江铃Ｂ(000550)2006年年度报告（英文版）

Jiangling Motors Corporation, Ltd. 2006 Annual Report 1 Important Note The Board of Directors and its members, the Supervisory Committee and its members, and the senior executives are jointly and severally liable for the truthfulness, accuracy and completeness of the information disclosed in the report and undertake that the information disclosed herein contains no false statement, misrepresentation or major omission. Chairman Wang Xigao, President Yuan-Ching Chen, CFO Joseph Verga and Chief of Finance Department, Wu Jiehong, ensure that the Financial Report in this Annual Report is truthful and complete. All financial data in this report are prepared under International Financial Reporting Standards (‘IFRS’) unless otherwise specify. The Annual Report is prepared in Chinese and English. In case of discrepancy, the Chinese version will prevail. Abbreviations: EVP Executive Vice President CFO Chief Financial Officer VP Vice President 2 Contents Chapter I Brief Introduction ...................................................................... 4 Chapter II Operating Highlight ................................................................... 5 Chapter III Share Capital Changes & Shareholders..................................... 6 Chapter IV Directors, Supervisors, Senior Management and Employees . 11 Chapter V Corporate Governance ............................................................. 18 Chapter VI Shareholders’ Meeting ............................................................. 20 Chapter VII Report of the Board of Directors ............................................. 21 Chapter VIII Report of the Supervisory Committee ..................................... 30 Chapter IX Major Events............................................................................ 32 Chapter X Financial Report....................................................................... 40 Chapter XI Catalog on Documents for Reference...................................... 85 3 Chapter I Brief Introduction Company’s Chinese name: 江铃汽车股份有限公司 English name: Jiangling Motors Corporation, Ltd. Abbreviation: JMC Company legal representative: Mr. Wang Xigao JMC’s Board secretary: Mr. Wan Hong (Tel: 86-791-5235675) Person for financial information disclosure: Mr. Joseph Verga (Tel: 86-791-5266503) JMC’s securities affairs representative: Mr. Quan Shi (Tel: 86-791-5266178) Contact address: No. 509, Northern Yingbin Avenue, Nanchang City, Jiangxi Province, P.R.C Switchboard: 86-791-5266000 Fax: 86-791-5232839 E-mail: relations@jmc.com.cn Company registered address & headquarters address: No. 509, Northern Yingbin Avenue, Nanchang City, Jiangxi Province, P.R.C Postal Code: 330001 JMC’s website: http://www.jmc.com.cn Newspapers for information disclosure: China Securities, Securities Times, Hong Kong Commercial Daily Website designated by CSRC for publication of JMC’s Annual Report: http://www.cninfo.com.cn Place for archiving Annual Report: Securities Department, Jiangling Motors Corporation, Ltd. Place of listing: Shenzhen Stock Exchange Share’s name: Jiangling Motors Jiangling B Share’s code: 000550 200550 Other Information: 1. JMC was registered with Nanchang Municipal Bureau of Industrial & Commercial 4 Administration on November 28, 1993. The company registration was changed with Jiangxi Provincial Bureau of Industrial & Commercial Administration on January 8, 1997, on October 25, 2003, on September 23, 2004 and on January 11, 2006. 2. Business License Registration Number: 002473. 3. Taxation Registration Number: 360100612446943. 4. Accounting Firm appointed by JMC for audit under both Chinese Accounting Standards (‘CAS’) and International Financial Reporting Standards (‘IFRS’): Name: PricewaterhouseCoopers Zhong Tian CPAs Company Limited (‘PwC Zhong Tian’) Headquarters address: 11th Floor, PricewaterhouseCoopers Center, 202 Hu Bin Road, Shanghai City, P.R.C. Chapter II Operating Highlight I. Certain Financial Indexes of the Reporting Year Unit: RMB’000 Profit Before Income Tax 747,550 Net Profit 623,197 Gross Profit 1,650,038 Other Income 49,318 Operating Profit 701,747 Investment Income 5,634 Subsidy Income 0 Net Cash Generated From Operating Activities 1,150,212 Net Increase in Cash and Cash Equivalents 208,770 Impact of IFRS adjustments on the net profit: Unit: RMB ‘000 Net Assets Net profit December 31, 2006 2006 As Prepared under CAS * 3,040,097 603,611 Adjustment per IFRS: Deferred Tax Asset 74,814 16,116 Defined Benefit Pension -85,805 11,431 Deferred Income -28,648 -2,536 Minority Interest 1,189 -584 Staff Bonus and Welfare Fund of Jiangling - -5,190 Isuzu JV appropriated from Profit after Tax Others - 349 As Restated in Conformity with IFRS 3,001,647 623,197 * Based on the financial statements audited by PwC Zhong Tian per CAS. 5 II. Main accounting data and financial ratios of the past three years. Unit: RMB’000 Item 2006 2005 2004 Sales 7,368,551 6,280,636 5,770,676 Net Profit 623,197 490,872 415,134 Total Assets 5,312,494 4,722,421 4,179,331 Shareholders’ Equity (Excluding Minority Interests) 3,001,647 2,810,410 2,449,019 Earnings Per Share (RMB) 0.72 0.57 0.48 Net Assets Per Share (RMB) 3.48 3.26 2.84 Net Cash Per Share Generated From Operating 1.33 1.16 0.87 Activities (RMB) Return on Net Asset Ratio 20.76% 17.47% 16.95% Chapter III Share Capital Changes & Shareholders I. Table of the changes of shareholding structure The Full Tradable Share Reform of JMC has been implemented on February 14, 2006. As of December 31, 2006, table of the changes of shareholding structure is shown as follows: Before the change Change (+, -) After the change Reserve- Proportion New Bonus Proportion Shares of total converted Others Subtotal Shares of total shares (%) shares Shares shares (%) shares I. Limited tradable A shares 1.State-owned shares 2. State-owned legal 354,176,000 41.03% 354,176,000 41.03% person shares 3. Other domestic shares Including: Domestic legal 47,438,000 5.50% 47,438,000 5.50% person shares Domestic natural 6,060 - 6,060 - person shares (Management Shares) II. Unlimited tradable shares 1. A shares 117,593,940 13.62% 117,593,940 13.62% 2. B shares 344,000,000 39.85% 344,000,000 39.85% III. Total 863,214,000 100% 863,214,000 100% JMC did not issue shares or derivative securities during the past three years as of December 31, 2006. JMC’s total shares and the share structure remained the same in 2006. 6 Listing date of limited tradable A shares Unlimited Tradable Balance of Balance of Shares Adding Listing Date Limited Tradable Unlimited Remark After Disposal Shares Tradable Shares Restriction Period February 16, 2007 84,085,700 317,534,360 545,679,640 *Note February 14, 2008 49,679,760 267,854,600 595,359,400 February 14, 2009 267,854,600 0 863,214,000 *Note: As of February 16, 2007, the total of 33 domestic legal person shareholders of JMC, including Guangdong Machinery & Electronic Company, Shenzhen Airport Terminal Building Co., Ltd. and others, who hold 6,519,060 JMC limited tradable A shares in total, did not repay the amount paid by Jiangling Holdings Limited (‘JHC’) on behalf of them in the Full Tradable Share Reform, nor deal with the procedure of relieving the trading restriction on the limited tradable A shares. The aforesaid shareholders should repay the consideration paid by JHC on behalf of them in the Full Tradable Share Reform and the interest thereof, or obtain written consent of JHC, if they want to list their limited tradable A shares, and complete the procedure of relieving the trading restriction on the limited tradable A shares. II. Shareholders 1. Total shareholders, top ten shareholders, and top ten shareholders holding unlimited tradable shares JMC had 27,769 shareholders, including 20,313 A-share holders and 7,456 B-share Total shareholders holders, as of December 31, 2006. Top ten shareholders Ratio in the Including: Shares due to Shareholder total capital limited mortgage or Name Shares type stock（%） tradable frozen shares Jiangling Holdings State 41.03 354,176,000 354,176,000 0 Limited Shareholder Ford Motor Company Foreign- 30 258,964,200 0 0 (‘Ford’) investment shareholder Shanghai Automotive Co., Other 3.01 25,970,000 25,970,000 0 Ltd. China Baoan Group Co., Other 1.39 12,000,000 12,000,000 12,000,000 Ltd. Southern Stock Open Other 1.39 12,000,000 0 0 Securities Investment Fund Dragon Billion Greater Other 1.12 9,684,798 0 0 China Master Fund National Social Security Other 0.75 6,477,808 0 0 7 Fund—Portfolio 108 Southern Positive Other 0.65 5,569,704 0 0 Securities Investment Fund National Social Security Other 0.64 5,501,015 0 0 Fund—Portfolio 103 YuLong Securities Other 0.62 5,309,794 0 0 Investment Fund Top ten shareholders holding unlimited tradable shares Name Shares Share Type Ford Motor Company 258,964,200 B share Southern Stock Open Securities 12,000,000 A share Investment Fund Dragon Billion Greater China Master 9,684,798 B share Fund National Social Security Fund—Portfolio 6,477,808 A share 108 Southern Positive Securities Investment 5,569,704 A share Fund National Social Security Fund—Portfolio 5,501,015 A share 103 YuLong Securities Investment Fund 5,309,794 A share Dragon Billion China Fund 5,073,066 B share UBS SDIC Dynamic Innovation Fund 4,895,605 A share China Intl Marine Containers (Hong 3,758,211 B share Kong) Ltd. Notes on association among Both Southern Stock Open Securities Investment Fund and Southern above-mentioned shareholders Positive Securities Investment Fund are in the custody of China Southern Fund Management Co., Ltd.; Both National Social Security Fund—Portfolio 108 and YuLong Securities Investment Fund are in the custody of Boshi Fund Management Co., Ltd. 2. The number of shares held by the top ten limited tradable A shares holders with restricted conditions No. Name Shares Date of Additional Restricted Listing Unlimited Condition Tradable Shares 1 Jiangling Holdings 354,176,000 February 16, Not to be listed or 43,160,700 Limited 2007 transferred within February 14, 12 months as of 43,160,700 Feb. 14, 2006. 5%, 2008 8 10% and 41.03% of the total outstanding shares February 14, can be listed 267,854,600 respectively after 2009 12 months, 24 months and 36 months from Feb. 14, 2006 2 Shanghai Automotive Co., Not to be listed or Ltd. February 16, transferred within 25,970,000 25,970,000 2007 12 months as of Feb. 14, 2006. 3 China Baoan Group Co., 12,000,000 *Note 12,000,000 *Note Ltd. 4 Guangdong Machinery & 1,200,000 *Note 1,200,000 *Note Electronic Company 5 Shenzhen Airport Terminal Building Co., 1,200,000 *Note 1,200,000 *Note Ltd 6 China Automobile Trading Corporation Guangdong 720,000 *Note 720,000 *Note Branch 7 Guangzhou Automobile 600,000 *Note 600,000 *Note Trading Center 8 Shenzhen Tongqian Not to be listed or Investment Co., Ltd. February 16, transferred within 600,000 600,000 2007 12 months as of Feb. 14, 2006. 9 Jilin Automobile Trading 240,000 *Note 240,000 *Note Corporation 10 Fuoshan Automobile Not to be listed or Trading Corporation February 16, transferred within 240,000 240,000 2007 12 months as of Feb. 14, 2006. *Note: The shareholder should repay the consideration paid by JHC in its behalf in the Full Tradable Share Reform and the interest thereof, or obtain written consent of JHC, if it wants to list its limited tradable A shares, and complete the procedure of relieving the trading restriction on the limited tradable A shares. 3. Controlling Shareholders The controlling shareholders of JMC are JHC and Ford. JHC was founded on November 1, 2004 and its registered capital is RMB 1 billion. Jiangling Motors Company (Group) (‘JMCG’) and Chongqing Changan Automobile Corporation Ltd. held 50% of total equity of JHC respectively. And its legal representative is Mr. Yin Jiaxu. Main scope of business: manufacturing of automobiles, engines, chassis, 9 and automotive components and parts, sales of self-produced products, as well as related after-sales services; industrial investment; management & agent for merchandise and technology export & import; property management; sales of household articles, mechanical & electronic equipment, artistic handicrafts, agricultural by-products and steel; consulting business in enterprise management. The registration of JHC was changed with Nanchang Municipal Bureau of Industrial & Commercial Administration on August 23, 2006, where the name of the enterprise was changed as Jiangling Holdings Limited from the original Jiangxi Jiangling Holdings Limited. Ford, founded in 1903, is a US-based listed company. Its ownership interest is US$ 3.5 billion. Chairman: William Clay Ford, Jr. Main scope of business: design, manufacturing, assembly and sales of cars, trucks, parts and components, financing, leasing of vehicles and equipment, and insurance business. 4. Actual Controlling Parties The actual controlling party of JHC is China South Industries Group. China South Industries Group was founded on June 29, 1999 with its registered capital of RMB 12,645,210,000 and was subordinate to the State-owned Assets Supervision and Administration Committee of the State Council (‘SASAC’). Its legal representative is Mr. Xu Bin. Business scope and major products: investment and management of state-owned assets, manufacturing of armaments, engineering prospecting, designing, contracting, construction supervision, equipment installation, etc. Ownership and control relations between the Company and the actual controlling parties is shown as follows: SASAC 100% China South Industries Group 100% China South Industries Automobile Co., Ltd. Nanchang Municipal Government 45.55% 100% Chongqing Changan Automobile Co., Ltd. JMCG 50% 50% JHC Ford 41.03% 30% JMC 10 III. Trading of JMC’s share 1. Jiangling A shares Highest price Closing price Total Total volume First transaction Lowest price of Total amount Year of the year at the year end transaction (million price (RMB) the year (date) (RMB million) (date) (RMB) days shares) 2004 10.40 12.47(02/18) 4.92(10/26) 5.18 236 7.93 61.68 2005 5.12 7.10(08/19) 3.52(05/10) 5.99 227 7.55 40.50 2006 5.13 12.87(12/28) 4.68(03/08) 12.40 218 8.44 67.76 2. Jiangling B shares Highest price Closing price Total Total volume First transaction Lowest price of Total amount Year of the year at the year end transaction (million price (HK$) the year (date) (HK$ million) (date) (HK$) days shares) 2004 6.60 7.15(03/10) 2.84(11/02) 2.89 236 162.94 8.33 2005 2.89 3.60(08/15) 2.45(04/26) 3.32 235 136.37 4.19 2006 3.33 9.30(12/28) 3.31(01/04) 9.02 239 243.96 14.27 Chapter IV Directors, Supervisors, Senior Management and Employees I. Directors, Supervisors and Senior Management 1. Basic Information Position Name Gender Age Term of office Shares Shares Share Cause of as of as of change in share Dec. 31, Dec. 31, Year 2006 change 2005 2006 Directors： Chairman Wang Xigao Male 57 2005.6～2008.6 0 0 0 Vice Chairman Mei Wei Cheng Male 57 2005.6～2008.6 0 0 0 Director Yin Jiaxu Male 51 2005.11～2008.6 0 0 0 Director Howard Welsh Male 49 2005.6～2008.6 0 0 0 Director & President Yuan-Ching Chen Male 55 2005.6～2008.6 0 0 0 Director & EVP Tu Hongfeng Male 59 2005.6～2008.6 0 0 0 Independent Director Zhang Zongyi Male 43 2005.6～2008.6 0 0 0 Independent Director Pan Yuexin Male 49 2005.6～2008.6 0 0 0 Independent Director Lok Kim Chai Male 60 2005.6～2008.6 0 0 0 Supervisors： Chief supervisor Wu Yong Male 57 2005.6～2008.6 4,860 4,860 0 Supervisor Alvin Qing Liu Male 50 2005.6～2008.6 0 0 0 Supervisor Zhu Yi Male 37 2005.6～2008.6 0 0 0 Supervisor Zhang Yong Male 37 2006.6～2008.6 0 0 0 Supervisor Jin Wenhui Male 40 2005.6～2008.6 0 0 0 Senior Management: EVP Xiong Chunying Female 43 2005.6～2008.6 1200 1200 0 EVP Liu Nianfeng Female 45 2005.6～2008.6 0 0 0 CFO Joseph Verga Male 47 2006.2～2008.6 0 0 0 11 VP & Board Secretary Wan Hong Male 46 2005.6～2008.6 0 0 0 VP Zhong Wanli Male 44 2005.6～2008.6 0 0 0 VP Zhou Yazhuo Male 44 2005.6～2008.6 0 0 0 VP Mustafa Menkü Male 37 2006.5～2008.6 0 0 0 VP Tamer Açıkel Male 46 2006.5～2008.6 0 0 0 VP Li Qing Male 42 2006.12～2008.6 0 0 0 2. Positions at the shareholder entities held by the JMC directors and the supervisors: Name Shareholder Title Term of Compensation paid entity office by shareholder entity (Y/N) Wang Xigao JHC Vice Chairman 2004.11— N Mei Wei Cheng Ford Vice President 1999.1—- Y Yin Jiaxu JHC Chairman 2004.11— N Wu Yong JHC Chief supervisor 2004.11— N Zhu Yi JHC Board member 2004.11— N 3. Particulars about working experience of directors, supervisors and senior management in the past five years Directors: Mr. Wang Xigao, born in 1950, is a senior engineer equivalent to professor, and holds a Bachelor’s Degree in Thermodynamics from Tsinghua University and a Bachelor’s Degree in Economic Management from Fudan University. In the past five years, Mr. Wang Xigao held various positions including General Manager & Chairman of Jiangxi Boiler & Petroleum Machining Joint Company, Ltd., Vice-Chairman, Chairman of JMCG, Chairman of Jiangling-Isuzu Motors Company Limited, and Vice-Chairman of JHC. Since March 2004, Mr. Wang Xigao assumed the post of the chairman of JMC. Mr. Mei Wei Cheng, born in 1950, holds a Bachelor’s Degree in industrial engineering/operations research from Cornell University. He has MBA Degree from Rutgers University and is a graduate of Dartmouth’s Amos Tuck Executive Program and MIT’s Program for Senior Executives. In the past five years, Mr. Mei Wei Cheng held various positions including Vice President of Ford, Chairman & CEO of Ford Motor (China), Ltd., and Vice Chairman of Changan Ford Mazda Automobile Company, Ltd. Since June 1999, Mr. Mei Wei Cheng assumed the post of Vice Chairman of JMC. Mr. Yin Jiaxu, born in 1956, is a master & senior engineer equivalent to the professor. In the past five years, Mr. Yin Jiaxu used to be Deputy General Director of Southwest Industries Bureau of China Industries Company, General Manager & Chairman of Changan Auto Group Co., Ltd., Chairman of Chongqing Changan Automobile Co., Ltd., General Manager & Executive Director of South Automobile Corporation, Ltd., Vice General Manager of China South Industries Group, and Chairman of JHC. Mr. Yin Jiaxu was appointed as a Director of JMC on November 2005. 12 Mr. Howard Welsh, born in 1957, holds a Bachelor’s Degree in Engineering from Pennsylvania State University and a MBA from University of Pittsburgh. In the past five years, Mr. Howard Welsh held various positions including Northern America Controller of Ford Customer Service Division, Northern America Business Strategy Manager of Ford, and Vice President & CFO of Ford Motor (China), Ltd. Mr. Howard Welsh was appointed as a Director of JMC on December 2004. Mr. Yuan-Ching Chen, born in 1952, holds mechanical engineering Degree from National Cheng Kung University of China Taiwan. In the past five years, Mr. Yuan-Ching Chen held various positions including Chief Technical Officer of Ford Lio Ho Motor Company, Chief Marketing & Sales Officer of Ford Lio Ho Motor Company, and Vice President of Ford (China) in charge of business operating & planning, and the President of JMC. Mr. Yuan-Ching Chen was appointed as a Director of JMC on June 2005. Mr. Tu Hongfeng, born in 1948, senior engineer, holds a College Degree. In the past five years, Mr. Tu Hongfeng held various positions including Vice General Manager of JMCG, Director, EVP of JMC, and Director, General Manager of Jiangling-Isuzu Motors Company Limited. Mr. Tu Hongfeng was appointed as a Director of JMC on June 2005. Mr. Zhang Zongyi, born in 1964, is a professor, professor of doctorate program and holds a Doctor Degree in Engineering from Chongqing University as well as a Doctor Degree in Economics from University of Portsmouth, U.K. In the past five years, Mr. Zhang Zongyi held various positions including Dean of the Economic and Business Administration School of Chongqing University, Vice President of Chongqing University and Dean of the Graduate School of Chongqing University. Mr. Zhang Zongyi was appointed as an Independent Director of JMC on June 2005. Mr. Pan Yuexin, born in 1958, lawyer, is a graduate of Chinese Academy of Social Sciences in Economic Laws. In the past five years, Mr. Pan Yuexin held various positions including a partner of Junhe Law Firm, General Secretary of Education Committee of Chinese Lawyer Association, Independent Director of the second Board of Directors of Sino-Chem International Co., Ltd., Vice General Manager of Sino-Chem International Co., Ltd. Mr. Pan Yuexin has been an Independent Director of JMC since June 2002. Mr. Lok Kim Chai, born in 1947, is a senior member of the Association of Chartered Certified Accountants (UK), the Institute of Chartered Accountants of New Zealand, the Malaysian Institute of Accountants and the Institute of Chartered Secretaries and Administrators (UK). In the past five years, Mr. Lok Kim Chai served a Fortune 500 USA company as the vice chairman, vice president and CFO of its China subsidiary and prior to this, also its IT manager for the Asia Region. He is currently the business advisor of a UK-based technology company. Mr. Lok Kim Chai has been an Independent Director of JMC since September 2003. 13 Supervisors: Mr. Wu Yong, born in 1951, is a senior counselor for political work, and holds a Bachelor’s Degree in Business Management. In the past five years, Mr. Wu Yong held various positions including Director, Vice Secretary of the Party Committee, Secretary of Discipline Inspection Committee of the Communist Party, Chairman of the Labor Union of JMCG, and Chairman of the Supervisory Committee of JHC. Mr. Wu Yong has been the Chief Supervisor of JMC since 1993. Mr. Alvin Qing Liu, born in 1957, has a Jurisprudence Doctor Degree and a Master Degree in International Economics from Marquette University, U.S.A. and is a member of American Bar Association and was admitted to practice in the U.S. Federal Court for the Eastern District of Wisconsin. In the past five years, Mr. Alvin Qing Liu was counsel for Asia Pacific Region, Chrysler Corporation, U.S.A., counsel of Mergers and Acquisitions Group and Northeast Asia Operations, Daimler-Chrysler A.G., Germany, an International Counsel in the Office of General Counsel, Ford Motor Company, and Vice President, General Counsel of Ford Motor (China), Ltd. Mr. Alvin Qing Liu has been a Supervisor of JMC since June 2002. Mr. Zhu Yi, born in 1970, is an accountant, and holds a Bachelor’s Degree in Business Management. In the past five years, Mr. Zhu Yi used to be the Chief of JMCG Asset & Finance Department, Assistant General Manager for JMCG, and Director of JHC. Mr. Zhu Yi has been a Supervisor of JMC since June 2002. Mr. Jin Wenhui, born in 1967, is a senior engineer, and holds a Bachelor’s Degree in Mechanical Manufacturing from Huazhong University of Science and Technology. In the past five years, he has held the positions of Chief of Die Centre for JMC and Chief of Manufacturing Department for JMC. Mr. Jin Wenhui has been a Supervisor of JMC since June 2002. Mr. Zhang Yong, born in 1970, holds a Bachelor’s Degree in Chinese Literature from Jiangxi Normal University. In the past five years, Mr. Zhang Yong has held the positions of Secretary of the Communist Youth League of JMCG, Vice Secretary of the Party Committee, Secretary of Discipline Inspection Committee of the Communist Party, and Chairman of the Labor Union of JMC Engine Plant. Mr. Zhang Yong held the post of supervisor of JMC since June 2006. Senior management: Ms. Xiong Chunying, born in 1964, a senior engineer, graduated from Jiangsu Engineering College, and holds a Bachelor’s Degree in Automotive Engineering. In the past five years, Mrs. Xiong has held the positions of Vice President, Executive Vice President for JMC. Ms. Liu Nianfeng, born in 1961, holds a Bachelor of Science Degree in Engineering from ZheJiang University and a MBA from the University of Texas at Arlington. In the past five years, Ms. Liu has held the positions of Deputy Plant Manager of JMC Engine Plant, Plant 14 Manager of JMC Framing Plant, and Executive Vice President of JMC. Mr. Joseph Verga, born in 1960, holds a Master’s Degree in Engineering from the University of the Witwatersrand, South Africa and a MBA from the University of Michigan, U.S.A. In the past five years, Mr. Joseph Verga held various positions including Finance Manager in charge of Product Development and Powertrain Operations for Ford Motor Company, China Product Develop Controller for Changan Ford Mazda Automobile Company, Ltd., and Chief Financial Officer of JMC. Mr. Wan Hong, born in 1961, is an engineer, and holds a College Degree in Management Engineering. In the past five years, Mr. Wan Hong has held the positions of Chief of Human Resource and Enterprise Management for JMC, Assistant to President for JMC, and Vice President and Board Secretary of JMC. Mr. Zhong Wanli, born in 1963, holds a Bachelor’s Degree from Nanchang Aeronautical Institute and a Master’s Degree from Jiangxi University of Finance & Economics. In the past five years, Mr. Zhong Wanli has held the positions of President of Zhongtian Hi-tech Special Vehicle Co., Ltd., Deputy Director of China Sourcing Office for Ford (China), and Vice President of JMC. Mr. Zhou Yazhuo, born in 1963, is a senior engineer, and holds a Bachelor’s Degree in Forging from the Central China Engineering College. In the past five years, Mr. Zhou Yazhuo has held the positions of Assistant to President and Chief of Manufacturing Department for JMC, and Vice President of JMC. Mr. Mustafa Menkü, bore in 1970, holds a Bachelor’s Degree in Mechanical Engineering from Middle East Technical University and a MBA from Koc University in Turkey. In the past five years, Mr. Mustafa Menkü has held the positions of Manager of Truck Area of the Inonu Plant for Ford Otosan, and Vice President of JMC. Mr. Tamer Açıkel, born in 1961, holds a Master’s Degree in Mechanical Engineering from Istanbul Technical University in Turkey. In the past five years, Mr. Tamer Açıkel has held the positions of Assistant Manager of Body Engineering for Ford Otosan, and Vice President of JMC. Mr. Li Qing, born in 1965, holds a Bachelor’s Degree in Marketing from Wuhan University of Technology and a MBA from University of South Australia and Jiangxi University of Finance & Economics. In the past five years, Mr. Li Qing has held the positions of Vice General Manager and General Manager of the former Jiangling Motors Sales General Company, General Manager of JMC Sales & Services Branch, and Vice President of JMC. 4. Particulars about positions and concurrent positions in other entities other than shareholder entities: Relationship with the Name/Title in the Company Entity Title Company 15 JMCG holding 50% JMCG Chairman equity of JHC Wang Xigao/Chairman Jiangling-Isuzu Motors Shareholding Subsidiary Chairman Company Limited Ford wholly-owned Ford Motor (China) Ltd. Chairman & CEO subsidiary Mei Wei Cheng/ Changan Ford Mazda Vice Chairman Ford holding 50% Automobile Company, Vice Chairman equity Ltd. China South Industries Vice General Manager Group China South Industries See the figure in General Manager & Yin Jiaxu/Director Automobile Co., Ltd. Chapter III Executive Director Chongqing Changan Chairman Automobile Co., Ltd. Ford wholly-owned Howard Welsh/Director Ford Motor (China) Ltd. Vice President & CFO subsidiary Vice President of Zhang Zongyi/ Chongqing University Chongqing University No relationship Independent director and Dean of the Graduate School Pan Yuexin/ Junhe Law Firm No relationship Partner Independent director Lok Kim Chai/ Lumiwave Limited No relationship Business Advisor Independent Director JMCG holding 50% Wu Yong/Chief Supervisor JMCG Director equity of JHC Ford wholly-owned Alvin Qing Liu/Supervisor Ford Motor (China) Ltd. General Counsel subsidiary JMCG holding 50% Assistant General Zhu Yi/Supervisor JMCG equity of JHC Manager Yuan-Ching Chen/ Jiangling-Isuzu Motors Shareholding Subsidiary Director President Company Limited JMCG holding 50% JMCG Director equity of JHC Tu Hongfeng/EVP Jiangling-Isuzu Motors Director & Shareholding Subsidiary Company Limited General Manager JMCG holding 50% Xiong Chunying/EVP JMCG Director equity of JHC JMCG holding 50% Liu Nianfeng/EVP JMCG Director equity of JHC Jiangling-Isuzu Motors Joseph Verga/CFO Shareholding Subsidiary Director Company Limited 5. Annual Compensation Directors and supervisors who did not concurrently hold other management positions in JMC were not paid by JMC. Director Wang Xigao, Supervisors Wu Yong and Zhu Yi were paid by JMCG. Directors Mei Wei Cheng, Howard Welsh and Supervisor Alvin Qing Liu were paid by Ford. Director Yin Jiaxu was paid by China South Industries Group. 16 (1) The compensation for the Chinese-side senior management, according to 2006 Senior Executives Compensation Plan of JMC approved by the Board, consists of three parts: base salary, position allowance and year-end bonus. In 2006, the Company paid annual compensation of approximately RMB 960 thousand to Mr. Tu Hongfeng, Director & EVP of JMC, paid Ms. Xiong Chunying and Ms. Liu Nianfeng, EVPs of JMC, approximately RMB 760 thousand per person, paid VP & Board Secretary Wan Hong and VP Zhou Yazhuo approximately RMB 580 thousand per person, paid VP Li Qing approximately RMB 390 thousand (VP Li Qing’s pay is consistent with his prior position as Sales Company General Manager). Two employee-representative supervisors, Mr. Jin Wenhui and Mr. Zhang Yong, were paid about RMB 190 thousand and RMB 90 thousand respectively. The total compensation paid by JMC for the aforesaid persons was about RMB 4.28 million in the reporting period. (2) JMC pays Ford annual compensation for Ford-seconded senior management personnel in accordance with the Personnel Agreement signed between Ford and JMC, and Ford pays the senior management and other foreign personnel seconded to JMC. Subject to the Amendment to Personnel Agreement approved by the Board, JMC in 2006 should pay US$ 250 thousand to Ford for Director & President Yuan-Ching Chen, US$ 20.8 thousand for former CFO Manto Wong, US$ 229.2 thousand for CFO Joseph Verga, US$ 36.3 thousand for former VP Ali İhsan Kamanlı, US$ 125 thousand for VP Mustafa Menkü and VP Tamer Açıkel per person, and RMB 250 thousand for VP Zhong Wanli, including salary, insurance, and other personnel-related expenses. (3) Pursuant to the resolutions of JMC 2003 Annual Shareholder’s Meeting, the annual compensation for the JMC independent directors is RMB 80 thousand per person, and JMC bears their travel-related expenses associated with JMC’s business. 6. Changes of Directors, Supervisors and Senior Management Supervisors Changes: Due to work rotation, Mr. Zhang Jianguo, the former employee-representative supervisor, no longer held the position as JMC supervisor. Mr. Zhang Yong was elected as an employee-representative supervisor of JMC fifth Supervisory Committee at the Employee Representative Meeting of JMC. Senior Management Changes: The Board of Directors accepted Mr. Manto Wong’s resignation from the Chief Financial Office position due to work rotation and appointed Mr. Joseph Verga as the Chief Financial Officer of the Company on January 23, 2006. The Board of Directors accepted Mr. Ali Ihsan Kamanli’s resignation from VP position in the Company due to work reasons on March 28, 2006. The Board of Directors approved the appointments of Mr. Mustafa Menkü and Mr. Tamer Açıkel as Vice Presidents of the Company on May 12, 2006. 17 The Board of Directors approved the appointment of Mr. Li Qing as a Vice President of the Company on December 21, 2006. II. Employees At the end of 2006, JMC had a total of 7,258 employees, of which 5,157 were production workers, 287 sales personnel, 999 technical personnel, 68 finance personnel, 750 administrative staff. The employees with polytechnic school degrees or above accounted for 32% of the total. There were 702 persons with junior technical titles, 652 with intermediate technical titles and 160 with senior technical titles, altogether accounting for 21% of the total. There were 950 early-retired employees and 55 lay-offs. JMC had a total of 1,091 retired employees with Company funded retirement benefits. Chapter V Corporate Governance Structure 1. Status of the Corporate Governance in JMC During the reporting period, the Company continued to improve its corporate governance in compliance with the Company law, the Code of Corporate Governance for Listed Companies in China, the Rules Governing Listing of Stock on Shenzhen Stock Exchange, the Rules on Strengthening the Protection of Public Shareholders’ Rights and Interests, the Guidelines on Implementing Full Tradable Share Reform in Listed Companies, the Guidelines on the Articles of Association of Listed Companies, as well as relevant laws and regulations. The measures included the following items: (1) implemented the Full Tradable Share Reform for JMC; (2) settled all non-operating account receivable balances with the related parties; (3) revised the Articles of Association of JMC correspondingly, and formulated the Rules of the Shareholders’ Meeting; and (4) improved compensation & evaluation mechanism for senior management, and formulated a Senior Executive Compensation & Incentive Plan of JMC. 2. Independent Directors’ Performance of Duty JMC has appointed three independent directors so far. The independent directors exercised their fiduciary duties regarding routine work and major decision-making of the Board of Directors. They studied every proposal reviewed by the Board of Directors thoroughly and raised their opinions, inquired about major events which required opinions from the independent directors and issued their written opinions, and actively engaged in the affairs of Compensation Committee and Audit Committee in the reporting period, to protect the interests of the Company and all shareholders. I. Particulars about independent directors’ attendance to the Board meeting: Required Actual Presence by Name Board presence in Absence proxy attendance person Zhang Zongyi 13 13 0 0 Pan Yuexin 13 13 0 0 18 Lok Kim Chai 13 13 0 0 II. Disagreements for JMC related matters The independent directors of the Company did not object to any proposal and issue of the Company reviewed at Board meetings in the reporting period. 3. Separation between JMC and the Controlling Shareholders in respect of Personnel, Assets and Finance, and Independence concerning Organization and Business: (1) With respect to personnel matters, the positions of chairman and president are held by different individuals; JMC’s senior management do not hold positions other than director positions with its controlling shareholders; JMC senior management personnel are paid by JMC; labor, personnel matters and compensation management of JMC are completely independent. (2) With respect to assets, JMC assets are complete. The assets utilized by JMC, including production system, supporting production system and peripheral facilities, and non-patent technology, are owned and/or controlled by JMC. (3) With respect to finance, JMC has an independent finance department and independent accounting system, and has a uniform and independent accounting system and financial control system for its branches and subsidiaries. JMC has its own bank accounts, and there are no bank accounts jointly owned by JMC and its controlling shareholders. JMC pays taxes independently in accordance with relevant laws. (4) With respect to organization, JMC’s organization is independent, complete and scientifically established with a sound and efficient operating mechanism. The establishment and the operation of JMC’s corporate governance are strictly carried out per the Articles of Association of JMC. Production and administrative management are independent from the controlling shareholders. JMC has established an organization structure that meets the need for ongoing development. (5) With respect to business, JMC has independent purchasing, production and sales systems. The purchasing, production and sales of main materials and products are carried out through its own purchasing, production & sales functions. JMC is independent from the controlling shareholders in respect to its business, and has independent and complete business and self-sufficient operating capability. In principle, controlling shareholders did not engage in production or sales of similar products in competition with JMC. 4. Compensation & Incentive Mechanism for Senior Management in the Reporting Period In the reporting period, the Board of Directors reviewed and approved the 2006 Senior Executives Compensation Plan and Senior Executive Compensation & Incentive Plan of JMC. According to the above-mentioned plans, the compensation for the senior management in 2006 consists of base salary, position allowance and year-end bonus. However, commencing from 2007, compensation for senior management will consist of fixed pay, short-term incentive and long-term incentive, and the funding of the short-term incentives and long-term incentives will be derived from an incentive fund based on the pre-tax profit. The two plans are applicable only to the Chinese-side senior management. 19 Chapter VI Introduction to Shareholders’ Meetings I. Annual Shareholders’ Meeting The 2005 annual shareholders’ meeting of JMC was held in the conference room on the fourth floor of the Administration Building of JMC on June 29, 2006. Resolutions passed at the 2005 annual shareholders’ meeting are as follows: 1. approved the 2005 Work Report of Board of Directors; 2. approved the 2005 Work Report of the Supervisory Committee; 3. approved the 2005 Financial Report; 4. approved the Proposal on the Profit Distribution for Year 2005; 5. approved the Proposal on V348 Approval; 6. approved the Proposal on 2006 Related Party Recurring Transaction Framework; 7. approved Proposed Amendments to the Articles of Association; and 8. approved the Rules of Shareholders’ Meeting. Public announcement on the resolutions of the annual shareholders’ meeting was published in China Securities, Securities Times and Hong Kong Commercial Daily on June 30, 2006. II. Special Shareholders’ Meeting The 2006 first special shareholders’ meeting of JMC was held in the conference center on the second floor of the Administration Building of JMC on January 5, 2006. Resolution passed at the 2006 first special shareholders’ meeting is as follows: approved 2005 Interim Dividend Distribution Proposal. Public announcement on the resolution of the special shareholders’ meeting was published in China Securities, Securities Times and Hong Kong Commercial Daily on January 6, 2006. III. Related Shareholders’ Meeting Regarding Full Tradable Share Reform The Related Shareholders’ Meeting Regarding Full Tradable Share Reform was held in the conference room on the fourth floor of the Administration Building of JMC on January 16, 2006. Resolution passed at the Related Shareholders’ Meeting Regarding Full Tradable Share Reform is as follows: approved the Full Tradable Share Reform plan for JMC. Public announcement on the resolution of the shareholders’ meeting was published in China Securities and Securities Times on January 17, 2006. 20 Chapter VII Report of the Board of Directors I. Management Discussion and Analysis 1. Operating Results JMC’s core business is production and sales of light vehicles and related components. Its major products include JMC series light truck and pickup, and Transit series commercial vehicles. The Company also produces engines, casting and other components. In 2006, JMC sales volume attained a record of 85,214 units including 32,936 JMC series light trucks, 881 Yunba microbuses, 24,917 pickups, 3,543 Baowei SUV and 22,937 Ford Transit series commercial vehicles. Total sales volume was up 16% from last year. Total production volume was 84,121 units, including 32,919 light trucks, 813 Yunba microbuses, 23,989 pickups, 3,336 Baowei SUV, and 23,064 Transits. The Company’s sales increase is primarily explained by industry increases and new model introduction. Transit sales volume increased by 25% compared with last year, Light Truck sales were higher by 19% and Pickup sales were higher by 13%. In 2006, the Company achieved a share of about 1.2% of the Chinese automotive market, decreasing by 0.1 percentage point compared with last year. (In 2006, the Company achieved a share of about 2.9% of the Chinese commercial automotive market, increasing by 0.1 percentage point from last year.) JMC light trucks (including pickup) accounted for 6.0% of the light truck market, up about 0.2 percentage points above 2005 level. Transit, along with the JMC brand Yunba microbus, achieved about 12% of the light bus market, about 1.3 percentage points higher than last year. (Data source for above analysis: China Association of Automobile Manufacturers and the Company sales records) The Table below summarizes Revenue & Cost of Goods Sold from Core Business. Unit: RMB’000 Year-on-year Year-on-year Year-on-year Cost in core Gross changes of changes of Product Turnover changes of business margin costs in core gross margin turnover (%) business (%) (points) I. Vehicle 6,730,742 5,094,123 24.3% 17.6 14.4 2.1 II. Components 637,809 494,499 22.5% 14.5 11.6 2.4 Total 7,368,551 5,588,622 24.2% 17.3 14.1 2.1 Including: Related party 709,087 577,400 18.6% 8.6 7.3 1.0 transaction 21 Regional classifications of JMC’s core business are: Unit: RMB’000 Region Turnover Year-on-year changes (%) North-east China 370,621 26.1 North China 652,375 12.0 East China 3,936,048 19.7 South China 1,244,003 8.2 Central China 416,448 18.0 North-west China 265,571 15.2 South-west China 483,485 26.2 2. Operating Results of Subsidiaries Name of Business Main Products Registered Assets Turnover Operating Net Profit Subsidiaries Capital (RMB’000) (RMB’000) Profit (RMB’000) (RMB’000) Jiangling-Isuzu N series Light Manufacturing $ 30 million 1,415,665 4,065,587 123,833 103,795 Motors Truck, T series Company, Ltd. Pickup, Microbus, SUV 3. Main Suppliers and Customers The total amount of purchases from the top 5 suppliers was RMB 1,463 million, accounting for 26% of JMC’s total annual purchasing value. The total sale amount to the top 5 customers was RMB 1,414 million, accounting for 19% of JMC’s total turnover. 4. Operational Challenges and Resolutions In 2006, the Company continued to face competitive challenges with new product entries and intensifying cost pressures. In the mean time, the Company focused on initiating new product development and expanding production capacity. Regarding competition, the Company continued to experience market share pressure from lower-priced competitors in all its segments. In response, the Company introduced new Transit and Pickup models in the Fourth Quarter of 2005. Additionally, we lowered prices for Baowei SUV models in January and for Pickup models in June. The Company also accelerated launch of Transit brand-specific stores to provide sales focus and enhance customer purchase experience. As a result, Transit sales grew by 25%, and Light Truck sales were higher by 19%, both reflecting a higher segment share than 2005. Pickup sales were higher by 13%, but segment share declined due to the increasing competition and new entrants in this segment. In the area of cost management, the Company continues to deal with higher raw material price and cost associated with increased regulatory requirements. To maintain acceptable 22 profit margin, the Company placed high priority on cost management and continued to establish dedicated teams to lead vigorous cost reduction and waste elimination activities throughout the entire enterprise. We also moved upstream in the product development process to reduce costs during the design stage, in addition to tightening cost control on models currently in production and daily operating expenses. The company anticipates continued market pressures including competitive price reduction, government policy revision, more stringent regulatory requirements and new vehicle entries in selected market segments. The Company's management remains focused on (1) leveraging existing product platforms to generate new revenue streams, (2) introducing new products, and (3) capacity expansion actions. The Company continues to execute the three major product projects approved in the fourth quarter of 2005 with the support of our technology partners. These programs are the V348 project (the next generation commercial vehicle product with technology provided by Ford), the N900 project (the next generation truck product which is developed independently), and the JX4D24 engine manufacturing project in support of localization as well as to meet future regulatory requirements. Additionally, the V128 project which distribute homologated imported Ford E-series models in the China market was approved in July 2006. The Board also approved the N350 project (a next generation independently developed pickup product) in December 2006. These actions will introduce competitive and profitable products into the light commercial vehicle market as soon as possible. A new paint shop was launched at the end of 2006. A frame plant press line capacity project and a C3 press line capacity project were approved by the Board of Directors in July 2006 and September 2006 respectively. These manufacturing actions are aimed at supporting the Company’s present volume growth and increased volume associated with new products. Finally, the company is continuing efforts to ensure sustainable growth, including studying project opportunities for adding incremental products and has established a team to expand profitable export and OEM sales. 5. Investment in the reporting period (1) In 2006, JMC did not raise equity funding, nor did it use equity funding raised in previous years. (2) Self funded major projects: Total Investment Spending To Project Name Estimate Date Planned Job#1 Date (RMB Mils) (RMB Mils) V348 909 476 Second Half, 2007 N350 598 13 Second Half, 2009 JX4D24 Engine 350 22 First Half, 2008 N900 250 48 Second Half, 2008 Paint Line 222 Completed 23 Second Half, 2006 Euro III 195 120 ~ First Half, 2007 C3 Press Line 64 9 Second Half, 2007 Frame Press Machine 53 9 First Half, 2008 6. Financial Results Revenue in 2006 was RMB 7,369 million, up 17% from year ago. This increase primarily reflected higher vehicle sales volume, partially offset by price reduction. Under International Financial Reporting Standards, net profit was RMB 623 million, up 27% from last year’s level. Higher profit derived from volume increases and cost reductions was partially offset by price reduction and cost increases driven by regulatory actions. Distribution costs increased by RMB 135 million, up 38% from last year, primarily reflecting volume-related changes including vehicle delivery costs, warranty, promotion expenses and advertisement expenditure. Administrative expenses increased by RMB 121 million, up 32% from the prior year, primarily reflecting higher program spending and technical development fees associated with higher Transit sales volume. Cash flow from operations was positive RMB 1,150 million, reflecting profitability and operating-related changes. Cash flow from investing activities was negative RMB 491 million, reflecting primarily spending for capital goods such as facilities, equipment and tooling. Financing cash flow was negative RMB 450 million, primarily reflecting dividend payment, bank loan reduction and interest expenses. At the end of 2006, Company cash and cash equivalents totaled RMB 2,168 million, up RMB 209 million from the end of 2005. The balance of bank borrowing was RMB 132 million, down RMB 3 million from the end of 2005 (decreased 2%). Total assets were RMB 5,312 million, up 12% from RMB 4,722 million at year-end 2005, primarily reflecting higher Construction in Progress, receivables and cash balance. The assets structure remains unchanged from 2005. Total liabilities, including minority interest, were RMB 2,311 million, up 21% from year-end 2005, primarily reflecting higher accounts payable and accrual due to higher production volumes and investment. Lower customer advances partially offset the above increases. Shareholder equity was RMB 3,002 million at December 31, 2006, up RMB 192 million from year-end 2005. This increase is explained by net profit earned in the reporting period. Dividend payments partially offset the equity increase. 7. Causes of Change in Accounting Estimate and Impact on JMC According to the requirements of Chinese Accounting Standards and considering JMC’s actual condition, on July 11, 2006, the Board of Directors approved the adjustment to the fixed asset depreciation periods and residual values adopted in 1993, effective from July 1, 2006, and approved a corresponding one-time asset write-down of RMB 22 million. This 24 change in accounting methods reduced pre-tax profit by RMB 41.58 million this year. The adjustment to the fixed asset depreciation periods, residual values and annual straight line depreciation rate was as follows: After Adjustment Before Adjustment Annual Straight Residual Annual Straight Depreciation Residual Value Depreciation Asset Sort Line Value (% of Line Period (% of Purchase Period Depreciation Purchase Depreciation (Years) Value) (Years) Rate (%) Value) Rate (%) Buildings 35-40 4% 2.4-2.74% 35 10% 2.57% Plant and 10-15 4% 6.4-9.6% 10 10% 9% Machinery Equipment and 6-10 4% 9.6-16% 6 10% 15% Motor Vehicles Electronics & 5-7 4% 13.71-19.2% 7 10% 12.86% Others 8. 2007 Year Plan The Company is projecting revenue in the range of RMB 8,000 to 8,500 million for 2007. Intensified competition resulting from new market entries and the launch of news models will require increased levels of marketing expense to support expanded market share. Additionally, R&D and capital expenditures are projected to be higher as we progress with new product programs and capacity expansion actions. In 2007, the Company continues to focus on generating cash and profits, enhance formulation of new product development strategies, and execute plans for future growth. Specific actions include: i. Accelerate efforts to strengthen our brand image through enhancing the Company's distribution network, including brand-specific shop expansion and improving customer sales service. ii. Work with our technology partners to launch the V348 project and to further implement the N900, JX4D24 and N350 new product development projects, and continue to expand production capacity; spending for presently approved projects will be funded from cash reserves. iii. Increase cost reduction efforts by focusing on customer value and eliminating waste. iv. Develop product plans to add new products for introduction in the Chinese market. v. Expand the export and OEM component sales business. II. Routine Work of the Board of Directors 1. Board Meetings and Resolutions in the Reporting Period The Board of Directors approved in form of paper meeting the following resolution on January 23, 2006: approved Mr. Manto Wong’s resignation from the position of Chief 25 Financial Officer, member of the Executive Committee and Secretary of the Audit Committee of the Company due to work rotation, and the Board further approved the appointment of Mr. Joseph Verga as Chief Financial Officer, member of the Executive Committee and Secretary of the Audit Committee of the Company. Public announcement on the resolution of the Board Meeting was published in China Securities, Securities Times and Hong Kong Commercial Daily on January 24, 2006. The Board of Directors approved in form of paper meeting the following resolutions on February 27, 2006: i. agreed the nomination of Mr. Joseph Verga as a candidate for the director of JMC’s subsidiary-Jiangling-Isuzu Motors Company Limited to replace Mr. Manto Wong; and ii. agreed to authorize CFO Joseph Verga with full power to handle loan financing between JMC and financial institutions. The Board of Directors simultaneously terminated the similar authorization for Mr. Manto Wong which was approved by the Board on December 14, 2005. The fourth session of the fifth Board of Directors was held in the conference center on the second floor of the Administration Building of JMC on March 28, 2006. The following resolutions were passed at the meeting: i. approved Transit Paint Shop Oven Emission Treatment Program; ii. approved MP&L Parts Market Place Program; iii. accepted Mr. Ali Ihsan Kamanli’s resignation from Vice President position in the Company due to work reasons; and iv. approved the 2006 Senior Executive Compensation Plan of JMC. Public announcement on the resolutions of the Board Meeting was published in China Securities, Securities Times and Hong Kong Commercial Daily on March 31, 2006. The Board of Directors approved in form of paper meeting the following resolutions on April 5, 2006: i. approved 2005 Annual Report of the Company and the extracts from the Annual Report. ii. approved the proposal on 2005 profit distribution plan; and iii. Because the Company pays utility fees on behalf of its major shareholder and its affiliates, the overall settlement of the utility costs results in the use of the Company's funds. The Board agreed to authorize the Executive Committee to amend the current procedures in order to comply with the relevant laws and regulations, and the Board required the implementation of such new procedures commencing from June 2006. Public announcement on the resolutions of the Board Meeting was published in China Securities, Securities Times and Hong Kong Commercial Daily on April 8, 2006. 26 The Board of Directors approved in form of paper meeting the following resolution on April 25, 2006: approved JMC 2006 First Quarter Report. The Board of Directors approved in form of paper meeting the following resolutions on May 25, 2006: i. approved the Proposed Amendments to the Articles of Association of JMC and the Rules of Shareholders’ Meeting of JMC. The proposals are subject to the approval of the Shareholders’ Meeting; ii. approved the Notice on Holding 2005 Annual Shareholders’ Meeting of JMC; iii. approved the long lead funding for V128 program; and iv. approved the appointments of Mr. Mustafa Menkü and Mr. Tamer Açıkel as Vice Presidents of the Company. Public announcement on the resolutions of the Board Meeting was published in China Securities, Securities Times and Hong Kong Commercial Daily on May 27, 2006. The fifth session of the fifth Board of Directors was held in the conference center on the second floor of the Administration Building of JMC on July 10, 2006. The following resolutions were passed at the meeting: i. approved transfer and acquisition of the relevant land use right; ii. approved the V128 Program; iii. approved N350 program kick off and associated long lead funding; iv. approved T Series Petrol Euro III OBD program; v. approved Frame Plant Underbody Structure 4-1000T Press program; vi. approved Pre-delivery & Testing Facility program; vii. related party transaction approval; and viii. approved the adjustment to fixed asset depreciation period and residual values. Public announcement on the resolutions of the Board Meeting was published in China Securities, Securities Times and Hong Kong Commercial Daily on July 12, 2006. The Board of Directors approved in form of paper meeting the following resolution on August 13, 2006: approved JMC 2006 Interim Report. The sixth session of the fifth Board of Directors was held in the conference center on the second floor of the Administration Building of JMC on September 28-29, 2006. The following resolutions were passed at the meeting: i. approved the incremental funding for N/T Series Euro III program; ii. approved Casting Plant Environmental Compliance program; iii. approved C3 Press Line program; iv. approved Employee Cafeteria Construction project; and v. related party transaction approval. Public announcement on the resolutions of the Board Meeting was published in China Securities, Securities Times and Hong Kong Commercial Daily on October 11, 2006. 27 The Board of Directors approved in form of paper meeting the following resolution on October 24, 2006: approved JMC 2006 Third Quarter Report. The Board of Directors approved in form of paper meeting the following resolution on November 3, 2006: approved incremental funding for Employee Cafeteria Construction Project. The seventh session of the fifth Board of Directors was held in the conference center on the second floor of the Administration Building of JMC on December 18, 2006. The following resolutions were passed as follows: i. approved N350 Program; ii. approved BaoDian & BaoWei 08 Model Year Freshening Program (N301 Program); iii. approved KaiYun 08 Model Year Freshening Program (N601 Program); iv. approved the proposal on V128 Vehicle Import Agreement and V128 Engineering Service Fees; v. approved V348 MT82 Transmission Localization Program and corresponding related party transaction; vi. related party transaction approval; vii. approved 2006 Eight Accounting Provisions & Write-off proposal; viii. approved the appointment of Mr. Li Qing as JMC Vice President based on the President’s nomination; and ix. approved JMC Senior Executive Compensation & Incentive Plan. Public announcement on the resolutions of the Board Meeting was published in China Securities, Securities Times and Hong Kong Commercial Daily on December 22, 2006. 2. Board of Directors’ implementation of the Resolutions of the Shareholders’ Meetings According to the 2005 year interim dividend distribution plan approved by the 2006 first special shareholders’ meeting, the announcement on the implementation of the 2005 year interim dividend distribution was published in China Securities, Securities Times and Hong Kong Commercial Daily on January 7, 2006, and it has been put into effect. The 2005 year interim dividend distribution plan was as follows: Based on the total share capital of 863,214,000 shares, a cash dividend of RMB 3.59 (before tax) per 10 shares is to be distributed to the shareholders. Individual shareholders and investment funds holding unlimited tradable A shares will receive after-tax cash dividend of RMB 3.231 per 10 shares, and the cash dividend for B-share holders shall be exempted from tax. Equity record date and ex-dividend date for A shares were January 11 and January 12, 2006 respectively; Last transaction date, ex-dividend date and equity record date for B shares were January 11, January 12, and January 16, 2006 respectively. The cash dividend for B-share holders was paid in Hong Kong Dollars based on the middle exchange rate between HK dollar and RMB quoted by the People’s Bank of China on the 28 first business day (January 6, 2006) after the resolution of the Shareholders’ Meeting. The exchange rate was HKD 1.00 / RMB 1.0404. According to the Full Tradable Share Reform plan for JMC approved by the related shareholders’ meeting on January 16, 2006, the announcement of the implementation of the Full Tradable Share Reform plan was published in China Securities and Securities Times on February 14, 2006, and it has been put into effect. The Board of Directors published the announcement on the discontinuance of the trading restriction on the limited tradable A shares according to the Full Tradable Share Reform in China Securities and Securities Times on February 15, 2007, and it has been put into effect. According to the 2005 year profit distribution plan approved by the 2005 shareholders’ meeting, the announcement on the implementation of the 2005 year dividend distribution was published in China Securities, Securities Times and Hong Kong Commercial Daily on July 14, 2006, and it has been put into effect. The 2005 year dividend distribution plan was as follows: Based on the total share capital of 863,214,000 shares, a cash dividend of RMB 1.50 (before tax) per 10 shares is to be distributed to shareholders. Individual shareholders and investment funds holding the Company’s unlimited tradable A shares will receive after-tax cash dividend of RMB 1.35 per 10 shares, and the cash dividend for B-share holders shall be exempted from tax. Equity record date and ex-dividend date for A shares were July 20 and July 21, 2006 respectively; Last transaction date, ex-dividend date and equity record date for B shares were July 20, July 21, and July 25, 2006 respectively. The cash dividend for B-share holders was paid in Hong Kong Dollars based on the middle exchange rate between HK dollar and RMB quoted by the People’s Bank of China on the first business day (June 30, 2006) after the resolution of the Shareholders’ Meeting. The exchange rate was HKD 1.00 / RMB 1.0294. JMC did not convert capital reserve into share capital in the reporting period. 3. Proposal on 2006 Year Profit Distribution Plan Details on the profit available for appropriation of the Company in 2006 prepared in accordance with Chinese Accounting Standards (‘CAS’) and International Financial Reporting Standard (‘IFRS’) are as follows: Unit: RMB’000 CAS IFRS Retained earning at Dec. 31, 2005 890,903 829,729 2006 net profit 603,611 623,197 Reserve -65,551 -60,361 Allocation of dividend for 2005 -439,376 -439,376 Retained earning at Dec. 31, 2006 989,587 953,189 The upper limit of profit available for distribution was based on the lower of the 29 unappropriated profit calculated in accordance with CAS and that calculated in accordance with IFRS. Therefore, the Company’s retained earnings available for distribution as of December 31, 2006 was RMB 953,189 thousand. The Board approved to submit to the 2006 Annual Shareholders’ Meeting the following proposal on year 2006 profit distribution: (1). Appropriate 10% of the 2006 net profit calculated in accordance with CAS as statutory surplus reserve; (2). Appropriate for dividend distribution from the year’s net profit, a standard dividend of RMB 0.3 per share based on the Company’s total share capital; and (3). Carry forward the balance of the unappropriated profit to the following fiscal year. Profit distribution proposal: A cash dividend of RMB 3 (including tax) will be distributed for every 10 shares held. Based on the total share capital of 863,214,000 shares as of December 31, 2006, total cash dividend distribution amounts to RMB 258,964,200. B share dividend shall be paid in Hong Kong Dollars and converted based on the HKD-to-RMB exchange rate published by the People’s Bank of China on the first working day following the approval on the profit distribution proposal at JMC’s Shareholders’ Meeting. The Board decided not to convert capital reserve to share capital this time. 4. The independent directors’ explanation and independent opinion on the Company’s outside guarantee and the implementation of relevant regulations JMC has no outside guarantee. 5. Others JMC continues to designate China Securities, Securities Times and Hong Kong Commercial Daily as the newspapers for information disclosure. Chapter VIII Report of the Supervisory Committee I. Work of the Supervisory Committee Pursuant to the relevant regulations in the Company Law, Securities Law and JMC Articles of Association as well as consistent with the spirit of being responsible to the shareholders, the Supervisory Committee earnestly fulfilled its duties stipulated by the laws and regulations and energetically worked to perform its functions fully in 2006. The Chief Supervisor attended all the board meetings as a non-voting attendee, and all the supervisors attended the annual Shareholders’ Meeting. The committee held 5 meetings during the reporting period. The following is the information in regard to the meetings and the subjects at the meetings: 30 1. The Supervisory Committee reviewed and passed in form of paper meeting the following resolutions on April 5, 2006: i. reviewed and passed the 2005 annual work report of the Supervisory Committee; and ii. reviewed and passed 2005 Annual Report of JMC and the extracts from the annual report. 2. The Supervisory Committee reviewed and passed the following resolution in form of paper meeting on April 25, 2006: reviewed and passed 2006 First Quarter Report of JMC. 3. The Supervisory Committee reviewed and passed the following resolution in form of paper meeting on August 14, 2006: reviewed and passed 2006 Interim Report of JMC. 4. The Supervisory Committee reviewed and passed the following resolution in form of paper meeting on October 24, 2006: reviewed and passed 2006 Third Quarter Report of JMC. 5. The Supervisory Committee reviewed and passed the following resolution in form of paper meeting on December 20, 2006: regarding 2006 Eight Accounting Provisions & Write-off proposal approved by the Board of Directors of the Company, the Supervisory Committee believed that it complied with JMC’s actual needs & situation. II. Supervisory Committee’s independent opinion on the following matters during the reporting period: 1. JMC’s operation in conformity with laws JMC operated in conformity with the laws and regulations, such as the Company Law, the Securities Law and the Articles of Association in 2006. The decision-making procedure was standardized and legal, and a relatively complete internal control system was established. No behaviors violating laws, regulations and the Articles of Association or harming JMC’s interest by the Directors, President and other senior management in carrying out their duties were found. 2. JMC’s financial status PwC Zhong Tian audited JMC’s 2006 financial statements and issued unqualified audit reports. We believe the reports reflect JMC’s financial status, operating results and asset changes objectively and accurately. 3. In 2006, JMC’s procedure for asset sales was legal and the prices were reasonable. There were no insider trading, deals, or situations harmful to shareholders’ interest or where a leak of JMC’s assets was detected. 4. JMC’s related transactions: imported component purchasing applied negotiated arm-length prices. The pricing for localized components was determined through the process of inviting public bidding, discussion and business negotiation. The prices were adjusted periodically, were fair and reasonable. 31 Chapter IX Major Events 1. JMC had no major litigation or arbitration issue in 2006. 2. Purchase or Sale of Assets (1) Acquiring The transfer of 80% equity held by Ford of Jiangxi Fujiang After-sales Service Co., Ltd. (“Fujiang Company”) to the Company has been completed during the reporting period with an acquisition payment of appropriately RMB 60 million, and Fujiang Company has been consolidated into the Company’s financial statements effective September 30, 2006. The cancellation of the registration of Fujiang Company was approved by the Jiangxi Provincial Bureau of Industrial & Commercial Administration on December 31, 2006. Fujiang's independent legal entity status has been cancelled and its operation and organization has been integrated into the Company, which exercised the relevant rights and bore the relevant liabilities of Fujiang Company. (2) Sale and Purchase of Land Use Rights The Board of Directors approved transfering the Company’s land use right for the 218 Mu land, located in Majiashan, Nanchang city, as well as affixtures thereto for RMB 33 million, and acquiring the land use right for the 2000 Mu Greenfield, located in Xiaolan Economic Development Zone, Nanchang city, P.R.C., for RMB 33 million on July 10, 2006. The aforesaid transaction is subject to the approval of the relevant authorities. As of the date of the issuance of this Annual Report, the transaction is still progressing towards obtaining governmental approval. 3. Major Related Transactions (1) Routine related party transactions A. JMC purchased certain raw materials, auxiliary materials and components from related parties. Transactions with annual value over RMB 30 million are listed as below: Transaction parties Pricing Settlement Amount As % of total Principle method (RMB’000) purchases JMCG Contracted 60 days after price delivery 499,083 9.01 Ford Contracted Letter of credit price 205,050 3.70 JMCG Interior Trim Factory Contracted 60 days after price delivery 201,086 3.63 Nanchang Gear Co., Ltd Contracted 60 days after price delivery 193,166 3.49 Jiangling-Lear Interior Trim Contracted 60 days after Factory price delivery 153,562 2.77 32 Jiangxi FuChang Climate Contracted 60 days after System Co. price delivery 133,182 2.41 Nanchang Jiangling Contracted 60 days after Huaxiang Auto Components price delivery Co. 63,603 1.15 JMCG Variant Vehicle Contracted Monthly Netting Factory price off payment of purchased goods 51,262 0.93 JMCG Industrial Company Contracted 60 days after price delivery 32,752 0.59 Necessity and continuity: the purchase of the imported components will immediately stop when the respective localization is achieved, and these components will be substituted by localized ones; some components from other related parties were unique parts for JMC’s Transit series, N series and T series, and other general components were purchased through open bidding. B. The sales of products by JMC to related parties with annual value over RMB 30 million: Transaction parties Pricing Settlement Amount Ratio to the Principle method (RMB’000) transactions of the same kind JMCG Import and Export Co., Contracted 30 days after 414,875 5.63 Ltd. price delivery JMCG Industrial Company Contracted Monthly 126,405 1.72 price Netting off payment of purchased goods JHC Market 30 days after 124,918 1.70 price invoicing JMCG Interior Trim Factory Contracted Consignment 59,407 0.81 price after receiving payment of purchased goods Nanchang Gear Co., Ltd Contracted Monthly 51,086 0.69 price Netting off payment of purchased goods Jiangling Land-wind Vehicle Market 30 days after 50,343 0.68 Co., Ltd. price invoicing Jiangling Chassis Company Contracted Monthly 34,849 0.47 price Netting off payment of purchased goods 33 JMCG Variant Vehicle Factory Contracted Monthly 33,879 0.46 price Netting off payment of purchased goods Necessity and continuity: JMCG Import and Export Co., Ltd. has a mature network and human resources to support import & export trade. JMC will continue to use its sales network to sell products to overseas markets. JMC will also continue supplying relevant components to JHC as long as an attractive margin is secured. In the above mentioned pricing principle, market price means that it is based on the market price of similar products, and contracted price means that for unique products or services for which comparable market data is difficult to obtain, prices are determined through the process of supplier quotes, cost assessment and negotiations. In the reporting period, the Company adhered to the 2006 Related Party Transaction Framework, and when necessary re-approved those transactions for which relationships were changed. The details for changes in relationships for related party transactions are as follows: 1. Because JHC has acquired 100% share of Jiangling Landwind Company and has dissolved Jiangling Landwind Company, the Board of Directors approved a transfer to JHC for all routine related party transactions previously concluded with Jiangling Landwind Company; all other terms remain unchanged; and 2. Due to the spin-off of the stamping business of Nanchang Gear Co., the Board of Directors approved the transfer of sales of frame stamping parts from Nanchang Gear Co. to JHC. All other terms and conditions with respect to the aforesaid related party transaction remain unchanged. Because all other terms and conditions with respect to the related party transaction remain unchanged, there is no material impact on the Company for the above-mentioned changes. There were no major changes between the actual amount and the amount forecasted at the beginning of the year for other related transactions. Public announcements on the routine related party transaction framework of the Company were published in China Securities, Securities Times and Hong Kong Commercial Daily on December 27, 2005, October 11 and December 22, 2006. C. Management Compensations In 2006, JMC paid US$ 3,929,000, plus RMB 2,102,500 to Ford for 19 expatriate secondees and 24 secondees of the Territory working in JMC in line with the Personnel Secondment Agreement signed by JMC and Ford on March 24, 2005. In 2006, JMC paid RMB 546,984 to JHC for the secondees in JMC in line with the Personnel Secondment Agreement signed by JMC and JHC on January 1, 2006. 34 D. General Service JMCG bears the middle school and primary school educational fees and retired employees expenses for JMC and its subsidiaries, and provides services such as security, fire control, road maintenance and cable television. The related costs were shared by JMC and its subsidiaries according to agreed percentages based on headcount ratio. In 2006, RMB 4.85 million of the above-mentioned costs was shared by JMC and its subsidiaries. E. Purchasing Agency JMCG Import & Export Co., Ltd. was the import agent of JMC for acquiring import materials, equipment and technology services with a commission rate of 1.3% for existing business and 0.8% for new program business. In 2006, JMC paid JMCG Import & Export Co., Ltd. commission totaling RMB 5.86 million. (2) Related party transaction resulting from the transfer of assets or shares in 2006 Please see the Article 2, Chapter IX for acquiring the equity of Fujiang Company. (3) Creditor’s rights, liabilities and guarantees between JMC and related parties. A. Settlement of the Company’s non-operating funding since Dec. 31, 2005 Unit: RMB 000 Non-operating account receivable balances by Total major shareholder and its amount subsidiaries in the Settlement Amount Date As of As of reporting January 1, December 31, period 2006 2006 1,650 0 1,650 Cash 1,650 May 2006 payment Notes on settlement of the The reason for establishment of this receivable was Company’s non-operating that the Company paid utility fees on behalf of a major shareholder and its subsidiaries. As of May 31, account receivable 2006, the aforesaid non-operating receivable balance balances by major has been settled. shareholder and its subsidiaries B. Balance of accounts due to or due from major related parties with value over RMB 30 million: Item Related parties Ratio to the Amount balance of the (RMB mils.) item Accounts and bills JMCG 90,713 7.22% payable Accounts and bills Jiangling-Lear Interior 62,951 5.01% payable Trim Factory Accounts and bills Nanchang Gear Co., Ltd 50,370 4.01% 35 payable Accounts and bills Jiangxi FuChang Climate 36,568 2.91% payable System Co. Accounts and bills JMCG Interior Trim 39,861 3.17% payable Factory Accounts and bills JMCG Variant Vehicle 30,098 2.40% payable Factory C. Deposit At the end of year 2006, JMC had a deposit of RMB 77.17 million in JMCG Finance Co., Ltd. and charged interest according to same period bank deposit interest rate (RMB at 0.72% - 1.62%, US$ at 1.15%). JMC received a total of RMB 1.78 million in interest from JMCG Financial Co., Ltd. in 2006. D. Guarantee JMCG provided a guarantee for portions of JMC’s bank loans, of which the maximum was US$ 2.28 million, or RMB 18.89 million. As of December 31, 2006, JMCG Finance Co. Ltd provided a guarantee for JMC’s bank loans of US$ 1.34 million, or RMB 10.48 million. E. Pledge JMC, Ford Automotive Finance Corporation, Ltd.(“FAFC”) and JMC dealers have entered into a three party consignment agreement. According to the agreement, JMC pledged vehicles, which were consigned to dealers, to FAFC, and dealers obtain financing credit from FAFC. The interests of these financing activities are borne by the dealers. As of December 31, 2006, finished goods (vehicles) with an aggregate net book value of approximately RMB 15.44 million have been pledged to FAFC. (4) Other major related party transactions in 2006 According to the Joint Development Agreement and the 2nd Amendment Contract to the Joint Development Agreement signed by JMC and Ford, JMC is to pay technology development fee totaling US$ 40 million to Ford. JMC bore a technology development fee of US$ 5.96 million (equal to RMB 47.27 million) in 2006 reflecting 1.8% of Transit sales revenue. 4. Major Contracts and Execution (1) There was neither entrustment, contract or lease of assets from other companies, nor entrustment, contract or lease of JMC’s assets to other companies by which profit was generated to exceed 10% of 2006 total profit in the reporting period. (2) JMC had no outside guarantee in the reporting period. (3) JMC did not entrust other people with cash asset management in the reporting period. 5. Commitments on Full Tradable Share Reform JHC, Shanghai Automotive Co., Ltd., Shenzhen Tongqian Investment Corporation, Ltd., Shenzhen Nan-guang (Group) Corporation, Ltd., Qingdao Infrastructure Material Co., Ltd., Harbin Car Supermarket, Nanchang Hongyan Express Mail Company, Wuhan Yuanchen Group Company, Jiangxi Jiangxin Zhiye Company, Zhengzhou Yuzheng Mechanical and 36 Electrical Equipment Company, Huangshi Auto Trading Company, Nanchang Auto Trading Company and Hebei Province Foreign-investment Material Company issued letters of commitment, and declared and promised the following: (1) according to the requirements of Rules on Implementing the Full Tradable Share Reform of the Listed Companies, legal commitments will be fulfilled in accordance with provisions of the stock exchange laws and regulations; (2) the promisees ensure that they will compensate for losses to other shareholders resulting from partial or complete non-fulfillment of his promises; and (3) the promisees will fulfill their commitments faithfully and undertake relevant legal responsibility, and they will not transfer their shares unless the transferee agrees and accepts liability to undertake the responsibility of the promise. JHC promises specifically to pay the consideration on behalf of the unlisted-share holders who oppose the Share Reform or did not express their opinions. The above-mentioned unlisted-share holders should repay the consideration paid by JHC and the interest, or obtain written consent from JHC, if they want to list their shares. Public announcement on implementing Full Tradable Share Reform was published in China Securities, Securities Times and Hong Kong Commercial Daily on February 10, 2006, and it has been put into effect. The 120,000 limited tradable A shares held by Harbin Car Supermarket, the former shareholder of the Company, were transferred to Beijing Ninggao Investment Company due to a judgment of the Court; the 75,000 limited tradable A shares held by Huangshi Auto Trading Company, the former shareholder of the Company, were purchased by Yubo Software Technology Company of Shunde District, Fuoshan City through public auction due to a judgment of the Court. Shares of the Company held by other unlisted-share holders were frozen in accordance with related requirements, and there is neither share transfer nor breach of promise. 6. Appointment or Dismissal of Accounting Firms JMC 2002 Annual Shareholders’ Meeting approved to appoint PwC Zhong Tian as JMC’s year 2002-2006 A & B share auditor. The firm has offered JMC audit services for six consecutive years. The compensation paid to the accounting firm is as follows: Accountant Firm Year 2006 Out of Pocket Expense RMB 1.2 million Included in audit fee. PwC ZhongTian (Both A & B share) 7. Neither JMC nor its Directors or senior management were punished by regulatory authorities in 2006. 8. External research and media interview to the Company In the reporting period, JMC welcomed institutional investors including 39 persons and discussed operating highlights, development strategy and other matters with them. The Company does not disclose, reveal or divulge major information not yet disclosed to 37 special person or entities. Table of external research, communication and media interviews with the Company is as follows: Date Place Communication Object Information discussed Method April In the Oral 16 persons from fund JMC Operating highlights and 12,2006 Company Communication companies, securities development strategy companies and qualified foreign institutional investors (QFII) May 20, In the Oral 6 persons from fund JMC Operating highlights and 2006 Company Communication companies and securities development strategy companies June 27, In the Media Interview A Journalist from China JMC Operating highlights and 2006 Company Securities development strategy August In the Oral Fund Managers from JMC Operating highlights and 16, 2006 Company Communication China International development strategy Capital Corporation Limited August In the Oral 12 persons from fund JMC Operating highlights and 29, 2006 Company Communication companies, securities development strategy companies and qualified foreign institutional investor (QFII) September In the Oral 2 fund managers JMC Operating highlights and 12, 2006 Company Communication development strategy October In the Oral An Analyst from JP JMC Operating highlights and 20, 2006 Company Communication Morgan Chase & Co development strategy November In the Oral Fund managers JMC Operating highlights and 2, 2006 Company Communication development strategy 9. Establishment & Implementation of Internal Control Mechanism Pursuant to the Shenzen Stock Exchange published request entitled "Listed Company Internal Control Guidelines", the Internal Control Office conducted a review of company internal control policies and company governance structures under supervision of the Board Audit Committee. The results of the review reflect that targets, responsibilities and delegation authority limits for individuals and departments have been established, that a management approval delegation and risk assessment system is in place, and that procedures and policies for all operating functions are implemented and executed effectively. A complete set of internal control self-check lists have been developed by the company for departmental self assessment and internal control purposes. Internal Control audits the company's operations according to an annual audit plan which is approved by the Audit Committee, it conducts an annual review on the self-check lists to assess the company's internal control status and risks, and it provides reports to the Audit Committee and senior management regularly. Company internal control policies are complete, rational and effective, thereby assisting to ensure the validity, accuracy and completeness of financial reports. In the future, internal control policies will be optimized and improved to address changes in the company's operating status, structure, and needs. 10. Other Major Events Full Tradable Share Reform With the approval obtained from State-owned Assets Supervision and Administration 38 Committee of the State Council of the People’s Republic of China on Full Tradable Share Reform for JMC on January 11, 2006, the Related Shareholders’ Meeting Regarding Full Tradable Share Reform of the Company approved the share reform plan on January 16, 2006. On January 25, 2006, Ministry of Commerce of the People’s Republic of China approved the change in the nature of JMC shares involved in the share reform. According to the Full Tradable Share Reform plan approved by the Related Shareholders’ meeting of the Company, the board of directors of the Company published an announcement on implementing the Full Tradable Share Reform plan in China Securities, Securities Times and Securities Daily on February 10, 2006, and it has been put into effect. Explanations on Full Tradable Share Reform plan of JMC were disclosed in the website (http://www.cninfo.com.cn) on December 14, 2005. Subject to the arrangement with respect to the relief of trading restriction stipulated in Full Tradable Share Reform plan, the board of directors published a prompt announcement on the relief of trading restriction for the limited tradable A shares in China Securities, Securities Times on February 15, 2007. The number of additional tradable shares is 84,085,700 shares and the date of listing of these shares was February 16, 2007. 39 Chapter X Financial Report 40 Jiangling Motors Corporation, Ltd. Consolidated Financial Statements 31 December 2006 41 普华永道中天会计师事务所有限公司 11th Floor PricewaterhouseCoopers Center 202 Hu Bin Road Shanghai 200021, P.R.C. Telephone +86 (21) 6123 8888 Facsimile +86 (21) 6123 8800 www.pwccn.com Independent Auditor's Report 2007/SH-52/BMC/MM To the Shareholders of Jiangling Motors Corporation, Ltd. Report on the financial statements We have audited the accompanying consolidated financial statements of Jiangling Motors Corporation, Ltd. (the “Company”) and its subsidiaries (together, the “Group”) which comprise the consolidated balance sheet as of 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 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 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. 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 financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the 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 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 financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 42 Opinion In our opinion, the accompanying consolidated financial statements give a true and fair view of 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. PricewaterhouseCoopers Zhong Tian CPAs Limited Company Shanghai, the People’s Republic of China 4 April 2007 43 Jiangling Motors Corporation, Ltd. For the year ended 31 December 2006 (All amounts in RMB unless otherwise stated) Consolidated Balance Sheet As of 31 December Note 2006 2005 RMB’000 RMB’000 ASSETS Non-current assets Property, plant and equipment 5 1,819,529 1,546,959 Lease prepayment 6 143,289 146,766 Intangible assets 7 36,971 - Investments in associates 8 16,120 21,245 Deferred tax assets 9 74,814 58,698 2,090,723 1,773,668 Current assets Inventories - net 10 595,717 625,869 Trade and other receivables 11 437,934 363,429 Held-to-maturity investment 12 19,895 - Cash and cash equivalents 13 2,168,225 1,959,455 3,221,771 2,948,753 Total assets 5,312,494 4,722,421 EQUITY Capital and reserves attributable the Company’s equity holders Share capital 14 863,214 863,214 Share premium 14 816,609 816,609 Other reserves 15 368,635 300,858 Retained earnings 953,189 829,729 3,001,647 2,810,410 Minority interests 126,012 116,451 Total equity 3,127,659 2,926,861 LIABILITIES Non-current liabilities Borrowings 16 10,227 10,834 Retirement benefits obligations 17 69,350 79,576 Deferred income 28,648 26,112 Provisions 18 104,738 103,508 212,963 220,030 Current liabilities Trade and other payables 19 1,823,228 1,422,670 Current tax liabilities 10,081 11,130 Borrowings 16 122,108 124,070 Retirement benefits obligations 17 16,455 17,660 1,971,872 1,575,530 Total liabilities 2,184,835 1,795,560 Total equity and liabilities 5,312,494 4,722,421 The notes on pages 48 to 84 are an integral part of these consolidated financial statements. 44 Jiangling Motors Corporation, Ltd. For the year ended 31 December 2006 (All amounts in RMB unless otherwise stated) Consolidated Income Statement Year ended 31 December Note 2006 2005 RMB’000 RMB’000 Sales 20 7,368,551 6,280,636 Sales tax and surcharge (129,891) (113,112) Net sales 7,238,660 6,167,524 Cost of sales (5,588,622) (4,898,489) Gross profit 1,650,038 1,269,035 Distribution costs (494,481) (359,515) Administrative expenses (503,128) (382,018) Other income/gains 49,318 51,129 Operating profit 701,747 578,631 Finance income 23 48,058 28,156 Finance costs 23 (7,889) (9,446) Finance costs-net 23 40,169 18,710 Share of profit of associates 5,634 4,173 Profit before income tax 747,550 601,514 Income tax expense 24 (99,116) (86,088) Profit for the year 648,434 515,426 Attributable to: Equity holders of the Company 623,197 490,872 Minority interest 25,237 24,554 648,434 515,426 Earnings per share for profit attributable to the equity holders of the Company (expressed in RMB per share) - Basic and diluted 25 0.72 0.57 The notes on pages 48 to 84 are an integral part of these consolidated financial statements. 45 Jiangling Motors Corporation, Ltd. For the year ended 31 December 2006 (All amounts in RMB unless otherwise stated) Consolidated Statement of Changes in Equity Attributable to equity holders of the Company Note Share Shares Other Retained Minority Total Capital Premium Reserves Earnings Interest Equity RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Balance at 1 January 2005 863,214 816,609 226,543 542,653 107,383 2,556,402 Profit for the year 25 - - - 490,872 24,554 515,426 Transfer to statutory reserve 15 - - 74,315 (74,315) - - Dividend relating to 2004 - - - (129,481) - (129,481) Dividend paid to minority shareholders - - - - (15,486) (15,486) Balance at 31 December 2005 863,214 816,609 300,858 829,729 116,451 2,926,861 Profit for the year 25 - - - 623,197 25,237 648,434 Transfer to statutory reserve 15 - - 60,361 (60,361) - - Acquisition of additional interests in an associate 15 - - 7,416 - - 7,416 Dividend relating to 2005 - - - (439,376) - (439,376) Dividend paid to minority shareholders - - - - (15,676) (15,676) Balance at 31 December 2006 863,214 816,609 368,635 953,189 126,012 3,127,659 The notes on pages 48 to 84 are an integral part of these consolidated financial statements. 46 Jiangling Motors Corporation, Ltd. For the year ended 31 December 2006 (All amounts in RMB unless otherwise stated) Consolidated Cash Flow Statement Note Year ended 31 December 2006 2005 RMB’000 RMB’000 Cash flows from operating activities Cash generated from operations 27 1,267,076 1,080,579 Interest paid (6,515) (8,916) Income tax paid (110,349) (70,511) Net cash generated from operating activities 1,150,212 1,001,152 Cash flows from investing activities Acquisition of a subsidiary, net of cash paid 30 (24,699) - Purchase of held-for-maturity (19,894) - Purchase of property, plant and equipment (“PPE”) (500,400) (223,062) Proceeds from sale of PPE 27 2,224 6,079 Interest received 47,568 30,101 Dividends received 3,314 3,214 Other cash flows from investing activities 787 - Net cash used in investing activities (491,100) (183,668) Cash flows from financing activities Proceeds from borrowings 162,704 124,693 Repayments of borrowings (163,481) (200,000) Dividends paid to Company’s shareholders (432,913) (127,905) Dividends paid to minority interest (15,676) (15,486) Other cash paid relating to financing activities (777) (715) Net cash used in financing activities (450,143) (219,413) Effects of exchange rate changes (199) (88) Net increase in cash and cash equivalents 208,770 597,983 Cash and cash equivalents at beginning of the year 1,959,455 1,361,472 Cash and cash equivalents at the end of the year 2,168,225 1,959,455 The notes on pages 48 to 84 are an integral part of these consolidated financial statements. 47 Jiangling Motors Corporation, Ltd. For the year ended 31 December 2006 Notes to the Consolidated Financial Statements (All amounts in RMB unless otherwise stated) 1 General information Jiangling Motors Corporation, Ltd. (the “Company”) was established in the People’s Republic of China (the “PRC”) under the Company Law of the PRC and under the approval of Hongban (1992) No. 005 of Nangchang Revolution and Authorization Group of Company’s Joint Stock as a joint stock limited company to hold certain operational assets and liabilities of the automotive manufacturing business of Jiangxi Motors Manufacturing Factory, Which was owned by Jiangling Motors Corporation Group (“JMCG”), the legal representative’s operating license of the Company is No.002473. The address of the Company’s registered office is No.509, Northern Yingbin Avenue, Nanchang, Jiangxi Province, the PRC. In December 1993, the Company issued 494,000,000 domestic ordinary shares (“A share”). In addition, the Company issued 25,214,000 A shares as bonus shares to the existing shareholders in 1994. The bonus shares were issued by utilisation of the Company’s retained earnings. In 1995, the Company issued 174,000,000 domestically listed foreign shares (“B share”) and the Company issued 170,000,000 B share in 1998. As of 31 December 2006, the total issued shares of the Company are 863,214,000 shares, which are all listed on the Shenzhen Stock Exchange. The Company and its subsidiaries (the “Group”) are principally engaged in the development, manufacturing and selling of automobiles, engines and automobile related parts, dies and tools. These consolidated financial statements have been approved for issue by the Board of Directors on 4 April 2007. 2 Summary of significant accounting policies The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. A Basis of preparation The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”). The consolidated financial statements have been prepared under the historical cost convention except as disclosed in the accounting policies below. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimations are significant to the consolidated financial statements, are disclosed in Note 4. 48 Jiangling Motors Corporation, Ltd. For the year ended 31 December 2006 Notes to the Consolidated Financial Statements (All amounts in RMB unless otherwise stated) 2 Summary of significant accounting policies (continued) A Basis of preparation (Continued) Amendments to published standards effective in 2006 IAS 19 (Amendment), Employee Benefits, is mandatory for the Group’s accounting periods beginning on or after 1 January 2006. It introduces the option of an alternative recognition approach for actuarial gains and losses. It may impose additional recognition requirements for multi-employer plans where insufficient information is available to apply defined benefit accounting. It also adds new disclosure requirements. As the Group does not intend to change the accounting policy adopted for recognition of actuarial gains and losses and does not participate in any multi-employer plans, adoption of this amendment only impacts the format and extent of disclosures presented in the accounts. Standards, amendments and interpretations effective in 2006 but not relevant to the Group The following standards, amendments and interpretations are mandatory for accounting periods beginning on or after 1 January 2006 but are not relevant to the Group’s operations: • IAS 21 (Amendment), Net Investment in a Foreign Operation; • IAS 39 (Amendment), Cash Flow Hedge Accounting of Forecast Intragroup Transactions; • IAS 39 (Amendment), The Fair Value Option; • IAS 39 and IFRS 4 (Amendment), Financial Guarantee Contracts; • IFRS 6, Exploration for and Evaluation of Mineral Resources; • IFRS 1 (Amendment), First-time Adoption of International Financial Reporting Standards and IFRS 6 (Amendment), Exploration for and Evaluation of Mineral Resources; • IFRIC 6, Liabilities arising from Participating in a Specific Market – Waste Electrical and Electronic Equipment; • IFRIC 4, Determining whether an Arrangement contains a Lease; and • IFRIC 5, Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds. Interpretations to existing standards that are not yet effective and have not been early adopted by the Group The following interpretations to existing standards have been published that are mandatory for the Group’s accounting periods beginning on or after 1 May 2006 or later periods that the Group has not early adopted: • IFRIC 10, Interim Financial Reporting and Impairment (effective for annual periods beginning on or after 1 November 2006). IFRIC 10 prohibits the impairment losses recognised in an interim period on goodwill, investments in equity instruments and investments in financial assets carried at cost to be reversed at a subsequent balance sheet date. The Group will apply IFRIC 10 from 1 January 2007, but it is not expected to have any impact on the Group’s accounts; and • IFRS 7, Financial Instruments: Disclosures, (effective for annual periods beginning on or after 1 January 2007). IFRS 7 introduces new disclosures relating to financial instruments. This standard does not have any impact on the classification and valuation of the Group’s financial instruments. 49 Jiangling Motors Corporation, Ltd. For the year ended 31 December 2006 Notes to the Consolidated Financial Statements (All amounts in RMB unless otherwise stated) 2 Summary of significant accounting policies (continued) A Basis of preparation (Continued) Interpretations to existing standards that are not yet effective and not relevant for the Group’s operations The following interpretations to existing standards have been published that are mandatory for the Group’s accounting periods beginning on or after 1 May 2006 or later periods but are not relevant for the Group’s operations: • IFRIC 7, Applying the Restatement Approach under IAS 29, Financial Reporting in Hyperinflationary Economies (effective from 1 March 2006). IFRIC 7 provides guidance on how to apply requirements of IAS 29 in a reporting period in which an entity identifies the existence of hyperinflation in the economy of its functional Currency, when the economy was not hyperinflationary in the prior period. As none of the group entities have a Currency of a hyperinflationary economy as its functional Currency, IFRIC 7 is not relevant to the Group’s operations; • IFRIC 8, Scope of IFRS 2 (effective for annual periods beginning on or after 1 May 2006). IFRIC 8 requires consideration of transactions involving the issuance of equity instruments – where the identifiable consideration received is less than the fair value of the equity instruments issued – to establish whether or not they fall within the scope of IFRS 2. The Group will apply IFRIC 8 from 1 January 2007, IFRIC 8 is not relevant to the Group’s operations; and • IFRIC 9, Reassessment of embedded derivatives (effective for annual periods beginning on or after 1 June 2006). IFRIC 9 requires an entity to assess whether an embedded derivative is required to be separated from the host contract and accounted for as a derivative when the entity first becomes a party to the contract. Subsequent reassessment is prohibited unless there is a change in the terms of the contract that significantly modifies the cash flows that otherwise would be required under the contract, in which case reassessment is required. As none of the group entities have changed the terms of their contracts, IFRIC 9 is not relevant to the Group’s operations. B Consolidation (1) Subsidiaries Subsidiaries are all entities (including especial purpose entities) over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases. 50 Jiangling Motors Corporation, Ltd. For the year ended 31 December 2006 Notes to the Consolidated Financial Statements (All amounts in RMB unless otherwise stated) 2 Summary of significant accounting policies (continued) B Consolidation (continued) (1) Subsidiaries (continued) The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the income statement. Inter-company transactions, balances and unrealised gains on transactions between group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. (2) Transactions and minority interests The Group applies a policy of treating transactions with minority interests as transactions with equity participants of the Group. Gains and losses for the Group resulting from disposals to minority interests are recorded in the Company’s equity. Difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary, resulting from purchases from minority interests are recorded in the Company’s equity. (3) Associates Associates are all entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method of accounting and are initially recognised at cost. The Group’s investment in associates includes goodwill identified on acquisition, net of any accumulated impairment loss (see Note 2 H). The Group’s share of its associates’ post-acquisition profits or losses is recognised in the income statement, and its share of post-acquisition movements in reserves is recognised in reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate. Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the Group. 51 Jiangling Motors Corporation, Ltd. For the year ended 31 December 2006 Notes to the Consolidated Financial Statements (All amounts in RMB unless otherwise stated) 2 Summary of significant accounting policies (continued) C Segment Reporting The Group’s turnover and profit for the year were mainly derived from the manufacture and domestic sale of automobiles, related spare parts and components, and the principal assets employed by the Group are located in the PRC. Therefore, no additional business segment or geographical segment data is presented. D Foreign currency translation (1) Functional and presentation currency Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the “functional currency”). The consolidated financial statements are presented in Renminbi (“RMB”), which is the Group’s functional and presentation currency. (2) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing on the first day of the month in which the transactions take place. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at period-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement. Changes in the fair value of monetary securities denominated in foreign currency classified as available for sale are analysed between translation differences resulting from changes in the amortised cost of the security, and other changes in the carrying amount of the security. Translation differences are recognised in profit or loss, and other changes in carrying amount are recognised in equity. Translation differences on non-monetary financial assets and liabilities are reported as part of the fair value gain or loss. Translation differences on non-monetary financial assets and liabilities such as equities held at fair value through profit or loss are recognised in profit or loss as part of the fair value gain or loss. Translation differences on non-monetary financial assets such as equities classified as available for sale are included in the fair value reserve in equity. E Property, plant and equipment Property, plant and equipment are stated at historical cost less accumulated depreciation and any impairment losses. Historical cost comprises its purchase price and any directly attributable costs of bring the assets to its working condition and location for its intended use. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. Repairs and maintenance are charged to the income statement during the financial period in which they are incurred. 52 Jiangling Motors Corporation, Ltd. For the year ended 31 December 2006 Notes to the Consolidated Financial Statements (All amounts in RMB unless otherwise stated) 2 Summary of significant accounting policies (continued) E Property, plant and equipment (Continued) Depreciation is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives, as follows: Buildings 35-40 years Plant and Machinery 10-15 years Motor Vehicles 6-10 years Moulds 5 years Others 5-7 years The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount (Note 2 H). Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in the income statement. Assets under construction represent buildings under construction and plant and equipment pending installation, and are stated at cost. Costs include construction and acquisition costs. No provision for depreciation is made on assets under construction until such time as the relevant assets are completed and ready for intended use. When the assets concerned are brought into use, the costs are transferred to property, plant and equipment and depreciated in accordance with the policy as stated above. F Lease prepayment Lease prepayments represent upfront prepayments made for the land use rights, and are expensed in the income statement on a straight line basis over the period of the lease and when there is impairment, the impairment is expensed in the income statement. G Intangible assets (1) Research and development Research expenditure is recognised as an expense as incurred. Costs incurred on development projects (relating to the design and testing of new or improved products) are recognised as intangible assets when the following criteria are fulfilled: (a) it is technically feasible to complete the intangible asset so that it will be available for use or sale; (b) management intends to complete the intangible asset and use or sell it; (c) there is an ability to use or sell the intangible asset; (d) it can be demonstrated how the intangible asset will generate probable future economic benefits; (e) adequate technical, financial and other resources to complete the development and to use or sell the intangible asset are available; and (f) the expenditure attributable to the intangible asset during its development can be reliably measured. 53 Jiangling Motors Corporation, Ltd. For the year ended 31 December 2006 Notes to the Consolidated Financial Statements (All amounts in RMB unless otherwise stated) 2 Summary of significant accounting policies (continued) (1) Research and development (continued) Other development expenditures that do not meet these criteria are recognised as an expense as incurred. Development costs previously recognised as an expense are not recognised as an asset in a subsequent period. Capitalised development costs are recorded as intangible assets and amortised from the point at which the asset is ready for use on a straight-line basis over its useful life. No development costs were capitalised by the Group during the year ended 31 December 2006 (2005: Nil). (2) Technical know-how Technical know-how are initially recorded at costs incurred to acquire and are amortised over the estimated useful lives of 6 years. H Impairment of non-financial assets Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment losses whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest level for which there are separately identifiable cash flows (cash-generating units). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date. I Financial assets The Group classifies its financial assets in the following categories: at fair value through profit or loss, loans and receivables, held-to-maturity financial assets and available for sale. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition. (a) Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss are financial assets held for trading. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term. Derivatives are classified as held for trading unless they are designated as hedges. Assets in this category are classified as current assets. (b) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the balance sheet date. These are classified as non-current assets. Loans and receivables are classified as trade and other receivables in the balance sheet (Note 2 L). 54 Jiangling Motors Corporation, Ltd. For the year ended 31 December 2006 Notes to the Consolidated Financial Statements (All amounts in RMB unless otherwise stated) 2 Summary of significant accounting policies (continued) I Financial assets (continued) (c) Held-to-maturity financial assets Held-to-maturity financial assets are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Group’s management has the positive intention and ability to hold to maturity. If the Group were to sell other than an insignificant amount of held-to-maturity financial assets, the whole category would be tainted and reclassified as available for sale. Held-to-maturity financial assets are included in non-current assets, except for those with maturities less than 12 months from the balance sheet date; these are classified as current assets. (d) Available-for-sale financial assets Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless management intends to dispose of the investment within 12 months of the balance sheet date. Regular purchases and sales of financial assets are recognised on the trade-date – the date on which the Group commits to purchase or sell the asset. Investments are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or loss are initially recognised at fair value, and transaction costs are expensed in the income statement. Financial assets are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and the Group has transferred substantially all risks and rewards of ownership. Available-for-sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value. Loans and receivables and held-to-maturity financial assets are carried at amortised cost using the effective interest method. Gains or losses arising from changes in the fair value of the ‘financial assets at fair value through profit or loss’ category are presented in the income statement within other (losses)/gains – net, in the period in which they arise. Dividend income from financial assets at fair value through profit or loss is recognised in the income statement as part of other income when the Group’s right to receive payments is established. Changes in the fair value of monetary securities denominated in a foreign Currency and classified as available-for-sale are analysed between translation differences resulting from changes in amortised cost of the security and other changes in the carrying amount of the security. The translation differences on monetary securities are recognised in profit or loss; translation differences on non-monetary securities are recognised in equity. Changes in the fair value of monetary and non-monetary securities classified as available for sale are recognised in equity. When securities classified as available for sale are sold or impaired, the accumulated fair value adjustments recognised in equity are included in the income statement as gains and losses from investment securities. Interest on available-for-sale securities calculated using the effective interest method is recognised in the income statement as part of other income. Dividends on available-for-sale equity instruments are recognised in the income statement as part of other income when the Group’s right to receive payments is established. 55 Jiangling Motors Corporation, Ltd. For the year ended 31 December 2006 Notes to the Consolidated Financial Statements (All amounts in RMB unless otherwise stated) 2 Summary of significant accounting policies (continued) I Financial assets (continued) (d) Available-for-sale financial assets (continued) The fair values of quoted investments are based on current bid prices. If the market for a financial asset is not active (and for unlisted securities), the Group establishes fair value by using valuation techniques. These include the use of recent arm’s length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis and option pricing models, making maximum use of market inputs and relying as little as possible on entity-specific inputs. The Group assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of equity securities classified as available for sale, a significant or prolonged decline in the fair value of the security below its cost is considered as an indicator that the securities are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss – is removed from equity and recognised in the income statement. Impairment losses recognised in the income statement on equity instruments are not reversed through the income statement. Impairment testing of trade receivables is described in Note 2 L. J Derivative financial instruments and hedging activities Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured at their fair value. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group has no derivative instruments that qualifying for hedge accounting. Changes in the fair value of any derivative instruments that do not qualify for hedge accounting are recognised immediately in the income statement. K Inventories Inventories are stated at the lower of cost and net realisable value. Cost is determined using the weighted average cost method. The cost of finished goods and work in progress comprises raw materials, direct labour, other direct costs and related production overheads (based on normal operating capacity). It excludes borrowing costs. Net realisable value is the estimated selling prices in the ordinary course of business, less applicable variable costs of completion and selling expenses. 56 Jiangling Motors Corporation, Ltd. For the year ended 31 December 2006 Notes to the Consolidated Financial Statements (All amounts in RMB unless otherwise stated) 2 Summary of significant accounting policies (continued) L Trade and other receivables Trade and other receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision made for impairment. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments are considered indicators that the trade receivable is impaired. The amount of the provision is the difference between the carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account, and the amount of the loss is recognised in the income statement within “administrative expenses”. When a trade receivable is uncollectible, it is written off against the allowance account for trade receivables. Subsequent recoveries of amounts previously written off are credited against “administrative expenses” in the income statement. M Cash and cash equivalents Cash and cash equivalents includes cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities on the balance sheet. N Shares capital Share capital consists of “A” and “B” ordinary shares. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds. O Trade and other payables Trade and other payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method. P Borrowings Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest method. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date. 57 Jiangling Motors Corporation, Ltd. For the year ended 31 December 2006 Notes to the Consolidated Financial Statements (All amounts in RMB unless otherwise stated) 2 Summary of significant accounting policies (continued) Q Deferred income tax Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. R Employee benefits (1) Pension obligations The Group contributes on a monthly basis to a defined contribution retirement scheme managed by the PRC government. The contribution to the schemes is charged to the income statement as and when incurred. The Group’s obligations are determined at a certain percentage of the salaries of the employees. In addition, the Group provides certain retirees with supplemental post-retirement benefits and the cost of providing the aforementioned supplemental post-retirement benefits under the Group’s defined benefit plan is actuarially determined and recognised over the employees’ service period by using the projected unit credit method. Post-retirement benefit expenses recognised in the income statement, include, if applicable, current service cost, interest cost, the expected return on plan assets, amortised actuarial gains and losses, the effect of any curtailment or settlement and past service cost. (2) Housing fund and other benefits The Group’s full-time employees are entitled to participate in a state-sponsored housing fund. The fund can be used by the employees for the purchase of apartment accommodation, or may be withdrawn upon their retirement. The Group is required to make annual contributions to the state-sponsored housing fund equivalent to a certain percentage of the employees’ salaries. (3) Profit sharing and bonus plan The Company recognises a liability and expense for bonus plans based on a formula that takes into consideration the profit attributable to the Company’s shareholders. 58 Jiangling Motors Corporation, Ltd. For the year ended 31 December 2006 Notes to the Consolidated Financial Statements (All amounts in RMB unless otherwise stated) 2 Summary of significant accounting policies (continued) S Provisions Provisions, mainly warranty costs, are recognised when the Group has a present legal or constructive obligation as a result of past events, it is more likely than not that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. Provisions are not recognised for future operating losses. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognised as interest expense. T Revenue recognition Revenue comprises the fair value for the consideration received or receivable for the sale of goods and services in the ordinary course of the Group’s activities. Revenue is shown net of value-added tax, returns, rebates and discounts and after elimination sales within the Group. The Group recognises revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the entity and specific criteria have been met for each of the Group’s activities as described below. (1) Sales of goods Revenue from the sale of goods is recognised when significant risks and rewards of ownership of the goods are transferred to the customer, and the customer has accepted the products and collectibility of the related receivables is reasonably assured. (2) Sales of services Sales of services are recognised in the accounting period in which the services are rendered, by reference to completion of the specific transaction assessed on the basis of the actual service provided as a proportion of the total services to be provided. (3) Interest income Interest income is recognised on a time proportion basis, taking account of the principal outstanding and the effective rate over the period to maturity, when it is determined that such income will accrue to the Group. (4) Rental income Rental income is recognised on an accruals basis in accordance with the substance of the relevant agreements. (5) Dividend income Dividend income is recognised when the right to receive payment is established. 59 Jiangling Motors Corporation, Ltd. For the year ended 31 December 2006 Notes to the Consolidated Financial Statements (All amounts in RMB unless otherwise stated) 2 Summary of significant accounting policies (continued) U Dividend distribution Dividend distribution to the Company’s shareholders is recognised as a liability in the Group’s financial statements in the period in which the dividends are approved by the Company’s shareholders. V Government grants Grants from the government are recognised at their fair value where there is a reasonable assurance that the grant will be received and the Group will comply with all attached conditions. Government grants relating to costs are deferred and recognised in the income statement over the period necessary to match them with the costs they are intended to compensate. Government grants not relating to future costs are recognised on receipt basis. Government grants relating to the purchase of property, plant and equipment are included in non-current liabilities as deferred income and are credited to the income statement on a straight line basis over the expected lives of the related assets. 3 Financial risk management 3.1 Financial risk factors The Group’s activities expose it to a variety of financial risks: market risk (including currency risk, fair value interest rate risk, cash flow interest rate risk and price risk), credit risk and liquidity risk. The Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group’s financial performance. Risk management is carried out by Finance Department under policies approved by the Board of Directors. (1) Market risk (a) Currency risk The Group is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the US dollar, UK pound and Japanese Yen. Foreign exchange risk arises from future commercial transactions, recognised assets and liabilities. Foreign exchange risk arises when future commercial transactions or recognised assets or liabilities are denominated in a currency that is not the Group’s functional currency. To manage their foreign exchange risk arising from future commercial transactions and recognises assets and liabilities, the Group uses external forward contracts. 60 Jiangling Motors Corporation, Ltd. For the year ended 31 December 2006 Notes to the Consolidated Financial Statements (All amounts in RMB unless otherwise stated) 3 Financial risk management (Continued) 3.1 Financial risk factors (Continued) (1) Market risk (Continued) (b) Commodity price risk Commodity price risk is the possibility of higher or lower costs due to changes in the prices of commodities, such as non-ferrous metals (e.g. aluminium), ferrous metals (e.g. steel and iron castings), energy (e.g. natural gas and electricity), and plastics/resins (e.g. polypropylene), which we use in the production of motor vehicles. Steel and resins are our two largest commodity exposures and are among the most difficult to hedge. Our purchasing department negotiates contracts to ensure continuous supply of raw materials. In some cases, these contracts stipulate minimum purchase amounts and specific prices, and as such, play a role in managing price risk. (2) Credit risk The Group does not have a significant exposure to any individual customer or counterparty. Credit risk on receivables has already been accounted for in the financial statements as they are shown net of provisions for bad and doubtful debts. (3) Liquidity risk Prudent liquidity risk management implies maintaining sufficient cash and marketable securities, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions. Due to the dynamic nature of the underlying businesses, the Group aims to maintain flexibility in funding by keeping committed credit lines available. (4) Cash flow and fair value interest rate risk The Group’s income and operating cash flows are substantially independent of changes in market rates. As of 31 December 2006 and 2005, substantially all of its borrowings were at fixed rate. The Group has not used any interest rate swaps to hedge its exposure to interest rate risk. 3.2 Fair value estimation The fair value of financial instruments traded in active markets (such as trading and available-for-sale securities) is based on quoted market prices at the balance sheet date. The quoted market price used for financial assets held by the Group is the current bid price. The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. The Group uses a variety of methods and makes assumptions that are based on market conditions existing at each balance sheet date. Quoted market prices or dealer quotes for similar instruments are used for long-term debt. Other techniques, such as estimated discounted cash flows, are used to determine fair value for the remaining financial instruments. The fair value of forward foreign exchange contracts is determined using quoted forward exchange rates at the balance sheet date. 61 Jiangling Motors Corporation, Ltd. For the year ended 31 December 2006 Notes to the Consolidated Financial Statements (All amounts in RMB unless otherwise stated) 3 Financial risk management (Continued) 3.2 Fair value estimation (continued) The carrying value less impairment provision of trade receivables and payables are assumed to approximate their fair values. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the Group for similar financial instruments. Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. 4. Critical accounting estimates and judgements Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, rarely equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are outlined below. (1) Depreciation and amortisation The Group’s management determines the estimated residual value, useful lives and related depreciation / amortisation charges for the property, plant and equipment and intangible assets with reference to the estimated periods that the Group intends to derive future economic benefits from the use of these assets. Management will revise the depreciation and amortisation charge where useful lives are different to previously estimated, or it will write-off or write-down technically obsolete or non-strategic assets that have been abandoned or sold. In 2006, the Board of Directors approved the following adjustment to the estimated useful lives and residual values of property, plant and equipment, which became effective on 1 July 2006. After Adjusted Before Adjusted Useful lives Residual Useful lives Residual (Years) Value (Years) Value Buildings 35-40 4% 35 10% Plant and Machinery 10-15 4% 10 10% Motor Vehicles 6-10 4% 6 10% Moulds 5 - 5 - Others 5-7 4% 7 10% The revised estimated useful life and residual values reduced the Group’s profit by approximately RMB 41,583,000. 62 Jiangling Motors Corporation, Ltd. For the year ended 31 December 2006 Notes to the Consolidated Financial Statements (All amounts in RMB unless otherwise stated) 4. Critical accounting estimates and judgements (Continued) (2) Impairment of non-financial assets Non-financial assets are reviewed for impairment in accordance with the accounting policy stated in Note 2H. The recoverable amount of an asset or a cash-generating unit is determined based on value-in-use calculations. The value-in-use calculation requires the entity to estimate the future cash flows expected to arise from the cash-generating unit and a suitable discount rate in order to calculate present value, which has been prepared on the basis of management’s assumptions and estimates. Detailed sensitivity analyses have been performed and management is confident that the carrying amount of the relevant assets will be recovered in full. (3) Impairment of trade and other receivables Provision for impairment of trade and other receivables is determined based on the evaluation of collectibility of trade and other receivables. A considerable amount of judgment is required in assessing the ultimate realisation of these receivables, including the current creditworthiness, the past collection history of each customer and the current market condition. (4) Inventories Management estimates the net realisable value for inventory based primarily on the latest invoice prices less costs to sell or value in use. The Group carries out an inventory review on a product-by-product basis at each balance sheet date and make provision for impairment on obsolete and slow-moving items or write-off or write-down inventories to net realisable value. (5) Provisions The Group provides warranties on automobile and undertakes to repair or replace items that fail to perform satisfactorily based on certain pre-determined conditions. Management estimates the related warranty claims based on historical warranty claim information including level of repairs and returns as well as recent trends that might suggest that past cost information may differ from future claims. Factors that could impact the estimated claim information include the success of the Group’s productivity and quality controls, as well as parts and labour costs. Any increase or decrease in the provision would affect profit or loss in future years. (6) Taxation The Group is subject to various taxes in the PRC, e.g. profit tax, value added tax, consumption tax, etc. Significant judgment is required in determining the provision for these taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Group recognises liabilities for anticipated tax issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from amounts that were initial recorded, such differences will impact the tax provisions in the period such determination is made. Deferred tax assets relating to certain temporary differences are recognised as management considers it is probable that future taxable profit will be available against which the temporary differences can be utilised. Where the expectation is different from the original estimate, such differences will impact the recognition of deferred tax assets and tax in the periods in which such estimate is changed. 63 Jiangling Motors Corporation, Ltd. For the year ended 31 December 2006 Notes to the Consolidated Financial Statements (All amounts in RMB unless otherwise stated) 5 Property, plant and equipment Plant and Motor Assets under At 1 January 2005 Buildings Machinery Vehicles Moulds construction RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Cost 614,866 1,393,847 47,906 587,748 172,232 Accumulated depreciation (111,086) (880,786) (24,235) (491,611) (2,272) Net book amount 503,780 513,061 23,671 96,137 169,960 Year ended 31 December 2005 Opening net book amount 503,780 513,061 23,671 96,137 169,960 Additions - 2,551 1,715 804 201,230 Transfers 22,079 117,199 3,059 35,690 (196,031) Disposals (5,669) (44) (119) - - Impairment charge (Note 21,27) - (1,708) (92) (301) - Depreciation charge (Note 27) (16,708) (122,018) (4,650) (41,147) - Closing net book amount 503,482 509,041 23,584 91,183 175,159 At 31 December 2005 Cost 629,535 1,509,304 50,279 624,242 175,851 Accumulated depreciation (126,053) (1,000,263) (26,695) (533,059) (692) Net book amount 503,482 509,041 23,584 91,183 175,159 Year 31 December 2006 Opening net book amount 503,482 509,041 23,584 91,183 175,159 Additions 4,059 9,377 3,468 488 503,211 Acquisition of a subsidiary (Note 30) 292 357 89 - - Reclassification - - - - - Transfers 1,735 187,576 3,447 2,469 (240,828) Disposals (4,518) (623) (390) - - Other deduction - - - - (153) Impairment charge (Note 21,27) (1,417) (3,710) (7) - - Depreciation charge (Note 27) (15,608) (123,353) (6,017) (31,001) - Closing net book amount 488,025 578,665 24,174 63,139 437,389 At 31 December 2006 Cost 626,590 1,696,579 53,667 617,106 438,081 Accumulated depreciation (138,565) (1,117,914) (29,493) (553,967) (692) Net book amount 488,025 578,665 24,174 63,139 437,389 Jiangling Motors Corporation, Ltd. For the year ended 31 December 2006 Notes to the Consolidated Financial Statements (All amounts in RMB unless otherwise stated) 5 Property, plant and equipment (continued) In connection with the Group’s reorganisation in 1993, the Group’s property, plant and equipment were revalued on 31 December 1992 by Zhonghua (Shenzhen) Certified Public Accountants on a depreciated replacement value basis. The opening accumulated depreciation of the revalued assets was computed using depreciation rates as stipulated by the State regulations, which are generally consistent with those applied by the Group for the preparation of its financial statements. Since this was a special purpose valuation conducted for the purposes of the formation of a joint stock limited company, this became deemed costs of the Company’s property, plant and equipment. Subsequent revaluations have not been performed and all further additions have been recorded at cost. 6 Lease prepayment Lease prepayments represent the Group’s interests in land which are held on leases of 50 years. The movement is as follows: 2006 2005 RMB’000 RMB’000 Opening net book amount 146,765 147,703 Additions - 3,025 Amortisation charge (Note 27) (3,476) (3,962) Closing net book amount 143,289 146,766 Cost 175,560 175,560 Accumulated amortisation (32,271) (28,794) Net book amount 143,289 146,766 7 Intangible assets 2006 2005 RMB’000 RMB’000 Opening net book amount - - Acquisition of a subsidiary (Note 30) 38,578 - Amortisation charge (Note 27) (1,607) - Closing net book amount 36,971 - Cost 38,578 - Accumulated amortisation (1,607) - Net book amount 36,971 - 65 Jiangling Motors Corporation, Ltd. For the year ended 31 December 2006 Notes to the Consolidated Financial Statements (All amounts in RMB unless otherwise stated) 8 Investments in associates (a) Movement of investment in associations are set out as follows 2006 2005 RMB’000 RMB’000 At the beginning of the year 21,245 20,068 Share of results of associates (Note 27) 5,634 4,173 Dividends received (3,314) (3,214) Increase in investment cost - 218 Transfer (7,445) - At the end of the year 16,120 21,245 In March 1996, the Company entered into a Sino-foreign equity joint venture agreement with Visteon International Holding Co., Ltd. (“Visteon”) to form Jiangxi Fuchang Climate Systems Co., Ltd. ( “Jiangxi Fuchang”). The tenure of Jiangxi Fuchang is 30 years, and its principal activities include manufacture and sale of air-conditioners and spare parts for motor vehicles. Jiangxi Fuchang has a registered capital of USD 5.6 million, of which Visteon has an 80.85% interest and the Company has the remaining 19.15% interest. The registered capital of Jiangxi Fuchang was paid up by the Company in the form of buildings, land use rights and electricity usage rights totalling RMB 8,934,000 (equivalent to approximately USD 1,072,000). Jiangxi Fujiang After-Sales Service Co., Ltd. (“Jiangxi Fujiang”) is a Sino-foreign equity joint venture with a registered capital of USD 4.4 million, of which Ford Motors Company (“Ford”) has an 80% interest and the Company has the remaining 20% interest. Jiangxi Fujiang’s principal activity includes after-sales services. In September 2006, the Group acquired the 80% equity interest in Jiangxi Fujiang as owned by Ford. Thereafter, the Group took on all the business and operations of Jiangxi Fujiang and Jiangxi Fujiang was liquidated on 31 December 2006. (b) The Group’s share of assets, liabilities, revenue and results of its associates are as follows: As of 31 December 2006 2005 RMB’000 RMB’000 Total assets 22,116 27,027 Total liabilities (5,996) (5,782) Net assets 16,120 21,245 Year ended 31 December 2006 2005 RMB’000 RMB’000 Revenue 34,806 28,431 Profit for the year 5,634 4,173 66 Jiangling Motors Corporation, Ltd. For the year ended 31 December 2006 Notes to the Consolidated Financial Statements (All amounts in RMB unless otherwise stated) 9 Deferred tax assets Deferred income taxes are calculated in full on temporary differences under the liability method using a principal tax rate of 15% (2005: 15%). The movement on the deferred tax assets account is as follows: 2006 2005 RMB’000 RMB’000 At beginning of the year 58,698 46,696 Income statement credit (Note 24) 16,116 12,002 At the end of the year 74,814 58,698 Provision for Retirement impairment of benefits Accrued Welfare Depreciation assets obligation expenses payable of PPE Others Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 At 1 January 2005 6,822 16,999 20,921 1,954 - - 46,696 Credited/(charged) to the income statement (1,032) (5,730) 16,738 (1,954) - 3,980 12,002 At 31 December 2005 5,790 11,269 37,659 - - 3,980 58,698 Credited/(charged) to the income statement (1,156) (1,823) 13,694 - 6,237 (836) 16,116 At 31 December 2006 4,634 9,446 51,353 - 6,237 3,144 74,814 The amounts shown in the balance sheet include the followings: 2006 2005 RMB’000 RMB’000 Deferred tax assets to be recovered after more than 12 months 11,800 14,410 10 Inventories - net 2006 2005 RMB’000 RMB’000 Raw materials 331,452 308,393 Work in progress 67,295 57,170 Finished goods 196,970 260,306 595,717 625,869 The cost of inventories recognised as expenses and included in cost of sales amounted to approximately RMB 5,812,482,000 (2005: RMB 5,156,890,000). JMC, Ford Automotive Finance Corporation, Ltd. (“FAFC”), a subsidiary of Ford, and dealers have entered into "three party consignment agreement" in which JMC pledged its finished goods (vehicles) to FAFC, and dealers obtain financing credit from FAFC. As of 31 December 2006, finished goods (vehicles) with an aggregate net book value of approximately RMB 15,440,000 (2005: Nil) have been pledged under this arrangement. The interests of these financing activities are not borne by the Company. 67 Jiangling Motors Corporation, Ltd. For the year ended 31 December 2006 Notes to the Consolidated Financial Statements (All amounts in RMB unless otherwise stated) 11 Trade and other receivables 2006 2005 RMB’000 RMB’000 Trade receivables 156,789 71,365 Less: Provision for impairment of receivables (1,149) (3,279) Trade receivables – net 155,640 68,086 Receivables from associates (Note 31) - 169 Receivables from related parties (Note 31) 83,759 52,273 Notes receivables 88,818 150,961 Prepayments 98,948 78,607 Other receivables 10,769 13,333 437,934 363,429 The carrying amounts of accounts receivable approximate their fair values. Movements on the provision for impairment of trade receivables are as follows: 2006 2005 RMB’000 RMB’000 At beginning of the year (3,279) (3,532) Provision for impairment of receivables (822) (691) Receivables written off during the year as uncollectible 2,695 57 Unused amounts reversed 257 887 At end of the year (1,149) (3,279) 12 Held-to-maturity investment As of 31 December 2006, held-to-maturity investments comprise marketable securities of approximately RMB 19,895,000 with fixed maturity within 12 months from the balance sheet date and the interest rate of the investment is 2.3%. 13 Cash and cash equivalents 2006 2005 RMB’000 RMB’000 Cash at bank and in hand 893,275 716,526 Short term bank deposit 1,274,950 1,242,929 2,168,225 1,959,455 As of 31 December 2006, the Group had cash deposits of approximately RMB 77,175,000 (2005: RMB 63,059,000) placed with Jiangling Motor Group Finance Company (“JMCF”) (Note 31 iii). The interest rates range from 0.72% to 1.62% per annum (2005: 0.72% to 1.44%). JMCF, a non-bank financial institution, is a 100% owned subsidiary of JMCG. 68 Jiangling Motors Corporation, Ltd. For the year ended 31 December 2006 Notes to the Consolidated Financial Statements (All amounts in RMB unless otherwise stated) 14 Share capital and share premium Number of shares Share Share (thousands) capital premium Total RMB’000 RMB’000 RMB’000 At 31 December 2005 and 2006 863,214 863,214 816,609 1,679,823 The total authorised number of ordinary shares is 863,214,000 shares (2005: 863,214,000 shares) with a par value of RMB 1 per share (2005: RMB 1 per share). All issued shares are fully paid. In January 2006, the Company implemented the share reform scheme in accordance with relevant PRC regulations after which the Company’s shares would become tradable in the stock market. With the approval from State-Owned Assets Supervision and Administration Committee of Guozichanquan [2006] No. 36, the shareholders of the Company approved the equity separation reform scheme (the “Share Reform Scheme”) on 16 January 2006. On 25 January 2006, the change on the nature of the shares relating to the Share Reform Scheme was approved by the Ministry of Commerce of the PRC of Shangzipi [2006] No. 387. According to the Share Reform Scheme, registered tradable A-share shareholders of the Company as at 13 February 2006 received cash consideration of RMB 13.40 per 10 shares on 14 February 2006, and subsequently these previously non-tradable A shares would be tradable with conditions. 69 Jiangling Motors Corporation, Ltd. For the year ended 31 December 2006 Notes to the Consolidated Financial Statements (All amounts in RMB unless otherwise stated) 15 Other reserves Statutory Statutory surplus public welfare Reserve Others Total reserve fund fund fund RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 At 1 January 2005 158,175 49,683 18,685 226,543 - Profit appropriation 49,543 24,772 - 74,315 At 31 December 2005 207,718 74,455 18,685 300,858 - Profit appropriation 60,361 - - 60,361 - Reclassification 74,455 (74,455) - - - Acquisition of additional interests in an associate - - 7,416 7,416 At 31 December 2006 342,534 - 18,685 7,416 368,635 (a) In accordance with the relevant laws and regulations in the PRC and Articles of Association of the Company, it is required to appropriate 10% and 5%-10% of its annual net profit, after offsetting any prior years’ losses as determined under the PRC GAAP, to the statutory surplus reserve fund and statutory public welfare fund respectively before distributing the net profit. When the balance of the statutory surplus reserve fund reaches 50% of the Company’s share capital, any further appropriation is at the discretion of shareholders. The statutory surplus reserve fund can be used to offset prior years’ losses, if any, and may be converted into share capital by issuing new shares to shareholders in proportion to their existing shareholders or by increasing the par value of the shares currently held by them. The statutory public welfare fund can only be utilised on capital expenditure for the collective benefit of the Company’s employees such as the construction of dormitories, canteen and other staff welfare facilities, with the title of these capital items remaining with the Company. The funds are non-distributable except for liquidation situation. Pursuant to the Articles of Association of the Company, approximately RMB 60,361,078 was appropriated to the statutory surplus reserve fund from the net profit for the year ended 31 December 2006. (b) According to the revised Company Law effective on 1 January 2006 and circular Caiqi [2006] No.67 issued by the Ministry of Finance on 15 March 2006, appropriation to statutory public welfare fund is no longer required, and the balance of statutory public welfare fund as of 31 December 2005 should be converted into statutory surplus reserve fund. (c) As mentioned in Note 30, the Group owned 20% equity interests in Jiangxi Fujiang prior to 30 September 2006 and has been accounted for as an associate of the Group. On 30 September 2006, the Group acquired the remaining 80% equity interests in Jiangxi Fujiang. Thereafter, Jiangxi Fujiang became wholly owned by the Group. In this connection, the difference between the carrying amount of Jiangxi Fujiang and the attributable share of the fair value of Jiangxi Fujiang before this acquisition is recorded as "other reserve" in 2006. 70 Jiangling Motors Corporation, Ltd. For the year ended 31 December 2006 Notes to the Consolidated Financial Statements (All amounts in RMB unless otherwise stated) 16 Borrowings 2006 2005 RMB’000 RMB’000 Current Bank borrowings - secured 256 - - unsecured 121,852 124,070 122,108 124,070 Non-current Bank borrowings - secured 10,227 10,834 Total borrowings 132,335 134,904 Bank borrowings of approximately RMB 10,483,000 (2005: RMB 10,834,000) were guaranteed by JMCF (Note 31 (v)). The interest rate of bank borrowings is ranging from 1.50% to 6.23% per annum (2005: 1.50% to 5.30%). The fair value of borrowings approximates their carrying values. The maturity of non-current borrowings is as follows: 2006 2005 RMB’000 RMB’000 Between 1 and 2 years 511 255 Between 2 and 5 years 1,534 1,534 Over 5 years 8,182 9,045 10,227 10,834 The carrying amount of the Group’s borrowings are denominated in the following currencies: Currency 2006 2005 RMB’000 RMB’000 RMB 75,000 70,000 US dollar 57,335 64,904 132,335 134,904 71 Jiangling Motors Corporation, Ltd. For the year ended 31 December 2006 Notes to the Consolidated Financial Statements (All amounts in RMB unless otherwise stated) 17 Retirement benefits obligations The amount of early retirement and supplemental benefit obligations recognised in the balance sheet are as follows: 2006 2005 RMB’000 RMB’000 Present value of defined benefits obligations Defined benefits obligations 85,805 97,236 Unrecognised actuarial gains - - Liability on the balance sheet 85,805 97,236 The movements of early retirement and supplemental benefit obligations for the years ended 31 December 2006 and 2005 are as follows: 2006 2005 RMB’000 RMB’000 At beginning of the year 97,236 113,327 For the year -Interest Cost 3,634 4,261 -Payment (16,455) (18,594) -Actuarial loss/(gain) 1,390 (1,758) At the end of the year 85,805 97,236 Current 16,455 17,660 Non-current 69,350 79,576 85,805 97,236 The material actuarial assumptions used in valuing these obligations are as follows: (1) Discount rate adopted: 3.15% (2005: 3.0% for normal retiree, 3.6% for early retiree). (2) Early-retiree's salary and supplemental benefits inflation rate: 0%. (3) Mortality: average life expectancy of residents in the PRC. Based on the assessment and IAS 19, the Group estimated that, at 31 December 2006, a provision of RMB 85,805,000 is sufficiently to cover all future retirement-related obligations. Obligation in respect of retirement benefits of RMB 85,805,000 is the present value of the unfunded obligations, of which the current portion amounting to RMB 16,455,000 (2005: RMB 17,660,000) has been included under current liabilities. 72 Jiangling Motors Corporation, Ltd. For the year ended 31 December 2006 Notes to the Consolidated Financial Statements (All amounts in RMB unless otherwise stated) 18 Provisions The movement on the provisions account is as follows: 2006 2005 RMB’000 RMB’000 At beginning of the year 103,508 70,084 Charged for year 67,833 85,000 Used during year (66,603) (51,576) At the end of the year 104,738 103,508 The above represents the warranty costs for repairs and maintenance, which are estimated based on present after-sale service policies and prior years’ experience on the incurrence of such cost. The warranty period is the sooner of two years and fifty thousand kilometres since the motor sold to consumer. 19 Trade and other payables 2006 2005 RMB’000 RMB’000 Trade payables 911,955 724,241 Amount due to an associate (Note 31) 36,568 35,205 Amount due to related parties (Note 31) 340,280 301,997 Accrued expenses 237,616 155,669 Payroll and welfare payable 100,309 80,560 Other payables 139,604 124,998 Other accrual related to sales 56,896 - 1,823,228 1,422,670 20 Sales The Group principally derives its turnover from the manufacture, assembly and sale of automobiles, related spare parts and components, and sales are made principally in the PRC. Sales represent the total invoiced value of goods supplied to customers, net of returns and allowances. 21 Expenses by nature 2006 2005 RMB’000 RMB’000 Raw materials and consumables used 5,006,826 4,364,396 Employee benefit expenses (Note 22 ) 342,364 274,270 Depreciation on property, plant and equipment (Note 5) 255,452 227,265 Impairment charges of PPE (Note 5) 7,273 2,537 Repairs and maintenance expenditure on PPE 53,941 69,050 Research and development expenditure 236,977 130,671 Amortisation of lease prepayment (Note 6) 3,476 3,962 Amortisation of intangible assets (Note 7) 1,607 - Provision for (reversal of) slow moving and obsolete inventories 7 (1,064) Reversal of provision for impairment of receivables (428) (552) 73 Jiangling Motors Corporation, Ltd. For the year ended 31 December 2006 Notes to the Consolidated Financial Statements (All amounts in RMB unless otherwise stated) 22 Employee benefit expenses 2006 2005 RMB’000 RMB’000 Wages and salaries 273,272 224,758 Social security costs 15,336 11,127 Pension costs − defined contribution plans 25,372 23,295 Pension costs − defined benefit plan (Note 17) 5,024 2,503 Others 23,360 12,587 342,364 274,270 The employees of the Group participated in a retirement benefit plan organised by the municipal and provincial governments under which the Group was required to make defined contributions monthly to this plan. In addition, the Group also paid certain pension subsidies to certain retired employees. In accordance with the Group’s early retirement programs, the Group was also committed to make periodic benefit payments to certain early-retired employees until they reach their legal retirement ages. 23 Finance income and cost 2006 2005 RMB’000 RMB’000 (a) Finance income Interest income on bank deposits 38,515 18,179 Interest income on credit sales 9,543 9,977 48,058 28,156 (b) Finance cost Interest expense on bank loans (6,528) (8,779) Bank charges (1,361) (667) (7,889) (9,446) Net finance income 40,169 18,710 24 Taxation (a) Enterprise income tax (“EIT”) The Company is subject to the PRC EIT and local income tax. As the Company is qualified as a domestic enterprise in encouraged industries and approved by the relevant tax authorities, the Company is entitled to a preferential EIT rate of 15% and is exempted from local income tax. Jiangling Isuzu Motor Corporation, Ltd. (“Jiangling Isuzu”), a subsidiary of the Company, is qualified as a foreign investment production enterprise. Accordingly, the applicable EIT rate is 15% and it is exempted from local tax. 74 Jiangling Motors Corporation, Ltd. For the year ended 31 December 2006 Notes to the Consolidated Financial Statements (All amounts in RMB unless otherwise stated) 24 Taxation (continued) (a) Enterprise income tax (“EIT”) (continued) The amount of income tax expense charged to the income statements represents: 2006 2005 RMB’000 RMB’000 Current tax (115,232) (98,090) Deferred tax (Note 9) 16,116 12,002 (99,116) (86,088) The difference between the actual income tax change in the income statements and the amounts which result from applying the enacted tax rate to profit before income tax can be reconciled as follows 2006 2005 RMB’000 RMB’000 Profit before tax 747,550 601,514 Tax calculated at a tax rate of 15% (2005: 15%) (112,132) (90,227) Tax concessions 11,737 6,945 Expense not deductible for tax purposes (1,359) (6,384) Income not subject to tax 2,638 2,771 Effect of tax rate change - 807 Tax charge (99,116) (86,088) (b) Value-added tax (“VAT”) Output VAT is levied at a general rate of 17% on the selling price of goods. Input VAT paid on purchase of goods can be used to offset the output VAT to determine the net VAT payable. (c) Consumption Tax (“CT”) The Group’s automobile sale is subject to CT at 5% on the selling price of goods. 25 Earnings per share Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during the year. 2006 2005 RMB’000 RMB’000 Profit attributable to equity holders of the Company 623,197 490,872 Weighted average number of ordinary shares in issue (thousands) 863,214 863,214 Basic earnings per share (RMB per share) 0.72 0.57 Diluted earnings per share equals to basic earnings per share as there were no dilutive potential ordinary shares outstanding during the years ended 31 December 2006 and 2005. 75 Jiangling Motors Corporation, Ltd. For the year ended 31 December 2006 Notes to the Consolidated Financial Statements (All amounts in RMB unless otherwise stated) 26 Dividend per share A special interim dividend for 2005 of RMB 3.59 per ten shares, amounting to RMB 309,893,826, was paid in 2006. In addition, a final dividend for 2005 of RMB 129,481,000 (RMB 1.5 per ten shares) was paid in 2006. A final dividend for 2006 of RMB 3 per ten shares, amounting to a total dividend of RMB 258,964,200 is to be proposed at the Directors’ Meeting on 4 April 2007. These financial statements do not reflect this dividend payable 27 Cash generated from operations 2006 2005 RMB’000 RMB’000 Profit for the year 648,434 515,426 Adjustments for: Income tax (Note 24) 99,116 86,088 Depreciation (Note 5) 255,452 227,265 Amortisation of lease prepayment (Note 6) 3,476 3,962 Amortisation of intangible assets (Note 7) 1,607 - Impairment charge of PPE (Note 5) 7,273 2,537 Reversal of impairment for receivables and prepayments (Note 21) (428) (552) Impairment for (reversal of) impairment of inventory (Note 21) 7 (1,064) Loss on disposal of PPE 3,702 286 Interest expense on long-term and short term loans (Notes 23) 6,528 8,779 Interest income on bank deposit (Note 23) (38,515) (18,179) Interest income on credit sales (Note 23) (9,543) (9,977) Finance income – Net foreign exchange transaction gain (3,314) (710) Other finance costs (Note 23) 1,361 667 Share of profit of associates (Note 8) (5,634) (4,173) Changes in working capital (excluding the effects of acquisition and exchange difference on consolidation): - Decrease / (Increase) in inventories 24,895 (69,817) - (Increase) / Decrease in trade and other receivables (74,077) 114,137 - Increase in provisions 1,230 33,424 - Increase in deferred income 2,536 26,112 - Increase in trade and other payables 355,450 182,914 - Decrease in current tax liabilities (1,049) (455) - Decrease in pensions and other retirement benefits (11,431) (16,091) Cash generated from operations 1,267,076 1,080,579 In the cash flow statement, proceeds from disposal of property, plant and equipment comprise: 2006 2005 RMB’000 RMB’000 Net book amount 5,926 6,365 Loss on disposal of property, plant and equipment (3,702) (286) Proceeds from disposal of property, plant and equipment 2,224 6,079 28 Contingencies At 31 December 2006, the Group did not have any significant contingent liabilities. 76 Jiangling Motors Corporation, Ltd. For the year ended 31 December 2006 Notes to the Consolidated Financial Statements (All amounts in RMB unless otherwise stated) 29 Commitments (a) Capital commitments Capital expenditure contracted for at the balance sheet date but not recognised in the financial statements, comprises purchases of buildings, plant and machinery and additional investments in associates, are as follows: 2006 2005 RMB’000 RMB’000 Contracted but not provided for: Purchases of buildings, plant and machinery 461,301 367,340 Equity investment - 60,000 461,301 427,340 (b) Royalty fee payable to a shareholder Pursuant to a joint development agreement entered into with Ford on 21 August 1995, and an amendment on 29 September 2000, Ford agreed to provide technical assistance to the Company for the production of automobiles. In return, the Company agreed to pay Ford the royalty fee with a total amount of USD 40,000,000, and it is calculated based on 1.8% of sale value of Transit series automobiles. As of 31 December 2006, the Company has paid USD 25,787,000. The outstanding amount USD 14,213,000 will be paid in future but not recognised in the financial statement. 30 Business combinations In September 2006, the Group acquired 80% equity interest of Jiangxi Fujiang. The acquired business contributed net loss of approximately RMB 1,733,000 (including amortization of intangible assets RMB 1,607,000 arising from the acquisition of Jiangxi Fujiang) to the Group for the period from date of acquisition to 31 December 2006. Details of net assets acquired and goodwill are as follows: Purchase consideration RMB’000 – Cash paid 59,445 – Direct costs relating to the acquisition - Total purchase consideration 59,445 Fair value of net assets acquired 59,445 Goodwill - The assets and liabilities as of the date of acquisition are as follows: Fair value Acquiree’s carrying amount RMB’000 RMB’000 Cash and cash equivalents 34,746 34,746 Property, plant and equipment (Note 5) 982 952 Intangible asset (Note 7) 38,578 1,528 Net assets 74,306 37,226 Net assets acquired 59,445 - Purchase consideration settled in cash 59,445 Cash and cash equivalents in subsidiary acquired (34,746) Cash outflow on acquisition 24,699 There were no acquisitions in the year ended 31 December 2005. 77 Jiangling Motors Corporation, Ltd. For the year ended 31 December 2006 Notes to the Consolidated Financial Statements (All amounts in RMB unless otherwise stated) 31 Related party transactions Related parties are those parties that have the ability to control the other party or exercise significant influence in making financial and operating decisions. Parties are also considered to be related if they are subject to common control. Jiangling Holdings Limited (“Jiangling Holdings”), which owns 41.03% of the Company’s shares, and Ford, which owns 30% of the Company’s shares, are major shareholders of the Company as of 31 December 2006. In addition, Chongqing Changan Automobile Corporation Ltd. (“Changan Auto”) and JMCG hold 50% equity interest of Jiangling Holdings, respectively. The following is a summary of the significant transactions carried out between the Group, its associates, JMCG and its subsidiaries, Ford, Isuzu-Motors Corporation of Japan (“Isuzu”) and their subsidiaries in the ordinary course of business during the period: i) Purchases of goods, provision of services Purchase of goods: 2006 2005 RMB’000 RMB’000 JMCG 499,083 406,889 JMCG Interior Trim Factory 201,086 252,305 JMCG Variant Vehicle Factory 51,262 32,360 Jiangxi Radiator Plant - 17,699 JMCG Industrial Co. 32,752 30,068 Jiangling Material Co. 21,855 16,696 Jiangxi Fuchang 133,182 118,357 Jiangling Chassis Company 2,894 5,779 Jiangling Forging Co., Ltd. 8,061 15,569 Jiangling-Lear Interior Trim Factory 153,562 148,194 Jiangling Metal Casting Co. 16,449 15,137 Nanchang Gear Co., Ltd. 193,166 173,064 Jiangling Hua Xiang Auto Components Co. 63,603 62,269 Jiangling Auto Component Co. 4,135 6,438 Ford Motor Company 205,050 155,763 JMCG Industrial Co. Shangrao Motor parts Plant 5,019 3,889 JMCG Industry Co. Printing Plant 1,999 1,911 JMCG Special Purpose Vehicle Plant 1,915 985 Ford Otosan Company 6,604 530 Others 1,375 1,138 1,603,052 1,465,040 78 Jiangling Motors Corporation, Ltd. For the year ended 31 December 2006 Notes to the Consolidated Financial Statements (All amounts in RMB unless otherwise stated) 31 Related party transactions (continued) i) Purchases of goods, provision of services (continued) Purchases of Services and others: 2006 2005 RMB’000 RMB’000 JMCG Import & Export Co., Ltd. - commission expenses 5,860 4,205 JMCG Construction & Development Co. - services 15,880 12,626 Jiangxi Fujiang - services - 8,498 JMCG - services* 4,750 5,270 - rental expense 2,169 2,539 - other 102 97 JMCG Variant Vehicle Factory - rental expense 40 356 Ford Otosan Company - services 3,230 24,116 Ford Motor (China) Co., Ltd. - services 1,127 2,677 Ford Motor Company - services 32,573 11,437 JMCG Property Co. - services 973 1,609 JMCG Jiangxi Engineering Construction Co. Ltd. - services 20,083 - Others 804 1,424 87,591 74,854 * JMCG bears the middle school and primary school educational fees of existing employees and certain retired employees’ expenses of the Group, and provides services such as security, fire control, road maintenance and cable television. The related costs were borne by the Group according to agreed percentages as determined by headcount ratio of the Group and JMCG. Purchases of buildings: 2006 2005 RMB’000 RMB’000 JMCG 4,099 2,900 JMCG Variant Vehicle Factory 3,860 - Others 660 - 8,619 2,900 79 Jiangling Motors Corporation, Ltd. For the year ended 31 December 2006 Notes to the Consolidated Financial Statements (All amounts in RMB unless otherwise stated) 31 Related party transactions (continued) ii) Sales of goods and provision of services Sales of goods: 2006 2005 RMB’000 RMB’000 JMCG Import & Export Co., Ltd. 414,875 340,654 Jiangling Land Wind Vehicle Co., Ltd. 50,343 211,386 JMCG Interior Trim Factory 59,407 67,400 JMCG Variant Vehicle Factory 33,879 7,159 JMCG Property Co. 6,279 6,573 JMCG Radiator Plant - 1,172 JMCG Industrial Co. 126,405 119,913 Jiangling New-power Auto manufacturing Co 5 2,138 Jiangling Chassis Company 34,849 42,644 Nanchang Gear Co., Ltd. 51,086 19,251 Jiangling Hua Xiang Auto Components Co. 9,909 18,795 Jiangling Auto Component Co. 13,324 37,049 Land Wind Sales Company 2,943 1,730 Jiangling Fu Da Auto Component Co. 24,209 41,459 Jiangling Material utilization Co. Ltd. 29,149 28,262 JMCG Special Purpose Vehicle Plant 1,115 1,567 Jiangling Ze Guang Auto Component Co. 460 1,006 Jiangling Holdings 124,918 - Others 1,741 2,336 984,896 950,494 Rental income: 2006 2005 RMB’000 RMB’000 JMCG Industrial Co. - 559 Others 235 228 235 787 iii) Year-end balances arising from sales/purchases of goods/services Receivables from related parties: 2006 2005 RMB’000 RMB’000 Jiangling Industrial Co. 8,001 6,353 JMCG Import & Export Co., Ltd. 32,326 4,028 Jiangling Land Wind Vehicle Co., Ltd. - 31,847 Jiangling Fu Da Auto Component Co. - 5,859 Jiangling Chassis Company - 2,103 JMCG Property Co. - 1,129 JMCG Variant Vehicle Factory 16,219 - Nanchang Gear Co., Ltd. 10,612 - Jiangling Holdings Limited 14,551 - Jiangling Auto Component Co. 2,029 - Others 21 1,123 83,759 52,442 80 Jiangling Motors Corporation, Ltd. For the year ended 31 December 2006 Notes to the Consolidated Financial Statements (All amounts in RMB unless otherwise stated) 31 Related party transactions (continued) Prepayment for construction in progress: 2006 2005 RMB’000 RMB’000 JMCG Construction & Development Co. 787 1,000 JMCG Import & Export Co., Ltd. 17,624 2,165 JMCG Jiangxi Engineering Construction Co. Ltd. 20,083 - 38,494 3,165 Payables to related parties: 2006 2005 RMB’000 RMB’000 JMCG Industrial Co. 7,930 6,650 Ford Motor Company 23,925 26,732 JMCG 90,713 77,460 JMCG Interior Trim Factory 39,861 36,268 JMCG Variant Vehicle Factory 30,098 13,236 JMCG Jiangxi Radiator Plant - 3,149 Jiangxi Fuchang 36,568 35,205 Jiangling Chassis Company 3,834 177 Jiangling Forging Co., Ltd. - 2,738 JMCG Import & Export Co., Ltd. 1,792 5,787 Jiangling-Lear Interior Trim Factory 62,951 65,909 Nanchang Gear Co., Ltd. 50,370 39,555 Jiangling Hua Xiang Auto Components Co. 19,706 18,660 Jiangling Metal Casting Co. 4,033 2,428 JMCG Industrial Co. Shangrao Motor parts Plant 1,510 1,658 Others 3,557 1,590 376,848 337,202 Cash deposit in related parties: 2006 2005 RMB’000 RMB’000 JMCF 77,175 63,059 iv) Service fee paid to Ford and Jiangling Holdings for management staff Pursuant to an agreement between the Company and Ford in March 2005, some employees of Ford were assigned to the Company as management staff. In 2006, the Company paid approximately USD 3,929,000 and RMB 2,102,500 to Ford as service fee for these employees. Pursuant to an agreement between the Company and Jiangling Holdings in January 2006, some employees of Jiangling Holdings were assigned to the Company as management staff. In 2006, the Company paid approximately RMB 547,000 to Jiangling Holdings as service fee for these emplyoees. 81 Jiangling Motors Corporation, Ltd. For the year ended 31 December 2006 Notes to the Consolidated Financial Statements (All amounts in RMB unless otherwise stated) 31 Related party transactions (continued) v) Guarantee/Pledge As of 31 December 2006, bank loans of USD 1,342,425 (equivalent to approximately RMB 10,483,000) (2005: USD 1,342,425, equivalent to approximately RMB 10,834,000) were guaranteed by JMCF (Note 16). As mentioned in Note 10, as of 31 December 2006, the Group’s finished goods (vehicles) of approximately RMB 15,440,000 were pledged to FAFC. vi) Directors’ remuneration At 31 December 2006, the total remuneration of the directors was about RMB 240,000. vii) Commitment As mentioned in Note 29 (b), Pursuant to the joint development agreement, the Company commit rolyalty fee to Ford with a total amount of USD 40,000,000. As of 31 December 2006, the Company has paid USD 25,787,000. The outstanding amount USD 14,213,000 will be paid in future. viii) Transaction with other state-owned entities The Group’s largest shareholder is Jiangling Holdings, which was established by state-owned enterprises, Chongqing Changan Automobile Corporation Ltd. and JMCG, with the equity interests of 50% and 50%, respectively. Jiangling Holdings is controlled by Changan Auto, and the Group is thereby considered to be indirectly controlled by the PRC Government, which controls a substantial number of entities in the PRC. In accordance with IAS 24 “Related Party Disclosure”, state-owned enterprises and their subsidiaries, other than Changan Auto and its subsidiaries as well as JMCG and its subsidiaries, directly or indirectly controlled by the PRC Government are also deemed as related parties of the Group (“other state-owned entities”). For purpose of related party transactions disclosure, the Group has in place procedures to assist the identification of the immediate ownership structure of its customers and suppliers as to whether they are state-owned entities. Many state-owned entities have multi-layered corporate structure and the ownership structures change overtime. Nevertheless the Management believes that meaningful information relating to such kind of related parties transactions has been adequately disclosed. 2006 2005 RMB’000 RMB’000 Purchase of goods 977,917 1,334,376 Purchase of fixed assets 56,892 43,303 Purchase of services 39,650 27,523 Sales of goods 4,139 5,570 Sales of services - 1,349 Interest income 36,737 16,078 Interest expense 6,515 8,434 Borrowing 162,704 124,693 Repay borrowing 163,481 200,000 82 Jiangling Motors Corporation, Ltd. For the year ended 31 December 2006 Notes to the Consolidated Financial Statements (All amounts in RMB unless otherwise stated) 31 Related party transactions (continued) viii) Transaction with other state-owned entities (continued) Year-end balances with other state-owned entities: 2006 2005 RMB’000 RMB’000 Cash and cash equivalents 2,093,390 1,896,396 Borrowings 132,335 124,070 Receivables and prepayments 88,056 61,948 Trade and other payables 145,672 188,527 32 Principal subsidiary As of the date of this report, the Group has the following subsidiary: Place and date of Percentage of equity Entity incorporation interest held Principal activities Jiangling Isuzu Nanchang, PRC / 75% Manufacture and sale of 10 March 1993 automobiles and spare parts As mentioned in Note 8 (a), the Group acquired 80% equity interest in Jiangxi Fujiang in September 2006. The Group took over the assets and liabilities and the business of Jiangxi Fujiang after the acquisition. Jiangxi Fujiang was subsequently liquidated on 31 December 2006. 33 Events after the balance sheet date In March 2007, the PRC Government passed the China Corporate Income Tax Law (“CIT Law”). Under the CIT Law, the enterprise income tax for domestic invested enterprises and foreign invested enterprises are combined into one and the new CIT rate is 25%, which will become effective 1 January 2008. The new CIT rate of 25% may gradually effective in a 5 years period for enterprises that currently enjoying low tax rates due to various tax incentive programs granted by tax authorities. As the details during this 5 year phase in period is yet to be released by the PRC Government, the Group will assess the impact of the CIT Law in the subsequent period. 34 Reclassification of Comparative Figures Certain comparative figures have been reclassified to conform to the current year presentation. 83 Jiangling Motors Corporation, Ltd. For the year ended 31 December 2006 Notes to the Consolidated Financial Statements (All amounts in RMB unless otherwise stated) Impact of IFRS adjustments on the consolidated profit after tax and shareholders’ equity Net profit for Net assets as of the year ended 31 December 2006 31 December 2006 RMB’000 RMB’000 As reported in the accounts of the Group under PRC accounting principles 3,040,097 603,611 1. Deferred tax assets 74,814 16,116 2. Defined benefit pension (85,805) 11,431 3. Deferred income (28,648) (2,536) 4. Staff bonus and welfare fund appropriated from - (5,190) net profit of a subsidiary 5. Others - 349 6. Minority interest 1,189 (584) As restated in conformity with IFRS 3,001,647 623,197 84 Chapter XI Catalog on Documents for Reference 1. Originals of 2006 financial statements signed by legal representative and Chief Financial Officer. 2. Originals of the Independent Auditor’s Reports signed by Independent accountants and stamped by the accounting firm. 3. Originals of all the documents and public announcements disclosed in newspapers designated by CSRC in 2006. 4. The Annual Report in CAS. Board of Directors Jiangling Motors Corporation, Ltd. April 4, 2007 85