晨鸣纸业(000488)2006年年度报告（英文版）

Annual Report 2006 Chenming Paper 山东晨鸣纸业集团股份有限公司 SHANDONG CHENMING PAPER HOLDINGS LIMITED Annual Report 2006 April 10th 2007 1 Annual Report 2006 Chenming Paper Important Statement: The Board of Directors, the Supervisory Committee, the Directors and the Supervisors of the Company guarantee that there are no significant omissions, fictitious or misleading statements carried in the Report and will accept individual and joint responsibilities for the truthfulness, accuracy and completeness of the Report. When there is any conflict in understanding between the Chinese and English version, the Chinese version prevail. Director Zhou Shaohua absented the meeting for business engagement. He entrusted Director Liu Chengzhen to vote on his behalf. 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. Table of Contents Chapter I. Company Profile ........................................................................................................................3 Chapter II. Financial Highlight ...................................................................................................................4 Chapter III. Change of Capital Shares and Shareholders............................................................................8 Chapter IV. Directors, Supervisors, Senior Executives and Employees ...................................................13 Chapter V. Management Structure............................................................................................................18 Chapter VI. Particulars about the Shareholders’ Meeting.........................................................................20 Chapter VII. Report of the Board..............................................................................................................21 Chapter VIII. Report of the Supervisory Committee ................................................................................35 Chapter IX. Significant Events .................................................................................................................36 Chapter X. Financial Report .....................................................................................................................39 Chapter XI. Documents for Reference......................................................................................................39 2 Annual Report 2006 Chenming Paper Chapter I. Company Profile 1. Statutory Chinese Name: 山东晨鸣纸业集团股份有限公司 Statutory English Name: SHANDONG CHENMING PAPER HOLDINGS LIMITED Abbreviation: SCPH 2. Legal Representative: Chen Hongguo 3. Secretary of the Board: Hao Yun Securities Affair Liaison: Fan Yingjie, Sun Wenke Address: No. 595 Shencheng Rd., Shouguang City, Shandong Province Tel: 0536－2158011、2156488 Fax: 0536－2158640 Email: chenmmingpaper@163.com 4. Registered address and office: No. 595 Shencheng Rd., Shouguang City, Shandong Province Post Code: 262700 Website:http://www.chenmingpaper.com 5. Newspapers Designated for Information Disclosing: China Securities Journal, Hong Kong Commercial Daily Website assigned by China Securities Regulatory Commission to publish the Annual Reports: http://www.cninfo.com.cn This Annual Report is available at the Capital Operation Department of the Company. 6. Stock Listed in: Shenzhen Stock Exchange Stock ID: Chenming Paper, Chenming B, Stock Code: 000488, 200488 Convertible bond: Chenming Bond, Code: 125488 7. Misc. Information Business registration updated at: December 13 2006. Registered address: No. 595 Shencheng Rd., Shouguang City, Shandong Province Business license No. : Qi-gu-lu-zong-zi No. 000003 Tax registration: No. 370783613588986 Certified Public Accountants invited by the Company: Deloitte Touche Tohmatsu CPA Ltd. Beijing Branch, 8/F office Tower W2, The Towers, Oriental Plaza, 1 East Chang An Avenue, Beijing 100738,PRC 3 Annual Report 2006 Chenming Paper Chapter II. Financial Highlight I. Major accounting data (RMB Yuan) Items Year 2006 Total profit 891,269,259.51 Net profit 602,967,195.37 Net profit deducted non-recurring gain/loss 436,232,957.51 Main business profit 2,213,998,867.28 Other business profit 37,882,454.26 Operation profit 650,455,118.16 Investment income 83,549,433.21 Allowance income 153,088,284.18 None business income / expense, net 4,176,423.96 Cash flow generated by business operation, net 1,008,558,176.84 Net decreasing of cash and cash equivalents -112,831,986.67 Note: Non-recurring gain/loss items and amount (RMB Yuan) 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 31,038.60 back 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 -24,157,014.31 gain/loss Total 166,734,237.86 4 Annual Report 2006 Chenming Paper II. Major accounting data and financial indices of the 3 years prior to the ending of the report year. Items Year 2006 Year 2005 Changed by Year 2004 Major business turnover 11,814,092,426.36 9,722,346,097.72 21.51% 7,064,613,089.05 (RMB) Net profit (RMB) 602,967,195.37 602,433,342.24 0.09% 503,721,298.14 Gross asset (RMB) 20,547,990,949.39 17,969,414,107.77 14.35% 15,850,290,151.74 Shareholders’ Equity (Minority shareholders 6,010,124,970.09 5,465,605,443.09 9.96% 4,839,068,873.63 excluded) Earnings per share (diluted) 0.4415 0.4451 -0.81% 0.5611 (RMB/share) Earnings per share (weighted) 0.4425 0.4451 -0.36% 0.5611 (RMB/share) Earnings per share (Diluted 0.3194 0.3930 -19.19% 0.5047 and less recurring gain/loss) Earnings per share (Weighted 0.3201 0.3930 -18.57% 0.5047 and less recurring gain/loss) Net asset per share 4.4009 4.0380 8.96% 5.3904 (RMB/share) Net asset per share , adjusted 4.3328 3.9597 9.42% 5.3257 (RMB/share) Net Cash flow per share generated by business 0.7385 0.7489 -1.39% 0.4525 operation Net earnings / capital ratio Decrease of 10.03 11.02 10.41 (%), diluted 0.99% Net earnings / capital ratio Decrease of 10.83 11.74 10.91 (%), Weighted 0.91% Note: For reasons of major changes in above indices compare with those of 2005 please see the explanations on major changes asset structure and expenses in Chapter VII. Report of the Board. Due to converting of convertible bonds, the capital shares of the Company has increased by 85,651,852 shares during the period from the end of the report term to March 31st 2007. The earnings per share would be RMB0.42 upon the new amount of capital shares. Net Income / Asset Ratio and Earnings per Share Upon provision 9 of the “Regulations of Information Disclosing for Listed Companies” issued by China Securities Regulatory Commission Year 2006 Net earnings / capital ratio (%) Earnings per share (yuan/share) Profit of the report period On full weighted On full weighted amortizing basis average amortizing basis average Main business profit 36.8378 39.7836 1.6212 1.6248 Operation profit 10.8227 11.6881 0.4763 0.4774 Net profit 10.0325 10.8348 0.4415 0.4425 Net profit deducted non-recurring gain/loss 7.2583 7.8387 0.3194 0.3201 5 Annual Report 2006 Chenming Paper III. Difference between the international and domestic accounting standards 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 RMB35,219,500.00. (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 Attachment: Difference between the data provided by domestic and international accounting standard Amount in RMB10 Items thousand The net profit provided by domestic CPA 60,296.72 Relative amortizing adjustment and trademark re-evaluation 146.00 The government special fund regarding purchasing of fixed assets is re-classified from capital 3521.95 reserves into differed income Carry back of value increased in fixed asset appraisal 174.93 Adjustment of credit of equity investment and relative amortizing -557.49 Gains from debt restructuring 2,459.56 Influence of L/C trades 296.69 Adjustment of convertible bond -8,948.16 Differed tax 1126.66 Others 10.66 The net profit provided by overseas CPA 58,527.49 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. 6 Annual Report 2006 Chenming Paper III. Changing of shareholders’ equity in the report term, and the causations Different Total of Statutory public of foreign Items Capital share Capital reserves Surplus reserves Attributable profit shareholders’ welfare currency equity translation At 1 January 1,353,539,920 1,824,530,228.15 333,805,784.39 282,364,065.83 1,671,365,444.72 5,465,605,443.09 Increased this term 12,130,235 93,304,782.19 344,023,962.49 602,967,195.37 1,052,426,175.05 Decreased this term 282,364,065.83 225,540,142.22 2,440.00 507,906,648.05 At the end of term 1,365,670,155 1,917,835,010.34 677,829,746.88 2,048,792,497.87 -2,440.00 6,010,124,970.09 Cause of change: 1. Change in capital shares: Increasing of shares converted from convertible bonds in the report term. 2. Change in capital reserves: capital premium caused by converting of convertible bonds in the report term and inputting of capital from disposal of Shanghai Chenming Paper-making Machinery Ltd. and Beijing Tianbao Jialin Tech Development Ltd. 3. Change in surplus reserves: providing of surplus reserves for the current year and carry over from statutory public welfare. 4. Change in public welfare: carried over to public welfare according to the Company Law. 5. Change in attributable profit: net profit realized in the current year, and providing of common reserves. 7 Annual Report 2006 Chenming Paper Chapter III. Change of Capital Shares and Shareholders I. Movement of capital shares (in Shares) Before the change Changed (+,-) After the change Shares Proportion allotted in Proportion Amount Others Sub-total Amount % share equity % 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 422,843,176 31.24 -94,269,519 -328,573,657 -422,843,176 shares National legal +328,573,657 +328,573,657 328,573,657 24.06 person shares Other domestic shares Including: Domestic legal 12,247,656 0.90 -2,730,517 -2,730,517 9,517,139 0.70 person 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 557,497,485 41.19 557,497,485 40.82 listed at home III. Total of 1,353,539,920 100.00 +12,130,235 +12,130,235 1,365,670,155 100.00 capital 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. 4. 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. 8 Annual Report 2006 Chenming Paper II. Share placing and listing 1. As approved by China Securities Regulatory Commission by Document No. [2004]147, the Company issued 20 million transferable company bond (referred to as “The Bond” at par value of RMB100, totaled to RMB2 billion. The term of the Bond is 5 years which started from September 15th 2004 to September 15th 2009. The Bond was listed in Shenzhen Stock Exchange on September 30th 2004 with ID of “Chenming Bond” and code of “125488” The share transferring period commencing March 15th 2005 to September 15th 2009, and will expire on September 15th 2009. On March 15th 2005, Chenming Convertible Bond has entered the convertible period. The initial converting rate was RMB9.99 per share. On May 20th 2005, the Company implemented the dividend distribution plan for year 2004. According to the provisions of the Placing Prospectus of Chenming Convertible Bond, and related regulations of China Securities Regulatory Commission on convertible bonds, the converting rate of the Company’s bonds has been adjusted to RMB6.59 per share. On July 7th 2006, the Company implemented the profit distribution plan of year 2005, the converting rate of Chenming Bond was adjusted to RMB6.47 per share. According to the Proposal on Lowering the Converting Rate of Chenming Bond adopted on the 17th meeting of the 4th term of Board, the convert rate of Chenming Bond was adjusted to RMB5.50 per share since September 21st 2006. As of the end of report term, there were totally RMB125,725,800 of Chenming Bond been converted into RMB common shares, accounted for 6.29% of the total amount of Chenming Bond placed. As of the end of 2006, there were still RMB1,874,274,200 of Chenming Bond in circulation of the market. And Chenming Paper (Code: 000488) had increased by 19,078,301 shares accumulatively. 2. On February 28th 2006, the shareholders’ meeting of Shandong Chenming Paper Holdings Co., Ltd. adopted “The Share Equity Relocation Plan”, and issued “Report on Implementing of Share Equity Relocation Plan” on March 27th 2006. Basing upon the share equity registration date of March 27th 2006, the holders of non-negotiable shares distributed 2.6 shares upon each 10 shares to the holders of negotiable A-shares. The equal shares the negotiable-share holders acquired were put into the market on March 29th 2006. The share relocation was accomplished thereof. 3. The Company didn’t issued any employees’ shares. 9 Annual Report 2006 Chenming Paper III. Particulars about the shareholders 1. The shareholders of the company as of end of the report term was 72,381, including 52,433 of A-share holders and 19,948 of B-share holders. 2. The Top Ten Shareholders No. Share Properties of Shares held at Conditional Frozen or Name of the shareholder portion shareholder the end of term shares pledged % Shouguang Chenming Share Holding 1 State-owned 24.06 328,573,657 328,573,657 18,653,854 Co., Ltd. BBH BOS S/A FIDELITY 2 B shares 2.52 34,429,000 0 N/A FD-CHINA FOCUS FD DBS VICKERS（HONG KONG） 3 B shares 1.52 20,817,457 0 N/A LTD A/C CLIENTS 4 PLATINUM ASIA FUND B shares 1.19 16,234,459 0 N/A SUN HUNG KAI 5 INVESTMENTSERVICES B shares 1.03 14,026,562 0 N/A LTD-CUSTOMERS A/C 6 CREDIT SUISSE HONG KONG B shares 0.83 11,343,889 0 N/A BONY-DREYFUS PIFI-DREYFUS 7 B shares 0.77 10,541,450 0 N/A PREMIER GREATER CHINA 8 FTIF TEMPLETON BRIC FUND B shares 0.76 10,448,400 0 N/A Yinfeng Securities Investment 9 Others 0.68 9,325,800 0 N/A Foundation JPMBLSA RE FTIF TEMPLETON 10 B shares 0.66 8,976,400 0 N/A CHINA FUND GTI5497 3. Top 10 holders of unconditional shares Shares held at the Share categories (A, No. Full name of shareholder end of report term B, H or others) 1 BBH BOS S/A FIDELITY FD-CHINA FOCUS FD 34,429,000 B shares 2 DBS VICKERS（HONG KONG）LTD A/C CLIENTS 20,817,457 B shares 3 PLATINUM ASIA FUND 16,234,459 B shares 4 SUN HUNG KAI INVESTMENTSERVICES LTD-CUSTOMERS A/C 14,026,562 B shares 5 CREDIT SUISSE HONG KONG 11,343,889 B shares 6 BONY-DREYFUS PIFI-DREYFUS PREMIER GREATER CHINA 10,541,450 B shares 7 FTIF TEMPLETON BRIC FUND 10,448,400 B shares 8 Yinfeng Securities Investment Foundation 9,325,800 A shares 9 JPMBLSA RE FTIF TEMPLETON CHINA FUND GTI5497 8,976,400 B shares 10 UBS WARBURG CUSTODY PTE LTD. Bank of Swiss 8,697,705 B shares Related relationship and “Action in Concert” between the top 10 shareholders and top 10 holders of unconditional shares: The Company is not informed whether there is relationship between the above parties regarding action in concert. 10 Annual Report 2006 Chenming Paper 4. Particulars bout the holders of conditional shares and the related conditions 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 Shouguang Chenming 1 328，573，657 Mar. 29 2010 0 since implementing of the share equity Share Holding Co., Ltd. relocation 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 4 Investment Group Co., 1,221,321 Mar. 29 2007 1,221,321 Ltd. Shouguang Huadong Not transferred in 12 months since 5 Construction Materials 1,022,855 Mar. 29 2007 1,022,855 implementing of the share equity Co., Ltd. relocation plan Shandong Chenming 6 732,790 Mar. 29 2007 732,790 Power Plant Ltd. Weifang New 7 Continental Investment 122,133 Mar. 29 2007 122,133 Consultants Ltd. Weifang Shenzhou Tech. 8 61,067 Mar. 29 2007 61,067 Ltd. Shares held by executives of the 9 Executive shares 16,718,345 － Company are frozen. 5. Profile of the controlling shareholder (1) 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. Shouguang State-owned Asset Administrative Bureau is the controlling shareholder of Shouguang Chenming Share Holding Co., Ltd. It is holding 75.73% of the shares of Shouguang Chenming Share Holding Co., Ltd. Mr. Li Pande is the legal representative. It is the administrative and supervisory body of state-owned properties in Shouguang City. (2) In the report term, Shouguang State-owned Assets Administrative Bureau used the entire state-owned shares of the Company it held to sponsor Shouguang Chenming Share Holding Co., Ltd. together with Shandong Sanwei Oil Group Co., Ltd., Shandong Jinsheng Color Metal Group Co., Ltd. and Shandong Yongfeng Paper Co., Ltd. Which caused changing in shareholding entity and property of the controlling shareholder of the Company. This has been approved by relative national department. The share equity transferring processes have been completed in September 10th 2005. For details of this please refer to the announcements published by China Securities Journal, and Hong Kong Commercial Daily on Decemer 21st, 2005, December 24th, 2005, December 31st, 2005, February 21st 2006, March 31st 2006, August 22nd 2006, September 12th 2006, and February 10th 2007, as well as www.cninfo.com.cn. 11 Annual Report 2006 Chenming Paper (3) Property and controlling relationship between the Company and the controller Shouguang State-owned Asset Administrative Bureau ↓75.73% Shouguang Chenming Share Holding Co., Ltd. ↓24.06％ SHANDONG CHENMING PAPER HOLDINGS LIMITED 6. Top-10 holders of the convertible bonds at the end of report term. The accounts of convertible bonds are totaled to 1019. No. Name of the holder Amount at the end of term 1 Zhongyou Finance Co., Ltd. 1,843,838 2 China Life Insurance Holdings Co., Ltd. 1,720,000 3 China Pingan Insurance (Group) Co., Ltd. 1,405,713 4 China Commercial and Industrial Bank – Southern Foundation 900,000 5 China Life Insurance (Group) Co., Ltd. 860,000 6 Shenzhen Pingan Life Insurance Co. 733,444 7 Xinhua Life Insurance Holdings Ltd. 716,482 8 Galaxy －Chartered －CITIGROUP GLOBAL MARKETS LIMITED 662,239 9 Huatai Property Insurance Co., Ltd. – traditional – general insurance 515,633 policies - 020C-CT001 10 National Social Insurance 603 portfolio 511,068 12 Annual Report 2006 Chenming Paper Chapter IV. Directors, Supervisors, Senior Executives and Employees I. General information Shares Shares held Changed Annual holding at the at the end by Remuneration Name Position Sex Age Job term beginning of of term (Shares) (RMB0’000) term (shares) Chen Hongguo Chairman M 42 2004.9-2007.9 824,691 6,334,527 5,509,836 154.06 Yin Tongyuan Vice Chairman, M 49 2004.9-2007.9 463,782 3,231,520 2,767,738 149.44 GM Li Feng Director M 34 2006.5-2007.9 78,586 471,818 393,232 85.10 Xing Fangtong Director M 41 2005.10-2007.9 37,350 355,561 318,211 85.69 Wu Bingyu Director M 41 2004.9-2007.9 99,450 428,107 328,657 39.03 Hou Huancai Director M 45 2004.9-2007.9 146,599 628,915 482,316 80.80 Zhou Shaohua Director M 45 2004.9-2007.9 99,450 125,307 25,857 58.05 Hu Wenhe Director M 61 2004.9-2007.9 115,167 496,510 381,343 30.00 Liu Chengzhen Director M 37 2004.9-2007.9 99,450 363,707 264,257 12.00 Guo Xiucheng Director M 41 2004.9-2007.9 149,250 1,199,655 1,050,405 42.99 Zhao Jinghua Independent M 45 2004.9-2007.9 0 0 0 4.00 Director Liu Xueyan Independent M 68 2004.9-2007.9 0 0 0 4.00 Director Diao Yuntao Independent M 42 2004.9-2007.9 0 0 0 4.00 Director Independent 2004.9-2007.9 0 0 0 4.00 Wang Zhihua M 48 Director Zhou Chengjuan Independent F 43 2004.9-2007.9 0 0 0 4.00 Director Zheng Liyong Chairman of the M 39 2004.9-2007.9 31,434 39,607 8,173 9.46 supervisory commission Gao Junjie Supervisor M 36 2004.9-2007.9 31,433 39,606 8,173 9.47 Wang Ju Supervisor F 41 2006.5-2007.9 0 0 0 9.69 Liu Wenzheng Supervisor M 35 2004.9-2007.9 0 0 0 6.90 Ren Guang’ai Supervisor M 39 2004.9-2007.9 0 0 0 6.35 Wang Baoliang Vice General M 33 2004.9-2007.9 0 209,200 209,200 31.20 Manager Ren Wei Vice General M 45 2004.9-2007.9 0 92,800 92,800 24.00 Manager Geng Guanglin Vice General M 33 2004.9-2007.9 74,550 437,433 362,883 58.87 Manager Fang Lijun Vice General M 37 2004.9-2007.9 73,374 436,851 363,477 40.80 Manager Li Xueqin Vice General F 44 2004.9-2007.9 57,657 429,348 371,691 28.80 Manager Hao Yun Vice GM, M 44 2004.9-2007.9 121,699 708,441 586,742 60.00 Secretary of the Board Xia Guangchun Vice General M 42 2005.6-2007.9 0 70,700 70,700 21.60 Manager Wang Zaiguo Vice General M 44 2004.9-2007.9 7,857 195,600 188,643 24.00 Manager Liu Junwu CFO M 45 2006.9-2007.9 0 0 0 16.80 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 13 Annual Report 2006 Chenming Paper 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. II. Major career history of the directors, supervisors and senior executives and their positions in the Company. Mr. Cheng Hongguo, who joined our company in 1987, once held the position of Workshop Manager, Director of Brach Factory, Deputy Manager, member of Board, and Baord Chairman of Wuhan Chenming Hanyang Paper Stock Co., Ltd. Mr. Cheng is now the Chairman of the Company, Chairman of Shouguang Chenming Share Holding Co., Ltd., and Executive Director of Shouguang Henglian Enterprise Investment Co., Ltd. Mr. Yin Tongyuan, who joined our company in 1982, once held the position of Workshop Manager, the Chief of Technology Dept., Deputy Factory Managing Director and Executive Deputy Factory Managing Director. Currently Mr. Yin is the Deputy Chairman and General Manager of the Company, General Manager of Shouguang Chenming Share Holding Co., Ltd., and Manager of Shouguang Henglian Enterprise Investment Co., Ltd. Mr. Li Feng, joined the Company in 1992. Once held the positions of workshop director, factory chief, assistant of General Manager, Vice Chairman, and Chairman of Wuhan Chenming Hanyang Paper Co., Ltd. At present Mr. Li is the director and Sales Supervisor of the Company. Mr. Xin Fangtong, joined the Company in 1984, once the chief of product line, director of workshop, GM and Chairman of Chibi Chenming Paper Co., Ltd. At present he is the director of the Company and Chairman of Qihe Paperboard Co., Ltd. Mr. Wu Bingyu, who joined our company in 1989, once held the position of Organization Section Chief, Director of Party Leadership Office, Director of Party Leadership Group, Assistant of General Manager, Deputy Secretary of Party Leadership Group of Wuhan Chenming Hanyang Paper Holdings Co., Ltd. and Chairman of Jilin Chenming Paper Co., Ltd. Mr. Wu is now director of the Company and director of Shouguang Chenming Share Holding Co., Ltd. Mr. Hou Huancai, who joined our company in 1983, once held the position of Workshop Director, Director of Branch Factory, Deputy Director of Qihe Paperboard Factory, Board Chairman of Yanbian Chenming Paper Co., Ltd. and Chairman of the 1st and the 2nd Supervisory Board. Mr. Hou is now the director of the Company, Chairman of Jiangxi Chenming Paper Co., Ltd., and director of Shouguang Chenming Share Holding Co., Ltd. Mr. Zhou Shaohua, who joined our company in 1997, once held the position of Executive Deputy Manager and Engineer in Chief of WUhan Chenming Hanyang Paper Stock Co., Ltd. and Borad Chairman of Jiangxi Chenmin Paper Co., Ltd. Mr. Zhou is now the director of the Company and Chief Secretary of CCP Committee of Zhanjiang Chenming Pulp & Paper Co., Ltd. Mr. Hu Wenhe, who joined our company in 1987, once held the position of Secretary of Party Leadership Group of Shandong Chenming Xinli Thermoelectricity Co., Ltd., General Manager and Chairman of Board . Mr. Hu is now director of the Company and director of Shouguang Chenming Share Holding Co., Ltd. 14 Annual Report 2006 Chenming Paper Mr. Liu Chengzhen, who joined our company in 1986, once held the position of Workshop Director, Deputy Director of Branch Pulp Mill, Factory Director, General Manager and Borad Chairman of Chibi Chenming Paper Co., Ltd. Deputy Manager and General Manager of Wuhan Chenming Hanyang Paper Stock Co., Ltd. Mr. Liu is now the director of the Company, General Manager of Shouguang Chenming Pulp Co., Ltd., and director of Shouguang Chenming Share Holding Co., Ltd. Mr. Guo Xiucheng, who joined our company in 1989, once held the position of Director of Operating Office, Director of Project Management Office, Manager of Beijing Branch, assistant of General Manager, Vice General Manager, and Sales Supervisor of the Company. Mr. Guo is now director of the Company, and director of Shouguang Chenming Share Holding Co., Ltd. Mr. Zhao Jinghua once held the position of Deputy Director of Economic Management Dept. of Shandong University, Vice President and President of Management Institute of Shandong University. Mr. Zhao is now assuming Director of Capital Management and Enterprise Stratigy Research Center of Central Finance and Economics University. Mr. Zhao has hold the position of Independent Director since June, 2002. Mr. Liu Xueyan, professor of accounting, he was in the position of teacher of accounting department of Shandong Finance and Accounting College, accountant of Shandong Tractor Factory, chief of accounting department of Shandong Economic College, director of China Accounting Professor Committee, principal of Shandong Dongfang Accountant Firm. Currently he is the commissioner of Shandong Certified Accountant Association Consulting Committee and business supervisor of Shandong Ruihua Management Consulting Company. He has been the independent director of the Company since June 2002. Mr. Diao Yuntao a certified accountant, once held the position of Deputy Director of Financial Office of Shandong Province, Deputy Director of Local Revenue Office of Shandong Province. Mr. Diao is now assuming Director of Shandong Qilu Accounting Office, Borad Chairman of Shandong Ruihua Management Consultant Co. and the Deputy Board Chairman and General Manager of Shandong Ruihua Investment Co. Currently he’s the vice president of Wanlong CPAs Ltd. He began to assume Independent Director in April, 2003. Mr. Wang Zhihua, who once held the position of teacher of Shandong Economics Institute, Director and Secretary of Shandong Electricity Academe, is now a member of Party Leadership Group and Deputy Manager of Shandong Xinyuan Stock Co. Mr. Wang began to assume Independent Director in April, 2003. Ms. Zhou Chenjuan, an Econopmics Bachelor who graduated from Finance Dept. of Shanghai Finance and Economics University in 1987, was assigned to Revenue Dept. of Shandong Finance and Economics Institute in 1987. Ms. Zhou is now assuming Director of Revenue Theory Staff Office. She began to assume Independent Director in April, 2003. Mr. Zheng Liyong, who joined our company in 1987, once held the position of Deputy Director of Power Supply Dept. He is now assuming Chairman of Supervisory Board, Vice GM of Jilin Chenming Paper Co., Ltd., and supervisor of Shouguang Chenming Share Holding Co., Ltd. Mr. Gao Junjie, who joined our company in 1994, once held the position of Director of Law Office and Deputy Director of Auditing Division of our company. He is now assuming Staff Supervisor and Assistant to the General Manager, supervisor of Shouguang Chenming Share Holding Co., Ltd., and Supervisor of Shouguang Henglian Enterprise Investment Co., Ltd. Ms. Wang Ju, joined the Company in 1987, once held the position of vice chief of workshop, vice manager and manager of Supply Company, assistant to General Manager of Shouguang Chenming, Vice General Manager of Shouguang Chenming, Vice Chairman of Workers’ Union. At present she is the supervisor of the Company and Vice General Manager of Shouguang Chenming Pulp Company. 15 Annual Report 2006 Chenming Paper Mr. Liu Wenzheng, who joined our company in 1993, once held the position of Accountant of our branch company, Director of Finance Dept. of Shandong Qihe Chenming Paperboard Co., etc. He is now assuming Staff Supervisor, Director of Auditing Dept., and Supervisor of Shouguang Ruifeng Enterprise Investment Co., Ltd. Mr. Ren Guang'ai, who joined our company in 1993, once held the position of Vice Director and Director of Enterprise Management Dept. He is now assuming Supervisor of the Company, Deputy Director of Human Resource Dept., and manager of Shouguang Ruifeng Enterprise Investment Co., Ltd. Mr. Wang Baoliang, who once held the position of teacher of Yingli Middle School of Shouguang City, Secretary of Party Leadership Committee of the town, Secretary and Section Chief of Shouguang Party Leadership Committee Deputy Director of Confidential Dept., Deputy General Office and Secretary-General, etc. He joined our company in October, 2003 and is now Deputy General Manager of the Company. Mr. Ren Wei once held the position of credit staff, Vice Chief of Credit Section, Vice Manager of International Dept., Assistant to the President, Vice President, and President of ICBC Shouguang Branch, He joined our company in July 2004 and now is the Vice General Manager of the Company. Mr. Geng Guanglin, who joined our company in 1992, once held the position of Workshop Director of our company, Deputy Manager of Chibi Chenming Paper Co. General Manager of Shouguang Chenming Co., Ltd. and Vice Chairman of Shouguang Chenming. He is now the Vice General Manager of the Company. Mr. Fang Lijun, joined the Company in 1991, once the manager of Beijing Branch, assistant to General Manager, and General Manager of Sales Company. At present he is the Vice General Manager of the Company. Ms. Li Xueqin, who joined our company in 1987, once held the position of Director of Auditing Dept., Vice Chairman of Supervisory Board and Deputy Manager of our company. He was selected as the representative of the 10th People's Congress and is now assuming Deputy Manager of our company. Mr. Hao Yun, who joined our company in 1984, once held the position of Secretary of the League Committee, Director of LAbour and Human Resource Dept., Director of Stock Office and Assistant of General Manager of our company. He is now assuming Vice General Manager and Secretary of the Board. Mr. Xia Guangchun, joined the Company in 1989. He once held the position of Vice General Manager of Wuhan Chenming Hanyang Paper Co., Ltd., General Manager of Shandong Chenming Thermal Power Co., Ltd., Chief Secretary of CCP Committee of Jilin Chenming Paper Co., Ltd. Currently he is the Vice General Manager of the Company. Mr. Wang Zaiguo, who joined our company in 1987, once held the position of Secretary of transportation company, the Assistant of General Manager and Director of Logistics Dept., manager of hotel, Vice General Manager of Shouguang Chenming Paper Co., Ltd. and Supervisor of our company. He is now Vice General Manager of our company, and Chairman of Zhanjiang Chenming Forestry Development Co., Ltd. Mr. Liu Junwu, joined the Company in 2002, one the Chief Financial Officer of Jilin Paper Co., Ltd., Chief Accountant of Shandong Chenming Paper Group Qihe Paperboard Co., Ltd., Director of Accounting Dept., assistant to General Manager of the Company, Chief Financial Officer of Jilin Chenming Paper Co., Ltd. At present he is the CFO of the Company. 16 Annual Report 2006 Chenming Paper III. Annual Remuneration 1. The judgment procedure for the remunerations of directors, supervisors and senior management: decided by the Assessment and Rewarding Committee of the Company. 2. Basis of remunerations to directors and senior management: upon the practical profitability, nature of duties, and individual performance, on the basic principle of motivating and stability, annual rewards are applied to directors and senior management. The remunerations to supervisors are annually fixed. For supervisors taking managerial positions in the Company, their reward are decided by the General Manager’s Conference basing on particular position. For supervisors not taking any position in the Company, their rewards vary between RMB100 thousand to RMB200 thousand. 3. As approved by Shareholders’ General Meeting 2002, the Company pays RMB40 thousand annually to each independent director. Travel expenses and rational expenses for exercising of duties according to the Article of Association are reimbursed by the Company. 4. The total annual remuneration for the current directors, supervisors and senior management are amounted to RMB11,051,000. IV. Replacing of Directors, Supervisors, and Senior Executives (1) On May 11th 2006, as examined by the Shareholders’ General Meeting 2005, Mr. Li Feng was elected to assume the position of director of the 4th term of Board till expiration of the 4th term of Board. Mr. Hu Changqing was approved to resign from the position of director. Ms. Wang Ju was elected the supervisor of the 4th term of Supervisory Committee and take the position till expiration of the 4th term of Supervisory Committee. Mr. Sun Dianming was approved to resign from the position of supervisor. (2) On July 27th 2006, as examined by the 16th meeting of the 4th term of Board, Mr. Zhen Yuanzhi was approved to quit from the position of Vice General Manager of the Company for his changing of job. (3) On September 17th 2006, as examined by the 17th meeting of the 4th term of Board, Mr. Liu Junwu was elected the Chief Finance Officer of the Company, and take the position till expiration of the 4th term of Board. Meanwhile Mr. Yu Shiyong quitted from the position of CFO for other job placement. V. The Employees There were totally 16,962 employees in the Company, including 12,594 of production employee, 596 of sales persons, 1076 technical persons, 236 of financial persons, 1166 of executive persons, and 1294 others. On education levels, 766 of bachelors or above, 1915 of college graduates, 3390 of intermediate technical, and 10,891 high school, technical school or lower. No expenses of retired employees assumed by the Company. Employees of the controlled subsidiaries included above. 17 Annual Report 2006 Chenming Paper Chapter V. Management Structure I. Administrative Structure Under the requirement of the Company Law, Security Law and relative circulars released by China Securities Regulatory Commission, the company kept optimizing the management structure and operate the company in a standardized mean to ensure its healthy development. During the report term, the “Article of Association” and “The Rules of Management” was revised. Comparing with the provisions provided by the ruling documents, the Board deems that the Company’s practical administrative structure is satisfying the requirements. II. Performance of the Independent Directors In the report term, 5 of the independent directors that engaged by the company were doing their jobs responsibly. They presented the board meetings and shareholders’ meetings, provided opinions for the Company’s management issues, and exercised their judgments independently on the decision-making processes of personnel changing, related transactions, and external guarantees. Thus protecting the legal benefit of the whole company and middle-small shareholders as well. Independent Directors’ presenting of the board meetings Name of Times of board Presented Entrusted proxies Absented Remark Independent meetings to present personally to present Director (times) (times) Liu Xueyan 9 9 0 0 Zhao Jinghua 9 9 0 0 Diao Yuntao 9 9 0 0 Wang Zhihua 9 7 2 0 On business travel Zhou Chengjuan 9 9 0 0 None of the 5 independent directors raised any objection on the resolutions of the Board neither on resolutions adopted beyond the Board. III. Particulars about the separation of businesses, personnel, assets, organizations, and accounting from the controlling shareholder 1. In the aspect of business: the company in completely independent from the controlling shareholder, and has its independent and complete business operation capability. 2. In personnel: The labor management, personnel and salary management are completely separated from the controlling shareholder. 3. In assets: There is only shareholding relationship between the Company and Shouguang Chenming Share Holding Co., Ltd. The company’s capital is completely separated from the controlling shareholder. 18 Annual Report 2006 Chenming Paper 4. In organization: The company has a mature and independent organization structure, which are established according to the legal processes and the business practice of the Company. They are completely separated from the controlling shareholder. 5. In accounting: The company has its own independent accounting department, accounting system, accounting management rules, bank account. The controlling shareholder never interfere in the financial activities of the Company. IV. Assessment and motivating mechanism of the senior executives 1. Assessments are done over the senior executives on both monthly and annual basis. Monthly assessments are upon the working performance, routine management, and discipline. It is carried out by way of cross assessment among the related departments. Results of monthly assessments are providing the basis for the annual assessment. The annual assessments are carried out by the Remuneration & Assessment Committee with considering of the results of monthly assessments and performances all over the year. 2. To further improve the administrative structure and motivation mechanism, the Board of Directors adopted “Future Shareholding Motivation Program” in the report term. It was about to give out 70 million future shareholding rights. This is subject to the approval of the governing departments and the shareholders’ meeting. For details of this please see the relative announcements released on October 11th 2006 by China Securities Journal and Hong Kong Commercial Daily. 19 Annual Report 2006 Chenming Paper Chapter VI. Particulars about the Shareholders’ Meeting I. The Shareholders’ Annual Meeting The Shareholders’ Annual Meeting 2005 was held on May 11th 2006. Proposals passed on the meeting were: work reports of the Board and Supervisory Committee of year 2005, profit distribution plan 2005, proposal on replacing of directors and supervisors, proposal on revising the Articles of Association, and proposal on issuing RMB2 billion of short-term bonds. Relative resolutions were published on May 12th 2006 by China Securities Journal, Hong Kong Commercial Daily and http://www.cninfo.com.cn. II. Shareholders’ Special Meeting 1. The Shareholders’ 1st Special Meeting 2006 was held on February 7th 2006, mainly examined: the proposal on using part of the controlled subsidiaries’ assets as counter-guarantee for the convertible bonds, the detailed operation plan of the four special committees of the Board, and other two proposals. The resolutions were published on February 8th 2006 by China Securities Journal, Hong Kong Commercial Daily and http://www.cninfo.com.cn. 2. The Shareholders’ 2nd Special Meeting 2006 was held on April 7th 2006, mainly examined: the proposal on revising the Articles of Association, and the proposal on providing guarantees to some subsidiaries for the integrated bank credit. The resolutions were published on April 8th 2006 by China Securities Journal, Hong Kong Commercial Daily and http://www.cninfo.com.cn. III. Shareholders’ meeting about the share equity relocation program on A shares The shareholders’ meeting about the share equity relocation program on A shares was held on February 28th 2006. The resolutions were published on January 1st 2006 issues of China Securities Journal, Securities Times, Shanghai Securities Daily and http://www.cninfo.com.cn. 20 Annual Report 2006 Chenming Paper Chapter VII. Report of the Board I. Operation overview by the executives (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 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. 21 Annual Report 2006 Chenming Paper 2. Constructions in process (1) Through one year and five months of construction, the 300 KT super clender paper project 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. (6) 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. 22 Annual Report 2006 Chenming Paper (II) Major business and operation situation The company is in the paper manufacturing industry, which is a light-industry. The Company is mainly engaged in production and sales of machine-make paper and paperboard, papermaking raw materials, papermaking machinery, power and heat supply. The major product lines are: art paper, light-coated paper, news paper, kraft liner board, double-offset paper, cartoon board, and writing paper. 1. Major business structure on industries and products In RMB10 thousand Distribution on industries Decrease/ Major Change of Increase/decrease of increase of major On industry or Major business Major business major business major business business profit product income business cost profit ratio cost over last turnover (%) over previous (%) year year Machine-made 1,078,035.82 875,039.08 18.83% 17.54% 19.40% -1.83% paper Power supply 5,988.34 3,028.76 49.42% 16.91% -41.61% 35.63% Construction 81,765.13 67,441.87 17.52% 33.40% 30.29% 3.86% materials Chemical products 7,522.29 5,716.95 24.00% -118.98% -123.06% 1.42% for 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% 2. Major business structure on territories In RMB10 thousand 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% 23 Annual Report 2006 Chenming Paper 3. 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 was amounted to 5.18% of the total sales of the year. (III) 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 Portion in total assets of Portion in total assets of Difference 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 receivable 141,528,858.87 0.69% 218,849,821.70 1.22% -0.53% Inventories 1,860,698,636.34 9.06% 2,174,779,264.45 12.10% -3.05% Long-term share equity 88,903,007.40 0.43% 5,843,440.51 0.03% 0.40% investment Original value of fixed assets 13,326,258,848.01 64.85% 13,141,351,140.78 73.13% -8.28% Net fixed assets 10,060,876,618.57 48.96% 10,738,991,767.88 59.76% -10.80% Construction in progress 4,134,036,858.09 20.12% 1,232,223,678.56 6.86% 13.26% 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 payable 2,026,019,444.42 9.86% 9.86% 24 Annual Report 2006 Chenming Paper 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. 25 Annual Report 2006 Chenming Paper (IV) Notes to major change in gain/loss comparing with the previous year in RMB Increase (+), decrease Items Accumulated this year Accumulated last year (-) % 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. (V) 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. 26 Annual Report 2006 Chenming Paper (VI) Particulars bout the major differences between the cash flow from business operation and the net profit in the report term In RMB10 thousand Analyze of 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 -405,590,981.47 -411,285,499.06 business operation and the net profit 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 (VII) 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 paper Writing paper, news 50.93% 21,136.70 222,135.85 17,089.71 Holding Ltd. making paper Shandong Chenming Paper paper Group Qihe Paper Board 99.9468% kraft liner paper 37,620.00 123,588.35 11,527.14 making Ltd. Shandong Chenming Power power production and sales 51% 9,955.31 71,444.24 3,681.89 Plant Ltd. plant of power and heat Jilin Chenming Paper Co., paper News paper and light 100% 40,000 164,060.91 -5,806.00 Ltd. 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 Yanbian Chenming Paper paper wood pulp, machine 76.73% 8,163.30 33,861.63 451.4 Ltd. making made paper 27 Annual Report 2006 Chenming Paper (VIII) Particulars about the subsidiaries whose net profit has exceeded 10% of the Company’s net profit In RMB 10 thousand Net profit due to the Portion in the Major business Main business Name of companies Net profit Company upon share Company’s net income profit portion profit % Wuhan Chenming Paper Holding Ltd. 159,670.09 36,296.576 17,089.71 8,703.78 14.43 Shandong Chenming Paper Group Qihe Paper Board 135,717.42 20,837.66 11,527.14 11,521.01 19.11 Ltd. 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 28 Annual Report 2006 Chenming Paper 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 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 29 Annual Report 2006 Chenming Paper 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 30 Annual Report 2006 Chenming Paper 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. 6. Possible influences of the new accounting standard on the accounting policies, accounting estimations, financial positions, and business performances of the Company (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 31 Annual Report 2006 Chenming Paper 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. III. Investment in the report term 1. Using of proceeds from issuing of shares in the report term The Company issued RMB2 billion of transferable corporation bond in September 2004, and practically received RMB1,956.22 million. The fund was utilized right as set out by the prospectus. No changing of investment project was made. Ended the report term, RMB1,754.65 million was put into investment. The balance of RMB203.78 million is in the special bank account for future use. The details of accumulated investment in the report term were as the followings: In RMB10 thousand Total Proposed Raised fund Predicted Accumulated Project set by the prospectus investment of investment by adopted profit after Progress expenses the project the raised fund practically tax 300Kt coated white board 83,760 83,760 83,760 140,019.8 5,306 Completed Pollution treatment and recycling 17,300 17,300 7,800 14,551.99 537 Completed Partially 17,800 17,800 1,361 2,618.00 - IT and modern logistics system completed 200Kt low-ration coated paper of 168,555 51,699 51,699 269,639.80 4,986 Completed Jiangxi Chenming 150T/D chemical-mechanical pulp 8,708 8,708 8,708 13,906.94 1,354 Completed Supplementary current capital 25,000 25,000 22,137 - - - Total 175,465 440,736.53 - - Note: When the investment from the raised fund is not enough, the short part is funded by banks or the Company itself. 2. Application of non-raised fund in the report term The 300 KT super clender paper project and supplementary projects were planned with total investment of RMB3.926 billion. As of the end of the report term totally RMB2.824 had been invested into these projects. All of the investments were from the Company’s own capital. IV. Particulars about the liabilities and credit position of the Company, and the arrangement for returning of debts as well as related interests. As of the end of report term, the Company has the current liability amounted to RMB5,867,735,700, the long-term liabilities of RMB6,930,638,700 and total liabilities of RMB12,798,374,400. The credit condition of the Company has not been changed till the end of report term. For details about this and the debt returning plan please go to “Announcement of Issuing Transferable Bonds of Shandong 32 Annual Report 2006 Chenming Paper Chenming Paper Holdings Ltd.” published by China Securities Journal, Securities Times, and Shanghai Securities Times on issues of September 25th 2004. V. Deloitte Touche Tohmatsu CPA Ltd., the international auditor employed by the Company has issued a standard auditing report without qualified opinions. VI. Routine works of the Board of Directors 1. The Board convened 9 meeting during the report term (1) The 12th meeting of the 4th term of Board was held on February 28th 2006. The revising proposal of Articles of Association and the proposal about providing guarantees to the subsidiaries for the credit from the banks were examined on the meeting. Resolutions of the meeting were published on March 1st 2006 by China Securities Journal and Hong Kong Commercial Daily. (2) The special meeting of the 4th term of Board was held on March 13th 2006. The revising proposal of Articles of Association was examined on the meeting. Resolutions of the meeting were published on March 15th 2006 by China Securities Journal and Hong Kong Commercial Daily. (3) The 13th meeting of the 4th term of Board was held on April 19th, 2005. The Annual Report 2005 and the 1st Quarterly Report 2006 were examined on the meeting. The resolutions were published on April 19th 2005 issues of China Securities Times and Hong Kong Commercial Daily. (4) The 14th meeting of the 4th term of Board was held on May 24th 2006. The proposals regarding issuing of private shares was examined on the meeting. Resolutions of the meeting were published on May 25th 2006 by China Securities Journal and Hong Kong Commercial Daily. (5) The 15th meeting of the 4th term of Board was held on June 3rd 2006. The proposal regarding acquisition of the 39% share equity of Shanghai Chenming Paper-making Machinery Co., Ltd. and sell it in whole was examined on the meeting. Resolutions of the meeting were published on June 6th 2006 by China Securities Journal and Hong Kong Commercial Daily. (6) The 16th meeting of the 4th term of Board was held on July 27th 2006. 10 proposals including the Semi-annual Report 2006, of setting up Chenming (HK) Ltd., of increasing the shareholding in Jilin Chenming Co., Ltd. and put extra capital in it, setting up of Zhanjiang Chenming Pulp Co., and providing guarantees to it, and cancelling of the “strategic investment contract by issuing of shares to specified investor” with CVC were examined on the meeting. Resolutions of the meeting were published on July 29th 2006 by China Securities Journal and Hong Kong Commercial Daily. (7) The 17th meeting of the 4th term of Board was held on September 17th 2006. The proposals regarding acquiring of the 3.846% share equity of Jiangxi Chenming Paper Co., Ltd. held by Jiangxi Paper Holding Co., Ltd., lowering of the converting price of the convertible bonds, and engaging of the CFO of the company were examined on the meeting. Resolutions of the meeting were published on September 19th 2006 by China Securities Journal and Hong Kong Commercial Daily. (8) The 18th meeting of the 4th term of Board was held on October 10th 2006. The proposals regarding the Share Equity Motivation Program were examined on the meeting. Resolutions of the meeting was published on October 11th 2006 by China Securities Journal and Hong Kong Commercial Daily. (9) The 19th meeting of the 4th term of Board was held on October 26th 2006. The proposals regarding engaging of CPAs and the 3rd Quarterly Report of 2006 were examined on the meeting. Resolutions of 33 Annual Report 2006 Chenming Paper the meeting was published on October 27th 2006 by China Securities Journal and Hong Kong Commercial Daily. 2. Execution of the resolutions of shareholders’ general meeting by the Board (1) The Shareholders’ General Meeting 2005 adopted the dividend plan for year of 2005 on May 11th 2006. Base on the total capital of 1,353,539,920 shares at the end of 2005 , the Company distributes cash dividend of RMB1.20 to each 10 shares (after tax, the after tax individual shareholders of social public shares, investment foundation can received cash RMB1.08 for each 10 shares which is distributed by the Company; B share shareholders are exempted of tax). According to the provisions set forth when issuing of Chenming Bond, “the bondholder becomes shareholder of Chenming Paper right on the next day when the transfer has completed. All registered shareholders at the registration day are entitled for the current dividend.” Shareholders have there bond converted into shares before the registration day also enjoy RMB1.2 of cash dividend upon each 10 shares. This proposal has been accomplished in July 2006. (2) In May 2005, the Shareholders’ Meeting of 2006 approved the application to the People’s Bank of China for issuing of short-term financing bonds with less than RMB2 billion of returnable balance in the domestic market, to meet the Company’s needs in current capital. The bond term would be 1 year. The Board of Directors has been empowered by the Shareholders’ Meeting to handle related procedures according to the opinions of the administrative bodies and related laws and regulations. As of the end of the report term, this plan has been accomplished. VII. Dividend distribution plan or capitalizing of common reserves of current term 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 of Association, 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 VIII. Other issues: China Securities Times and Hong Kong Commercial Daily are the official press media for information disclosing. 34 Annual Report 2006 Chenming Paper Chapter VIII. Report of the Supervisory Committee 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. 35 Annual Report 2006 Chenming Paper Chapter IX. Significant Events I. Significant lawsuit or arbitration events occurred in the report term In the report period, the Company had no material lawsuits or arbitrations. II. Asset acquisition, takeover or merger occurred in the report term 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. III. Material related transactions No major related transaction occurred in the report term. 36 Annual Report 2006 Chenming Paper VI. Important contracts and fulfilling 1. In the report period, the Company offered no external guarantee or illegal guarantee. Ended December 31, 2006, the Company offered RMB1,066,446,700 of guarantees for its controlled subsidiaries, accounted for 17.75% of the net assets of the Company. In RMB10 thousand Name of the subsidiaries Amount guaranteed Wuhan Chenming Paper Holding Ltd. 15,000.00 Jilin Chenming Paper Ltd. 26,000.00 Jiangxi Chenming Paper Ltd. 57,132.00 Heze Chenming Board Ltd. 6,009.35 Wuhan Qianneng Thermal Power Co., Ltd. 500.00 Juancheng Chenming Plates Co., Ltd. 2,003.33 Total 106,644.68 Note: Jilin Chenming, Hezhe Chenming and Juanchen Chenming have exceeded 70% in liability/asset ratio. Guarantees provided to these three companies were approved by the 2nd Shareholders’ Special Meeting of 2006. 2. In the report term, to lower the financial expenses and increase the gains, the Company provided loans totaled to RMB2.05 billion to Jilin Chenming, Wuhan Chenming, and Yanbian Chenming in term of enclosed loans through China Merchants Bank. This had been passed by the 16th meeting of the 4th term of Board. For details please see the announcement released on July 29th 2006 by China Securities Journal and Hong Kong Commercial Daily. 3. The sponsor of the Company’s issuing of convertible bonds: China Industrial & Commercial Bank Shandong Branch has not changed in its profitability, asset, and credit position during the report term. V. Commitments made by holders of non-negotiable shares in share relocation program The share relocation plan has been accomplished on March 29th 2006, Shouguang State-owned Asset Administration Bureau and other holders of non-negotiable shares will pay part of their shares to A-share holders at 2.6 shares upon each 10 shares. In the report term, Shouguang State-owned Asset Administration Bureau was replaced by Shouguang Chenming Share Holding Co., Ltd. as the controlling shareholder of the Company. Shouguang Chenming Share Holding Co., Ltd. has committed to carry forward the commitments made by Shouguang State-owned Asset Administration Bureau, which are: 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 case of the share capital is changed due to distribution of bonus shares or capitalizing of common reserves during the registration date of this plan and the supplementary registration date, the amount of supplementary shares shall be adjusted correspondingly.) 37 Annual Report 2006 Chenming Paper 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. In the report term, the controlling shareholder was fulfilling the commitment made for the relocation plan. All of the shares held are conditional negotiable shares. The shareholding status is not changed comparing with the negotiable day of the conditional shares. VI. The 19th meeting of the 4th term of Board reviewed and approved the proposal on renewing engagement of domestic and international certified public accountants. Deloitte Touche Tohmatsu Certified Public Accountants Co., Ltd. was engaged as the Company’s domestic and international auditor for the year 2006 with the service term of one year. The auditing fee would be RMB3 million and the Company undertakes the transportation fees of the accountants. This issue is subject to the examination of the Shareholders’ Meeting. Since 2004, Deloittee Touch Tohmatsu has been the auditing body of the Company successively for 3 years. VII. In the report period, the Company, the Board of Directors or any director had never been criticized by China Securities Regulatory Commission, or by Shenzhen Stock Exchange. VIII. Other significant events In the report term, the 2nd Shareholders’ Special Meeting has adopted the proposal on revising of the Articles of Association of the Company. For details about this please see the announcement released on April 8th 2006 issues of China Securities Journal, Hong Kong Commercial Daily, and www.cninfo.com.cn. IX. Public relationship and investor relationship management approaches In the report term, beside the appropriate and timely information disclosure according to the related criteria, the Board carried out investor relationship management and communication approach in various of ways. This was to enforce the direct communication with the investors, new medias, and the public, and properly promote the Company’s good reputation, outstanding advantages, sound business performance, and expectable future development. These was to enable the investors further comprehend the investment value of the Company. The Board organized direct communication activities forwardly with the investors. During the period of share equity relocation, the members of the Board and senior executives organized promotions in Shanghai, Beijing and Shenzhen. Special promotions were organized in Beijing after releasing of the Annual Report and Quarterly Reports, providing information about the Company’s performance to professional investment organizations. Senior executives were arranged to participate in the investment forums organized by Deutsch 38 Annual Report 2006 Chenming Paper Bank, Zhongjin Company and a number of well-known financial organizations. The investment value of the Company was promoted to over 100 investment organizations from all over the world. In year 2006, the headquarter of the Company hosted over 100 visits and investigations by organizations or individual investors. Meanwhile, according to the requirement of investors, the controlled subsidiaries such as Wuhan Chenming, Jiangxi Chenming, and Zhanjiang Chenming were arranged to host the visitors too. The investors’ hotlines were fully used to enhance the communications with the shareholders. Inquiries of the shareholders were answered patiently. Special forum was established in the Company’s website to communicate through the Internet. 6 staffs were arranged to response all of the questions asked by the investors. The secretary of the Board was awarded “The Gold Medal Secretary” by “New Fortune” magazine. Chapter X. Financial Report (Enclosed) Chapter XI. Documents for Reference (I) Financial Statements carrying signatures and seals of the legal representative, Chief Financial Officer and Manager of the Accounting Department; (II) Auditors’ Report carrying the stamps of the CPA firm and signature of the certified accountants. (III) All the originals of the Company’s documents and public notices disclosed in the newspapers designated by China Securities Regulatory Commission in the report period; The Board of Directors of Shandong Chenming Paper Holdings Co., Ltd. April 6, 2007 39 SHANDONG CHENMING PAPER HOLDINGS LIMITED Auditor's Report and Consolidated Financial Statements For the year ended 31 December 2006 (Prepared under International Financial Reporting Standards) 40 SHANDONG CHENMING PAPER HOLDINGS LIMITED AUDITOR'S REPORT AND CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2006 CONTENTS PAGE(S) AUDITOR'S REPORT 1-2 CONSOLIDATED INCOME STATEMENT 3 CONSOLIDATED BALANCE SHEET 4 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY 5 CONSOLIDATED CASH FLOW STATEMENT 6-7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8 - 51 41 DTT(A)(07) IB001 AUDITOR'S REPORT TO THE SHAREHOLDERS OF SHANDONG CHENMING PAPER HOLDINGS LIMITED (established as a joint stock limited company in the People's Republic of China) We have audited the accompanying consolidated financial statements of Shandong Chenming Paper Holdings Limited and its subsidiaries (the "Group"), which comprise the consolidated balance sheet as at 31 December 2006, and the consolidated income statement, consolidated statement of changes in equity and consolidated cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes. Management's responsibility for the consolidated financial statements Management is 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 consolidated financial statements that are free from material misstatement, 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 ethical requirements and plan and perform the audit to obtain reasonable assurance whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgement, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated 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 policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. - 1 - Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Group as of 31 December 2006, and of its financial performance and its cash flows for the year then ended, in accordance with International Financial Reporting Standards. Deloitte Touche Tohmatsu CPA Ltd. Beijing, 6 April 2007 - 2 - SHANDONG CHENMING PAPER HOLDINGS LIMITED CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2006 NOTES 2006 2005 RMB'000 RMB'000 (restated) Continuing operations Revenue 8 11,714,018 9,625,781 Cost of revenue (9,461,699) _________ (7,662,484) _________ Gross profit 2,252,319 1,963,297 Other income 10 315,195 248,559 Gain on disposal of subsidiaries 35,947 - Share of result of associates (540) 649 Distribution expenses (677,808) (534,674) Administrative expenses (557,372) (468,640) Loss on change in conversion price of convertible loan notes (229,399) - Changes in fair value of embedded derivatives 154,598 (111,694) Finance costs 11 (456,366) _________ (288,121) _________ Profit before tax 12 836,574 809,376 Income tax expense 13 (126,923) _________ (181,477) _________ Profit for the year from continuing operations 709,651 _________ 627,899 _________ Discontinued operation Profit (loss) for the year from discontinued operation 14 36,341 _________ (7,766) _________ Profit for the year 745,992 _________ 620,133 _________ Attributable to: Equity holders of the Company 585,274 546,607 Minority interests 160,718 _________ 73,526 _________ 745,992 _________ 620,133 _________ Earnings per share 16 From continuing and discontinued operations: Basic RMB0.43 _________ RMB0.41 _________ Diluted RMB0.40 _________ N/A _________ From continuing operations: Basic RMB0.40 _________ RMB0.41 _________ Diluted RMB0.38 _________ N/A _________ - 3 - SHANDONG CHENMING PAPER HOLDINGS LIMITED CONSOLIDATED BALANCE SHEET AT 31 DECEMBER 2006 NOTES 2006 2005 RMB'000 RMB'000 (restated) Non-current assets Property, plant and equipment 17 13,627,676 11,221,142 Prepaid lease payments - non-current portion 18 691,127 641,778 Investments in associates 19 79,891 20,707 Available-for-sale investments 20 5,910 6,052 Goodwill 21 20,284 - Biological assets 22 19,514 - Deferred tax assets 23 31,024 14,166 Derivative financial assets 30 130,077 _______ 17,002 _______ 14,605,503 _______ 11,920,847 _______ Current assets Inventories 24 1,841,184 2,127,036 Trade and other receivables 25 3,299,012 2,456,430 Prepaid lease payments - current portion 18 6,962 19,048 Restricted bank deposits 26 41,949 109,206 Bank balances and cash 784,320 _______ 897,152 _______ 5,973,427 5,608,872 Assets classified as held for sale - _______ 334,581 _______ 5,973,427 _______ 5,943,453 _______ Total assets 20,578,930 _______ 17,864,300 _______ Equity and liabilities Capital and reserves Share capital 27 1,365,670 1,353,540 Reserves 28 2,427,153 2,039,372 Retained earnings 1,977,983 _______ 1,650,166 _______ Equity attributable to equity holders of the Company 5,770,806 5,043,078 Minority interests 1,703,564 _______ 1,663,056 _______ Total equity 7,474,370 _______ 6,706,134 _______ Non-current liabilities Borrowings - amount due after one year 29 5,028,029 1,757,764 Convertible loan notes 30 1,807,605 1,862,991 Derivative financial liabilities 30 65,976 107,874 Deferred income 31 336,394 _______ 362,147 _______ 7,238,004 _______ 4,090,776 _______ Current liabilities Trade and other payables 32 2,217,351 2,032,793 Borrowings - amount due within one year 29 1,547,755 4,694,973 Short term debentures 33 2,026,019 - Provision 34 17,987 17,987 Taxation payable 56,744 48,701 Dividend payable 700 _______ 419 _______ 5,866,556 6,794,873 Liabilities directly associated with assets classified as held for sale - _______ 272,517 _______ 5,866,556 _______ 7,067,390 _______ Total liabilities 13,104,560 _______ 11,158,166 _______ Total equity and liabilities 20,578,930 _______ 17,864,300 _______ - 4 - SHANDONG CHENMING PAPER HOLDINGS LIMITED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2006 Attributable to equity holders of the Company Convertible Statutory loan notes Statutory public Discretionary Share Capital equity surplus welfare surplus Dividend capital reserve reserve reserve reserve reserve reserve RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 Balance at 1 January 2005, originally stated 897,728 1,547,310 223,858 252,589 232,486 117 89,773 Effect of adjustments to convertible loan notes (note 4) - - (105,119) - - - - ______ ______ _____ _____ _____ ___ ______ Balance at 1 January 2005, as restated 897,728 1,547,310 118,739 252,589 232,486 117 89,773 Shares issued upon conversion of convertible loan notes 6,947 38,749 (2,718) - - - - Share issued by way of capitalisation of capital reserve 269,319 (269,319) - - - - - Bonus shares issued 179,546 - - - - - - Dividend paid - - - - - - (89,773) Net profit for the year - - - - - - - Appropriations to reserves - 25,577 - 47,921 47,921 - - Dividend proposed - - - - - - 162,425 Contributions from minority shareholders - - - - - - - Distributions made by subsidiaries to minority shareholders - - - - - - - Decrease in minority interests as a result of increase in interest in subsidiaries - - - - - - - ______ ______ _____ _____ _____ ___ ______ Balance at 31 December 2005 1,353,540 1,342,317 116,021 300,510 280,407 117 162,425 Shares issued upon conversion of convertible loan notes 12,130 69,553 (4,746) - - - - Dividend paid - - - - - - (162,425) Loss on change in conversion price of convertible loan notes recognised - - 229,399 - - - - Net profit for the year - - - - - - - Appropriations to reserves - 31,917 - 61,658 - - - Transfer between reserves (note 28 (a)) - - - 280,407 (280,407) - - Dividend proposed - - - - - - 163,880 Contributions from minority shareholders - - - - - - - Distributions made by subsidiaries to minority shareholders - - - - - - - Disposal of subsidiaries - - - - - - - Decrease in minority interests as a result of increase in interest in subsidiaries - - - - - - - ______ ______ _____ _____ _____ ___ ______ Balance at 31 December 2006 1,365,670 1,443,787 340,674 642,575 - 117 163,880 ______ ______ _____ _____ _____ ___ ______ ______ ______ _____ _____ _____ ___ ______ SHANDONG CHENMING PAPER HOLDINGS LIMITED CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2006 NOTE 2006 2005 RMB'000 RMB'000 (restated) Operating activities Profit before taxation 872,915 798,115 Adjustments for: Share of loss (profit) of associates 540 (649) Gain on disposal of subsidiaries (80,268) - Interest income (33,661) (20,824) Finance costs 456,366 291,410 Depreciation of property, plant and equipment 902,807 756,920 Lease payment charge 14,915 17,327 Release of government grants (31,917) (26,109) Loss on disposal of property, plant and equipment 5,088 23,095 Impairment on property, plant and equipment 8,074 - Allowances for bad and doubtful debts 22,720 53,689 Allowances for inventories 4,298 935 Impairment of available-for-sale investments 142 - Investment income from available-for-sale investment (279) - Loss on change in conversion price of convertible loan notes 229,399 - Changes in fair value of embedded derivatives (154,598) 111,694 _________ _________ Operating cash flows before movements in working capital 2,216,541 2,005,603 Decrease (increase) in inventories 170,468 (562,841) Increase in biological assets (19,514) - Increase in trade and other receivables (669,961) (526,909) (Decrease) increase in trade and other payables (586,903) 330,432 _________ _________ Cash generated by operations 1,110,631 1,246,285 Income taxes paid (135,735) (255,635) Interest received 33,661 20,824 _________ _________ Net cash from operating activities 1,008,557 1,011,474 _________ _________ Investing activities Purchase of property, plant and equipment and lease payment on land use right (2,814,160) (2,433,985) Acquisition of interest in subsidiaries from minority interests (73,842) (26,000) Investment in associates (60,000) - Interest paid (64,550) (45,373) Proceeds on disposal of property, plant and equipment 6,749 1,844 Proceeds on disposal of subsidiaries 37 136,880 - Government grants received 5,610 740 Investment income received 555 - _________ _________ Net cash used in investing activities (2,862,758) (2,502,774) _________ _________ - 6 - SHANDONG CHENMING PAPER HOLDINGS LIMITED 2006 2005 RMB'000 RMB'000 (restated) Financing activities New borrowings raised 9,631,689 6,492,572 Borrowings repaid (9,278,895) (5,201,278) Proceeds from issue of short term debentures 2,000,000 - Interest paid (330,174) (247,411) Expense incurred in connection with the issue of short term debentures (8,000) - Dividends paid (163,599) (90,129) Dividends paid by subsidiaries to minority shareholders of subsidiaries (84,229) (84,481) Increase in restricted bank deposits (67,257) (101,402) Capital contribution by minority shareholders of subsidiaries 25,500 _________ 30,710 _________ Net cash from financing activities 1,725,035 _________ 798,581 _________ Net decrease in cash and cash equivalents (129,166) (692,719) Cash and cash equivalents at beginning of the year 897,152 1,586,340 Effects of exchange rate changes on the balance of cash held in foreign currencies 16,334 _________ 3,531 _________ Cash and cash equivalents at end of the year, representing Bank balances and cash 784,320 _________ 897,152 _________ - 7 - SHANDONG CHENMING PAPER HOLDINGS LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2006 1. GENERAL Shandong Chenming Paper Holdings Limited (the "Company") is a joint stock company incorporated in the People's Republic of China (the "PRC") in May 1993. The Company's B shares and A shares have been listed on the Shenzhen Stock Exchange since 1997 and 2000, respectively. Its registered office is located at No. 595 Shencheng Road, Shouguang City, Shandong Province, the PRC. The ultimate holding company of the Company is Shouguang Chenming Holdings Co., Ltd. which is also incorporated in the PRC. The Company and its subsidiaries (the "Group") are principally engaged in manufacture of paper and paper products, construction materials, chemical products, and production of electricity and others. 2. BASIS OF PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS The Company and its subsidiaries maintain their accounting records and prepare their statutory financial statements in accordance with the accounting standards and regulations applicable to joint stock companies limited by shares of the People's Republic of China ("PRC GAAP"). These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS"). The accounting policies and bases adopted in the preparation of the statutory financial statements differ in certain respects from IFRS. The differences arising from the restatement of the results of operations and the net assets for compliance with IFRS are adjusted in the consolidated financial statements but are not taken up in the accounting records of the Company and its subsidiaries. These consolidated financial statements are presented in Renminbi ("RMB") which is the functional currency of the Company. 3. ADOPTION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS In the current year, the Group has adopted all of the new and revised standards and interpretations issued by the International Accounting Standards Board (the "IASB") and the International Financial Reporting Interpretations Committee ("IFRIC") of the IASB that are relevant to its operations and effective for accounting periods beginning on 1 January 2006. The adoption of the new and revised standards and interpretations has had no material effect on how the results and the financial position for the current or prior accounting periods are prepared and presented. Accordingly no prior period adjustment has been required. - 8 - SHANDONG CHENMING PAPER HOLDINGS LIMITED 3. ADOPTION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS - continued At the date of authorisation of these consolidated financial statements, the following standards and interpretations were in issue but not yet effective: • IAS 1 (Amendment) Capital Disclosures Effective for annual periods beginning on or after 1 January 2007 • IFRS 7 Financial Instruments: Disclosures Effective for annual periods beginning on or after 1 January 2007 • IFRS 8 Operating Segments Effective for annual periods beginning on or after 1 January 2009 • IFRIC 7 Applying the Restatement Approach under Effective for annual periods IAS 29 Financial reporting in Hyperinflationary beginning on or after 1 March Economics 2006 • IFRIC 8 Scope of IFRS 2 Effective for annual periods beginning on or after 1 May 2006 • IFRIC 9 Reassessment of Embedded Derivatives Effective for annual periods beginning on or after 1 June 2006 • IFRIC 10 Interim Financial Reporting and Impairment Effective for annual periods beginning on or after 1 November 2006 • IFRIC 11 IFRS2: Group and Treasury Share Effective for annual periods Transactions beginning on or after 1 March 2007 • IFRIC 12 Services Concession Arrangement Effective for annual periods beginning on or after 1 January 2008 The directors anticipate that the adoption of these standards and interpretations in future periods will have no material impact on the financial statements of the Group. - 9 - SHANDONG CHENMING PAPER HOLDINGS LIMITED 4. PRIOR PERIOD ADJUSTMENTS In September 2006, the Group has made an adjustment on the conversion price of its convertible loan notes. In order to assess the relevant financial impact to the Group's financial statements, the Group has engaged an independent valuer to conduct a valuation on its convertible loan notes. With reference to the result of the valuation, the Group has re-measured the impact to the value of the components of the convertible loan notes in the previous years and made corresponding adjustments to the prior year's income statement and balance sheet accordingly. At 1 January 2005, the adjustments result in an increase in the Group's retained profits by RMB20,399,000, an increase in liability component of convertible loan notes by RMB95,703,000, an increase in derivative financial liabilities by RMB97,000,000, an increase in derivative financial asset by RMB118,600,000, a decrease in convertible loan note equity reserve by RMB105,120,000 and an increase in deferred tax liabilities by RMB9,416,000 and a decrease in property, plant and equipment by RMB1,202,000. Such changes result in a decrease in the consolidated profit attributable to the equity holders of the Company for the year ended 31 December 2005 by RMB59,589,000 as follows: RMB'000 Decrease in finance cost 28,523 Increase in fair value on derivative financial liabilities (12,298) Decrease in fair value on derivative financial asset (99,396) Decrease in deferred tax charge 23,582 ________ (59,589) ________ 5. SIGNIFICANT ACCOUNTING POLICIES Statement of compliance The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards. Basis of preparation The consolidated financial statements have been prepared on the historical cost basis, except for certain financial instruments which are measured at fair value. The principal accounting policies adopted are set out below. Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries). Control is achieved where the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. - 10 - SHANDONG CHENMING PAPER HOLDINGS LIMITED 5. SIGNIFICANT ACCOUNTING POLICIES - continued Basis of consolidation - continued The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate. When necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies in line with those used by other members of the Group. All intra-group transactions, balances, income and expenses are eliminated on consolidation. Minority interests in the net assets of consolidated subsidiaries are identified separately from the Group's equity therein. Minority interests consist of the amount of those interests at the date of the original business combination (see below) and the minority's share of changes in equity since the date of the combination. Losses applicable to the minority in excess of the minority's interest in the subsidiary's equity are allocated against the interests of the Group except to the extent that the minority has a binding obligation and is able to make an additional investment to cover the losses. Business combination Acquisitions of subsidiaries and business are accounted for using the purchase method. The cost of the acquisition is measured at the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the Group in exchange for control of the acquiree, plus any costs directly attributable to the business combination. The acquiree's identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS 3 Business combinations are recognised at their fair values at the acquisition date, except for non-current assets (or disposal groups) that are classified as held for sale in accordance with IFRS 5 Non-Current Assets Held for Sale and Discontinued Operations, which are recognised and measured at fair value less costs to sell. Goodwill arising on acquisition is recognised as an asset and initially measured at cost, being the excess of the cost of the business combination over the Group's interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised. If, after reassessment, the Group's interest in the net fair value of the acquiree's identifiable assets, liabilities and contingent liabilities exceeds the cost of the business combination, the excess is recognised immediately in profit or loss. The interest of minority shareholders in the acquiree is initially measured at the minority's proportion of the net fair value of the assets, liabilities and contingent liabilities recognised. - 11 - SHANDONG CHENMING PAPER HOLDINGS LIMITED 5. SIGNIFICANT ACCOUNTING POLICIES - continued Investments in associates An associate is an entity over which the Group has significant influence and that is neither a subsidiary nor an interest in a joint venture. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies. The results and assets and liabilities of associates are incorporated in these financial statements using the equity method of accounting, except when the investment is classified as held for sale, in which case it is accounted for under IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. Under the equity method, investments in associates are carried in the consolidated balance sheet at cost as adjusted for post-acquisition changes in the Group's share of the net assets of the associate, less any impairment in the value of individual investments. When the Group's share of losses of an associate equals or exceeds its interest in that associates (which includes any long-term interest, that, in substance, from part of the Group's net investments in the associates), the Group discontinues recognizing its share of further losses. An additional share of losses is provided for and a liability is recognised only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of that associates. Any excess of the cost of acquisition over the Group's share of the net fair value of the identifiable assets, liabilities and contingent liabilities of the associate recognised at the date of acquisition is recognised as goodwill. The goodwill is included within the carrying amount of the investment and is assessed for impairment as part of the investment. Any excess of the Group's share of the net fair value of the identifiable assets, liabilities and contingent liabilities over the cost of acquisition, after reassessment, is recognised immediately in profit or loss. Where a group entity transacts with an associate of the Group, profits and losses are eliminated to the extent of the Group's interest in the relevant associate. Non-current assets held for sale Non-current assets and disposal groups are classified as held for sale if their carrying amount will be recovered through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset (or disposal group) is available for immediate sale in its present condition. Management must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one year from the date of classification. Non-current assets (and disposal groups) classified as held for sale are measured at the lower of the assets' previous carrying amount and fair value less costs to sell. - 12 - SHANDONG CHENMING PAPER HOLDINGS LIMITED 5. SIGNIFICANT ACCOUNTING POLICIES - continued Goodwill Goodwill arising on the acquisition of a subsidiary represents the excess of the cost of acquisition over the Group's interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the subsidiary recognised at the date of acquisition. Goodwill is initially recognised as an asset at cost and is subsequently measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill is allocated to each of the Group's cash-generating units expected to benefit from the synergies of the combination. A cash-generating unit to which goodwill has been allocated is tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. An impairment loss recognised for goodwill is not reversed in a subsequent period. On disposal of a subsidiary, the attributable amount of goodwill is included in the determination of the profit or loss on disposal. The Group's policy for goodwill arising on the acquisition of an associate is described under "Investments in associates" above. Revenue recognition Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods and services provided in the normal course of business, net of discounts and sales related taxes. Sales of goods are recognised when goods are delivered and title has passed. Sales of electricity are recognised when electricity are generated and transmitted to the power grid operated by the local electric power company. Sales of steam are recognised when steam is generated and delivered to the customers. Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset's net carrying amount. Dividend income from investments is recognised when the shareholders' rights to receive payment have been established. - 13 - SHANDONG CHENMING PAPER HOLDINGS LIMITED 5. SIGNIFICANT ACCOUNTING POLICIES - continued Leases Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. The Group as lessee Rentals payable under operating leases are charged to profit or loss on a straight line basis over the term of the relevant lease. Benefits received and receivable as an incentive to enter into an operating lease are also spread on a straight-line basis over the lease term. Foreign currencies The individual financial statements of each group entity are presented in the currency of the primary economic environment in which the entity operates (its functional currency). For the purpose of the consolidated financial statements, the results and financial position of each entity are expressed in RMB, which is the functional currency of the Company, and the presentation currency for the consolidated financial statements. In preparing the financial statements of the individual entities, transactions in currencies other than the entity's functional currency (foreign currencies) are recorded at the rates of exchange prevailing on the dates of the transactions. At each balance sheet date, monetary items denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. Exchange differences arising on the settlement of monetary items, and on the retranslation of monetary items, are included in profit or loss for the period. For the purposes of presenting the consolidated financial statements, the assets and liabilities of the Group's foreign operations are translated into the presentation currency of the Group at the rate of exchange prevailing at the balance sheet date, and their income and expenses are translated at the average exchange rates for the year, unless exchange rates fluctuate significantly during the period, in which case, the exchange rates prevailing at the dates of transactions are used. Exchange differences arising, if any, are recognised as a separate component of equity (the exchange translation reserve). Such exchange differences are recognised in profit or loss in the period in which the foreign operation is disposed of. Borrowing costs Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the costs of those assets. - 14 - SHANDONG CHENMING PAPER HOLDINGS LIMITED 5. SIGNIFICANT ACCOUNTING POLICIES - continued Borrowing costs - continued All other borrowing costs are recognised in net profit or loss for the period in which they are incurred. Government grants Government grants relating to property, plant and equipment are treated as deferred income and released to consolidated income statement over the expected useful lives of the assets concerned. Other government grants, including value-added tax refunds are recognised as income when the Group is entitled to receive. Retirement benefit costs Payments to defined contribution retirement benefit plans are charged as an expense as they fall due. Payments made to state-managed retirement benefit schemes are dealt with as payments to defined contribution plans where the Group's obligations under the schemes are equivalent to those arising in a defined contribution retirement benefit plan. Taxation Income tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group's liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amount of assets and liabilities in the consolidated financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit. Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. - 15 - SHANDONG CHENMING PAPER HOLDINGS LIMITED 5. SIGNIFICANT ACCOUNTING POLICIES - continued Taxation - continued The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realized. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis. Research and development expenditures Expenditure on research activities is recognised as an expense in the period in which it is incurred. Property, plant and equipment Assets in the course of construction for production, rental or administrative purposes, or for purposes not yet determined, are carried at cost, less any recognised impairment loss. Cost includes professional fees and, for qualifying assets, borrowing costs capitalized in accordance with the Group's accounting policy. Depreciation of these assets, on the same basis as other assets, commences when the assets are ready for their intended use. Other items of property, plant and equipment are stated at cost less accumulated depreciation and any recognised impairment loss. Depreciation is charged so as to write off the cost of assets, other than construction in progress, over their estimated useful lives, after taking into account of their estimated residual value using the straight-line method. The gain or loss arising on disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in income. Impairment of tangible assets excluding goodwill At each balance sheet date, the Group reviews the carrying amounts of its assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. - 16 - SHANDONG CHENMING PAPER HOLDINGS LIMITED 5. SIGNIFICANT ACCOUNTING POLICIES - continued Impairment of tangible assets excluding goodwill - continued Recoverable amount is the greater of 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 the time value of money and the risks specific to the asset. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash generating unit) is reduced to its recoverable amount. Impairment losses are recognised as an expense immediately. Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognised as income immediately. Inventories Inventories are stated at the lower of cost and net realisable value. Cost comprises direct materials and, where applicable, direct labour costs and those overheads that have been incurred in bringing the inventories to their present location and condition. Cost is calculated using the weighted average method. Net realisable value represents the estimated selling price less all estimated costs to completion and costs to be incurred in marketing, selling and distribution. Biological assets Biological assets are measured on initial recognition and at each balance sheet date at their fair value less estimated point-of-sale costs, unless where the case that market price is not available, the plantation forest is stated at cost less accumulated amortisation and impairment loss. The fair value of the plantation forest is determined based on market prices. The gain or loss arising on initial recognition of the biological assets at fair value less estimated point-of-sale costs and from a change in fair value less estimated point-of-sale costs of biological assets is included in profit or loss for the period in which it arises. Financial instrument Financial assets and financial liabilities are recognised on the balance sheet when a group entity becomes a party to the contractual provisions of the instrument. Financial assets and financial liabilities are initially measured at fair value. Transactions costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognised immediately in profit or loss. - 17 - SHANDONG CHENMING PAPER HOLDINGS LIMITED 5. SIGNIFICANT ACCOUNTING POLICIES - continued Financial instrument - continued Financial assets at fair value through profit or loss A financial asset other than a financial asset held for trading may be designated as at fair value through profit or loss upon initial recognition if: • such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or • the financial asset forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Group's documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or • it forms part of a contract containing one or more embedded derivatives, and IAS 39 permits the entire combined contract (asset or liability) to be designated as at fair value through profit or loss. At each balance sheet date subsequent to initial recognition, financial assets at fair value through profit or loss are measured at fair value, with changes in fair value recognised directly in profit or loss in the period in which they arise. Available-for-sale financial assets For available-for-sale equity investments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured and derivatives that are linked to and must be settled by delivery of such unquoted equity instruments, they are measured at cost less any identified impairment losses at each balance sheet date subsequent to initial recognition. An impairment loss is recognised in profit or loss when there is objective evidence that the asset is impaired. The amount of the impairment loss is measured as the difference between the carrying amount of the asset and the present value of the estimated future cash flows discounted at the current market rate of return for a similar financial asset. Such impairment losses will not reverse in subsequent periods. Trade and other receivables Trade and other receivables are measured at initial recognition at fair value, and subsequently measured at amortised cost, using the effective interest rate method, less impairment. Appropriate allowances for estimated irrecoverable amounts are recognised in profit and loss when there is objective evidence that the asset is impaired. The allowance recognised is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows discounted at the effective interest rate computed at initial recognition. Allowances are reversed in subsequent periods when an increase in the asset's recoverable amount can be related objectively to an event occurring after the impairment was recognised, subject to a restriction that the carrying amount of the asset at the date the impairment is reversed does not exceed what the amortised cost would have been had the impairment not been recognised. - 18 - SHANDONG CHENMING PAPER HOLDINGS LIMITED 5. SIGNIFICANT ACCOUNTING POLICIES - continued Financial instrument - continued Cash and cash equivalents Cash and cash equivalents comprise cash on hand and demand deposits, and other short-term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value. Financial liabilities and equity Financial liabilities and equity instruments issued by the Group are classified according to the substance of the contractual arrangements entered into and the definitions of a financial liability and an equity instrument. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. The accounting policies adopted for specific financial liabilities and equity instruments are set out below. Convertible loan notes Convertible loan notes issued by the Group that contain the liability and conversion option components and other embedded derivatives are classified separately into respective items on initial recognition. Conversion option will be settled by the exchange of a fixed amount of cash or another financial asset for a fixed number of the Company's own equity instruments is classified as an equity instrument. On initial recognition, the fair value of the liability component is determined using the prevailing market interest of similar non-convertible debts. The difference between the proceeds of the issue of the convertible loan notes and the fair value assigned to the liability component, representing the conversion option for the holder to convert the loan notes into equity, is included in equity (convertible loan notes equity reserve). In subsequent periods, the liability component of the convertible loan notes is carried at amortised cost using the effective interest method. The equity component, represented by the option to convert the liability component into ordinary shares of the Company, will remain in convertible loan notes equity reserve until the embedded option is exercised (in which case the balance stated in convertible loan notes equity reserve will be transferred to share premium). Where the option remains unexercised at the expiry date, the balance stated in convertible loan notes equity reserve will be released to the retained profits. No gain or loss is recognised in profit or loss upon conversion or expiration of the option. Transaction costs that relate to the issue of the convertible loan notes are allocated to the liability and equity components and other embedded derivatives in proportion to the allocation of the proceeds. Transaction costs relating to the equity component are charged directly to equity. Transaction costs relating to the liability component are included in the carrying amount of the liability portion and amortised over the period of the convertible loan notes using the effective interest method. - 19 - SHANDONG CHENMING PAPER HOLDINGS LIMITED 5. SIGNIFICANT ACCOUNTING POLICIES - continued Financial instrument - continued Financial liabilities at fair value through profit or loss A financial liability other than a financial liability held for trading may be designated as at fair value through profit or loss upon initial recognition if: • such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or • the financial liability forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Group's documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or • it forms part of a contract containing one or more embedded derivatives, and IAS 39 permits the entire combined contract (asset or liability) to be designated as at fair value through profit or loss. At each balance sheet date subsequent to initial recognition, financial liabilities at fair value through profit or loss are measured at fair value, with changes in fair value recognised directly in profit or loss in the period in which they arise. Embedded derivatives Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of the host contracts and the host contracts are not measured at fair value with changes in fair value recognised in profit or loss. Derivatives are initially recognised at fair value at the date a derivative contract is entered into and are subsequently re-measured to their fair value at each balance sheet date. The resulting gain or loss is recognised in profit or loss immediately. Other financial liabilities Other financial liabilities including bank and other borrowings and trade payables are subsequently measured at amortised cost, using the effective interest method. Equity instruments Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs. Provisions Provisions are recognised when the Group has a present obligation as a result of a past event, and it is probable that the Group will be required to settle that obligation. Provisions are measured at the directors' best estimate of the expenditure required to settle the obligation at the balance sheet date, and are discounted to present value where the effect is material. - 20 - SHANDONG CHENMING PAPER HOLDINGS LIMITED 6. CRITICAL ACCOUNTING JUDGMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY Critical judgments in applying the Group's accounting policies In the progress of applying the Group's accounting policies, which are described in note 5, management has made the following judgments that have the most significant effect on the amounts recognised in the financial statements (apart from those accounting estimations, which are dealt with below). Timing of constructions in progress transfer to qualifying asset for its intended use In determining the timing when the construction in progress, especially for large-scale paper manufacturing plant and machinery, is transferred to qualifying asset ready for its intended use requires the Group to determine whether substantially all the activities necessary to bring the qualifying asset to the condition ready for its intended use are completed and related direct expenditure are included in the cost of the qualifying asset. The determination requires the use of management's judgment and experience. Key sources of estimation uncertainty The Group makes estimates and assumptions concerning the future. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets are discussed below. Depreciation of property, plant and equipment Property, plant and equipment are depreciated on a straight-line basis over their estimated useful lives, after taking into account their estimated residual value. The Group assesses annually the residual value and the useful life of the property, plant and equipment and if the expectation differs from the original estimate, such difference will impact the depreciation in the year in which such estimate has been changed. Impairment of property, plant and equipment The Group assesses annually whether property, plant and equipment have any indication of impairment in accordance with the accounting policy. The recoverable amounts of property, plant and equipment have been determined based on value-in-use calculations. These calculations require the use of judgment and estimates. Impairment of goodwill Determining whether goodwill is impaired requires an estimation of the value in use of the cash-generating units to which goodwill has been allocated. The value in use calculation requires the Group to estimate the future cash flows expected to arise from the cash-generating unit and a suitable discount rate in order to calculate the present value. Where the actual future cash flows are less than expected, a material impairment loss may arise. At 31 December 2006, the carrying amount of goodwill is approximately RMB20,284,000. Details of the assessment are disclosed in note 21. - 21 - SHANDONG CHENMING PAPER HOLDINGS LIMITED 6. CRITICAL ACCOUNTING JUDGMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY - continued Allowance for bad and doubtful debts The Group makes allowances for bad and doubtful debts based on an assessment of the recoverability of trade and other receivables. Allowances are applied to trade and other receivables where events or changes in circumstances indicate that the balances may not be collectable. The identification of bad and doubtful debts requires the use of judgment and estimates. Where the expectation is different from the original estimate, such difference will impact carrying value of trade and other receivables and doubtful debts expenses in the year in which such estimate has been changed. 7. FINANCIAL INSTRUMENTS Financial risk management objectives and policies The Group's major financial instruments include equity investments, borrowings, trade receivables, trade payables, convertible loan notes and short term debentures. Details of these financial instruments are disclosed in respective notes. The risks associated with these financial instruments are set out below. The management manages and monitors these exposures to ensure appropriate measures are implemented on a timely and effective manner. Fair value interest rate risk The Group's fair value interest rate risk relates primarily to fixed-rate bank borrowings. The Group's fixed-rate bank borrowings mainly are short term bank borrowings which mininise the fair value risk. Cash flow interest rate risk The Group's cash flow interest rate risk relates primarily to variable-rate bank borrowings and convertible loan notes. It is the Group's policy to keep its borrowings at floating rate of interests so as to minimise the fair value interest rate risk. Credit risk The Group's credit risk is primarily attributable to its trade and other receivables. At the balance sheet date, the Group's maximum exposure to credit risk which will cause a financial loss to the Group due to failure to discharge an obligation by the counterparties or debtors is the carrying amount of the respective recognised financial assets stated in the consolidated balance sheet. In order to minimise the credit risk, the management of the Group has delegated a team responsible for determination of credit limits, credit approvals and other monitoring procedures to ensure that follow-up action is taken to recover overdue debts. In addition, the Group reviews the recoverable amount of each individual trade debts at each balance sheet date to ensure that adequate impairment losses are made for irrecoverable amounts. In this regard, the directors of the Company consider that the Group's credit risk is significantly reduced. - 22 - SHANDONG CHENMING PAPER HOLDINGS LIMITED 7. FINANCIAL INSTRUMENTS - continued Credit risk - continued The Group has no significant concentration of credit risk, with exposure spread over a large number of counterparties and customers. The credit risk on liquid funds is limited because the counterparties are authorised financial institutions in the PRC. Liquidity risk In the management of the liquidity risk, the Group monitors and maintains a level of cash and cash equivalents deemed adequate by the management to finance the Group's operations and mitigate the effects of fluctuations in cash flows. The management monitors the utilisation of bank borrowings and ensures compliance with the loan covenants. The Group relies on bank borrowings as a significant source of liquidity. At 31 December 2006, the Group had unused bank loan facilities of approximately RMB1,599,260,000. 8. REVENUE An analysis of the Group's revenue for the year, for both continuing and discontinued operations, is as follows: 2006 2005 RMB'000 RMB'000 Continuing operations Sale of paper products 10,762,640 8,866,581 Sale of construction materials 816,299 544,518 Sale of chemical products 75,099 164,720 Sale of electricity and steam 59,784 49,756 Others 196 _________ 206 ________ 11,714,018 9,625,781 Discontinued operation Sale of paper manufacturing machinery 80,547 _________ 73,331 ________ 11,794,565 _________ 9,699,112 ________ - 23 - SHANDONG CHENMING PAPER HOLDINGS LIMITED 9. BUSINESS AND GEOGRAPHICAL SEGMENTS Business segments For management purpose, the Group is currently organised into following operating divisions: paper products, construction materials, chemical products, electricity and others. These divisions are the basis on which the Group reports its primary segment information. However, since the sales of paper products accounted for over 90% (2005: over 90%) of the consolidated revenue, results and assets of the Group in the business segment, no business segment analysis is presented accordingly. Geographical segments The Group's operations and assets are located in the PRC and sales are in the PRC and overseas. The following table provides an analysis of the Group's revenue by location of customers. Continuing operations Discontinued operation Total 2006 2005 2006 2005 2006 2005 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 PRC 9,792,911 8,593,978 80,547 73,331 9,873,458 8,667,309 Others 1,921,107 ________ 1,031,803 _______ - _____ - _____ 1,921,107 ________ 1,031,803 _______ 11,714,018 ________ 9,625,781 _______ 80,547 _____ 73,331 _____ 11,794,565 ________ 9,699,112 _______ Revenue to other countries is individually below 10% of the total revenue, so no disclosure on other reportable geographical segments is presented. 10. OTHER INCOME Continuing operations Discontinued operation Total 2006 2005 2006 2005 2006 2005 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 Government grants Expansion grants (a) 142,186 121,727 - - 142,186 121,727 Value-added tax and other taxes refund (b) 10,903 19,383 - - 10,903 19,383 _____ _____ ___ ___ _____ _____ 153,089 141,110 - - 153,089 141,110 Interest income 33,661 20,686 - 138 33,661 20,824 Net exchange gain 68,285 51,651 - - 68,285 51,651 Net gain from sales of raw materials and others 24,143 20,284 - - 24,143 20,284 Insurance compensation 10,734 1,946 - - 10,734 1,946 Others 25,283 12,882 169 656 25,452 13,538 _____ _____ ___ ___ _____ _____ 315,195 248,559 169 794 315,364 249,353 _____ _____ ___ ___ _____ _____ _____ _____ ___ ___ _____ _____ - 24 - SHANDONG CHENMING PAPER HOLDINGS LIMITED 10. OTHER INCOME - continued (a) The Company and its subsidiaries received government grants from the local municipal governments in relation to the encouragement of the development and advancement of the business of the Group. The total amount granted and received during the year is RMB142,186,000 (2005: RMB121,727,000). According to the relevant government grant documents, the grants are the general subsidies for the business operation of the Group. 2006 2005 RMB'000 RMB'000 The Company 56,634 45,673 Shandong Chenming Paper Group Qihe Linerboard Paper Company Limited 33,424 47,336 Shandong Chenming Paper Group Qihe Linerboard Paper Company Limited 28,350 - Chibi Chenming Paper Company Limited 9,700 12,060 Yanbian Chenming Paper Company Limited 6,611 6,649 Wuhan Chenming Hanyang Paper Company Limited 2,800 5,803 Hailaer Chenming Paper Company Limited 2,700 2,240 Shandong Chenming Panels Company Limited 1,521 771 Jiangxi Chenming Paper Company Limited 446 245 Heze Chenming Panels Company Limited - _______ 950 _______ 142,186 _______ 121,727 _______ (b) Pursuant to various circulars issued by the State Administration of Taxation and local government authorities, the Group received various types of refund on value-added tax and other local taxes. - 25 - SHANDONG CHENMING PAPER HOLDINGS LIMITED 11. FINANCE COSTS Continuing operations Discontinued operation Total 2006 2005 2006 2005 2006 2005 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 Interest expenses on: Bank borrowings 394,053 213,085 4,657 3,289 398,710 216,374 Convertible loan notes 60,213 76,750 - - 60,213 76,750 Short term debentures 33,969 - - - 33,969 - Other borrowings 32,681 43,659 - - 32,681 43,659 Less: Interest capitalised in construction in progress (64,550) (45,373) - - (64,550) (45,373) _____ _____ ____ ____ _____ _____ Net interest expense 456,366 288,121 4,657 3,289 461,023 291,410 _____ _____ ____ ____ _____ _____ _____ _____ ____ ____ _____ _____ Borrowing costs capitalised during the year are calculated by applying a capitalisation rate of 5.89% (2005: 4.16%) to expenditure on qualifying assets. 12. PROFIT BEFORE TAX Profit before tax has been arrived at after charging (crediting): Continuing operations Discontinued operation Total 2006 2005 2006 2005 2006 2005 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 Wages and salaries 377,912 274,646 5,090 19,119 383,002 293,765 Staff welfare 27,750 33,332 713 3,366 28,463 36,698 Cost to retirement benefit schemes contributions 55,142 30,695 1,256 2,940 56,398 33,635 Performance bonus 34,506 20,374 252 - 34,758 20,374 ______ ______ _____ _____ ______ ______ Total staff costs 495,310 359,047 7,311 25,425 502,621 384,472 ______ ______ _____ _____ ______ ______ Allowance for bad and doubtful debts 22,618 53,382 102 307 22,720 53,689 Allowance of inventories 4,298 935 - - 4,298 935 Cost of inventories recognised as an expense 8,073,018 6,162,887 66,421 54,858 8,139,439 6,217,745 Lease payment charge 14,915 17,327 - - 14,915 17,327 Depreciation of property, plant and equipment 897,348 750,232 5,459 6,688 902,807 756,920 Impairment loss on property, plant and equipment 8,074 - - - 8,074 - Loss (gain) on disposal of property, plant and equipment 5,182 23,255 (94) (160) 5,088 23,095 Minimum operating lease payment in respect of property, plant and equipment17,926 36,351 - 52 17,926 36,403 Repairs and maintenance expenditure on property, plant and equipment 106,107 72,274 - 551 106,107 72,825 Research and development costs 6,179 13,033 - - 6,179 13,033 ______ ______ _____ _____ ______ ______ ______ ______ _____ _____ ______ ______ - 26 - SHANDONG CHENMING PAPER HOLDINGS LIMITED 13. INCOME TAX EXPENSE Continuing operations Discontinued operation Total 2006 2005 2006 2005 2006 2005 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 The income tax charge comprises Charge (credit) for the year 134,767 199,517 - - 134,767 199,517 Under(over)provision in prior years 9,014 5,542 - (3,495) 9,014 2,047 Deferred tax credit (note 23) (16,858) (23,582) - - (16,858) (23,582) _____ _____ ____ ____ _____ _____ 126,923 181,477 - (3,495) 126,923 177,982 _____ _____ ____ ____ _____ _____ _____ _____ ____ ____ _____ _____ Pursuant to the relevant laws and regulations in the PRC, the statutory enterprise income tax rate of 33% is applied to the Group except for the following companies which are entitled to different concessionary tax rates below. Since the Company is a foreign investment enterprise established and operated in the Technology Economic Zone in Shandong, the applicable income tax rate of the Company is 24%. Pursuant to the approval of the local government and according to the related regulations issued by PRC Ministry of Foreign Trade and Economic Cooperation, for Hailaer Chenming Paper Company Limited and Yanbian Chenming Paper Company Limited, subsidiaries of the Company, the applicable income tax rate is 15% from 2001 to 2010. Pursuant to the approval of the local government and according to regulations issued by State of Council, the applicable income tax rate of Shandong Chenming Xinli Co-generation Company Limited, a subsidiary of the Company, is 15%. Pursuant to the approval of the Wuhan State Tax Bureau, Wuhan Chenming Hanyang Paper Company Limited, a subsidiary of the Company, was changed to a foreign investment enterprise in April 2005, is exempted from paying PRC income tax for two years starting from the first profit-making year followed by a 50% reduction in income tax rate in the following three years. 2006 is the second profit-making year of the subsidiary and accordingly, income tax has been exempted. Jiangxi Chenming Paper Company Limited is a foreign investment enterprise established in the PRC. Pursuant to the enterprise income tax laws applicable to foreign investment enterprise, the subsidiary is exempted from paying PRC income tax for two years starting from the first profit-making year followed by a 50% reduction in income tax rate in the following three years. Jiangxi Chenming Paper Company Limited is in its first profit making year in 2006 and accordingly, income tax has been exempted. Jilin Chenming Paper Company Limited is a foreign investment enterprise established in the PRC. Pursuant to the enterprise income tax laws applicable to foreign investment enterprise, the subsidiary is exempted from paying PRC income tax for two years starting from the first profit-making year followed by a 50% reduction in income tax rate in the following three years. Jilin Chenming Paper Company Limited has not yet generated any taxable income during 2006. Shandong Yujing Hotel Company Limited is still in its development stage in 2006 and no enterprise income tax is levied. - 27 - SHANDONG CHENMING PAPER HOLDINGS LIMITED 13. INCOME TAX EXPENSE - continued PRC Enterprise Income Tax of the Group for the year mainly comprises income tax of the Company and certain of its subsidiaries which are calculated at rates applicable to the relevant companies ranging from 0% to 33% (2005: 0% to 33%). The charge for the year can be reconciled to the profit per the consolidated income statement as follows: 2006 2005 RMB'000 RMB'000 Profit before taxation 872,915 _______ 798,115 _______ Tax at the applicable income tax rate of 24% (2005: 24%) 209,500 191,548 Effect of tax incentives (note) (92,437) (60,801) Tax effect of income not taxable (55,441) (27,101) Tax effect of expenses not deductible 74,821 64,773 Under(over)provision in prior years 9,014 2,047 Tax effect of tax losses not recognised 21,548 20,436 Effect of tax exemptions granted to certain subsidiaries (34,376) (30,474) Effect of different tax rates of subsidiaries operating in other jurisdictions 14,730 17,750 Tax effect of utilisation of tax losses previously not recognised (20,436) _______ (196) _______ Tax charge for the year 126,923 _______ 177,982 _______ Note: Included in the amounts above, according to regulations issued by the State Administration of Taxation, the Group obtained incentives of income tax deduction for purchase of equipment manufactured domestically with an amount of RMB92,437,000 (2005: RMB57,306,000) respectively from local tax authorities during the year. The details of deferred tax credit for the year are set out in note 23. 14. DISCONTINUED OPERATION On 31 December 2005, the Group announced to dispose of all of its interests in Shanghai Chenming Paper Machinery Company Limited ("Shanghai Chenming") which was engaged in manufacture of paper machinery business. In 2006, the Board of Directors entered into an agreement with a third party to dispose of this subsidiary and the disposal was completed on 31 August 2006 at a consideration of RMB122,955,000. A gain on disposal of RMB44,321,000 was resulted. Details of the assets and liabilities disposed of are disclosed in note 37(a). - 28 - SHANDONG CHENMING PAPER HOLDINGS LIMITED 14. DISCONTINUED OPERATION - continued The results of the discontinued operation included in the consolidated income statement are set out below. Profit (loss) for the year from discontinued operation: 2006 2005 RMB'000 RMB'000 Revenue 80,547 73,331 Cost of sales (68,225) (57,460) Other income 169 794 Distribution cost (367) (1,934) Administrative expenses (15,447) (22,703) Finance cost (4,657) (3,289) Gain on disposal of a subsidiary 44,321 _______ - ______ Profit (loss) before tax 36,341 (11,261) Income tax credit - _______ 3,495 ______ Profit (loss) for the year 36,341 _______ (7,766) ______ Cash flows from discontinued operation: Net cash inflows from operating activities (1,480) 51,296 Net cash outflows from investing activities (47,109) (34,352) Net cash inflows (outflows) from financing activities 48,028 _______ (42,233) ______ Net cash outflows (561) _______ (25,289) ______ 15. PROPOSED DIVIDEND 2006 2005 RMB'000 RMB'000 Proposed dividend for the year ended 31 December 2006 of RMB12 cents (2005: RMB12 cents) per share 163,880 ______ 162,425 _______ The proposed dividend for the year ended 31 December 2006 is subject to approval by the Company's shareholders at the forthcoming Annual General Meeting and has not been included as a liability in these financial statements (see note 39). - 29 - SHANDONG CHENMING PAPER HOLDINGS LIMITED 16. EARNINGS PER SHARE From continuing and discontinued operations The calculation of the basic and diluted earnings per share attributable to the equity holders of the Company is based on the following data: Earnings 2006 2005 RMB'000 RMB'000 Earnings for the purpose of basic earnings per share (profit for the year attributable to equity holders of the Company) 585,274 546,607 Effect of dilutive potential shares: Interest on convertible loan notes (net of tax) 45,762 - Loss on change in conversion price of convertible loan notes 229,399 - Change in value of embedded derivatives (154,598) - Deferred tax related to convertible loan notes (19,941) _______ - _______ Earnings for the purpose of diluted earnings per share 685,896 _______ 546,607 _______ Number of shares 2006 2005 '000 '000 Weighted average number of shares for the purposes of basic earnings per share 1,364,330 1,348,647 Effect of dilutive potential shares: Convertible loan notes 342,117 ________ - ________ Weighted average number of shares for the purpose of diluted earnings per share 1,706,447 ________ 1,348,647 ________ - 30 - SHANDONG CHENMING PAPER HOLDINGS LIMITED 16. EARNINGS PER SHARE - continued From continuing operations The calculation of the basic and diluted earnings per share attributable to the equity holders of the Company is based on the following data: Earnings 2006 2005 '000 '000 Profit for the year attributable to equity holders of the Company 585,274 546,607 (Profit) loss for the year from discontinued operation (36,341) _______ 7,766 _______ Earnings for the purpose of basic earnings per share from continuing operations 548,933 554,373 Effect of dilutive potential shares: Interest on convertible loan notes (net of tax) 45,762 - Loss on change in conversion price of convertible loan notes 229,399 - Change in value of embedded derivatives (154,598) - Deferred tax related to convertible loan notes (19,941) _______ - _______ Earnings for the purpose of diluted earnings per share 649,555 _______ 554,373 _______ Number of shares 2006 2005 '000 '000 Weighted average number of shares for the purpose of basic earnings per share 1,364,330 1,348,647 Effect of dilutive potential shares: Convertible loan notes 342,117 ________ - ________ Weighted average number of shares for the purpose of diluted earnings per share 1,706,447 ________ 1,348,647 ________ - 31 - SHANDONG CHENMING PAPER HOLDINGS LIMITED 16. EARNINGS PER SHARE - continued The following table summarises the impact on the basic earnings per share for the year ended 31 December 2005 as a result of the prior period adjustments mentioned in note 4: Impact on basic earnings per share RMB From continuing and discontinued operations: Reported figures before adjustments 0.45 Adjustments arising from prior period adjustments in note 4 (0.04) ____ Restated 0.41 ____ From continuing operations: Reported figures before adjustments 0.45 Adjustments arising from prior period adjustments in note 4 (0.04) ____ Restated 0.41 ____ The computation of diluted earnings per share for the year ended 31 December 2005 does not assume the conversion of the Company's outstanding convertible loan notes since their exercise would result in an increase in profit per share. - 32 - SHANDONG CHENMING PAPER HOLDINGS LIMITED 17. PROPERTY, PLANT AND EQUIPMENT Plant and machinery, Construction Buildings and equipment in progress Total RMB'000 RMB'000 RMB'000 RMB'000 COST At 1 January 2005, originally stated 1,451,014 6,023,389 4,566,583 12,040,986 Effect of prior period adjustment (note 4) - (1,202) - (1,202) ________ _________ ________ _________ At 1 January 2005, as restated 1,451,014 6,022,187 4,566,583 12,039,784 Additions 85,414 250,829 1,603,110 1,939,353 Transfers 737,401 4,264,425 (5,001,826) - Disposals (12,349) (103,660) - (116,009) Reclassified as held for sale (144,267) (85,476) (16,767) (246,510) ________ _________ ________ _________ At 31 December 2005 2,117,213 10,348,305 1,151,100 13,616,618 Additions 92,262 130,810 3,142,061 3,365,133 Transfers 83,137 240,685 (323,822) - Disposal of subsidiaries - (2,742) - (2,742) Disposals (5,861) (55,177) - (61,038) Transfer to construction in progress for upgrading and improvement (28,253) (38,114) 62,871 (3,496) ________ _________ ________ _________ At 31 December 2006 2,258,498 10,623,767 4,032,210 16,914,475 ________ _________ ________ _________ DEPRECIATION AND IMPAIRMENT At 1 January 2005 229,858 1,524,004 - 1,753,862 Provided for the year 80,087 676,833 - 756,920 Eliminated on disposals (11,545) (71,492) - (83,037) Reclassified as held for sale (2,285) (6,662) - (8,947) ________ _________ ________ _________ At 31 December 2005 296,115 2,122,683 - 2,418,798 Provided for the year 88,767 814,040 - 902,807 Impairment for the year 6,928 1,146 - 8,074 Eliminated on disposal of subsidiaries - (778) - (778) Eliminated on disposals (5,268) (33,338) - (38,606) Eliminated on transfer to construction in progress (892) (2,604) - (3,496) ________ _________ ________ _________ At 31 December 2006 385,650 2,901,149 - 3,286,799 ________ _________ ________ _________ CARRYING AMOUNT At 31 December 2006 1,872,848 7,722,618 4,032,210 13,627,676 ________ _________ ________ _________ ________ _________ ________ _________ At 31 December 2005 1,821,098 8,225,622 1,174,422 11,221,142 ________ _________ ________ _________ ________ _________ ________ _________ - 33 - SHANDONG CHENMING PAPER HOLDINGS LIMITED 17. PROPERTY, PLANT AND EQUIPMENT - continued The above items of property, plant and equipment, other than construction in progress, are depreciated over their estimated useful lives, after taking into account their estimated residual value, on a straight line basis: Buildings 20 - 40 years Plant and machinery, and equipment 5 - 10 years Cost of upgrade of leased plant and machinery Over the unexpired terms of the lease The Group has pledged plant and machinery having a carrying amount of approximately RMB2,972,134,000 (2005: RMB2,008,748,000) to secure the loan facilities granted to the Group. The impairment loss for the year of RMB8,074,000 was related to a paper manufacturing factory of the Group that the Group plans to close down. The carrying value of relevant items of property, plant and equipment of that factory was fully impaired during the year. 18. PREPAID LEASE PAYMENTS 2006 2005 RMB'000 RMB'000 Prepaid lease payments related to Land use rights 692,089 648,826 Production facilities 6,000 _______ 12,000 _______ 698,089 _______ 660,826 _______ Analyzed for reporting purposes as: Current assets 6,962 19,048 Non-current assets 691,127 _______ 641,778 _______ 698,089 _______ 660,826 _______ At 31 December 2006, the Group has pledged the land use rights having a carrying value of approximately RMB294,821,000 (2005: RMB104,558,000) to secure the loan facilities granted to the Group. The lease terms of the land use rights held by the Group are between 40 and 50 years. The payment of production facilities represents prepaid rentals for production facilities leased from Hanyang Paper Making Factory, a minority shareholder of Wuhan Chenming Hanyang Paper Company Limited. - 34 - SHANDONG CHENMING PAPER HOLDINGS LIMITED 19. INVESTMENTS IN ASSOCIATES 2006 2005 RMB'000 RMB'000 Cost of unlisted investments 80,090 20,090 Share of post-acquisition reserves and profits, net of dividends received (199) ______ 617 ______ 79,891 ______ 20,707 ______ Particulars of associates of the Group at 31 December 2006, which are established in the PRC, are as follows: Place of Percentage of equity Name of company operation interest held by the Group Principal activities Shouguang Liben Paper PRC 26.40% Manufacture Making Company Limited of paper Qingzhou Chenming PRC 30.00% Production of Denaturation Amylum denaturated Co., Ltd. Amylum Arjowiggins Chenming PRC 30.00% Manufacture Specialty Paper Company of paper Limited Summarised financial information in respect of the Group's associates is set out below: 2006 2005 RMB'000 RMB'000 Revenue 118,045 _______ 87,887 ______ (Loss) profit for the year (2,244) _______ 2,457 ______ Group's share of results for the year (540) _______ 649 ______ Total assets 443,370 111,680 Total liabilities (175,951) _______ (37,424) ______ Net assets 267,419 _______ 74,256 ______ Group's share of net assets 79,891 _______ 20,707 ______ - 35 - SHANDONG CHENMING PAPER HOLDINGS LIMITED 20. AVAILABLE-FOR-SALE INVESTMENTS 2006 2005 RMB'000 RMB'000 Unlisted investments, at cost 7,252 7,252 Less: Impairment (1,342) (1,200) _____ _____ Carrying value at the balance sheet date 5,910 6,052 _____ _____ _____ _____ Available-for-sale investments comprise unlisted investments in the companies established in the PRC in which the Group holds less than 20% of their paid-up capital or the Group cannot exercise any significant influence or control. They are measured at cost less impairment at each balance sheet date because the range of reasonable fair value estimates is so significant that the directors of the Company are of the opinion that their fair values cannot be measured reliably. 21. GOODWILL 2006 2005 RMB'000 RMB'000 COST At beginning of the year - - Arising from acquisition of additional interest in subsidiaries 20,284 - ______ _____ At end of the year 20,284 - ______ _____ ______ _____ During the year, the Group acquired additional interests in subsidiaries and goodwill of RMB20,284,000 was arised from the acquisition. Valuation of the net assets of the subsidiaries was performed by the management at the time of acquisition and balance sheet date for the impairment test on goodwill. There is no indication of the impairment loss during the year. 22. BIOLOGICAL ASSETS Plantation forest 2006 2005 RMB'000 RMB'000 Carrying value at 1 January - - Increase due to purchases 19,514 - ______ ______ Carrying value at 31 December 19,514 - ______ ______ ______ ______ The assets comprise immature trees in the plantation forest purchased in 2006 to be grown for lumber. As the market-determined prices of the assets are not available and alternative estimate of fair value of the assets cannot be determined reliably, the assets are stated at its cost less any accumulated depreciation and accumulated impairment losses. The assets are depreciated over the estimated years of lumbering of the plantation forest on a straight line basis since maturity. - 36 - SHANDONG CHENMING PAPER HOLDINGS LIMITED 23. DEFERRED TAXATION The following are the major deferred tax assets (liabilities) recognised and movements thereon during the current and prior years: Allowance for doubtful debts Convertible Staff cost Tax and inventories loan notes accruals losses Others Total RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 At 1 January 2005 (note 4) 25,834 (35,250) - - - (9,416) Credit (charge) to consolidated income statement for the year 13,110 10,472 - - - 23,582 ______ ______ _____ _____ ____ ______ At 31 December 2005 38,944 (24,778) - - - 14,166 Credit (charge) to consolidated income statement for the year 6,485 4,837 4,459 1,804 (727) 16,858 ______ ______ _____ _____ ____ ______ At 31 December 2006 45,429 (19,941) 4,459 1,804 (727) 31,024 ______ ______ _____ _____ ____ ______ ______ ______ _____ _____ ____ ______ For the purpose of balance sheet presentation, certain deferred tax assets and liabilities have been offset. The following is the analysis of the deferred tax balances for financial reporting purpose: 2006 2005 RMB'000 RMB'000 Deferred tax assets 31,024 14,166 Deferred tax liabilities - - ______ ______ 31,024 14,166 ______ ______ ______ ______ At the balance sheet date, the Group has unutilised tax loss of RMB68,991,000 (2005: RMB90,615,000) available for offset against future profits. No deferred tax asset has been recognised in respect of the remaining RMB63,524,000 due to the unpredictability of future profit streams that will expire in 2011. 24. INVENTORIES 2006 2005 RMB'000 RMB'000 Raw materials 1,020,214 1,081,929 Work in progress 38,787 64,120 Finished goods 782,183 843,793 Property under construction for resale purpose - 137,194 ________ ________ 1,841,184 2,127,036 ________ ________ ________ ________ - 37 - SHANDONG CHENMING PAPER HOLDINGS LIMITED 25. OTHER FINANCIAL ASSETS Trade and other receivables 2006 2005 RMB'000 RMB'000 Trade receivables 2,212,871 1,419,171 Bills receivable 939,705 509,989 Other receivables 146,436 ________ 527,270 ________ 3,299,012 ________ 2,456,430 ________ Credit of up to 60 days is granted to customers with established trading history, otherwise sales on cash terms are required. An allowance has been made for estimated irrecoverable amounts of trade receivables arising from the sale of goods of RMB156,388,000 (2005: RMB131,466,000). This allowance has been determined by reference to past default experience. Bank balances and cash Bank balances and cash comprise cash held by the Group and short-term deposits with an original maturity of three months or less. The carrying amounts of trade, bills and other receivable, bank balances and cash at the balance sheet date approximate to the fair value. 26. RESTRICTED BANK DEPOSITS Amounts represent the Group's bank deposits pledged to banks to secure certain bills facilities granted to the Group by certain banks. The carrying amounts of restricted bank deposits at the balance sheet date approximate to the fair value. - 38 - SHANDONG CHENMING PAPER HOLDINGS LIMITED 27. SHARE CAPITAL PRC State- legal Legal Number of owned person person shares shares shares shares A shares B shares Total '000 '000 '000 '000 '000 '000 '000 Balance at 1 January 2005 897,728 281,896 8,165 - 236,002 371,665 897,728 Shares issued by way of capitalisation of capital reserve (note (b)) 269,319 84,569 2,450 - 70,801 111,499 269,319 Bonus shares issued by way of capitalisation of retained earnings (note (c)) 179,546 56,379 1,633 - 47,201 74,333 179,546 Shares issued upon conversion of convertible bonds (note (d) 6,947 - - - 6,947 - 6,947 _______ _______ ______ ______ ______ ______ _______ Balance at 31 December 2005 1,353,540 422,844 12,248 - 360,951 557,497 1,353,540 Shares issued upon conversion of convertible bonds (note (d)) 12,130 - - - 12,130 - 12,130 Share reform (note (e)) - (422,844) (12,248) 338,090 97,002 - - _______ _______ ______ ______ ______ ______ _______ Balance at 31 December 2006 1,365,670 - - 338,090 470,083 557,497 1,365,670 _______ _______ ______ ______ ______ ______ _______ _______ _______ ______ ______ ______ ______ _______ Notes: (a) All issued shares are authorised, issued and fully paid with a par value of RMB1 each. The state-owned shares, the legal person shares, A and B shares carry equal voting rights. (b) In 2005, the Company issued additional shares of 269,318,674 shares by the way of capitalisation of capital reserve of approximately RMB269,319,000 in the ratio of 3 shares for every 10 shares to the then shareholders at 19 May 2005. (c) A bonus issue of 2 shares for every 10 shares to the then shareholders at 19 May 2005, by the way of capitalisation of retained earnings of approximately RMB179,546,000, resulted in a new issue of 179,545,782 shares of the Company. (d) During the year, 12,130,235 A shares (2005: 6,947,561 A shares) were issued upon the conversion of convertible bonds with total carrying value of approximately RMB80,839,000 (2005: RMB47,941,000). (e) Before the share reform of the Company, the state-owned shares and the PRC legal person shares were non-transferable. On 29 March 2006, the Company has completed its share reform plan that all the A shares holders are entitled to 2.6 shares for 10 shares from the non-transferable shares holders. As a result of the share reform, all the shares of the Company are transferable. - 39 - SHANDONG CHENMING PAPER HOLDINGS LIMITED 28. RESERVES (a) Reserves of the Group other than accumulated profits and dividend reserve include capital reserve, equity reserve, statutory surplus reserve, discretionary surplus reserve and statutory public welfare reserve, which form part of shareholders' equity. Capital reserve comprises surplus between the appraised value of the net assets and the value of shares issued when the Company was converted from a state-owned enterprise to a joint stock limited company, premium of shares issued, capital surplus arising from capital injection from minority shareholders, transfers from accumulated profits for those government grants recognised in the income statement under IFRS but are not distributable in accordance with the legal requirement in the PRC. The capital reserve can be applied for conversion into share capital. Equity reserve Equity reserve represents the balance of equity component of the convertible loan notes issued. Statutory surplus reserve/Discretionary surplus reserve In accordance with relevant PRC Company laws and regulations and the Company's Articles of Association, the Company is required to appropriate 10% of its profit after taxation reported in its statutory financial statements prepared under the PRC GAAP to the statutory surplus reserve. Allocation to the discretionary surplus reserve shall be approved by the shareholders in general meeting. The appropriation to statutory surplus reserve may cease if the balance of the statutory surplus reserve has reached 50% of the Company's registered capital. Both surplus reserves may be used to make up losses or for conversion into share capital. The Company may, upon the approval by a resolution of shareholders' general meeting, convert its surplus reserves into share capital by issuing new shares to existing shareholders in proportion to their then existing shareholdings or by increasing the nominal value of each share. However, when converting the Company's statutory surplus reserve into share capital, the balance of such reserve remaining unconverted must not be less than 25% of the registered capital. - 40 - SHANDONG CHENMING PAPER HOLDINGS LIMITED 28. RESERVES - continued Statutory public welfare reserve In accordance with relevant PRC Company laws and regulations and the Company's Articles of Association, the Company is required to appropriate 5% to 10% of the profit after taxation as reported in its statutory financial statements prepared under the PRC GAAP to the statutory public welfare reserve. The statutory public welfare reserve shall only apply to collective welfare of staff and workers and welfare facilities remain as properties of the Group. The statutory public welfare reserve is non-distributable. When the statutory public welfare reserve is utilised, an amount equal to the cost of the assets acquired is transferred to discretionary surplus reserve. On disposal of the relevant asset, the original transfers from the reserve are reversed. There is no utilisation during both years. Pursuant to a circular [2006] No. 67 issued by Ministry of Finance in 2006, the balance of the statutory public welfare reserve is transferred to statutory surplus reserve. (b) Basis for profit distribution In accordance with the Company's Articles of Association, profit available for distribution to shareholders should be based on the lower of the amount determined in accordance with the PRC accounting standards and regulations and that determined under IFRS after deduction of the current year's appropriation to the statutory reserves. 29. BORROWINGS 2006 2005 RMB'000 RMB'000 Secured bank borrowings 572,494 749,914 Unsecured bank borrowings 4,945,149 5,228,183 Unsecured bank borrowings guaranteed by third parties - 5,000 Other borrowings 1,058,141 _________ 469,640 _________ 6,575,784 _________ 6,452,737 _________ - 41 - SHANDONG CHENMING PAPER HOLDINGS LIMITED 29. BORROWINGS - continued 2006 2005 RMB'000 RMB'000 The borrowings are repayable as follows: Within one year 1,547,755 4,694,973 In the second year 528,511 301,773 In the third to fifth year inclusive 3,698,133 766,100 After five years 801,385 _________ 689,891 _________ 6,575,784 6,452,737 Less: Amount due for settlement within one year and shown under current liabilities (1,547,755) _________ (4,694,973) _________ Amount due after one year 5,028,029 _________ 1,757,764 _________ Total borrowings - at fixed rates 1,904,830 5,070,990 - at floating rates 4,670,954 _________ 1,381,747 _________ 6,575,784 _________ 6,452,737 _________ Analysis of borrowings by currency: - denominated in RMB 3,933,039 4,050,975 - denominated in United States dollars 2,642,745 _________ 2,401,762 _________ 6,575,784 _________ 6,452,737 _________ Fixed interest rate borrowings are charged at the prevailing market rates up to 6.32% (2005: 6.05%) per annum. The effective weighted average annual rate for the year ended 31 December 2006 was 6.30% (2005: 4.38%) per annum. Interest on RMB borrowings at floating rates are calculated based on the borrowing rates announced by the People's Bank of China whereas interests on United States dollars borrowings at floating rates are charged at 0.9% to 1.875% over LIBOR. The secured bank borrowings are secured by the Group's bank deposits, buildings, plant and machinery. Other borrowings are the loans from a minority shareholder of a subsidiary which are secured by the Group's buildings, plant and machinery and bear interest at 1.65% to 2% over LIBOR. The directors consider that the carrying amounts of borrowings approximate their fair values. - 42 - SHANDONG CHENMING PAPER HOLDINGS LIMITED 30. CONVERTIBLE LOAN NOTES The convertible loan notes were issued on 15 September 2004. The loan notes are convertible into shares of the Company at the discretion of the holders, at any time between 15 March 2005 and 15 September 2009. The initial conversion price is RMB9.99 per share of the Company. The conversion price will be adjusted during the period (a) if the capital structure of the Company is changed as a result of bonus issues, rights issue, issue of new shares or dividends distribution occurred after the issue of convertible loan notes; (b) when the closing share price of the Company's A shares continues to be lower than 90% of the conversion price for any 10 consecutive trading days, the Company has the right to adjust the conversion price downwards for up to 15% of the conversion price; the approval from the shareholders in the general meeting is required if the adjustment to the conversion price is greater than 15%; or (c) two years after the issuance of the convertible loan notes, upon the approval from the shareholders in the general meeting, the Company may adjust the conversion price downwards, in which the adjusted conversion price should not be lower than the net asset value per share in the latest published audited financial statements of the Company. On 19 May 2005, the conversion price was adjusted to RMB6.59 per share of the Company as a result of bonus issues made by the Company to its shareholders. On 7 July 2006, the conversion price was further adjusted to RMB6.47 per share of the Company as a result of dividend distribution in July 2006. On 20 September 2006, the conversion price was then adjusted to RMB5.50 per share of the Company pursuant to the resolution passed by the Board of Directors on 17 September 2006. Interest is preset at annual fixed rates on a progressive basis from 1.5% to 3.17% per annum over the term, subject to any subsequent increase in interest rate of the People's Bank of China, will be paid to the holders of the loan notes during 2004 to 2009 until that settlement date. According to the redemption clause of the convertible loan notes, two years after the issuance of the convertible loan notes, if the closing share price of the Company's A shares continues to be not lower than 140% of the conversion price for any 25 consecutive trading days, the Company has the right to redeem part or all the outstanding loan notes at the price of RMB105 per loan note of RMB100 (including the interest for that period). If the conversion price has been adjusted during that 25 consecutive trading days, the calculation is based on the closing share price and the conversion price on the trading day prior to the change in conversion price, and on the closing share price and the conversion price on the trading day when the conversion price is changed. If such condition has been first met during a year but the Company does not exercise this right, the Company will not be able to exercise this right during that year. According to the general re-sell clause of the convertible loan notes, two years after the issuance of the convertible loan notes, if the closing share price of the Company's A shares continues to be below 80% of the conversion price for any 25 consecutive trading days, the loan notes holders have the right to sell back part or all the outstanding convertible loan notes at the price of RMB105 per loan note of RMB100 (including the interest for that period) to the Company. If the conversion price has been adjusted during that 25 consecutive trading days, the calculation is based on the closing share price and the conversion price on the trading day prior to the change in conversion price, and the closing share price and the conversion price on the trading day when the conversion price is changed. If such condition has been first met during a year but the loan notes holders have not exercised the above right, those loan notes holders will not be able to exercise such right during that year. If the loan notes have not been converted nor redeemed, the loan notes holders have the right to sell back part or all the outstanding loan notes on the fifth 5 trading day before 15 September 2009 (loan maturity date) at the price of RMB106.5 per loan note of RMB100 (including the interest for that period) to the Company. At maturity date, the loan notes will be redeemed at RMB100 plus accrued interest per loan note. - 43 - SHANDONG CHENMING PAPER HOLDINGS LIMITED 30. CONVERTIBLE LOAN NOTES - continued The net proceeds received from the issue of the convertible loan notes have been split between the liability component, embedded derivatives (issuer's repurchase right and loan note holders' redemption rights) and equity component. The movement of the liability component, derivative financial liabilities and derivative financial asset of the convertible loan notes for the year is set out as follows: Derivative Derivative Liability financial financial component liabilities assets RMB'000 RMB'000 RMB'000 Carrying amount at 1 January 2005 1,862,753 97,000 118,600 Conversion into share capital (43,759) (1,424) (2,202) Interest charged 76,750 - - Interest paid (32,753) - - Increase (decrease) in fair value - ________ 12,298 _________ (99,396) _________ Carrying amount at 31 December 2005 1,862,991 107,874 17,002 Conversion into share capital (76,561) (3,237) (2,862) Interest charged 60,213 - - Interest paid (39,038) - - (Decrease) increase in fair value - ________ (38,661) _________ 115,937 _________ Carrying amount at 31 December 2006 1,807,605 ________ 65,976 _________ 130,077 _________ The interest charged for the year is calculated by applying an effective interest rate of 4.16% per annum to the liability component since the loan notes were issued. 31. DEFERRED INCOME 2006 2005 RMB'000 RMB'000 At beginning of the year 362,147 408,492 Grants obtained 6,164 740 Released to consolidated income statement (31,917) (26,109) Reclassified as held for sale - _______ (20,976) _______ At end of the year 336,394 _______ 362,147 _______ During the year, certain government grants obtained are in relation to the construction of property, plant and equipment amounting to RMB6,164,000 (2005: RMB740,000) from the local municipal governments. - 44 - SHANDONG CHENMING PAPER HOLDINGS LIMITED 31. DEFERRED INCOME - continued The grants were recorded as deferred income in the balance sheet and to be credited to the income statement on a straight-line basis over the expected useful lives of the related assets. In accordance with the terms of the grants, the amount attributable to the Group of RMB31,917,000 (2005: RMB25,577,000) was transferred from retained earnings to capital reserve as the relevant amount is restricted in distribution. 32. TRADE AND OTHER PAYABLES An analysis of trade and other payables is as follows: 2006 2005 RMB'000 RMB'000 Trade payable 1,559,170 1,603,712 Bills payable 47,202 117,589 Other payables 610,979 311,492 ________ ________ 2,217,351 2,032,793 ________ ________ ________ ________ The directors consider that the carrying amounts of trade and other payable approximate to fair value. 33. SHORT TERM DEBENTURES Pursuant to a circular [2006] No. 232 issued by the People's Bank of China in 2006, the Group issued one year debentures of RMB1 billion and RMB1 billion on 24 July 2006 and 29 August 2006 respectively. The debentures are unsecured and bear interests at 3.68% and 3.82% per annum respectively. The directors consider that the carrying amounts of short term debentures approximate their fair values. 34. PROVISION The amount represents that provision made in relation to a claim from one of its contractors against a dispute in payment of the construction work performed for a production plant of the Company in 2004. 35. COMMITMENTS Capital commitments 2006 2005 RMB'000 RMB'000 Contracted but not provided for - acquisition of property, plant and equipment 679,185 1,580,549 - investment in associates - 60,000 _______ ________ 679,185 1,640,549 _______ ________ _______ ________ - 45 - SHANDONG CHENMING PAPER HOLDINGS LIMITED 35. COMMITMENTS - continued Operating lease commitments The Group as a lessee At the balance sheet date, the Group has future minimum lease payments under non-cancelable operating leases in respect of property, plant and equipment are as follows: 2006 2005 RMB'000 RMB'000 Within one year 9,836 28,216 In the second to fifth year inclusive 1,550 39,567 After five years 10,737 33,019 ______ _______ 22,123 100,802 ______ _______ ______ _______ Leases are negotiated for an average term of 6 years and rental was fixed at the date of signing of lease agreements. 36. RELATED PARTY TRANSACTIONS (a) The Group has entered into the following significant transactions with its associates during the year: 2006 2005 RMB'000 RMB'000 Continuing operations: Purchase of raw materials 17,856 6,800 Electricity charges received 8,275 7,150 Utility charges received 288 5,174 Technology consultancy fee received 715 1,405 Miscellaneous service charges received 266 509 ______ _____ ______ _____ (b) Balances with related parties 2006 2005 RMB'000 RMB'000 Other receivable Associates 1,337 1,156 _____ _____ _____ _____ Trade payable Associates 2,361 2,651 _____ _____ _____ _____ - 46 - SHANDONG CHENMING PAPER HOLDINGS LIMITED 36. RELATED PARTY TRANSACTIONS - continued (c) Material transactions and balances with other stated-owned enterprises in the PRC The Group operates in an economic environment currently predominated by enterprises directly or indirectly owned or controlled by the PRC government (hereinafter collectively referred to as "State-owned Enterprises"). During the year, the Group had material transactions with some of these State-owned Enterprises in its ordinary and usual course of business. In establishing its pricing strategies and approval process for its products, the Group does not differentiate whether the counter-party is a State-owned Enterprise or not. While the directors of the Group consider the State-owned Enterprises are independent third parties so far as the Group's business transactions with them are concerned, for the purpose of this report, the Group has identified the nature and quantified the amounts of its significant transactions with State-owned Enterprises during the year as follows: (i) Material transactions 2006 2005 RMB'000 RMB'000 Sales 1,019,620 472,390 Purchases 1,207,627 515,581 Construction works 242,765 ________ 61,750 _______ (ii) Material balances 2006 2005 RMB'000 RMB'000 Bank balances and deposits 362,784 1,004,277 Trade and other receivables 231,194 708,470 Trade and other payables 260,792 40,167 Bank borrowings 3,180,120 ________ 5,854,704 ________ (d) Compensation of key management personnel In 2006, the total short term employee benefit of the directors and other members of key management personnel amounted to approximately RMB11,050,000 (2005: RMB13,630,000). - 47 - SHANDONG CHENMING PAPER HOLDINGS LIMITED 37. DISPOSAL OF SUBSIDIARIES Details of disposal of subsidiaries during the year are as follows: (a) Shanghai Chenming Paper Machinery Company Limited 31.8.2006 RMB'000 Net assets disposed: Bank balances and cash 2,673 Trade and other receivables 31,549 Inventories 48,024 Property, plant and equipment 276,993 Trade and other payables (214,891) Borrowings (65,714) _______ 78,634 Gain on disposal 44,321 _______ Total consideration, satisfied by cash 122,955 _______ _______ Net cash inflow on disposal: Cash consideration received 122,955 Bank balances and cash disposed of (2,673) _______ 120,282 _______ _______ (b) Beijing Tianbaojialin Technological Development Company Limited 28.9.2006 RMB'000 Net assets disposed: Bank balances and cash 28,590 Trade and other receivables 22,036 Property under development 292,170 Property, plant and equipment 1,702 Trade and other payables (258,980) Borrowings (60,000) _______ 25,518 Minority interests (16,919) Gain on disposal 36,401 _______ Total consideration, satisfied by cash 45,000 _______ _______ Net cash inflow on disposal: Cash consideration received 45,000 Bank balances and cash disposed of (28,590) _______ 16,410 _______ - 48 - SHANDONG CHENMING PAPER HOLDINGS LIMITED _______ 37. DISPOSAL OF SUBSIDIARIES - continued (c) Shouguang Xinyuan Coal Company Limited 8.4.2006 RMB'000 Net assets disposed: Bank balances and cash 600 Trade and other receivables 530 Property, plant and equipment 262 Trade and other payables (150) _______ 1,242 Loss on disposal (454) _______ Total consideration, satisfied by cash 788 _______ _______ Net cash inflow on disposal: Cash consideration received 788 Bank balances and cash disposed of (600) _______ 188 _______ _______ Total proceeds from disposal of subsidiaries during the year 136,880 _______ _______ 38. RETIREMENT BENEFIT SCHEME CONTRIBUTIONS The Company and its subsidiaries have participated in certain defined contribution retirement schemes managed by the respective municipal governments where the Group operates, covering all permanent staff of the Group. The Group has no obligation beyond the contributions which are calculated based on 20% to 25% (2005: 20% to 25%) of permanent staff basic salaries. 39. POST BALANCE SHEET EVENTS (a) Announcement for initial public offering of H shares On 16 March 2007, the Board of Directors of the Company approved the plan for initial public offering of H shares on the Hong Kong Stock Exchange Limited. The plan is subject to the approval by the shareholders at the forthcoming Annual General Meeting. (b) Proposed dividend On 6 April 2007, the dividend for the year ended 31 December 2006 of RMB12 cents per share has been proposed by Board of Directors and is subject to the approval by the shareholders at the forthcoming Annual General Meeting and has not been included as a liability in these financial statements. - 49 - SHANDONG CHENMING PAPER HOLDINGS LIMITED 39. POST BALANCE SHEET EVENTS - continued (c) Change in enterprise income tax rate in the PRC In March 2007, the Government has announced the applicable enterprise income tax rate for the entities carried on business in the PRC will be 25% since 1 January 2008. The directors anticipate that the effect of the adoption of the new tax policy in 2008 will not have material impact on the financial statements of the Group in the next financial year. 40. PARTICULARS OF SUBSIDIARIES The particulars of the subsidiaries of the Company at 31 December 2006 which are established in the PRC, except for Hong Kong Chenming Sales Company Limited which is incorporated in Hong Kong, are as follows: Attributable equity interest Place of held by Principal Name of company operation the Company activities Directly held by the Company Shandong Chenming Electric Power PRC 51.00% Investment holding Generation Holdings Company Limited Wuhan Chenming Hanyang Paper PRC 50.93% Manufacture of paper Company Limited Hailaer Chenming Paper Company Limited PRC 75.00% Manufacture of paper Shandong Chenming Paper Group Qihe PRC 99.95% Manufacture of paper Linerboard Paper Company Limited Yanbian Chenming Paper Company Limited PRC 76.73% Manufacture of paper pulp Jilin Chenming Paper Company Limited PRC 100.00% Manufacture of paper Shouguang Chenming Tianyuan PRC 68.00% Arboriculture of tree Arboriculture Company Limited Jiangxi Chenming Paper Company Limited* PRC 47.15% Manufacture of paper Shandong Yujing Hotel Company Limited PRC 70.00% Property investment Yangjiang Chenming Arboriculture PRC 100.00% Arboriculture of tree Company Limited Zhanjiang Chenming Arboriculture PRC 100.00% Arboriculture of tree Company Limited Qihe Chenming Panels Company Limited PRC 100.00% Manufacture of paper Zhanjiang Chenming Paper Pulp Company PRC 100.00% Production of Paper Pulp Limited Hongkong Chenming Sales Company Limited Hong Kong 100.00% Trading of paper - 50 - SHANDONG CHENMING PAPER HOLDINGS LIMITED 40. PARTICULARS OF SUBSIDIARIES - continued Attributable equity interest Place of held by Principal Name of company operation the Company activities Indirectly held by the Company Xiangfan Chenming Copperplate Paper PRC 51.00% Manufacture of paper Company Limited Chibi Chenming Paper Company Limited PRC 51.00% Manufacture of paper Shandong Chenming Xinli Co-generation PRC 51.00% Generation of electricity Company Limited Wuhan Chenming Qianneng Electric PRC 51.00% Generation of electricity Power Generation Company Limited Shandong Chenming Panels PRC 100.00% Manufacture of Company Limited decorating materials Shouguan Chenming Cements PRC 90.00% Manufacture of cement Company Limited Wuhan Chenjian New-style Wall PRC 51.00% Manufacture of Materials Company Limited construction materials Juancheng Chenming Panels Company Limited PRC 100.00% Manufacture of paper Heze Chenming Panels Company Limited PRC 67.00% Manufacture of paper Shouguang Chenming Floor Board PRC 90.00% Manufacture of floor board Company Limited * The Group controls more than 50% of the voting power of shares and therefore has the power to appoint and remove the majority of the board of directors and control of the entity is by the board. Consequently, this entity has been consolidated in these financial statements. 41. APPROVAL OF FINANCIAL STATEMENTS The consolidated financial statements on page 3 to 51 were approved and authorised for issue by the Board of Directors on 6 April 2007. - 51 -