB-2,758.20 million of current term, and RMB-2,458.14 of previous term. This was caused by the investment made in the 300KT super clender paper project, 180 KT low weight coated paper project of Jilin, and Yujing Hotel. (3) Cash flow from financing activities: RMB1,670.67 million of current term, RMB751.70 million of previous term. This was caused by the investment made in the 300KT super clender paper project, 180 KT low weight coated paper project in the report term was higher than in the previous term. 11 Shandong Chenming Paper Holdings Ltd. Summary of Annual Report 2006 (V) Particulars bout the major differences between the cash flow from business operation and the net profit in the report term Analyze of major differences between the cash flow from business operation and the net profit In RMB Yuan Items Year 2006 Year 2005 Net profit 602,967,195.37 602,433,342.24 Cash flow for business activities 1,008,558,176.84 1,013,718,841.30 Differences between the cash flow from business operation and the net profit -405,590,981.47 -411,285,499.06 Include: Minor shareholders’ equity -144,521,541.16 -59,412,865.53 Asset impairment provision provided (written back) -35,234,471.95 -54,624,225.02 Depreciation of fixed assets -958,231,034.31 -767,120,539.61 Amortizing of intangible assets -8,490,215.54 -6,742,851.06 Amortizing of long-term attributable expenses -6,961,561.55 -30,133,204.70 Decreasing of attributable expenses (less: increasing) -947,650.25 1,232,332.50 Increasing of expenses drawn in advance (less: decreasing) -7,427,110.17 -4,857,785.16 Disposal of fixed assets, intangible assets and others Loss of other long-term assets (less: gains) -4,903,964.15 -23,095,243.24 Financial expenses -444,244,528.54 -253,385,125.31 Invest losses (Less: gains) 83,549,433.21 5,134,984.68 Decrease of inventory (Less: increase) -150,953,631.94 562,841,084.94 Decrease of operational receivables (Less: increase) 669,960,692.92 521,210,390.78 Increase of operational payables (Less: decrease) 602,814,601.96 -302,332,452.33 (VI) Business status and performances of major controlled subsidiaries Business Share Registered Capital Name of the subsidiary Main products Net profit nature portion capital scale Wuhan Chenming Paper Holding paper Writing paper, news 50.93% 21,136.70 222,135.85 17,089.71 Ltd. making paper Shandong Chenming Paper Group paper 99.9468% kraft liner paper 37,620.00 123,588.35 11,527.14 Qihe Paper Board Ltd. making Shandong Chenming Power Plant production and sales of power plant 51% 9,955.31 71,444.24 3,681.89 Ltd. power and heat paper News paper and light Jilin Chenming Paper Co., Ltd. 100% 40,000 164,060.91 -5,806.00 making coated paper paper Chibi Chenming Paper Ltd. 35.7883% Duplex press paper 17,741.94 48,919.11 3,267.14 making paper Jiangxi Chenming Paper Ltd. 51% coated paper USD172 mil. 359,487.55 4,985.73 making paper wood pulp, machine Yanbian Chenming Paper Ltd. 76.73% 8,163.30 33,861.63 451.4 making made paper (VIII) Particulars about the subsidiaries whose net profit has exceeded 10% of the Company’s net profit (or investment gains) Major business Main business Net profit attributable to Portion in the Name of companies Net profit income profit the Company Company’s net profit % Wuhan Chenming Paper Holding 159,670.09 36,296.576 17,089.71 8,703.78 14.43 Ltd. Shandong Chenming Paper 135,717.42 20,837.66 11,527.14 11,521.01 19.11 Group Qihe Paper Board Ltd. 12 Shandong Chenming Paper Holdings Ltd. Summary of Annual Report 2006 II. Prospect 1. Trend of the industry and competition situation in the market The Company is engaged in paper making industry of light industry. At present, the domestic paper industry is in the stage of high speed development, the annual consuming of paper is growing faster than the growth of GDP. It has already made China the 2nd large paper consumer of the world. However the average consuming on population is far lower than the developed countries. Thus paper making industry has plenty room of development. At present the domestic paper industry is primarily moving toward large scale, specialization, and globalization. However it is not centralized enough. Along with the country’s higher environmental requirement, paper industry is developing toward clean production. It has accelerated the trend integration to a certain extent. A number of minor paper makers will be eliminated and the productivity will be centralized to larger enterprises. At present the raw materials are at high level in price, which lifted up the production costs, and offset the efficiency of large scale operation. Along with the slowing down of investments in paper industry, domestic paper industry will be gradually recovered from declining. However the competition will still be severe in the entire industry. Thus the production scale, product class, cost controlling, and environmental protection measures have become the key factors of an enterprise to survive. The integration of forestry, pulp making, and paper making has become the future trend of the industry. Launching of wood pulp project in Zhangjiang will not only enhance the Company’s controlling over raw material costs, but also strongly support the consistent growth of the Company in the future. 2. Potential opportunities and strategic development plan (1) Resolving resource problems which limited the Company’s development, enforcing the controlling over production costs The 3000 thousand MU forest base project in Zhanjiang has been pushed forward on schedule, the preparation works have basically accomplished, and the constructions will be started in the 1st half of 2007. Upon accomplish of the project, the raw material structure of the Company will be formed mainly by self-made pulp and wasted paper as the secondary input. The imported pulp will be further decreased, which will release the Company from the restriction of upriver resources. This will strongly support the consistent growth of the Company and has an strategic influence on the Company’s future. (2) Carry forward the strategy of globalization Enforce the cooperation with world leading paper producers to introduce their advanced experiences in management, production technologies, and marketing to the Company’s operation. Further expand the investment in cooperated projects to lift up productivity. Upgrade the class of the products by launching a number of high-tech production lines. Aiming to make the Company a leading enterprise in the global market. Further develop both of the domestic and global market, increase the export volume and international competition abilities. (3) Highly recognize environmental protection construction, accelerate the construction of recyclable economy The Company keeps promoting the concept of “environment protection prior to the development of enterprise”, aiming to make the Company an energy efficiency and environment friendly enterprise. Along with the enforcing of environment related national policies, the Company will accelerate the construction of recyclable economy with focusing on material recycling and pollution control. (4) On the basis of the convertible company bonds and short-term bonds issued previously, according to the national policies, the Company will keep develop other low-cost financial resources to further improve its capital-liability layout and its financial situation. 3. Business plan for year 2007 and key measures 2007 will be the year of breakthrough in the Company’s growth, and also the key period of the 11th “Five Year Plan”. The guidance ideology of 2007 is: fully practice scientific and concordant development, with economical efficiency as the central target, attach importance to the connection of speed with organization, quality and efficiency. Great effort will be laid on innovation, energy saving, enterprise management and trademark construction. The goal was set at 3 million tons both in production and sales. To achieve the goal, the following measures will be adopted: (1) Enforce the construction of new projects, realize a new breakthrough in business scale In year 2007, the major construction and investment projects are Zhanjiang wood pulp project, office waste paper decarbon pulp project, and fine-art paper project. The company will fine arrange the organizing, coordinating, personnel, and capital to ensure high quality operation of the projects. (2) Enforce the ability of innovation and realize a breakthrough in R&D and marketing force Fully accelerate international cooperation, such cooperation with Arjowiggins and Domtar Inc. Make all possible to gain high quality talents through training and importing. Promote using of newly developed technologies, lowering of production costs, and lift up product quality. Following with the market demands, keep developing high-tech and high value-adding products, such as high class cartoon product line, super clender paper, transparent cartoon paper, and decoration paper base line. Exploring of global market will be focusing on the product lines of CFS, white cartoon, LWC paper, and news paper. In year 2007, the export goal is 600 KT. Meanwhile great effort will be done in trademark promoting, quality, order processing, delivery, information feedback, and market services. (3) Fully accelerate the developing of recyclable economy, realize a new breakthrough in energy saving 13 Shandong Chenming Paper Holdings Ltd. Summary of Annual Report 2006 To achieve the energy saving goals and make the Company an environment friendly enterprise, the pulp making system will be reconstructed in 2007. Along with improving the quality of home-made pulp, pollution of waste water will be further controlled. The reclaimed water recycling project will be constructed to satisfy the technical requirement of pulp making process. 50% of the waste water will be recycled in the production, using of underground water will be reduced. Firedamp power plant project will also be enhanced to use firedamp generated by the waste water processing yard. These will save the Company over RMB10 million of cost per annual. Environmental indices will be introduced in annual assessment mechanism. The annual target paper will be fully implemented. Clean production will be fully promoted to ensure the disposal of residues will satisfy the national standard. (4) Enforce the capital operation and make sure the issuing of H shares carried forward smoothly. To support the construction of pulp project in Zhanjiang, the Company will further develop financial resources. On the Shareholders’ Meeting held on April 1st 2007, it has been decided to issue H shares. The Board of Directors will manage the preparation works according to the authorization by the Shareholders’ Meeting. This financing approach will significantly improve the Company’s capital-liability layout, and completely satisfy the need of capital in construction of pulp project in Zhanjiang. It will inject power to the consistent developing of the Company. 4. Future requirements of capital, resources and application plans Along with the expanding of production scale, especially the launching of the pulp project in Zhanjiang, requirement in capital input will be increasing significantly. However, as the largest paper producer in the country, with both A shares and B shares placed in the stock market, the Company long has good reputation in the financial market. Thus financing resources are wildly available to the Company. (1) As long as the proposal of issuing H shares is adopted by the Shareholders’ Meeting, the Board of Directors will go all out to carry forward the works. It is expected to obtain HKD3 billion of proceeds through issuing of the H shares. (2) To ensure the smooth operation of the pulp project in Zhanjiang, the Company has applied to the bank group lead by National Development Bank for the long-term project-specified credit of RMB6 billion. (3) To enhance the market and sales force, increase the retrieving of trading funds along with the increasing of sales income, to speed up capital circulation and efficiently apply the Company’s operational capital. (4) To satisfy the requirement of the subsidiaries’ business operation, against the good relationship with the banks, the Company has applied to the banks for the integrated credit of RMB16 billion. (5) Issuing of short-term bonds will be carried forward to the banks to fully apply the low-cost financing resources, to further improve the Company’s capital structure and support the operational capital. 5. Risk facts that may possibly impact the Company’s future development and the countermeasures (1) Risk brought by alternation of national policies: As stated by “Outline of the 11th five-year-plan”, “Adjust the raw material structure of paper-making industry, reduce the consuming of water resources and output of pollutions, eliminate out-of-date straw pulp production lines, and implement integration of forestry and paper-making industry”. Focusing on this requirement, National Development & Reforming Commission has produced “Paper-making Industry Development Policies” (draft). Business scale and environment protection has became the important indices of the development of the industry. It will by certain means influence the operation and growth of the Company. Regarding the above policies, as the leader of the country’s paper-making industry, the Company will fully adopt the governmental support available at present, accelerate the investment in the new construction projects. The pulp project of Zhanjiang (including 700 KT wood pulp line and 3 million MU forest) is the key project to lead the Company toward integration of forestry, pulp making, and paper-making industry. This will also made the Company one of the leading player of the global market. Facing the risks brought by higher requirement regarding environment protection, the Company reproduced its enterprise goals with great importance attached to energy saving and clean production. Through technical reconstruction of old facilities and construction of new environment protection projects, the pollution output will be reduced, the output standard will be upgraded, water recycling rate will be increased, and using of underground water will be reduced. Environmental indices will be introduced in annual assessment mechanism. The annual target paper will be fully implemented. Clean production will be fully promoted to ensure the disposal of residues will satisfy the national standard. (2) Price vibration risks: For the recent years, wood pulp and waste paper – the main raw materials of the Company, was consistently rising in prices. This has been greatly influencing the Company’s production cost, especially the high-end products, in which wood pulp is taking a greater portion. Whereas because of the rapid increasing of the industry’s overall productivity, the market competition is becoming even more severe. A lot of paper products’ prices are not increasing correspondingly to the increasing of raw materials. Thus the price vibration of raw materials could make influence on the Company’s business performance. In a certain period of time, along with the globally increasing of pulp supply, slowing down of development of the entire industry, and speeding up of industrial integration, the increasing trend of raw materials will be slowed down, while the increasing of paper products will become more and more obvious. Therefore we regard the forestry & paper-making integration approach as the key of the key projects. It will enable the Company to overtake the control of upriver resources, especially forestry resources, and gain better control over the production costs. It will also improve the Company’s production structure, accelerate the developing of new products, and enforce the competition ability in the market. (3) Exchange rate risks: Since July 2005, Renminbi has been rising constantly to US dollar. This has been influencing the Company’s export business. For the Company’s import volume is much higher than the export, rising of Renminbi has been bringing exchange gains to the Company however. Practically the foreign currencies received from export business are used to pay for the import business, thus the losses from currency exchange are avoid. 14 Shandong Chenming Paper Holdings Ltd. Summary of Annual Report 2006 6.1.1 How implementing of the new accounting standard may influence the accounting policies, accounting estimations, financial position, and business operation of the Company √ applicable □ not applicable (1) Long-term share equity investment: the new standard requires the parent company to do daily accounting of investment in controlled subsidiaries on cost basis, while adopt equity basis in producing of consolidated financial statements. By this way, the financial position and business performance are more frankly reflected by the financial statements. Meanwhile the new standard requires accounting of equity investment under sole control or common control to be on equity basis. Affiliates of the Company adopting this basis are Arjowiggins Special Paper Co., Ltd. and Shouguang Liben Paper Making Co., Ltd. (2) Financial instruments: Under current accounting standard, the convertible bonds issued by the Company are recognized as liabilities at the total of actual issuing price. Whereas according to the new standard, the non-extension financial instruments occurred shall be recognized separated as liabilities and equities. The Company adopts the new standard in accounting of these financial instruments since the day when the new standard takes effect. (3) Intangible assets: the new standard requires the accounting of newly obtained lands to be according to the criteria of intangible assets. Since the day when the new standard takes effect, the Company amortizes the newly obtained land using rights as intangible assets, and no longer carried into the properties and houses as fixed assets. (4) Governmental subsidies: according to the new standard, the subsidies received from the government shall be recognized as deferred gains or current gain/loss account directly. The Company will adopt the new standard in accounting of governmental subsidies since the day when the new standard takes effect. (5) Income tax: under the current accounting standard, the Company adopts tax payable basis in accounting of enterprise income tax. Whereas under the new accounting standard, the Company shall calculate the income tax by means of liability basis upon the balance sheet. For the countervail provisional differences, or taxable provisional differences between the asset book value and taxable asset, or between liability book value and taxable liability, the Company adopts the new standards in accounting of deferred income tax asset and deferred income tax liabilities. 6.2 Principal businesses distribution on industries/products In RMB 10 thousand Yuan Distribution on industries Decrease/ Increase/decreas Change of major increase of major Major business Major business Major business e of major On industry or product business cost business profit income cost profit ratio (%) business over last year over previous turnover (%) year Machine-made paper 1,078,035.82 875,039.08 18.83% 17.54% 19.40% -1.83% Power supply 5,988.34 3,028.76 49.42% 16.91% -41.61% 35.63% Construction materials 81,765.13 67,441.87 17.52% 33.40% 30.29% 3.86% Chemical products for 7,522.29 5,716.95 24.00% -118.98% -123.06% 1.42% paper making Paper machines 8,077.96 6,822.47 15.54% 9.22% 12.11% -2.69% Others 19.70 7.46 62.13% -5.37% -392.15% 139.09% Total 1,181,409.24 958,056.59 18.91% 17.71% 19.07% -1.34% Distribution on products Lightweight coated paper 179,861.02 148,522.46 17.42% 83.15% 84.67% -0.69% Duplex press paper 167,505.08 134,145.84 19.92% 30.37% 33.84% -2.07% Writing paper 36,694.18 27,695.88 24.52% -9.22% -9.22% 0.00% Art paper 188,795.69 147,806.82 21.71% -21.85% -22.11% 0.26% News press paper 100,367.21 80,907.83 19.39% 15.36% 25.86% -6.72% Paperboard 77,568.90 65,159.97 16.00% -0.62% -2.98% 2.04% White paper board 199,075.15 165,102.07 17.07% 64.66% 58.87% 3.02% 15 Shandong Chenming Paper Holdings Ltd. Summary of Annual Report 2006 6.3 Major businesses distribution on regions In RMB 10 thousand Yuan Increase/decrease of major business Regions Major business income turnover (%) East 364,078.21 33.99% North 156,677.62 -5.88% South 169,540.98 31.70% Mid-south 73,246.67 5.11% North-east 51,479.45 -6.10% South-west 40,764.54 6.58% North-west 22,032.50 18.86% Hong Kong 44,417.19 74.29% US 33,619.56 35.33% Japan 39,037.99 268.15% Overseas 75,163.85 68.63% Total 1,078,035.82 21.27% 6.4 Using of proceeds from financing actions √ applicable □ not applicable In RMB 10 thousand Yuan Total of fund raised and 0.00 Total of proceeds 195,622.00 utilized Accumulated fund used 175,465.00 Planned Changed or Practical Gains Schedule Profit prediction Committed projects investment not investment generated fulfilled or not fulfilled? 300Kt coated white board 83,760.00 No 83,760.00 5,306 Yes Yes Pollution treatment and recycling 17,300.00 No 7,800.00 537 Yes Yes IT and modern logistics system 17,800.00 No 1,361.00 - Yes Yes 200Kt low-ration coated paper of Jiangxi 51,699.00 No 51,699.00 4,986 Yes Yes Chenming 150T/D chemical-mechanical pulp 8,708.00 No 8,708.00 1354 Yes Yes Supplementary current capital 25,000.00 No 22,137.00 - Yes Yes Total 204,267.00 - 175,465.00 - - - Statement for overdue (in detailed projects) Statement for reason of changing and procedure (in detailed projects) Changing of projects □applicable √ not applicable 6.5 Using of fund from other sources √ applicable □ not applicable In RMB 10 thousand Yuan Amount of the Projects Progress of the project Turnover of the project project Main body has been finished, the 300KT Super Clender Paper Project RMB305.30 million of profit per 392,600.00 supplementary projects are under and supplementary projects annual is expected processing Total 392,600.00 - - 16 Shandong Chenming Paper Holdings Ltd. Summary of Annual Report 2006 6.6 Statement on the none-standard opinion issued by the CPA □applicable √ not applicable 6.7 Profit distribution or capitalizing of common reserves adopted by the Board of Directors √ applicable □ not applicable 1. As audited by Deloitte Touche Tohmatsu CPA Ltd., the net profit of the Company for year 2006 was RMB602,967,195.37 As stipulated by the Articles ofAssociation, after providing of statutory common reserves of RMB61,659,896.66 at 10%, the distributable profit of year 2006 would be RMB541,307,298.71. Plus the attributable profit of RMB1,671,365,444.72 at the beginning of year, less the dividend of RMB163,880,245.56 distributed for year 2005, the profit attributable to the shareholders was RMB2,048,792,497.87. 2. Dividend distribution plan for year 2006 Upon the total capital share of 1,365,670,155 shares at the end of 2006, RMB1.20 of cash dividend will be distributed to each 10 shares of the entire shareholders (tax included). Totally RMB163,880,418.60 will be distributed as cash dividend (tax included). The dividend will be distributed upon the substantial capital shares at the registration day. For the Company is in the convertible period of the bonds, the total capital shares can be increased, though the Company will still distribute the dividend at RMB1.20 upon each 10 shares (tax included). Therefore the practical dividend may possibly exceeds RMB163,880,418.60 No cash dividend proposal was raised though the Company is making profit for the report term. □applicable √ not applicable §7 Significant Events 7.1 Acquisition and disposal of assets √ applicable □ not applicable 1. The 15th meeting of the 4th term of Board passed the proposal of purchasing 39% of the share equity of Shanghai Chenming Paper-making Machinery Co., Ltd. and selling the whole company. This event has been accomplished during the report term. Since then the Company is no longer holding the equities of Shanghai Chenming Paper-making Machinery Co., Ltd. For details of this please see June 6th 2006, September 12th 2006, January 19th 2007 issues of China Securities Journal and Hong Kong Commercial Daily. 2. The 15th meeting of the 4th term of Board passed the proposal on increasing the shareholding in Zhanjiang Chenming Forestry Development Co., Ltd. and Yangjiang Chenming Forestry Development Co., Ltd. The share transferring has been accomplished in the report term. Zhanjiang Chenming Forestry Development Co., Ltd. and Yangjiang Chenming Forestry Development Co., Ltd. have became the fully-owned subsidiaries of the Company. For details please see June 6th 2006 issues of China Securities Journal and Hong Kong Commercial Daily. 3. According to the proposal about selling of the share equities held in Beijing Tianbao Jialin Tech Development Co., Ltd. adopted by the 16th meeting of the 4th term of Board, the transaction was accomplished. For details please see July 29th 2006 and October 10th 2006 issues of China Securities Journal and Hong Kong Commercial Daily. 4. The 16th meeting of the 4th term of Board passed the proposal on increasing the shareholding in Jilin Chenming Paper Co., Ltd. The share transferring and registration process has been accomplished by the Board in the report term. Jilin Chenming has became the fully-owned subsidiaries of the Company. For details please see June 6th 2006 issues of China Securities Journal and Hong Kong Commercial Daily. 5. The 17th meeting of the 4th term of Board passed the proposal on purchasing of Jiangxi Chenming Paper Co., Ltd. held by Jiangxi Paper Holdings Co., Ltd. In the report term, the Share Equity Transferring Agreement was engaged with Jiangxi Paper Holdings Co., Ltd. According to the agreement, the 3.846% part of shares of Jiangxi Chenming Paper Co., Ltd. held by Jiangxi Paper Holdings Co., Ltd. will be transferred to the Company at price of RMB26 million. After the transaction, the Company would hold 51% of the shares of Jiangxi Chenming. For details please see September 19th 2006 issues of China Securities Journal and Hong Kong Commercial Daily. On March 5th 2007, this issue was approved by Jiangxi Foreign Trade and Cooperation Dept. Currently the registration changing procedures are under process. In RMB 10 thousand Yuan Net profit Debt & contributed since Related Completely The other party Date of Pricing credit Assets Price the day of trade transaction transferred or of trade purchase policies transferred till the end of or not not or not report term 17 Shandong Chenming Paper Holdings Ltd. Summary of Annual Report 2006 Shenzhen 30% of the Kaihua Tech equities of Jilin 2006-08-04 1,485.00 -588.91 No On negotiation Yes Yes Development Chenming Co., Ltd. 3.846% of the Open bidding Jiangxi Paper equities of through Holdings Co., Jiangxi 2007-03-05 2,600.00 0.00 No Yes Yes property Ltd. Chenming trading center Paper Co., Ltd. Impact of the issues said above on the continuity and stability of the management Purchasing and disposal of assets are not influencing the consistency of the Company’s business, neither the stability of the executive team. 7.2 Significant Guarantees √ applicable □ not applicable In RMB 10 thousand Yuan External Guarantee (Exclude controlled subsidiaries) Amount Type of Completed or Related party Guarantee provided to Date of contract Term guaranteed guarantee not or not Total occurred in the report term 0.00 Total of balance of guarantees at the end of report term (A) 0.00 Guarantee provided to controlled subsidiaries Total of guarantee provide to controlled subsidiaries in the 86,615.00 report term Total of balances of guarantees to the controlled subsidiaries at 106,644.67 the end of report term (B) Total of guarantee (including controlled subsidiaries) Total of guarantees (A+B) 106,644.67 Proportion of the total guarantee in the net asset of the 17.74% Company Including: Guarantees provided to the shareholders, substantial controllers 0.00 and the related parties (C) Guarantees provided to objects with over 70% in 34,012.68 liability/capital rate, directly or indirectly (D) Amount of guarantee over 50% of the net asset (E) 0.00 Total of the above 3 * (C+D+E) 34,012.68 * Note: In case of a particular guarantee is fitting with all of the above 3 conditions, it shall only be calculated once. 7.4 Significant Related Transactions 7.4.1 Related transactions regarding normal operation □applicable √ not applicable 7.4.2 Related credit and debt transaction √ applicable □ not applicable In RMB 10 thousand Yuan Provide money to the related parties Accept money from the related parties Related parties Amount occurred Balance Amount occurred Balance 18 Shandong Chenming Paper Holdings Ltd. Summary of Annual Report 2006 Shouguang Liben Paper Ltd. 1,046.63 133.73 0.00 0.00 Qingzhou Chenming Transformed 0.00 0.00 1,785.56 236.14 Amylum Ltd. Total 1,046.63 133.73 1,785.56 236.14 Including: The Company provided RMB0.00 to the controlling shareholder and its subsidiaries in the report term, therefore the balance was RMB0.00. 7.4.3 Clearing of adopted capital at the end of 2005 □applicable √ not applicable Newly occurred capital adoption □applicable √ not applicable As of the end of 2006, if the clearing of adopted non-operational capital has not been accomplished, please provide the measurements used to push it forward. □applicable √ not applicable 7.5 Financing proxy □applicable √ not applicable 7.6 Fulfilling of consent issues 7.6.1 Consent issues made by original non-negotiable-share holders in the process of share reconstruction, and their execution √ applicable □ not applicable Name of the Fulfilling of Commitments Notes shareholder commitments 1. According to the financial statements of 2005-2007 (standard auditing report without qualified opinion), in case the integrated increment of net profit during 2005-2007 is lower than 20% (namely the cube root of the multiplied increasing ratios over the previous year during 2005-2007 is lower than 20%), the equal supplementary share equity registration date shall be confirmed within 5 working days after the Annual Report 2007 is published (The 10th day after the Annual Report 2007 is published.) and announcement on the supplementary of share equity. The supplementary share equity shall be implemented on consideration price at the day next to the registration day. Shouguang State-owned Asset Bureau shall transfer the shares at ratio of 5% of the total A shares upon the closing of market at the registration date to the holder of shares without subscription limitation. (In Shouguang case of the share capital is changed due to distribution of bonus shares or capitalizing of Properly Chenming Share common reserves during the registration date of this plan and the supplementary None fulfilled Holding Co., Ltd. registration date, the amount of supplementary shares shall be adjusted correspondingly.) 2 Shouguang Chenming Share Holding Co., Ltd. shall not put the shares in market in 48 months from the launching of share relocation plan 3. Whenever the share equity relocation scheme was approved, Shouguang Chenming Share Holding Co., Ltd. shall propose dividend plan in the Shareholders’ General Meetings of 2005, 2006, and 2007. The proposed dividend distribution shall not lower than 30% of the distributable profit realized in the current year (namely the balance of net profit realized in the current year which has deducted the common reserves and statutory public welfares), and promises to vote affirmative on the proposal in the Shareholders’ General Meeting. 7.6.2 Particulars about the unconditional shares held by original non-negotiable-share holders holding over 5% of the total shares □applicable √ not applicable 19 Shandong Chenming Paper Holdings Ltd. Summary of Annual Report 2006 7.7 Material Lawsuits/Arbitrations □applicable √ not applicable §8 Report of the Supervisory Committee √ applicable □ not applicable In the report term, the Supervisory Committee was exercising its duty with respecting of the shareholders’ benefit. The committee presented the Board meetings and performed inspection on the legality of the financial activities and performing of duties of the directors, managers and other senior managements. I. The committee convened four meetings in the report term 1. The 4th meeting of the 4th term of Supervisory Committee was held on April 19th 2006. The Annual Report 2005 and the summary, the Supervisory Committee’s Annual Report, and the proposal about replacing of particular supervisor were examined on the meeting. The resolutions were published on April 21st 2005 issues of China Securities Times and Hong Kong Commercial Daily. 2. The 5th meeting of the 4th term of Supervisory Committee was held on July 27th 2006, The Semi-Annual Report 2006 was examined on the meeting. 3. The 6th meeting of the 4th term of Supervisory Committee was held on October 10th 2006. Proposals regarding the Share Equity Motivation Program was examined on the meeting. The resolutions were published on October 11th 2006 by China Securities Journal and Hong Kong Commercial Daily. 4. The 7th meeting of the 4th term of Supervisory Committee was held on October 26th 2006, The 3rd Quarterly Report 2006 and summary was examined on the meeting. II. Independent statement of the Supervisory Committee 1. The decision-making procedures of the company are valid. The internal controlling system is mature and properly operated. No behaviors of the directors, senior executives that violate the laws or the Article of Association or harming the benefit of the company were found. 2. The committee undertook inspections on the financial status of the company. The committee deems that the auditors’ reports issued by Deloitte Touche Tohmatsu CPA Ltd. is reflecting the financial status and business results of the company frankly, objectively, and justly. 3. In the report term, the proceeds from placing of the RMB2 billion of convertible bonds were used in accordance with the descriptions of the Placing Prospectus. No investment has been made to projects other than that of set by the prospectus. 4. Capital purchased in the report term was at reasonable prices, and harmed no benefits of the shareholders or cause losses in the Company’s capital. 5. Related transactions occurred during the report term was on a fair and reasonable base, harmed no benefit of the company. 20 Shandong Chenming Paper Holdings Ltd. Summary of Annual Report 2006 §9 Financial Report 9.1 Auditor’s Opinion Standard without classified opinion 9.2 Financial Statements 9.2.1 Balance Sheet Prepared by: Shandong Chenming Paper Holdings Co., Ltd. Ended December 31st 2006 RMB Yuan At the end of term At 1 January Items Consolidated Parent company Consolidated Parent company Current asset: Monetary fund 826,269,791.68 431,939,246.80 1,006,358,691.91 582,318,662.70 Short-term investment 0.00 0.00 0.00 0.00 Notes receivable 939,705,242.42 530,093,631.70 510,125,716.95 236,676,178.17 Dividend receivable 0.00 11,192,644.92 0.00 30,546,681.86 Interest receivable 0.00 0.00 0.00 0.00 Account receivable 1,720,291,295.31 1,507,460,934.43 1,424,647,094.65 1,283,251,626.85 Other account receivable 141,528,858.87 1,188,275,196.61 218,849,821.70 1,737,150,199.61 Advance account 492,579,662.89 238,777,329.46 326,071,657.87 121,951,785.04 Allowance receivable 0.00 0.00 0.00 0.00 Inventories 1,860,698,636.34 767,688,945.32 2,174,779,264.45 859,436,722.72 Expense to be amortized 6,519,470.91 2,217,031.72 7,467,121.16 4,032,949.52 Long-term credit invest expire in 1 year 0.00 0.00 0.00 0.00 Other current asset 0.00 0.00 0.00 0.00 Total of current asset 5,987,592,958.42 4,677,644,960.96 5,668,299,368.69 4,855,364,806.47 Long-term investment: Long-term share equity investment 88,903,007.40 2,787,924,932.45 5,843,440.51 2,323,148,570.07 Long-term credit investment 0.00 1,934,000,000.00 142,210.00 142,210.00 Total of long-term investment 88,903,007.40 4,721,924,932.45 5,985,650.51 2,323,290,780.07 Consolidated price difference 0.00 0.00 0.00 0.00 Fixed asset: Original value of fixed assets 13,326,258,848.01 6,012,685,003.74 13,141,351,140.78 5,821,014,491.53 Less: Accumulated depreciation 3,265,382,229.44 1,919,980,506.35 2,402,359,372.90 1,454,284,100.09 Net fixed assets 10,060,876,618.57 4,092,704,497.39 10,738,991,767.88 4,366,730,391.44 Less: Fixed asset impairment provision 8,074,288.89 0.00 0.00 0.00 Net fixed asset 10,052,802,329.68 4,092,704,497.39 10,738,991,767.88 4,366,730,391.44 Engineering material 22,009,470.38 8,821,504.25 48,510,535.99 2,843,904.62 Construction in progress 4,134,036,858.09 3,033,912,461.12 1,232,223,678.56 810,907,262.79 Fixed asset disposal-{}- 0.00 0.00 0.00 0.00 Total of fixed assets 14,208,848,658.15 7,135,438,462.76 12,019,725,982.43 5,180,481,558.85 Intangible and others: Intangible assets 230,184,993.12 67,097,887.79 238,655,438.66 71,373,383.85 Long-term expenses to be amortized 32,461,332.30 0.00 36,747,667.48 0.00 Other long-term assets 0.00 0.00 0.00 0.00 Total of intangible and other assets 262,646,325.42 67,097,887.79 275,403,106.14 71,373,383.85 Deferred tax: Deferred tax debit 0.00 0.00 0.00 0.00 Total of assets 20,547,990,949.39 16,602,106,243.96 17,969,414,107.77 12,430,510,529.24 21 Shandong Chenming Paper Holdings Ltd. Summary of Annual Report 2006 Current liabilities Short-term loans 1,299,830,153.46 883,743,888.55 4,463,141,400.00 2,848,935,900.00 Notes payable 47,201,892.31 0.00 117,589,277.53 62,986,900.04 Account payable 1,511,968,573.51 1,385,033,481.89 1,550,657,327.12 1,049,274,128.55 Account received in advance 193,388,136.60 147,372,278.27 192,725,604.27 247,249,769.68 Prepaid wages 21,462,771.50 0.00 10,580,204.14 0.00 Welfare payable 13,173,207.02 0.00 13,294,619.65 0.00 Dividend payable 699,815.30 699,815.30 419,113.13 419,113.13 Tax payable 75,369,185.08 25,901,541.84 31,133,610.71 -46,095,743.29 Other accounts to be delivered 907,604.10 0.00 915,435.72 389.14 Other account payable 399,646,120.70 372,111,813.24 312,888,158.27 115,752,502.91 Reserved expenses 28,968,680.78 8,192,492.66 20,033,329.41 4,155,541.89 Expected liabilities 0.00 0.00 0.00 0.00 Long-term liability expire in 1 year 249,100,117.61 201,540,000.00 268,006,748.19 124,161,400.00 Other current liability 2,026,019,444.42 2,026,019,444.42 0.00 0.00 Total of current liability 5,867,735,702.39 5,050,614,756.17 6,981,384,828.14 4,406,839,902.05 Long-term liabilities Long-term borrowings 5,035,160,067.69 3,713,779,535.94 1,831,097,639.85 573,373,035.94 Bond payable 1,889,788,636.25 1,889,788,636.25 1,966,230,711.66 1,966,230,711.66 Long-term payable 0.00 0.00 0.00 0.00 Special payable 5,690,000.00 1,000,000.00 320,000.00 0.00 Other long-term liability 0.00 0.00 0.00 0.00 Total of long-term liability 6,930,638,703.94 5,604,568,172.19 3,797,648,351.51 2,539,603,747.60 Deferred tax: Deferred tax credit 0.00 0.00 0.00 0.00 Total of liability 12,798,374,406.33 10,655,182,928.36 10,779,033,179.65 6,946,443,649.65 Minor shareholders’ equity 1,739,491,572.97 0.00 1,724,775,485.03 0.00 Owners’ equity (or shareholders’ equity) Practical capital collected (or share capital) 1,365,670,155.00 1,365,670,155.00 1,353,539,920.00 1,353,539,920.00 Less: returned investment 0.00 0.00 0.00 0.00 Practical capital (or share capital), net 1,365,670,155.00 1,365,670,155.00 1,353,539,920.00 1,353,539,920.00 Capital reserves 1,917,835,010.34 2,065,990,870.66 1,824,530,228.15 2,067,983,390.70 Surplus reserves 677,829,746.88 665,640,164.97 616,169,850.22 603,980,268.31 Incl. Statutory public welfare 0.00 0.00 282,364,065.83 251,607,673.84 Attributable profit 2,048,792,497.87 1,849,622,124.97 1,671,365,444.72 1,458,563,300.58 Incl. Cash dividend 163,880,418.60 163,880,418.60 162,424,790.40 162,424,790.40 Investment loss not recognized yet 0.00 0.00 0.00 0.00 Different of foreign currency translation -2,440.00 0.00 0.00 0.00 Total of owners’ equity (or shareholders’ equity) 6,010,124,970.09 5,946,923,315.60 5,465,605,443.09 5,484,066,879.59 Total of liabilities and owners’ equity (or shareholders’ 20,547,990,949.39 16,602,106,243.96 17,969,414,107.77 12,430,510,529.24 equity) 22 Shandong Chenming Paper Holdings Ltd. Summary of Annual Report 2006 9.2.2 Income Statements Prepared by: Shandong Chenming Paper Holdings Co., Ltd. Jan-Dec, 2006 RMB Yuan Current term Same period last year Items Consolidated Parent company Consolidated Parent company I. Major business turnover 11,814,092,426.36 9,755,695,672.02 9,722,346,097.72 8,557,397,818.91 Less: Major business cost 9,580,565,820.78 8,697,878,455.05 7,753,621,043.16 7,505,103,857.51 Major business tax and surtax 19,527,738.30 2,915,266.62 23,233,923.04 8,204,254.01 II. Major business profit (“-“ for loss) 2,213,998,867.28 1,054,901,950.35 1,945,491,131.52 1,044,089,707.39 Plus: Other business profit (“-“ for loss) 37,882,454.26 16,151,373.82 22,557,209.35 10,819,080.58 Less: Business expenses 678,174,266.91 349,623,630.37 536,608,445.64 298,180,199.73 Administrative expense 544,880,856.14 178,353,659.15 495,438,620.50 254,667,918.58 Financial expenses 378,371,080.33 218,240,459.25 193,176,724.68 93,605,744.80 III. Operational profit (“-“ for loss) 650,455,118.16 324,835,575.40 742,824,550.05 408,454,924.86 Plus: Investment gains (“-“ for loss) 83,549,433.21 316,527,055.27 5,134,984.68 118,708,899.51 Allowance income 153,088,284.18 56,102,000.00 139,475,516.38 45,673,194.81 Non-business income 22,491,040.89 2,664,498.31 7,317,986.15 1,811,901.90 Less: Non-business expenses 18,314,616.93 5,299,572.23 31,343,824.34 10,577,664.30 IV. Gross profit (“-“ for loss) 891,269,259.51 694,829,556.75 863,409,212.92 564,071,256.78 Less: Income tax 143,780,522.98 78,230,590.14 201,563,005.15 84,863,385.95 Minor shareholders’ equity 144,521,541.16 0.00 59,412,865.53 0.00 Plus: Investment loss occurred this term but not recognized 0.00 0.00 0.00 0.00 V. Net profit (“-“ for loss) 602,967,195.37 616,598,966.61 602,433,342.24 479,207,870.83 Plus: Retained profit at the beginning of term 1,671,365,444.72 1,458,563,300.58 1,434,092,349.94 1,344,515,677.21 Other transferred in 0.00 0.00 0.00 0.00 VI. Distributable profit 2,274,332,640.09 2,075,162,267.19 2,036,525,692.18 1,823,723,548.04 Less: Statutory surplus reserves 61,659,896.66 61,659,896.66 47,920,787.08 47,920,787.08 Drawing of statutory public welfare 0.00 0.00 47,920,787.08 47,920,787.08 Employee award and welfare fund 0.00 0.00 0.00 0.00 Reserves 0.00 0.00 0.00 0.00 Enterprise development fund 0.00 0.00 0.00 0.00 Profit returned to investment 0.00 0.00 0.00 0.00 VII. Distributable profit 2,212,672,743.43 2,013,502,370.53 1,940,684,118.02 1,727,881,973.88 Less: Preference share dividend payable 0.00 0.00 0.00 0.00 Optional surplus reserves 0.00 0.00 0.00 0.00 Common share dividend payable 163,880,245.56 163,880,245.56 89,772,891.30 89,772,891.30 Common share dividend transferred to capital (or share 0.00 0.00 179,545,782.00 179,545,782.00 capital) VIII. Undistributed profit 2,048,792,497.87 1,849,622,124.97 1,671,365,444.72 1,458,563,300.58 Income statement (Appendix) 1. Income from selling and disposal of department or 80,268,170.26 80,278,170.26 0.00 0.00 invested entities 2. Loss from nature disasters 0.00 0.00 0.00 0.00 3. Increasing (or decreasing) of gross profit by changing of 0.00 0.00 0.00 0.00 accounting policies 4. Increasing (or decreasing) of gross profit by changing of 0.00 0.00 0.00 0.00 accounting estimation 5. Loss from debt reconstruction 754,818.32 734,659.03 454,797.58 454,797.58 6. Others 0.00 0.00 0.00 0.00 23 Shandong Chenming Paper Holdings Ltd. Summary of Annual Report 2006 9.2.3 Cash Flow Statement Prepared by: Shandong Chenming Paper Holdings Co., Ltd. Jan-Dec, 2006 RMB Yuan Current term Items Consolidated Parent company I. Net cash flow from business operation Cash received from sales of products or services 10,769,181,718.98 7,739,197,098.18 Tax returned 10,902,714.70 0.00 Other cash inflow related to operation 190,595,684.89 895,513,753.64 Sub-total of cash inflow from business activities 10,970,680,118.57 8,634,710,851.82 Cash paid for purchasing of merchandise and services 8,003,818,969.28 6,333,971,738.70 Cash paid to staffs or paid for staffs 412,570,576.56 155,608,913.68 Taxes paid 836,855,006.21 316,469,932.96 Other cash paid related to operation 708,877,389.68 635,528,747.98 Sub-total of cash outflow from business activities 9,962,121,941.73 7,441,579,333.32 Cash flow generated by business operation, net 1,008,558,176.84 1,193,131,518.50 II. Cash flow generated by investing Cash received from returning of investment 136,880,491.49 168,742,730.70 Cash received as investment profit 555,074.17 136,054,534.00 Net cash received from disposal of fixed assets, intangible assets and other long-term assets 6,748,567.10 998,906.35 Other cash received related to investment 5,610,000.00 1,000,000.00 Sub-total of cash inflow due to investment activities 149,794,132.76 306,796,171.05 Cash paid to acquire fixed assets, intangible assets and other long-term assets 2,814,159,750.79 1,981,383,117.12 Cash paid for investment 133,842,195.20 2,517,353,310.00 Other cash paid related to investment 0.00 0.00 Sub-total of cash outflow due to investment activities 2,948,001,945.99 4,498,736,427.12 Net cash flow generated by investment -2,798,207,813.23 -4,191,940,256.07 III. Cash flow generated by financing Proceeds from investments 25,500,000.00 0.00 Cash received from loans 9,631,688,684.69 7,848,743,769.78 Other cash received related to financing 2,000,000,000.00 2,000,000,000.00 Subtotal of cash inflow from financing activities 11,657,188,684.69 9,848,743,769.78 Cash paid for recovering of debt 9,278,895,054.00 6,545,880,803.36 Cash paid for dividend, profit or interest 675,860,480.85 408,771,000.37 Other cash paid related to financing 41,949,396.50 0.00 Subtotal of cash outflow due to financing activities 9,996,704,931.35 6,954,651,803.73 Net cash flow generated by financing 1,660,483,753.34 2,894,091,966.05 IV. Influence of exchange rate movement 16,333,899.38 3,137,355.62 V. Net increase of cash and cash equivalents -112,831,983.67 -101,579,415.90 24 Shandong Chenming Paper Holdings Ltd. Summary of Annual Report 2006 Appendix of Cash Flow Statement 1. Net profit adjusted to cash flow of business operation Net profit 602,967,195.37 616,598,966.61 Plus: Asset impairment provision drawn 35,234,471.95 -30,599,925.59 Depreciation of fixed assets 958,231,034.31 535,951,437.65 Amortizing of intangible assets 8,490,215.54 4,275,496.06 Amortizing of long-term expenses 6,961,561.55 0.00 Decrease of expenses to be amortized (Less: increase) 947,650.25 1,815,917.80 Increase of reserved expenses (Less: decrease) 7,427,110.17 -375,860.39 Cash lost from treatment of fixed assets, intangible assets and other long-term assets (less: 4,903,964.15 2,876,766.67 gains) Loss of disposing fixed assets 0.00 0.00 Financial expenses 444,244,528.54 278,996,651.60 Investment loss (less: gains) -83,549,433.21 -316,527,055.27 Credit of deferred tax (less: debit) 0.00 0.00 Decreasing of inventories (less: increasing) 150,953,631.94 91,747,777.40 Decrease (less: increase) in operating receivables -669,960,692.92 -74,875,393.52 Increase (less: decrease) in operating payables -602,814,601.96 83,246,739.48 Others 0.00 0.00 Minor shareholders’ equity 144,521,541.16 0.00 Cash flow generated by business operation, net 1,008,558,176.84 1,193,131,518.50 2. Investment and financing activities not involving with cash Liabilities converted to capital 79,937,769.90 79,937,769.90 Convertible bond expire in 1 year 0.00 0.00 Fixed assets leased through financing 0.00 0.00 3. Net increasing of cash and cash equivalents Balance of cash at period end 784,320,395.18 431,939,246.80 Less: Initial balance of cash 897,152,378.85 533,518,662.70 Plus: Balance at the end of term of cash and equivalents 0.00 0.00 Less: Balance at the beginning of term, cash and equivalents 0.00 0.00 Net increasing of cash and cash equivalents -112,831,983.67 -101,579,415.90 9.3 Explanation on changes of accounting policies, accounting estimation, and accounting method □applicable √ not applicable 9.4 Content, amount, reason and impact of major accounting errors □applicable √ not applicable 9.5 Explanation on changes of consolidation range comparing with the previous annual report √ applicable □ not applicable Subsidiaries that are changed in the consolidation range: Zhanjiang Chenming Paper Pulp Co., Ltd. On January 23rd 2006, the Company invested to establish Zhanjiang Chenming Pulp & Paper Co., Ltd. together with Zhanjiang Chenming Forestry Development Co., Ltd. The newly established company was registered with capital of RMB20 million. The Company invested RMB19.80 million and take 99% of the share equity; and Zhanjiang Chenming Forestry Development Co., invested RMB200 thousand to take 1% of the share equity. Chenming (HK) Co., Ltd. According to Wai-Jing-Mao-He-Han[2002]629 – “Response to the application of establishing Chenming (HK) Co., Ltd.” issued by the Ministry of International Trade & Cooperation, Chenming (HK) Co., Ltd. was incorporated in Hong Kong on November 13th 2006, with registered capital of USD100 thousand. The Company is holding 100% of the share equities of the new company. Subsidiaries disposed in the year: Shanghai Chenming Paper-making Machine Ltd. Shanghai Chenming Paper-making Machine Ltd. has been sold out on August 31st 2006 (“the day of sell”). Therefore it was not included in the consolidated balance sheet with was ended on December 31st 2006. However the business performance and cash flow were reflected in the consolidated income statement and cash flow statement of year 2006. 25 Shandong Chenming Paper Holdings Ltd. Summary of Annual Report 2006 Beijing Tianbao Jialin Technologies Development Co., Ltd. Beijing Tianbao Jialin Technologies Developoment Co., Ltd. has been sold out on September 28th 2006 (“the day of sell”). Therefore it was not included in the consolidated balance sheet with was ended on December 31st 2006. However the business performance and cash flow were reflected in the consolidated income statement and cash flow statement of year 2006. Shouguang Xinyuan Coal Ltd. Shouguang Xiyuan Coal Ltd. was sold out by Shandong Chenming Powerplant Co., Ltd. and Shouguang Chenming Cement Co., Ltd., which are the subsidiaries of the Company, on April 8, 2006 (“the day of sell”). Therefore it was not included in the consolidated balance sheet with was ended on December 31st 2006. However the business performance and cash flow were reflected in the consolidated income statement and cash flow statement of year 2006. 9.6 Adjustment form of discrepancies in shareholders’ equity according to the new Accounting Standard In RMB Yuan Projects Amount Shareholders’ equity at Dec 31st 2006 (upon current accounting standard) 6,010,124,970.09 Difference of long-term equity investment 15,926,785.43 Incl. Differences in long-term equity investment caused by merger of companies under same holding Differences in credit of other long-term equity investment calculated on equity basis 15,926,785.43 Investment properties measured by faire value Depreciations drawn for the previous years on the assets expected to be wasted Dismissal compensation recognizable as predicted debts Payment for shares Reconstruction liabilities recognizable as predicted debts Merger of companies Incl. Book value of consolidated goodwill under same holder Impairment provisions drawn upon goodwill according to the new accounting standard Financial assets booked as current gain/loss at fair value and disposable financial assets Financial liabilities booked as current gain/loss at fair value Equity increased by splitting with financial tools 62,757,976.62 Derived financial instruments 64,101,330.18 Income tax 31,024,046.03 Minor shareholders’ equity 1,739,491,572.97 Others -22,744,394.00 Shareholders’ equity at January 1st 2007 (upon new accounting standard) 7,900,682,287.32 Verification opinion of Deloitte Touche Tohmatsu To the shareholders of Shandong Chenming Paper Holdings Ltd.: We have verified the attached Consolidated Adjustment Form of discrepancies in shareholders’ equity (the Adjustment Form) prepared by Shandong Chenming Paper Holdings Ltd. (the Company) according to the new Accounting Standard. According to the description of Note 2, to prepare the Adjustment Form is the responsibility of your Company. Our responsibility is to issue a verification report upon the verification work we have done over the Adjustment Form. According to the provisions of “Circular about accounting information disclosing according to the newly released accounting standard” (Zheng-Jian-Fa (2006)136, “the Circular”), we performed verification with reference to “Chinese CPA Verification Rules, Item 2101 – Verification over financial statements”. The Rules require us to plan and execute the verification and obtain limited guarantee on if there is no major false report in the form. The verification was mainly limited to inquire related staffs of the Company about their accounting policies and all of the major recognitions, to comprehend the calculation method of the figures provided with the Form, check through the Form against the indicated basis of accounting, and perform analyze procedures when necessary. The guarantee level is lower than an audit. We were not performing auditing procedure, thus no auditing opinion was issued. According to the verification we performed, there was no such facts appear to us that the Adjustment Form was not prepared upon the basis provided by the “Note 2”. On the other hand, we hereby draw the attention of the readers of the Form, as described in the Important Statement of the Adjustment Form, the consolidated shareholders’ equity (upon new accounting standard) at January 1st 2007 may be different with those presented in the Financial Report 2007. For better understanding of the Adjustment Form, please read it along with the audited Financial Statements of the Company. Deloitte Touche Tohmatsu CPA Ltd. Accountants Certified in China Shanghai China Tong Chuanjiang Zhang Koudi 26 Shandong Chenming Paper Holdings Ltd. Summary of Annual Report 2006 27