晨鸣纸业(000488)2007年年度报告（英文版）

山东晨鸣纸业集团股份有限公司 SHANDONG CHENMING PAPER HOLDINGS LIMITED Annual Report 2007 April 15, 2008 Important Statement: The Board of Directors, the Supervisory Committee, the Directors and the Supervisors of the Company guarantee that there are no significant omissions, fictitious or misleading statements carried in the Report and will accept individual and joint responsibilities for the truthfulness, accuracy and completeness of the Report. When there is any conflict in understanding between the Chinese and English version, the Chinese version prevail. Mr. Chen Hongguo, the Chairman of Board, Mr. Liu Junwu, the Chief Financial Officer, and Mr. Tan Yuhua, the Financial Manager declares the truthfulness and completeness of the financial statements carried in this report. Definitions: “Company”, “the Company”, and “Chenming Paper” are refering to Shandong Chenming Paper Holdings Co., Ltd. in this report, unless otherwise defined. Table of Contents Chapter I. Company Profile ........................................................................................................................ 3 Chapter II. Financial Highlights.................................................................................................................. 3 Chapter III. Change of Capital Shares and Shareholders............................................................................ 7 Chapter IV. Particulars about the Directors, Supervisors and Senior Executives..................................... 11 Chapter V. Management Structure............................................................................................................ 16 Chapter VI. Particulars about the Shareholders’ Meeting......................................................................... 20 Chapter VII. Report of The Board Of Directors ....................................................................................... 21 Chapter XIII. Report of the Supervisory Committee ................................................................................ 32 Chapter X. Significant Events................................................................................................................... 33 Chapter XI. Financial Report .................................................................................................................... 39 Chapter XII. Documents for Reference .................................................................................................... 39 1. Chapter I. Company Profile 1. Statutory Chinese Name: 山 东 晨 鸣 纸 业 集 团 股 份 有 限 公 司 Statutory English Name: SHANDONG CHENMING PAPER HOLDINGS LIMITED Abbreviation: SCPH 2. Legal Representative: Chen Hongguo 3. Secretary of the Board: Hao Yun Securities Affair Liaison: Fan Yingjie, Sun Wenke Address: No. 595 Shencheng Rd., Shouguang City, Shandong Province Tel: 0536 － 2158011 、 2156488 Fax: 0536 － 2158640 Email: chenmmingpaper@163.com 4. Registered address and office: No. 595 Shencheng Rd., Shouguang City, Shandong Province Post Code: 262700 Website:http://www.chenmingpaper.com 5. Newspapers Designated for Information Disclosing: China Securities Journal, Hong Kong Commercial Daily Website assigned by China Securities Regulatory Commission to publish the Annual Reports: http://www.cninfo.com.cn This Annual Report is available at the Capital Operation Department of the Company. 6. Stock Listed in: Shenzhen Stock Exchange Stock ID: Chenming Paper, Chenming B, Stock Code: 000488, 200488 Convertible bond: Chenming Bond, Code: 125488 7. Misc. Information Business registration updated at: July 18, 2007. Registered address: No. 595 Shencheng Rd., Shouguang City, Shandong Province Business license No. : Qi-gu-lu-zong-zi No. 000003 Tax registration: No. 370783613588986 Organization No. 61358898-6 Certified Public Accountants invited by the Company: Deloitte Touche Tohmatsu CPA Ltd. Beijing Branch, 8/F office Tower W2, The Towers, Oriental Plaza, 1 East Chang An Avenue, Beijing 100738,PRC 2. Chapter II. Financial Highlights A. I. Major accounting data of the year In RMB Yuan No. Main financial indecies Amount 1 Operation profit 1,284,844,000.04 2 Total profit 1,489,336,202.56 3 Net profit attributable to the shareholders of the listed company 967,636,172.39 4 Net profit after deducting of non-recurring gain/loss attributable to the owners of the PLC 884,374,053.66 5 Cash flow generated by business operation, net 1,324,263,125.01 Non-recurring gain/loss items and amount (RMB Yuan) Non-recurring gain and loss items Amount Net gain/loss from disposal of non-working capital -9,748,342.61 Government subsidy 102,004,487.80 Net gain/loss from debt reorganization 1,088,135.44 Balance of offered price to purchase minor share equities lower than the share of book value of 24,040,943.45 recognizable net assets of the enterprise being purchased Net amount of other non-operational gain/expenses other than the above 11,734,011.08 Influence of income tax of non-recurring gain/loss -21695055.51 Influenced amount of minor shareholders -24,162,060.92 Total 83,262,118.73 B. II. Influence of adjustment according to IAS on net profit and net asset Net profit provided by the Financial Statements 2007 prepared under China Enterprise Accounting Standard was RMB967,636,172.39, and net assets was RMB10,580,559,664.96. The main differences with the net profit and net asset provided under IAS were displayed as the following: RMB Yuan 2007.12.31 Year 2007 Items Net asset Net profit Amount provided under IAS 10,180,295,419.17 1,252,584,099.57 Receiving of national bond special fund and special payables 377,439,812.94 -31075994.27 Gain/loss from foreign currency special loans 22,824,432.85 -2,966,916.01 Amount provided under China Enterprise Accounting Standard 10,580,559,664.96 1,281,541,189.29 Notes: (1) According to China Enterprise Accounting Standard, receiving of national bond special fund and special payables are accounted into capital reserves; whereas according to the IAS, they are accounted into differed income and amortized to the useful life of the fixed asset. (2) According to the China Enterprise Accounting Standard, Gain/loss from foreign currency special loans are capitalized; whereas according to the IAS, these are converted into expenses. C. III. Major accounting data and financial indices of the 3 years prior to the ending of the report year. In RMB Yuan Year Increase/decrease Items Year 2007 2006 (%) Year 2005 Not adjusted Adjusted Adjusted Not adjusted Adjusted Turnover 15,164,742,450.26 11,814,092,426.36 11,983,464,568.89 26.55% 9,722,346,097.72 9,943,474,093.62 Total profit 1,489,336,202.56 891,269,259.51 615,690,757.28 141.9% 863,409,212.92 890,129,267.73 Net profit attributable to the shareholders of the listed company 967,636,172.39 602,967,195.37 356,907,182.90 171.12% 602,433,342.24 616,044,602.83 Net profit attributable to shareholders of listed company after deducting of non-recurring gain/loss 884,374,053.66 436,232,957.51 396061925.60 123.29% 531,906,232.30 551,964,382.34 Cash flow generated by business operation, net 1324263125.01 1,008,558,176.84 1,008,558,176.84 31.30% 1,013,718,841.30 1,013,718,841.30 Increase/decrease End of 2007 End of 2006 (%) End of 2005 Not adjusted Adjusted Adjusted Not adjusted Adjusted Gross Assets 22,011,108,257.29 20,547,990,949.39 20,558,560,560.77 7.07% 17,959,414,107.77 17,488,260,546.89 Owners’ (shareholders’) equity 8,745,035,011.85 6,010,124,970.09 6,151,642,343.81 42.16% 5,465,605,443.09 5,654,830,619.26 Basic gains per share 0.60 0.4425 0.26 130.77% 0.4451 0.45 Diluted gains per share 0.59 0.4415 N/A - 0.4451 0.415 Basic earning per share after deducting of non-recurring gains/losses 0.55 0.3201 0.29 89.66% 0.393 0.403 Net income on asset, fully diluted 11.06% 10.03% 5.80% 5.26% 11.02% 10.89% Net income on asset, weighted 12.64% 10.83% 6.06% 6.58% 11.74% 11.98% Net income on asset, fully diluted and deducted non-recurring gain/loss 10.11% 7.26% 6.44% 3.67% 9.73% 9.76% Net income on asset after deducting of non-recurring gain/loss 11.55% 7.84% 6.73% 4.82% 10.37% 10.74% Net Cash flow per share generated by business operation 0.7761 0.7385 0.7385 5.09% 0.7489 0.7489 Net asset per share attributable to shareholders of the Company 5.1250 4.4009 4.5045 13.78% 4.038 4.18 3. Chapter III. Change of Capital Shares and Shareholders D. I. Movement of capital shares In shares At beginning of term Changed in the report term (+,-) At end of term Converted from Increased and Releasing of Amount Proportion Sub-total Amount Proportion bond frozen restriction I. Shares with conditional 354,809,141 25.98% -15,308,688 339,500,453 19.90% subscription National legal person 328,573,657 24.06% 328,573,657 19.26% shares Domestic non-state- 9,517,139 0.70% -9,517,139 -9,517,139 owned legal person shares Management shares 16,718,345 1.22% 16,400* -5,807,949 -5,791,549* 10,926,796 0.64% II. Shares with unconditional 1,010,861,014 74.02% 355,984,474 1,366,845,488 80.10% subscription RMB common shares 453,363,529 33.20% 340,675,786 -16,400 15,325,088 355,984,474 809,348,003 47.43% Foreign shares listed at 557,497,485 40.82% 557,497,485 32.67% home III. Total of capital shares 1,365,670,155 100.00% 340,675,786 340,675,786 1,706,345,941 100.00% Note: 1. The Company implemented share relocating scheme on March 29, 2006. On April 17, 2007, the original legal person shares of 9,517,139 were expired for restriction period and became negotiable. 2. In the report term, the executive shares among the conditional shares have changed from 16,718,345 shares to 10,926,796 shares, that has decreased by 5,791,549 shares. That was because, (1) According to “Operation guide for administration over shareholding of directors, supervisors, and top executives in listed companies” issued by Shenzhen Stock Exchange, the conditional shares held by directors, supervisors and top executives were released at rate of 25% in May 2007. Thus the 3,731,670 shares of “Conditional executive shares” were altered to “Unconditional common shares (A shares)”. No executive reduced his/her shareholding amount. (2) In the report term, the conditional shares held by directors and executives who left their positions were released, thus the 2,076,279 shares of “Conditional executive shares” were altered to “Unconditional common shares (A shares)”. (3) In the report term, Mr. Ren Wei, the Vice General Manager has increased his shareholding by 16400 shares and were frozen thereof. 3. “Chenming Bond” has entered convertible period since March 15, 2005. As approved on the 21st meeting of the 4th term of Board, all of the retained bonds were bought back ahead of schedule on May 14, 2007. Till then, the shares of “Chenming Paper” have increased by 359,754,087 because of bond converting, including 340,675,786 shares converted in the report term. Announcements regarding repurchasing of bonds were published on May 19, 22, 2007 issues of China Securities Journal, Hong Kong Commercial Daily, and http://www.cninfo.com.cn . E. II. Share placing and listing 1. As approved by China Securities Regulatory Commission by Document No. [2004]147, the Company issued 20 million transferable company bonds (referred to as “the Bonds” at par value of RMB100, totaled to RMB2 billion. The term of the Bond is 5 years which started from September 15th 2004 to September 15th 2009. The Bond was listed in Shenzhen Stock Exchange on September 30th 2004 with ID of Chenming Bond and code of 125488. On March 15th 2005, Chenming Convertible Bond has entered the convertible period. The initial converting rate was RMB9.99 per share. On May 20th 2005, the Company implemented the dividend distribution plan for year 2004. According to the provisions of the Placing Prospectus of Chenming Convertible Bond, and related regulations of China Securities Regulatory Commission on convertible bonds, the converting rate of the Company’s bonds has been adjusted to RMB6.59 per share. On July 7th 2006, the Company implemented the profit distribution plan of year 2005, the converting rate of Chenming Bond was adjusted to RMB6.47 per share. According to the Proposal on Lowering the Converting Rate of Chenming Bond adopted on the 17th meeting of the 4th term of Board, the convert rate of Chenming Bond was adjusted to RMB5.50 per share since September 21st 2006. As approved on the 21st meeting of the 4th term of Board, all of the retained bonds were bought back ahead of schedule on May 14, 2007. Till then, the shares of “Chenming Paper” have increased by 359,754,087 because of bond converting, including 340,675,786 shares converted in the report term. Announcements regarding repurchasing of bonds were published on May 19, 22, 2007 issues of China Securities Journal, Hong Kong Commercial Daily, and http://www.cninfo.com.cn . 2. The Company didn’t issued any employees’ shares. F. III. Particulars about the shareholders 1. 1. Change in conditional shares in shares Conditional Conditional shares Released this Increased Name of the shareholder shares at end of Reason of condition Date of releasing at beginning of year year this year year Shouguang Chenming Commitment in share 328,573,657 0 0 328,573,657 Mar 29, 2010 Share Holding Co., Ltd. equity relocation Shanghai Xinglong Commitment in share 3,303,671 3,303,671 0 0 Apr 17, 2007 Investment Co., Ltd. equity relocation Commitment in share People’s Post Press 3,053,302 3,053,302 0 0 Apr 17, 2007 equity relocation Meilin Zhengda Commitment in share Investment Group Co., 1,221,321 1,221,321 0 0 Apr 17, 2007 equity relocation Ltd. Shouguang Huadong Commitment in share Construction Materials 1,022,855 1,022,855 0 0 Apr 17, 2007 equity relocation Co., Ltd. Shandong Chenming Commitment in share 732,790 732,790 0 0 Apr 17, 2007 Power Plant Ltd. equity relocation Weifang New Commitment in share Continental Investment 122,133 122,133 0 0 Apr 17, 2007 equity relocation Consultants Ltd. Weifang Shenzhou Tech. Commitment in share 61,067 61,067 0 0 Apr 17, 2007 Ltd. equity relocation Shares held by Released according Executive shares 16,718,345 5,807,949 16,400 10,926,796 executives of the to relative Company are frozen. regulations Total 354,809,141 15,325,088 16,400 339,500,453 － － 2. 2. Particulars about the top 10 shareholders and top 10 unconditional-share holders In shares Total of shareholders Total of shareholders: 147,136; A share holders: 115，178; B share holders: 31，958 Top 10 Shareholders Share Conditional Pledged or Name of the shareholder Properties of shareholder Total shares proportion % shares frozen Shouguang Chenming Share Holding Co., Ltd. State-owned legal person 19.26% 328,573,657 328,573,657 18,653,854 China Agriculture Bank – Zhongyou Core Growth Domestic non-state-owned 3.82% 65,131,793 0 N/A Stock Investment Fund legal person China Agriculture Bank – Zhongyou Core Best Domestic non-state-owned 2.63% 44,946,700 0 N/A Portfolio Stock Investment Fund legal person China Industrial & Commercial Bank – Nuo’an Domestic non-state-owned 2.18% 37,241,842 0 N/A Stock Investment Fund legal person BONY-DREYFUS PIFI-DREYFUS PREMIER Overseas legal person 2.03% 34,583,845 0 N/A GREATER CHINA China Construction Bank – Penghua Value Domestic non-state-owned 1.21% 20,671,486 0 N/A Advantage Stock Investment Fund legal person BBH BOS S/A FIDELITY FD - CHINA FOCUS Overseas legal person 1.20% 20,527,600 0 N/A FD Domestic non-state-owned Lizhu Pharmacy Group Co., Ltd. 1.11% 18,988,090 0 N/A legal person MIRAE ASSET CHINA SOLOMON EQUITY Overseas legal person 1.06% 18,164,012 0 N/A INVESTMENT TRUST 1 Domestic non-state-owned Joincare Pharmacy Group Co., Ltd. 1.06% 18,116,585 0 N/A legal person Top 10 holders of unconditional shares Name of the shareholder Unconditional shares Category of shares China Agriculture Bank – Zhongyou Core Growth Stock Investment Fund 65,131,793 A shares China Agriculture Bank – Zhongyou Core Best Portfolio Stock Investment Fund 44,946,700 A shares China Industrial & Commercial Bank – Nuo’an Stock Investment Fund 37,241,842 A shares BONY-DREYFUS PIFI-DREYFUS PREMIER GREATER CHINA 34,583,845 B shares China Construction Bank – Penghua Value Advantage Stock Investment Fund 20,671,486 A shares BBH BOS S/A FIDELITY FD - CHINA FOCUS FD 20,527,600 B shares Lizhu Pharmacy Group Co., Ltd. 18,988,090 A shares MIRAE ASSET CHINA SOLOMON EQUITY INVESTMENT TRUST 1 18,164,012 B shares Joincare Pharmacy Group Co., Ltd. 18,116,585 A shares UBS WARBURG CUSTODY PTE LTD. Swiss Bank 16,415,585 B shares Notes to relationship or “action in concert” among the top ten shareholders. Among the top 10 shareholders, Shouguang Chenming Share Controlling Co., Ltd. – the controlling shareholder of the Company as a state-owned legal person, is not connected with any other shareholders or current share holders. And there isn’t action-in-concert relationship either according to the Administration Criteria of Information Disclosure of Listed Companies. China Agriculture Bank – Zhongyou Core Growth Stock Investment Fund and China Agriculture Bank – Zhongyou Core Best Portfolio Stock Investment Fund are under common control of Zhongyou Venture Fundation Co., Ltd. Jiangkangyuan Pharmacy is the first shareholder of Lizhu Pharmacy Group Co., Ltd.The Company is not informed whether there is any relationship between any of the other shareholders, neither any relationship regarded by the Administration Criteria of Information Disclosure of Listed Companies as action-in-concert. 3. 3. Profile of the controlling shareholder (1) None of the controlling shareholder and the substantial controller of the Company has changed in the report term. (2) Shouguang Chenming Share Holding Co., Ltd. is the controlling shareholder of the Company which is holding more than 5% of the capital shares. It was incorporated on December 30th 2005 with registered capital of RMB1.685 billion. Mr. Chen Hongguo is the legal representative of the company. Its business range is investment in industries of paper-making, power plant, thermal power, and forestry. It was holding 328,573,657 of state-owned shares at the end of the report term, which was 19.26% of the total share capital. The 18,653,854 shares used as supplementary shares in share equity relocation program were temporarily managed by Shenzhen Branch of China Securities Depository & Clearing Corporation Ltd. None of other shares was put into amortizing or freezing. (2) Shouguang State-owned Asset Administrative Bureau is the controlling shareholder of Shouguang Chenming Share Holding Co., Ltd. It is holding 75.73% of the shares of Shouguang Chenming Share Holding Co., Ltd. Mr. Zhang Yuhua is the legal representative. It is the administrative and supervisory body of state- owned properties in Shouguang City. (4) Property and controlling relationship between the Company and the controller Shouguang State-owned Asset Administrative Bureau ↓75.73% Shouguang Chenming Share Holding Co., Ltd. ↓19.26％ SHANDONG CHENMING PAPER HOLDINGS LIMITED 4. Chapter IV. Particulars about the Directors, Supervisors and Senior Executives G. I. Change of shareholding of directors, supervisors and senior executives Remuneration Take Shares held at Shares held at Amount accepted from remuneration Cause of change the company Name Position Sex Age Job term the beginning the end of of from of term term change in report term shareholding or (RMB0’000) related parties? I. Executive directors Chen Apr 2007 – Apr Chairman M 43 6,334,527 6,334,527 160.76 No Hongguo 2010 Yin Vice Apr 2007 – Apr M 50 3,231,520 3,231,520 106.80 No Tongyuan Chairman, GM 2010 Director and Apr 2007 – Apr Li Feng M 35 471,818 471,818 66 No sales officer 2010 Xing Apr 2007 – Apr Director M 42 355,561 355,561 66 No Fangtong 2010 Apr 2007 – Apr Wu Bingyu Director M 42 428,107 428,107 11.8 No 2010 Apr 2007 – Apr Hou Huancai Director M 46 628,915 628,915 60 No 2010 Zhou Apr 2007 – Apr Director M 46 125,307 125,307 30 No Shaohua 2010 II. Non-executive Directors Apr 2007 – Apr Gan Zhihe Director M 63 0 0 4 No 2010 Apr 2007 – Apr Zhao Wei Director M 48 0 0 4 No 2010 Apr 2007 – Apr Cao Chunyu Director M 44 0 0 4 No 2010 III. Independent directors Independent Apr 2007 – Apr Diao Yuntao M 43 0 0 4 No Director 2010 Wang Independent Apr 2007 – Apr M 49 0 0 4 No Zhihua Director 2010 Zhou Independent Apr 2007 – Apr F 44 0 0 4 No Chengjuan Director 2010 Independent Apr 2007 – Apr Wang Yumei F 45 0 0 4 No Director 2010 Independent Apr 2007 – Apr Liu Yingjie M 33 0 0 10 No Director 2010 IV. Supervisors Apr 2007 – Apr Gao Junjie Supervisor M 37 39,606 39,606 8.24 No 2010 Liu Apr 2007 – Apr Supervisor M 36 0 0 14.94 No Wenzheng 2010 Wang Ju Supervisor F 42 Apr 2007 – Apr 0 0 7.71 No 2010 Yang Apr 2007 – Apr Supervisor F 40 0 0 7.19 No Hongqin 2010 Apr 2007 – Apr Zhao Shujun Supervisor M 34 0 0 6.9 No 2010 V. Senior Executives Wang Vice General Apr 2007 – Apr M 34 209,200 209,200 31.2 No Baoliang Manager 2010 Geng Vice General Apr 2007 – Apr M 34 437,433 437,433 51 No Guanglin Manager 2010 Vice General Apr 2007 – Apr Purchase Ren Wei M 46 92,800 109,200 16,400 24 No Manager 2010 of shares Vice General Apr 2007 – Apr Li Xueqin F 42 429,348 429,348 28.8 No Manager 2010 Vice GM, Apr 2007 – Apr Hao Yun secretary of the M 45 708,441 708,441 30 No 2010 board Xia Vice General Apr 2007 – Apr M 43 70,700 70,700 36 No Guangchun Manager 2010 Wang Vice General Apr 2007 – Apr M 45 195,600 195,600 24 No Zaiguo Manager 2010 Wang Vice General Apr 2007 – Apr M 44 0 0 20 No Shihong Manager 2010 Vice General Apr 2007 – Apr Fang Lijun M 38 436,851 436,851 28.04 No Manager 2010 Apr 2007 – Apr Liu Junwu CFO M 46 0 0 19.2 No 2010 Dong Vice General Apr 2007 – Apr M 45 196,794 196,794 12.22 No Jianwen Manager 2010 Total - - - - 14,392,528 14,408,928 - - 888.80 - Note: The Shareholders’ Annual Meeting 2001 approved the Executive Share Option Incentive Program. The Company has purchased A shares for some of the directors and executives. This has been disclosed in Annual Report 2004 and 2006. No share option incentive program was implemented in the current term. H. II. Major career history of the directors, supervisors and senior executives and their positions in the Company. 1. 1. Profiles of the Directors (1) Executive directors Mr. Cheng Hongguo, who joined our company in 1987, once held the position of Workshop Manager, Director of Brach Factory, Deputy Manager, member of Board, and Baord Chairman of Wuhan Chenming Hanyang Paper Stock Co., Ltd. Mr. Cheng is now the Chairman of the Company, Chairman and General Manger of Shouguang Chenming Share Holding Co., Ltd. Mr. Yin Tongyuan, who joined our company in 1982, once held the position of Workshop Manager, the Chief of Technology Dept., Deputy Factory Managing Director and Executive Deputy Factory Managing Director. Currently Mr. Yin is the Deputy Chairman and General Manager of the Company, General Manager of Shouguang Chenming Share Holding Co., Ltd.. Mr. Li Feng, joined the Company in 1992. Once held the positions of workshop director, factory chief, assistant of General Manager, Vice Chairman, Vice General Manager of Shandong Chenming Qihe Paper Board Co., Ltd., and Vice General Manager, Vice Chairman, and Chairman of Wuhan Chenming Hanyang Paper Co., Ltd. At present Mr. Li is the director and Sales Supervisor of the Company. Mr. Xin Fangtong, joined the Company in 1984, once the chief of product line, director of workshop, GM and Chairman of Chibi Chenming Paper Co., Ltd. At present he is the director of the Company and Chairman of Qihe Paperboard Co., Ltd. Mr. Wu Bingyu, who joined our company in 1989, once held the position of Organization Section Chief, Director of Party Leadership Office, Director of Party Leadership Group, Assistant of General Manager, Deputy Secretary of Party Leadership Group of Wuhan Chenming Hanyang Paper Holdings Co., Ltd. and Chairman of Jilin Chenming Paper Co., Ltd. Mr. Wu is now director of the Company. Mr. Hou Huancai, who joined our company in 1983, once held the position of Workshop Director, Director of Branch Factory, Deputy Director of Qihe Paperboard Factory, Board Chairman of Yanbian Chenming Paper Co., Ltd. and Chairman of the 1st and the 2nd Supervisory Board. Mr. Hou is now the executive director of the Company, and Chairman of Jilin Chenming Paper Holding Co., Ltd. Mr. Zhou Shaohua, who joined our company in 1997, once held the position of Executive Deputy Manager and Engineer in Chief of WUhan Chenming Hanyang Paper Stock Co., Ltd. and Borad Chairman of Jiangxi Chenmin Paper Co., Ltd. Mr. Zhou is now the executive director of the Company and Chief Secretary of CCP Committee of Zhanjiang Chenming Pulp & Paper Co., Ltd. (2) Non-executive directors Mr. Gan Zhihe, he was once the head of Technical Development Dept. of National Construction Material Bureau, Principal of China Construction Material Institute, vice chief of Technical equipment Dept. of National Commission of Economics and Commerce, director of Investment and Planning Dept. of National Commission of Economics and Commerce, vice chief secretary of National Commission of Economics and Commerce, and vice chief secretary of National Development and Reformation Committee, independent director of Xinjiang Tianshan Cement Co., Ltd. At present he’s the non-executive director of the Company. Mr. Zhao Wei, he was once the vice director of Paper Manufacturing Dept. of Minister of Light Industry. At present he’s vice chief commissioner and chief secretary of China Paper Manufacturer Association. Independent director of Shandong Huatai Paper Holdings Co., Ltd. and Guangdong Guanhao High-Tech Holdings Co., Ltd. and non-executive director of the Company. Cao Chunyu, he’s the vice director of China Pulp and Paper Making Industry Institute, vice general manager of China Paper Manufacturing Co., Ltd., commissioner of China Paper-Making Association, independent director of Mudanjiang Hengfeng Paper Holdings Co., Ltd., non-executive director of the Company. (3) Independent non-executive directors Mr. Diao Yuntao, once held the position of Deputy Director of Financial Office of Shandong Province, Deputy Director of Local Revenue Office of Shandong Province. Mr. Diao is now assuming Director of Shandong Qilu Accounting Office, Borad Chairman of Shandong Ruihua Management Consultant Co. and the Deputy Board Chairman and General Manager of Shandong Ruihua Investment Co. Currently he’s the vice president of Wanlong CPAs Ltd. He began to assume Independent Director in April, 2003. Mr. Wang Zhihua, who once held the position of teacher of Shandong Economics Institute, Director and Secretary of Shandong Electricity Academe, is now a member of Party Leadership Group and Deputy Manager of Shandong Xinyuan Stock Co. Mr. Wang began to assume Independent Director in April, 2003. Ms. Zhou Chenjuan, an Econopmics Bachelor who graduated from Finance Dept. of Shanghai Finance and Economics University in 1987, was assigned to Revenue Dept. of Shandong Finance and Economics Institute in 1987. Ms. Zhou is now assuming Director of Taxation Theory Staff Office. She began to assume Independent Director in April, 2003. Ms. Wang Yumei, commissioner of Politic Consultants Committee, commissioner of Legal Committee. At present she’s the vice dean of Insurance School of Central University of Finance, standing commissioner of China Labor Association, commissioner of China Democratic and Construction Party Beijing Economics Committee. She assumes the position of independent director of the Company since April 2007. Mr. Liu Yingjie, was CFO of Xinli Software (Group) Co., Ltd. At present he’s CFO of China Glass Holdings Co., Ltd. (PLC in Hong Kong), He assumes the position of independent director of the Company since April 2007. 2. 2. Supervisors Mr. Gao Junjie, who joined our company in 1994, once held the position of Director of Law Office and Deputy Director of Auditing Division of our company. He is now assuming Staff Supervisor and Assistant to the General Manager, supervisor of Shouguang Chenming Share Holding Co., Ltd., and Supervisor of Shouguang Henglian Enterprise Investment Co., Ltd. Ms. Wang Ju, joined the Company in 1987, once held the position of vice chief of workshop, vice manager and manager of Supply Company, assistant to General Manager of Shouguang Chenming, Vice General Manager of Shouguang Chenming, Vice Chairman of Workers’ Union. At present she is the supervisor of the Company and Vice General Manager of Shouguang Chenming Pulp Company. Ms. Yang Hongqin, joined the Company in 1987. once the vice chief and chief of QA dept., director of After-sales Services dept., manager of Property Management Co. At present he’s the supervisor of the Company and assistant to General Manager of Shandong Chenming Thermal Power Co., Ltd. Mr. Zhao Shujun, joined the Company in 1997. Once he was the vice director of party office, vice director of Training Dept., vice director of HR dept., at present he’s the Supervisor of the Company, and vice director of PR dept. of the Party. Mr. Liu Wenzheng, joined the Company in 1993, once director of Accounting Dept., Auditing Dept. of Shandong Chenming Paper Group Qihe Paper Board Co., Ltd. At present he’s the supervisor of the Company and Shouguang Ruifeng Enterprise Investment Co., Ltd. 3. 3. Executives Mr. Wang Baoliang, who once held the position of teacher of Yingli Middle School of Shouguang City, Secretary of Party Leadership Committee of the town, Secretary and Section Chief of Shouguang Party Leadership Committee Deputy Director of Confidential Dept., Deputy General Office and Secretary-General, etc. He joined our company in October, 2003 and is now Deputy General Manager of the Company, and director of Shouguang Chenming Share Holding Co., Ltd. Mr. Geng Guanglin, who joined our company in 1992, once held the position of Workshop Director of our company, Deputy Manager of Chibi Chenming Paper Co. General Manager of Shouguang Chenming Co., Ltd. and Vice Chairman of Shouguang Chenming. He is now the Vice General Manager of the Company, and director of Shouguang Chenming Share Holding Co., Ltd. Mr. Ren Wei, once loan clerk, vice director of Loan Division, vice manager of International Dept., chief of branch, assistant to president, vice president, and president of Shouguang Industrial & Commercial Bank. He joined the Company in July 2004 and currently he’s the vice general manager of the Company. Ms. Li Xueqin, who joined our company in 1987, once held the position of Director of Auditing Dept., Vice Chairman of Supervisory Board and Deputy Manager of our company. She is now assuming Deputy Manager of our company and director of Shouguang Chenming Share Holding Co., Ltd. Mr. Hao Yun, who joined our company in 1984, once held the position of Secretary of the League Committee, Director of LAbour and Human Resource Dept., Director of Stock Office and Assistant of General Manager of our company. He is now assuming Vice General Manager and Secretary of the Board. Mr. Xia Guangchun, joined the Company in 1989. He once held the position of Vice General Manager of Wuhan Chenming Hanyang Paper Co., Ltd., General Manager of Shandong Chenming Thermal Power Co., Ltd., Chief Secretary of CCP Committee of Jilin Chenming Paper Co., Ltd. Currently he is the Vice General Manager of the Company, and Chairman of Shandong Yujing Hotel Ltd. Mr. Wang Zaiguo, who joined our company in 1987, once held the position of Secretary of transportation company, the Assistant of General Manager and Director of Logistics Dept., manager of hotel, Vice General Manager of Shouguang Chenming Paper Co., Ltd. and Supervisor of our company. He is now Vice General Manager of our company, and Chairman of Zhanjiang Chenming Forestry Development Co., Ltd. Mr. Wang Shihong, once the chief secretary of National Planning Committee, general manager of Administration Dept. of Fuxing Pulp Co., Ltd., assistant to general manager of China High-tech Investment Group. He assumed vice general manager of the Company since March 2006. Mr. Fang Lijun, joined the Company in 1991, once the manager of Beijing Branch, assistant to General Manager, and General Manager of Sales Company. At present he is the Vice General Manager of the Company. Mr. Liu Junwu, joined the Company in 2002, one the Chief Financial Officer of Jilin Paper Co., Ltd., Chief Accountant of Shandong Chenming Paper Group Qihe Paperboard Co., Ltd., Director of Accounting Dept., assistant to General Manager of the Company, Chief Financial Officer of Jilin Chenming Paper Co., Ltd. At present he is the CFO of the Company. Mr. Dong Jianwen, joined the Company in 1988, once the chief of workshop, head of production dept., assistant of general manager, general manager and chairman of Chibi Chenming Paper Co., Ltd., and general manager of Wuhan Chenming Hanyang Paper Co., Ltd. At present he’s the vice general manager of the Company. I. III. Annual Remunerations of the Directors, Supervisors and Senior Executives 1. The judgment procedure for the remunerations of directors, supervisors and senior management: decided by the Assessment and Rewarding Committee of the Company, and implemented upon approval at the Board meeting. 2. Basis of remunerations to directors and senior management: upon the practical profitability, nature of duties, and individual performance, on the basic principle of motivating and stability, annual rewards are applied to directors and senior management. The remunerations to supervisors are annually fixed. For supervisors taking managerial positions in the Company, their reward are decided by the General Manager’s Conference basing on particular position. For supervisors not taking any position in the Company, their rewards vary between RMB100 thousand to RMB200 thousand. 3. As approved by Shareholders’ General Meeting 2006, the Company pays RMB40 thousand – RMB100 thousand annually to independent directors (after tax). Travel expenses and rational expenses for exercising of duties are reimbursed by the Company according to the Article of Association. 4. The total annual remuneration for the current directors, supervisors and senior management in 2007 is available in the 1st part of this chapter. J. IV. Alternation of the Directors, Supervisors, and Senior Management 1. On April 30, 2007, election of the new board of directors was undertaken ahead of schedule. As approved on the Shareholders’ Annual Meeting 2006, Mr. Chen Hongguo, Mr. Yin Tongyuan, Mr. Li Feng, Mr. Xing Fangtong, Mr. Wu Bingyu, Mr. Hou Huancai, and Mr. Zhou Shaohua were elected the executive directors of the 5th term of Board with job tem of three years. Mr. Gan Zhihe, Mr. Zhao Wei, and Mr. Cao Chunyu were elected the external directors of the 5th term of Board with job term of 3 years. Mr. Liu Yingjie, Ms. Wang Yumei, Mr. Diao Yuntao, Mr. Wang Zhihua, and Ms. Zhou Chengjuan were elected the independent directors with job term of 3 years. 2. On April 30, 2007, election of the new supervisory committee was undertaken ahead of schedule. As approved on the Shareholders’ Annual Meeting 2006, Mr. Gao Junjie, Mr. Liu Wenzheng, and Ms. Yang Hongqin were elected the supervisors of the 5th term of Supervisory Committee with job term of 3 years. As elected on the meeting of Workers’ Union, Ms. Wang Ju and Mr. Zhao Shujun were elected the supervisor representing the employees with job term of 3 years. 3. On April 30, 2007, as approved on the 1st meeting of the 5th term of Board, Mr. Yin Tongyuan was engaged the General Manager of the Company; Mr. Hao Yun was engaged the secretary of Board; Mr. Li Feng was engaged the Sales Supervisor; Mr. Wang Baoliang, Mr. Dong Jianwen, Mr. Geng Guanglin, Mr. Ren Wei, Mr. Fang Lijun, Mr. Li Xueqin, Mr. Hao Yun, Mr. Xia Guangchun, Mr. Wang Zaiguo, Mr. Zhang Xuejun, and Mr. Wang Shihong were engaged the Vice General Managers of the Company; Mr. Liu Junwu was engaged the Chief Financial Officer. All of them will hold the office term of 3 years. Details of above are available with the announcements released by China Securities Journal, Hong Kong Commercial Daily and http://www.cninfo.com.cn dated May 9, 2007. 4. As passed at the 3rd meeting of the 5th term of Board, Mr. Zhang Xuejun resigned from the position of vice general manager due to change of job position. Details are available with the announcement published by China Securities Journal, Hong Kong Commercial Daily and www.cninfo.com.cn dated August 25, 2007. K. V. The Employees There were totally 15312 employees in the Company, including 11594 of production employee, 498 of sales persons, 1271 technical persons, 242 of financial persons, 706 of executive persons, and 1001 others. On education levels, 737 of bachelors or above, 1800 of college graduates, 3419 of intermediate technical, and 9356 high school, technical school or lower. No expenses of retired employees assumed by the Company. Employees of the controlled subsidiaries included above. 5. Chapter V. Management Structure L. I. Administrative Position Under the requirement of the Company Law, Security Law and relative circulars released by China Securities Regulatory Commission, the company kept optimizing the management structure and operate the company in a standardized mean to ensure its healthy development. Comparing with the provisions provided by the ruling documents, the Board deems that the Company’s practical administrative structure is satisfying the requirements. In year 2007, the Company conducted the special administration improving operations in accordance with the overall arrangement and requirement of CSRC and SSE, as well as the Company Law, Securities Law, and the Articles of Association of the Company. The operation was completed in three stages including self- inspection, public inquiry, and rectifying. In conducting of the operation, the Company has discovered that the General Manager Working Criteria was not updated duly along with the updating of the Articles of Association. On the other hand, the Company has not established the Independent Director Administration Criteria, Reception and Promotion Criteria, Internal Control Criteria, along with the releasing of new regulations. Focusing on the problems discovered, the Company has revised and improved the Related Transaction Criteria, Information Disclosure Criteria, General Manger Working Criteria, Internal Control Criteria, Independent Director Administration Criteria, Secretary of Board Working Criteria, and Reception and Promotion Criteria. All of these regulations were examined and approved at the 2nd meeting of the 5th term of Board. On October 25, 2007, Shandong Bureau of CSRC issued the “Circular to Shandong Chenming Paper Holdings Co., Ltd. about overall assessment of administration situation and suggestions” (Lu-Zheng-Jian- Han[2007]154), which deems that the Company has established a mature and standard administrative structure. Meanwhile it also pointed out some problems exist in the Company. The Company has performed rectification according to the suggestions and accomplished the special improving operations. The “Self-inspection Report and Rectification Plan of Special Administration Improving Operation” and “Report on Rectification Actions of Special Administration Improving Operation” produced by the Company were passed at the 1st Special Meeting of the 5th term of Board, and the 4th meeting of the 5th term of Board, and published by China Securities Journal, Hong Kong Commercial Daily and www.cninfo.com.cn synchronously. With reference to the circulars of CSRC, the Company believe that problems discovered in the operation were practically resolved. Upon completion of the operation, the Company has established its administration structure with clear functions of decision-making, monitoring, and authorization, which is complying with the provisions of the circulars of the CSRC regarding standardizing of administration. M. II. Performance of the Independent Directors In the report term, 5 of the independent directors that engaged by the company were doing their jobs responsibly. They presented the board meetings and shareholders’ meetings, provided opinions for the Company’s management issues, and exercised their judgments independently on the decision-making processes of personnel changing, related transactions, and external guarantees. Followings are the meetings the independent directors presented: Name of Times of board Presented Presented by Absented Note Independent meetings to present personally proxy Director Zhao Jinghua * 3 3 0 0 Liu Xueyan* 3 3 0 0 Liu Yingjie * 5 4 1 0 Asked for leaving due Wang Yumei * 5 4 0 1 business engagement Asked for leaving due Diao Yuntao 8 7 0 1 business engagement Asked for leaving due Wang Zhihua 8 7 0 1 business engagement Zhou Chengjuan 8 8 0 0 * Note: Electing the new term of Board was done at the Shareholders’ Meeting held on April 30, 2007. Zhao Jinghua, Liu Xueyan, Diao Yuntao, Wang Zhihua, and Zhou Chengjuan were elected the independent directors of the 4th term of Board. Therefore the 5 independent directors of the current Board are: Liu Yingjie, Wang Yumei, Diao Yuntao, Wang zhihua, and Zhou Chengjuan. In the report term, the independent directors issued their independent opinions on the related transactions according to the related laws and regulations. They raised no objection opinion on the proposals of board meetings or other issues. N. III. Particulars about the separation of businesses, personnel, assets, organizations, and accounting from the controlling shareholder 1.In the aspect of business: the company in completely independent from the controlling shareholder, and has its independent and complete business operation capability. 2. In personnel: The labor management, personnel and salary management are completely separated from the controlling shareholder. 3. In assets: There is only shareholding relationship between the Company and Shouguang Chenming Share Holding Co., Ltd. The company’s capital is completely separated from the controlling shareholder. 4. In organization: The company has a mature and independent organization structure, which are established according to the legal processes and the business practice of the Company. They are completely separated from the controlling shareholder. 5. In accounting: The company has its own independent accounting department, accounting system, accounting management rules, bank account. The controlling shareholder never interfere in the financial activities of the Company. O. IV. Internal Controlling System 1. (I) Internal control overview The Company has established the rules for Shareholders’ Meetings, the Board of Directors, and the Supervisory Committee to ensure their decision-making, execution, and supervision duties are carried out effectively. Meanwhile, the Company also established the Strategy Committee, Nomination Committee, Auditing Committee and Remuneration & Assessment Committee in the Board of Directors. In accordance with their respective working criteria, they participated in the discussing and decision-making processes in view of providing scientific and professional assistant in decision-making. Internal administration departments are established to monitor the producing, improving and implementing of internal control systems. The Auditing Committee monitors on the material related transactions. The Company has established a completed internal control system covering production management, financial management, related transactions, external guarantee, use of proceeds, and material investment. 2. (II) Controlling over material operations 1. Administration and controlling of controlled subsidiaries The Company administrates the controlled subsidiaries strictly according to the laws and regulation. According to the requirements of the Company Law, all subsidiaries have established Board of Directors and Supervisory Committees to conduct management and supervision duties legally. Administrative and financial rules were established according to the practice of the Company’s business operation. Through exercising of the shareholders’ rights, the Company controls the nominating and decision-making processes of the controlled subsidiaries. Thus the Company may control them effectively, promptly and constantly. Criteria of Major Information Internal Reporting was produced. The controlled subsidiaries’ strategy planning, annual planning, operation analysis, and information disclosure were under the Company’s control. Internal controlling systems have been established to effectively control the material issues and major risks. 2. Controlling over related transactions The Articles of Association of the Company has provided clear rules for the examination procedures of related transactions by the Board and Shareholders’ Meeting, waiving of voting by related directors and shareholders. According to the Guide for Internal Control System of PLC, the company has produced the Rules of Related Transactions to set out the regulations regarding classification, recognition, entering of contracts, and information disclosure. None of capital, assets, or other resources has been employed or transferred by the controlling shareholder. All related transactions were conducted under the principle of faithfulness, fairness, voluntary, and open. Information disclosing works were done according to relative regulations. No action was conducted which was harmful to the benefits of the Company and the shareholders. Overall, controlling over the related transactions was complying with the laws and regulations as well as the Guide for Internal Control System of PLC. 3. Controlling over external guarantee It has been stipulated by the Articles of Association and implemented according to the Share Listing Rules of Shenzhen Stock Exchange. Meanwhile the Company has produced “The Working Procedures of Financing and Guarantee”. Except for guarantees provided to the controlled subsidiaries, the Company made no external guarantee. It was complying with the laws and regulations as well as the Guide for Internal Control System of PLC. 4. Controlling over using of financing proceeds The Company has produced Administration Criteria of Financing Proceeds to govern the approving, saving, use, report, supervision, investment, and responsibilities of financing proceeds. It have been making sure the legal and save use of the proceeds, and relative information have been disclosed according to the regulations. 5. Controlling over capital The Company has produced Capital Administration Criteria, Financing and Guarantee Procedures, Reporting Rules of Material Financial Issues, and Administrative Rules of Account Receivable which composes a strict capital administration system. 6. Controlling over material investments Material investment operations were conducted under principles of legal, cautious, safe and effective. The Articles of Association has clearly set out the authorities of the Shareholders’ Meeting and the Board on approval of major investment operations. The Company has been focusing on its main businesses and made no material investment other than the main businesses so far. 7. Financial management The Company has produced its Financial Management Rules in accordance with the Company Law, Accounting Law, and Enterprise Accounting Standard. All accounting practices, procedures and responsibilities were clearly stipulated. Accounting computer system was constructed to assist internal control. The Company also introduced ERP system as the common platform for the management technique and coordinating of the internal administration. It has effectively increased the management efficiency and information interchange. The financial system of the Company was established and operated healthily and completely in accordance with the laws and regulations. 8. Information disclosure management The Company has produced the Information Disclosure Criteria, Internal Reporting of Material Information, Investor Relationship Management Criteria, and Investor Reception and Promotion Criteria. These has set out the extent, reporting, examining, disclosing, and secrecy processes of material information. China Securities Journal, Hong Kong Commercial Daily and www.cninfo.com.cn were assigned the official information disclosure medias. The Company also release its public information through its own website and intercommunicate with the investors. Reception of visitors and online road shows were conducted legally to ensure open and fair information disclosure. 9. Shareholding structure of the controlled subsidiaries 33% Heze Chenming Board Co., 51% Ltd. Shandong Chenming Power Plant Co., Ltd Shandong Chenming Xinli 34% 51% Power Plant Ltd. 75% Hailaer Chenming Paper Co., Ltd. 100% Shouguang Chenming Floor 100% Shouguang Chenming Co., Ltd. 76.73% Yanbian Chenming Paper Co., Ltd. Cement Co., Ltd. 49% Qihe Chenming Board Co., 100% Shouguang Chenming Mordern Logistics Co., Ltd. 100% Shandong Chenming Board Ltd. Co., Ltd. 51% 100% Shandong Chenming Paper Group Qihe Paper Board Co., Ltd. Shandong Chenming Paper Holdings Limited 98% Qihe Chenming Waste 20% Material Recycling Co., Ltd. 50.93% 31% Xiangfan Chenming Art Wuhan Chenming Hanyang Paper Co., Ltd. Paper Co., Ltd. 68% Shouguang Chenming Tianyuan Forestry Co., Ltd. 51% Wuhan Chenming New Type 100% Wall Material Co., Ltd. Juancheng Chenming Board Co., Ltd. (2005.06.06) 51% Wuhan Chenming Qianneng 70% Power Plant Co., Ltd. Shandong Yujing Hotel Co., Ltd. Chibi Chenming Paper Co., 20% Ltd. 31% 51% 100% Jiangxi Chenming Paper Co., Ltd. Nanchang Chenming Forestry Co., Ltd. 100% 100% Zhanjiang Chenming Pulp Co., Ltd. Zhanjiang Chenming Forestry Co., Ltd. 100% 100% Yangjiang Chenming Forestry Co. Ltd. Chenming (HK) Co., Ltd. 100% 99% Jilin Chenming Waste Material Recycling Co., Ltd. Jilin Chenming Paper Co., Ltd. 100% Jilin Chenming Machinery Co., Ltd. 75% Shouguang Chenming Art Paper Co., Ltd. 100% Fuyu Chenming Paper Co., Ltd. 3. (III) Implementation of internal control system The Company performs inspection and monitoring operation on implementation of internal control system. The planning department is in charge of the inspection and monitoring of the internal control system. The Company also inspect over the implementation of financial systems of subsidiaries an perform random auditing on the subsidiaries’ financial situations. 4. (IV) Overall assessment on the internal control system The Company believes that the internal control system has been designed and operated rationally, scientifically, and effectively. This has been proved by years of practice. No material fault exist in the system. The Company will keep the internal controlling system constantly reviewed and improved according to the relative laws and regulations. P. V. Assessment and awarding system for executives in the report term Assessments are done over the senior executives on both monthly and annual basis. Monthly assessments are upon the working performance, routine management, and discipline. It is carried out by way of cross assessment among the related departments. Results of monthly assessments are providing the basis for the annual assessment. The annual assessments are carried out by the Remuneration & Assessment Committee with considering of the results of monthly assessments and performances all over the year. 6. Chapter VI. Particulars about the Shareholders’ Meeting Q. I. The Shareholders’ Annual Meeting The Shareholders’ Annual Meeting 2007 was held on April 30, 2007. Proposals passed on the meeting were: work reports of the Board and Supervisory Committee of year 2006, financial settlement 2006, profit distribution plan 2006, proposal on employing of CPAs, proposal on renewing of Board and Supervisory Committee, proposal on issuing of H shares and overall revising of the Articles of Association, proposal about arrangement of retained profit before issuing of H shares, proposal on statement of use of proceeds from issuing of convertible bonds in 2004, and the proposal on providing guarantee to the controlled subsidiaries for bank credits. Relative resolutions were published on May 9 2007 by China Securities Journal, Hong Kong Commercial Daily and http://www.cninfo.com.cn. R. II. The Shareholders’ Special Meeting 1. The Shareholders’ 1st Special Meeting was held on April 1, 2007, mainly examined: Proposal on qualifications and conditions for the Company’s issuing of H shares, Proposal on placing shares in overseas market, Proposal on usages of the proceeds from placing of H shares, Proposal about requesting the shareholder’s meeting to fully empower the Board of Directors of the Company to handle the issuing of H- stocks. The resolutions were published on April 3, 2007 by China Securities Journal, Hong Kong Commercial Daily and http://www.cninfo.com.cn. 2. The Shareholders’ 2nd Special Meeting was held on September 12, mainly examined: proposal on composing of meeting criteria of the Shareholders’ Meeting, the Board, and the Supervisory Committee, the Related Transaction Criteria, the Independent Director Administrative Rules, revising of the Articles of Association, revising of the Articles of Association (draft), proposal on consigned loan of up to RMB1.5 billion, and proposal on repaying of short-term financing bonds. Resolutions were released by China Securities Journal, Hong Kong Commercial Daily and www.cninfo.com.cn dated September 13, 2007. 7. Chapter VII. Report of The Board Of Directors S. I. Business review 1. (I). Summary of Operation In 2007, the civil paper manufacturing industry experienced change of winter to spring. In the first half year, along with increasing prices of the raw materials, the manufacturing cost increased. And because the redundant manufacturing capacity accumulated in the previous term broke the balance of the manufacturing and supply, most products’ price went lower continuously; some countries setting up international protectionism barriers led the paper manufacturing industry go to the valley. According to the difficulties in the first half of the year, the management of the Company deployed measures: enhancing the management on purchasing, sale, accounting management, environment protecting and energy saving, administration and etc, emphasizing on the operation of new products, improving equipment operation quality, exploiting the civil and aboard market. According to the data of the first half year of 2007 of the National Bureau of Statistics of China, in the first half year, the production volume of the paper and paper board slowed down which obviously lower than that of the last year; and the stock of products increased; the loss rate of the losing enterprise increased. And the industrial centralization showed out obviously, according to these facts above, the management figured firmly: “the national energy saving, consumption reducing, environment protection and waster reducing policies, and the macroscopical policies on eliminating slow enterprises in the paper manufacturing industry in the “11th five years” period further improved the confidence of the future progress in the paper manufacturing industry.” In the second half year, along with the enhancing of the national macroscopical adjustment especially on enterprises with high energy consumption and high waste distribution, the government continuously worked out a series of policies on energy saving and reducing waste distribution and eliminating slow enterprises which required the paper manufacturing industry to reduce 2300000 tons manufacturing capacity which centralizing on the intermit and low end culture paper made by grass, the elimination caused serious absence of culture paper and high price, which led to little difference between intermit and low end with the high end culture paper and requirement moved to high end paper with price increasing. And according the customs head office’ data, the national importing of paper and paper board decreased year by year from 2005, especially the high end paper such as light-weight coated paper and coated art paper, carton board paper and board paper. In the recent years, along with the manufacturing capacity expanding of the large paper manufacturing enterprise, more international fist class paper manufacturing equipments were imported in, the national paper manufacturing level increased highly and some data showed most volume of the exporting paper increased compared to the last year such as newsprint paper, light weight coated paper, coated art paper and carton board paper and etc. the decreasing of paper importing and increasing of paper exporting improved the civil manufacturing and supply to some extend, the reason of price increasing of carton board paper, coated art paper and newsprint paper changed from cost to requirement. The management figured: in 2007, although the paper manufacturing material price was still high, the increasing rate slowed down, and the civil and the aboard competition was still tough, the manufacturing capacity of paper and paper board increased with a low increasing rate in 2007 compared to the last year. Along with the enhancing of national policy of energy saving and waste reducing, some slow enterprises were eliminated, industrial centralization showed out further, affected by the facts above, the Company had high developing period in 2007. The Company’s manufacturing scale expanded along with new product of some new constructed projects, and the Company enhanced the management on sale which led to high increasing sale, and with the price increasing of main products, the income of 2007 increased highly. 1. Summary of operation During the period, the Company implemented machine made papers of 2870000 tons with a increasing rate of 18.11% which increased 440000 tons compared to the last year, the main operation income was RMB15,164,742,500 with a increasing rate of 26.55% which increased RMB3,181,177,900 compared to the last year, the main business cost increased RMB2,366,271,700 with a increasing rate of 24.37%, the business profit and net profit attributable to the shareholders of the Company were RMB1,284,844,000 and RMB967,636,200 respectively with increasing of 96.33% and 171.12% compared to the last year. The main reasons of increasing: the Company’s 300,000 tons level calendar-colored paper production line and Jilin Chenming annual 180,000 tons level production line began production in the report term, and at the same time the manufacturing capacity increased stably by efficient measures of old production line upgrading and enhancing management. The main papers of news paper increased 270,000 tons and woodfree tape increased 40,000 tons and other paper increased about 90,000 tons, the total paper increasing was 440,000 tons, and the prices of the Company’s main paper products increased highly at the 2nd half of 2007, which led to significant increasing of main business income, business profit, and net profit. On the other hand, due to initializing of the new accounting standard, the Company adjusted the initial figures of the beginning of year (including net profit attributable to the shareholders of the listed company). For details please see the Financial Report attached herein. 2. Project construction The Company continuously persisted healthy developing, scientific devotion, optimizing structure and principals of accuracy, fastness, goodness, focusing on on-building projects on the aspects of human resource, resource, finance, which assured projects smooth progress. (1) Annual production 98,000 tons office deinked waste paper pulp project. The building construction and equipments installation finished in 2007 and the project would begin to product officially at the end of January 2008. (2) 120,000 tons cast coated paper project. The building construction was at the end procedure, now the equipments installation was in procedure, and will begin production in Jun 2008. (3) 30,000 tons/day paper-manufacturing waste water recycle project. The construction and equipments installation was finished, and began production. The recycled waste water was in accordance with the drinking water standard. (4) Shandong Yujing Hotel project. Construction, decoration and equipments debug was basically finished, the management was ready , the hotel was official opened in April 2008. (5) Zhanjian Chenming 700,000 wood pulp project. The main supplier was ready, cleaning the factory, internal and external roads construction, employment, rules construction was in procedure, which helped the further project beginning construction; has defined the tree planting task and target to fasten the tree planting speed with evaluation measures to implement contracted 300,000 Chinese acre units. And fasten the cooperation of Forestry with Leizhou Forestry Bureau to consolidate the basis for Zhanjian wood pulp project. 3. Management and innovation (1) In 2007, the Company conducted manufacturing, sale, management joint meeting system, the chairman of the Board convoked joint meeting every month with the management, subsidiaries’ main manager, the managers above prime representative of sale districts, analyzed strictly the economic operation affairs of every product type and equipments, searched and presented issues, and solved the issues separately with regulating measures, on the weak management procedures of the Company and the subsidiaries, the company established professional groups of technology, environment protection, energy saving, equipment, dispatch, cost, electricity, safety to enhance professional management to help the companies to find and solve the existing issues, which improved the management level effectively. (2) During the period, coordinating with national technology centers and post doctor research station, the Company enhanced cooperation with international first class enterprises of French Arjowiggins and South Africa SAPPI, and fasted the innovation steps, developed low weight one side coated art paper, fruit packet paper and anti-oil paper step by step. Also the Company has optimize product structure, improved the market competition. And experimentally developed Environmentally-sound release coated raw paper, fruit package raw paper, snow wood-free paper, six times coated art paper, has gotten the technical references and technology data to support further beginning production. The Company enhanced the trial and promotion of the cloth-coat technical recipe which improved products quality and reduced manufacturing cost by adjusting technical recipes, the light-coated paper factory reduced the manufacturing cost about RMB100 for each ton product by upgrading the part equipment which had constrained the paper manufacturing speed, which increased the paper manufacturing speed and increased the manufacturing capacity; and the coated art paper upgraded the transporting part of the paper machine, the transporting speed increased from 1300m/minute to 1400m/minute. On energy saving and waste reducing, the Shouguang area part of the Company consumed a little more than 700,000 tons standard charcoal units, the energy consumption for RMB10,000 was 1.032 tons standard charcoal units which decreased 16.23% compared to that of 2005, saved 142,300 tons standard charcoal units, the energy consumption for RMB10,000 and main product unit consumption was in the top three among one thousand civil enterprises. During the period, the company’s “Chenming” trade mark was referred as the “China famous brand” by the State Administration for Industry and Commerce. The Company was honored chosen into “China top 500 enterprises in 2007” by Chinese Enterprises Association and Chinese Enterpriser Association, ranked 201, and at the same time ranked 101 in the “China Top 500 Manufacturing Enterprise”. The Company was honored chosen into “Chinese Top 100 Listed Companies” by a influential media. The Company was honored as the Excellent Foreign Invested Enterprise, Customs Honest Enterprise, National excellent Culture construction Light-industry Group, Shandong Light-industry Famous Enterprise and etc. The four products of gelatine printing paper, feather-weight coated paper, coated art paper, coated card paper were ranked as “National inspection-exempt product” by the General Administration of Quality Supervision, Inspection and Quarantine. The Company was honored as “Shandong Advanced Enterprise on Comprehensively Utilizing Resource” The chairman of the Board Chen, Honguo was honored the National Labor Day Medal, and two employees were honored as the National Light Industrial Model Worker. 2. (II) Major business and operation situation The company is in the paper manufacturing industry, which is a light-industry. The Company is mainly engaged in production and sales of machine-make paper and paperboard, papermaking raw materials, papermaking machinery, power and heat supply. The major product lines are: art paper, light-coated paper, news paper, kraft liner board, double-offset paper, cartoon board, and writing paper. 1. Major business segment In RMB10 thousand Distribution on industries Major Increase/decrease of Change of major Decrease/ increase of On industry or Major business Major business profit major business turnover business cost over major business profit product turnover business cost ratio (%) (%) last year over previous year Machine-made paper 1,385,561.05 1,104,007.94 20.32 28.53 26.22 1.45 Power supply 6,899.59 5,892.48 14.60 15.22 94.55 -34.82 Construction 86,990.96 72,736.37 16.39 6.39 7.85 -1.13 materials Chemical products 9,200.41 4,589.15 50.12 22.31 -19.73 26.12 for paper making Paper machines 36.50 - - - Others 27,822.24 20,222.21 27.32 -80.12 53.71 4.91 Total 1,516,474.25 1,207,448.15 20.38 26.55 24.37 1.39 Distribution on products Lightweight coated 18.66 paper 188,980.93 153,716.55 5.07 3.50 1.24 Duplex press paper 207,208.52 161,857.60 21.89 23.70 20.66 1.97 Writing paper 25,327.34 19,487.61 23.06 -30.98 -29.64 -1.47 Art paper 231,166.53 177,418.22 23.25 22.44 20.03 1.54 News press paper 198,152.39 160,148.88 19.18 97.43 97.94 -0.21 Paperboard 91,694.42 76,724.80 16.33 18.21 17.75 0.33 White paper board 235,138.35 193,050.77 17.90 18.12 16.93 0.83 2. Geographic segment (RMB0’000) Regions Major business turnover Increase/decrease of major business turnover (%) Mainland China 1,155,036.02 30.40 US 25,006.27 -25.62 HK 30,326.07 42.06 Japan 33,418.94 -14.39 South Africa 29,253.01 26.81 Other countries 112,520.73 49.70 Total 1,385,561.05 28.53 3. Major suppliers and clients The purchasing from the top 5 suppliers was amounted to 7.55% of the total purchasing of the year. The sales to the top 5 clients was amounted to 5.03% of the total sales of the year. 3. (III) Statement on the major changing in company asset structure and expenses compare with the same period of last year In RMB Yuan year 2007 Year 2006 Ratio in total assets of Difference Items Portion in total assets of At the end of term 2007- At the end of term 2006 Notes receivable 1,676,684,054.95 7.62% 939,705,242.42 4.57% 3.05% Account receivable 1,660,020,696.84 7.54% 1,720,291,295.31 8.37% -0.83% Inventories 1,744,492,612.36 7.93% 1,841,184,203.10 8.96% -1.03% Property investment 29,902,980.19 0.14% 30,601,525.68 0.15% -0.01% Long-term share equity 96,289,936.43 0.44% 85,801,487.18 0.42% 0.02% investment Fixed assets 13,243,156,039.93 60.17% 9,523,489,397.32 46.32% 13.84% Construction in process 904,753,634.02 4.11% 4,111,992,678.09 20.00% -15.89% Bank loan 8,317,941,137.54 37.79% 6,575,783,590.76 31.99% 5.80% Other current liability 506,212,916.67 2.30% 2,026,019,444.42 9.85% -7.55% About the major factors of the changes (1) Note receivable: In the report term, the Company’s 300K ton SC-paper line was put into production, the productivity was expanded. For those frequent buyers, the Company used relative looser payment conditions. Short-term acceptance drafts are acceptable from lump-sum buyers with tight money. (2) Fixed assets: In the report term ,the 300K ton SC-paper line and 180K ton LWC paper line were completed and transferred into fixed assets. (3) Construction in process: major change in the report term was caused by operation of the 300K ton SC- paper production line and Jilin Chenming 180K ton LWC paper production line, which have been completed in the report term and transferred into fixed and the construction in process were decreased thereof. Measurement properties adopted by the Company in accounting of main assets: The Company adopts historic costs at the measurement basis, but the followings are measured at fair value: (1) Financial assets accounted at fair value and accounted into current income (See note 2 of the Notes to the Financial Statements) (2) Consumable biological assets (See note 17 of the Notes to Financial Statements) Statement of influence of the change in assets which are accounted at fair value: Items Project Way to obtain Balance at Balance at Influence on fair value Dec. 31, 2007 Dec. 31, 2007 current income Transactional Derivate Quotation of 5,955,480.00 5,955,480.00 financial financial financial assets instrument organization Consumable Consumable Note (1) 92,159,871.29 19,514,433.24 24,415,400.31 biological forestry assets assets For transactional financial assets and consumable biological assets, the Company adopts the following methods in estimation of fair values: (1) Derivate financial instruments: the fair value of long-term foreign currency contracts are decided at the difference between the current value of contract price and the current price. The Company adopts the difference of exchange rate in the contract and the exchange rate at the same deliver day with December 31, 2007. (2) Consumable biological assets: Independent appraisal agent will take the location of the biological assets, and the price in the active market in Zhanjiang and Fujian to decide the market value of the wood. In estimation of the future cash flow, they will consider the following factors: 1) Nominal price of the predicted harvest. 2) Predicted wood income will depend on the experts opinion and judgment on the anticipated wood stock and production rate. 3) Predicted cost of raising the existing biological assets. 4) Predicted sales cost will include the harvest cost and shipping costs. 4. (IV) Notes to major change in gain/loss comparing with the previous year in RMB Items Accumulated this year Accumulated last year Increase (+) and decrease (-) Turnover 15,164,742,450.26 11,983,464,568.89 26.55% Operation cost 12,074,481,475.02 9,708,209,802.96 24.37% Operational expenses 783,289,341.85 678,174,266.91 15.50% Financial expenses 392,163,050.56 451,449,468.40 -13.13% Investment income -9,461,550.75 80,100,746.64 -111.81% 270,795,013.27 100,741,186.90 168.80% Income tax expenses Net profit attributable to the shareholders of the parent co. 967636172 .39 356907182.90 171.12% Major factors about the changes (1) For changes of turnover, business costs, business profit and net profit attributable to the shareholders of the parent company please see the 1st part of Overall business situation in the report term. (2) Operation costs increased by 105.12 million, which was a 15.5% over the same period of last year. Which was caused by increasing of freights. (3) Financial expenses has decreased by RMB59.29 million, which was a decrease of 13.13% from the same period of previous year, which was caused by appreciation of RMB and movement of foreign currency rates, thus the exchange gain has increased. (4) Investment income has decreased by RMB89.56 million, which has decreased by 111.81%. This was caused by gains from disposal of controlled subsidiaries in 2006. (5) Income tax expenses has increased by RMB170.05 million, which has increased by 168.8%. This was caused by operation of the new projects and the sales and gross profit have increased thereof. 5. (V) Cash flow generated by business operation in the report term In RMB Yuan Items Current term Same period of last term Increase (+) and decrease (-) Net Cash flow generated by business operation 31.3% 1,324,263,125.01 1,008,558,176.84 Net cash flow from investment -977,001,495.03 -2,798,207,813.23 65.08% Net cash flow from financing -512,996,336.43 1,660,483,753.34 -130.89% Note: In the cash flow statement, the bank accepted notes received and not expired are not reflected in the “Cash received from providing of goods and services” as cash inflow. Correspondingly, the bank accepted notes not expired are not reflected in the “Cash paid for accepting goods and services” or investment by notes in “Cash paid for purchasing of fixed assets, intangible assets, and other long-term assets”. Major causes of change: (1) Increasing of net cash flow from business operation was caused by operating of the new projects and the profit has increased. (2) Increasing of net cash flow from investment was caused by: most of the investment in the 300K ton SC- paper line and 180K ton LWC paper line was made in 2006. (3) Decreasing of net cash flow from financing was caused by proceeds of the short-term bonds of RMB2 billion issued in 2006 was received in the report term. 6. (V) Cash flow generated by business operation in the report term In RMB Yuan Items Current term Same period of last term Increase (+) and decrease (-) Cash received from providing of goods and services 17,559,157,609.86 10,769,181,718.98 63.05% Tax returned 75,372,967.36 10,902,714.70 591.32% Other cash inflow related to operation 118,630,782.11 190,595,684.89 -37.76% Sub-total of cash inflow from business activities 17,753,161,359.33 10,970,680,118.57 61.82% Cash paid for purchasing of merchandise and services 13,113,761,335.78 8,003,818,969.28 63.84% Cash paid to or paid for the employees 456,658,601.33 412,570,576.56 10.69% Taxes paid 1,093,026,679.69 836,855,006.21 30.61% Other cash paid related to operation 897,589,922.49 708,877,389.68 26.62% Sub-total of cash outflow from business activities 15,561,036,539.29 9,962,121,941.73 56.20% Net Cash flow generated by business operation 2,192,124,820.04 1,008,558,176.84 117.35% 7. (VI) Business performance of major controlled subsidiaries Business Share Registered Capital Name of the subsidiary Main products Net profit Property portion capital scale paper Wuhan Chenming Paper Holding Ltd. 50.93% Writing paper, news paper 21,136.70 213,739.13 15,275.62 making Shandong Chenming Paper Group paper 100% Kraft liner paper 37,620.00 126,224.85 11,468.68 Qihe Paper Board Ltd. making production and sales of Shandong Chenming Power Plant Ltd. power plant 51% 9,955.31 73,296.58 8,086.07 power and heat paper News paper and light coated Jilin Chenming Paper Co., Ltd. 100% 40,000 225,109.27 -6,294.09 making paper paper Chibi Chenming Paper Ltd. 35.7883% Duplex press paper 17,741.94 46,619.70 5,191.18 making paper USD172 mil. Jiangxi Chenming Paper Ltd. 51% coated paper 365,973.93 15,107.88 making Pulp and chemistry Yanbian Chenming Paper Ltd. Pulp 76.73% 8163.3 34,715.82 4,922.03 products 8. (VII) Statement on single subsidiary whose net profit (or investment gains) takes over 5% of the Company’s net profit In RMB 10 thousand Main Major business Net profit attributable to Portion in the Company’s Name of companies turnover business Net profit the Company net profit % profit Wuhan Chenming Paper Holding 164,181.19 33,200.18 15,275.62 7,779.87 8.04% Ltd. Shandong Chenming Paper 157,808.9 25,186.29 11,468.68 11,468.68 11.85% Group Qihe Paper Board Ltd. Jiangxi Chenming Paper Ltd. 193,572.28 36,488.04 15,107.88 7,705.02 7.96% T. II. Prospect 1. 1. Industrial trend and future development plan The Company is engaged in paper making industry of light industry. As one of the important basic material industry, paper-making industry is featured high-tech, capital intensive, and large scale. At present, the domestic paper industry is in the stage of high speed development, the annual consuming of paper is growing faster along with the growth of GDP. In June 2007, the national government has produced the “Overall plan of energy saving and pollution reducing”, which said that 6.5 million ton of the out-of-date paper mills will be closed down in the period of “11th 5-year-plan”. In which, 2.3 million will be closed in 2007. At the end of October 2007, National Development and Reformation Committee released the “Paper-Making Industry Development Policies”, which setout detailed rules for the development target, administrative mechanism, development pattern, structural adjustment, resource saving, environment protection, investment activities, market entrance, market administration and consumer ideology. These have provided powerful support for better market order and merit development environment. As the judgment of the executive of the Company, the whole industry will have these main features in coming years: domestic paper-making industry is in merit development, and the GDP of the country will keep growing at a high and steady speed, this will bring better prospect for the whole industry; as the second large producer and consumer country, the average consuming of paper products is far lower than those developed countries. Thus paper making industry has plenty room of development. At present the domestic paper industry is primarily moving toward large scale, specialization, and globalisation. Integration of forestry, pulp, and paper-making will be the future trend of the industry. As the leading paper mill enterprise, the Company will expand its global market share and realize integration of forestry, pulp-making and paper-making. To keep the Company’s productivity in a constant growth, the management of Chenming figured out the following policies: (1) Break through the bottleneck of raw material supplying, enforce cost control Attaches great importance to the construction of Zhanjiang Project. The 3000 thousand MU forest base project in Zhanjiang has been pushed forward on schedule, the preparation works have basically accomplished, and the constructions will be started in the 1st half of 2007. Upon accomplish of the project, the raw material structure of the Company will be formed mainly by self-made pulp and wasted paper as the secondary input. The imported pulp will be further decreased, which will release the Company from the restriction of upriver resources. This will strongly support the consistent growth of the Company and has an strategic influence on the Company’s future. (2) Devote in developing of high-end product developing and production, lift up domestic and overseas market share Depending on the national level R&D center and Post-doctorial workstation, the Company will further reinforce the R&D in developing of new products and improving of quality. Reinforce overall cooperation with international manufacturers, to introduce advanced administration, production and sales experiences. Keep enlarge the investment to expand productivity, construct several high-tech production lines to lift up product class, push the company up to the leading row in the global industry. (3) Attach great importance to environmental protection and target on energy saving and concordance development The Company keeps promoting the concept of “environment protection prior to the development of enterprise”, aiming to make the Company an energy efficiency and environment friendly enterprise. Along with the enforcing of environment related national policies, the Company will accelerate the construction of recyclable economy with focusing on material recycling and pollution control. (4) Keep increase business operation efficiency The Company will further optimize the production flow and equipment, expand productivity and quality. Further improve management system including consolidated sales and purchase system, as well as the consolidation of financial instruments to lower financial costs. (5) Fully adopt the advantage of capital operation, realize low cost expanding The paper industry of China is now in the process of integration. For purpose of rapid expanding at low costs, and fully use the advantage of capital operation, the company will keep searching for appropriate object to takeover or merger to serve the Company’s geographic layout. 2. 2. Business plan for year 2008 The management believes that, following with the elimination of out-of-date productivities and enforce of energy policies, and many other factors such as the Olympic Games in Beijing, the prospect of the industry will still at an inclining trend. It will be another year of rapid growth. According to the Company’s development strategy, 2008 will be the year to switch to the fast lane of development and structural adjustment. Issuing of H shares will be one of the focuses. The target will be output and sales of over 3 million ton, revenue of RMB18 billion, and RMB1.8 billion of operation profit. (1) Accelerate structural adjustment Adjustment will be done on products with lower value adding and higher energy consuming. Those out-of- date equipment and technologies will be eliminated. Construction of new projects will be accelerated to lift up the class of product lines. Research will be reinforced to introduce new project reserves. (2) Reinforce innovation Against the national level R&D center and post-doctorial workstation, along with the cooperation with international leading manufacturers, the Company will fully accelerate the introducing of global state-of-art technologies and resources. Reconstruction of the pulp making lines will be accelerated to further optimize the raw material structure. New products such as direct coat paper, Semigloss Paper, re-stickable paper, decoration paper, original wall paper, and SC-B paper. (3) Reinforce energy saving and pollution reduction Attach great importance to water consuming reduction. New techniques and equipment will be employed to increase recycling of water. The 30K ton/ day wastewater processing yard will be well managed to increase water recycling rate. It will be promoted to the whole company as soon as the project is mature. Processing of solid pollution wastes will also be reinforced and target at saving 44.6K ton standard coal, and energy consuming on RMB10 thousand will be reduced by 5% from that of the 2007. (4) Accelerating of the integration of forestry, pulp making, and paper making Carefully organize and coordinate to speedup the construction of Zhanjiang Chenming project. Target is set on accomplishing 80% of equipment contracting and 20% of installation. Forest construction will be increased by 400K Mu. A production chain will be formed with forestry, pulp, and paper making. (5) Reinforce trademark promotion and expanding of domestic and overseas markets Enforce marketing by lifting up qualities to the best level of the industry. Along with cooperation with global leading manufacturers, the Company will reinforce the establishing of a global sales network. (6) Reinforce capital operation, carry forward issuing of H shares To support the construction of pulp project in Zhanjiang, the Company will further develop financial resources. It has been decided to issue H shares. The Board of Directors will manage the preparation works according to the authorization by the Shareholders’ Meeting. This financing approach will significantly improve the Company’s capital-liability layout, and completely satisfy the need of capital in construction of pulp project in Zhanjiang. It will inject power to the consistent developing of the Company. 3. 3. Risk factors in future development and achieving of business targets To prevent economic overheating, the central government has adopted tight monetary policies. Cash flow problem has become the challenging factor and will therefore accelerate integration of the paper-making industry. The Company will properly use its good reputation and wide financial resources to resolve the risks brought by tight monetary policies. 4. 4. Future requirements of capital, resources and application plans Following with the expanding of business scale, especially the construction of Zhanjiang Project with investment of RMB9.432 billion. The Company will face a rapid growing of demand in capital input. As one of the largest paper- making enterprise with A and B shares issued to the market, the Company has merit reputation and wide financial resources. (1) When the proposal of issuing H shares was adopted by the Shareholders’ Meeting, the Board of Directors will go all out to carry forward the works. It is expected to obtain HKD3 billion of proceeds through issuing of the H shares, and 90% of the proceeds will be used in Zhangjiang project. (2) A bank group led by National Development Bank will provide RMB6 billion of long-term loans which will support the construction of Zhanjiang project. (3) Reinforce market and sales force. Along with expanding of sales, the Company will speedup capital circulation by clearing of debts. (4) To satisfy the need of operation of the controlled subsidiaries, the Company has applied for RMB18.05 billion of loans. (5) By issuing of short-term bonds to banks, the Company will further reduce financial costs and optimize the liability structure and support the working capital. U. III. Investment in the report term 1. 1. Using of proceeds from issuing of shares in the report term No using of proceeds from financing in the year, or carried down from previous years. 2. 2. Application of non-raised fund in the report term (1) The project of 300K ton SC-paper project and auxiliary projects are planned to be invested with RMB3.926 billion. As of the end of the report term, the investment accomplished was RMB3.095 billion. The production line has been put into operation and realized RMB110 million of net profit in the report year. The project was financed by the Company’s own capital and bank loans. (2) 30K ton / day waste water process and recycling project was invested by RMB35.58 million, and was financed by the Company itself. This project has been put into operation at the end of report term, which has effectively resolved the problem of upgrading of water outlet, and saved water resources. (3) 120K ton art paper project was invested with USD49 million, which was financed by the Company’s own capital. As of the end of report term, RMB218 million of investment has accomplished. At present the project is in equipment installation stage, and will be put into operation in June 2008. (4) 98K ton waste paper deink pulp project was invested with RMB340 million which as financed by the Company itself. As of the end of report term, RMB193 million has been invested and the project will be put into operation in January 1 2008. (5) Yujing Hotel project was invested with RMB230 million, and financed by the Company itself. As of the end of report term, RMB118 million has been invested, and the hotel will launch for business in April 2008. 3. 3. Particulars about establishing of controlled subsidiaries in the report term (1) Shouguang Chenming Modern Logistics Co., Ltd. was incorporated in Shouguang Shandong with registered capital of RMB10 million and fully funded by the Company. Its main businesses are: shipping, warehousing, custom clearing agency, inspection agency, import and export of technologies and goods within the permission of the country. (2) Shouguang Chenming Art Paper Co., Ltd. was founded by the Company and Arjowiggins HKK2 Limited in Shouguang Shandong with registered capital of USD20 million. In which the Company inputted USD15 million to hold 75% of the shares, while Arjowiggins HKK2 Limited invested RMB5 million to hold 25% of the shares. Its main businesses are manufacturing and sales of the Company’s products. (3) Fuyu Chenming Paper Co., Ltd. was incorporated on October 15, 2007 with registered capital of RMB20 million which was fully funded by the Company. The Company is holding 100% of the shares. Establishing of this company was to lease and operation of the assets of Heilongjiang Sida Paper Co., Ltd. V. IV. Deloitte Touche Tohmatsu CPA Ltd. has issued standard Auditors’ Report without qualified opinion on the Financial Statements of the year prepared by the Company. W. V. Daily work of the Board 1. 1. Particulars about the board meetings and resolutions The Board convened 8 meetings in the report term. (1) The 20th meeting of the 4th term of Board was held on March 16, 2007. Proposals regarding issuing of H Shares were examined at the meeting. Resolutions were announced by China Securities Journal, Hong Kong Commercial Daily and www.cninfo.com.cn dated March 17, 2007. (2) The 21st meeting of the 4th term of Board was held on April 6, 2007. The proposal about the Annual Report 2006, electing of the new term of Board, revising of the Article of Association, allocation of retained profit, application of overall credit from the banks in 2007, providing guarantee for subsidiaries for bank credits, investment in construction of waste paper deink project, establishing of Shouguang Chenming Modern Logistics Co., Ltd., dispose of share equities of Zhanjiang Forestry and Yangjiang Forestry and increase the shareholding in Zhanjiang Chenming, remuneration plan 2006 raised by the Remuneration and Assessment Committee, proposal on initial figures of financial statement of year 2006 under IAS, and proposal to convene the Shareholders’ Annual Meeting 2006. Resolutions were announced by China Securities Journal, Hong Kong Commercial Daily and www.cninfo.com.cn dated April 10, 2007. (3) The 22nd meeting of the 4th term of Board was held on April 26, 2007. Proposals regarding initializing of the New Enterprise Accounting Standard were examined at the meeting. Resolutions were announced by China Securities Journal, Hong Kong Commercial Daily and www.cninfo.com.cn dated April 30, 2007. (4) The 1st meeting of the 5th term of Board was held on April 30, 2007. Proposals regarding electing of Directors and employing of executives, adjustment of professional committees, and producing of meeting criteria of the Board and Shareholders’ Meeting were examined at the meeting. Resolutions were announced by China Securities Journal, Hong Kong Commercial Daily and www.cninfo.com.cn dated May 9, 2007. (5) The 2nd meeting of the 5th term of Board was held on June 29, 2007. Proposals examined and passed at the meeting were: revising of Articles of Association, improving of internal control system, entrusted loan up to RMB1.5 billion, and providing guarantee to Chenming (HK) Co., Ltd. for bank credits. Resolutions were announced by China Securities Journal, Hong Kong Commercial Daily and www.cninfo.com.cn dated June 30, 2007. (6) The 1st special meeting of the 5th term of Board was held on July 6, 2007. Proposal examined at the meeting was the self-inspection report and rectification plan. Resolutions were announced by China Securities Journal, Hong Kong Commercial Daily and www.cninfo.com.cn dated July 10, 2007. (7) The 3rd meeting of the 5th term of Board was held on August 23, 2007. Proposals examined at the meeting was the Interim Report 2007, issuing of short-term bonds less than 40% of the net asset, construction of Qihe Chenming’s 60K ton / year middle-high class household paper project, construction of 30K ton/day waste water processing project, proposal on establishing of a joint venture to develop the forestry resources of Leizhou Foresty Bureau together with Zhonglin Co. and Zhanjiang State-owned Asset Operation Co., proposal to establish Shouguang Chenming Art Paper Co., Ltd. together with Arjowiggins HK Limited, proposal to revise the Articles of Association (Draft), proposal to employ CPAs, secretary of the Board, authorized representatives, and valid consultants, change of executives, and convening of the 2nd shareholders’ special meeting 2007. Resolutions were announced by China Securities Journal, Hong Kong Commercial Daily and www.cninfo.com.cn dated August 25, 2007. (8) The 4th meeting of the 5th Board was held on October 28, 2007. Proposals examined at the meeting were the 3rd Quarterly Report of 2007, the Rectification Report on Special Administrative Improvement Operations, and proposal to invest in Shouguang Mihe Water Service Co., Ltd. and leasing of assets of Heilongjiang Sida Paper Co., Ltd. Resolutions were announced by China Securities Journal, Hong Kong Commercial Daily and www.cninfo.com.cn dated October 30, 2007. 2. 2. Execution of the resolutions of shareholders’ general meeting by the Board The Board of Directors has been executing its legal duties provided by the Shareholders’ Meetings and the Articles of Association with diligence. Under the authorization of the Shareholders’ Meetings, the Board conducted the following works: (1) On April 1, 2007, as authorized by the 1st shareholders’ special meeting 2007, the Board was fully responsible to carry out works related to issuing of H shares. In the report term, the Board had carried out the works actively. On February 25, 2008, the Company has received the “Approval for Shandong Chenming Paper Holdings Ltd. to Issue Foreign Shares in Overseas Market” issued by CSRC, which means the Company is approved to issue shares in overseas market and list in Hong Kong Exchanges and Clearing Limited. Related details were announced by China Securities Journal, Hong Kong Commercial Daily and www.cninfo.com.cn dated February 26, 2008. At present, issuing and listing of shares in Hong Kong Exchanges and Clearing Ltd. are subject to the approval of Hong Kong Exchanges and Clearing Ltd. (2) Implementation of profit distribution plan of year 2006 As approved by the Shareholders’ Annual Meeting 2006, the profit distribution plan 2006 was: upon the total capital share of 1,365,670,155 shares at the end of 2006, RMB1.20 of cash dividend will be distributed to each 10 shares of the entire shareholders (tax included). Totally RMB163,880,418.60 will be distributed as cash dividend (tax included). The dividend will be distributed upon the substantial capital shares at the registration day. For the Company is in the convertible period of the bonds, the total capital shares can be increased, though the Company will still distribute the dividend at RMB1.20 upon each 10 shares (tax included). Therefore the practical dividend may possibly exceeds RMB163,880,418.60 The Profit Distribution Plan of Year 2006 was released by China Securities Journal, Hong Kong Commercial Daily and www.cninfo.com.cn dated June 21, 2007. The profit distribution plan was implemented with registration day for A shares of June 26, 2007, and for B shares of June 29, 2007. 3. 3. Work report of the Auditing Committee of the Board There were 5 members of the Auditing Committee, including 4 independent non-executive directors and 1 non- executive director. The chief of committee was undertaken by an independent non-executive with professional accounting background. According to the regulations provided by CSRC and SSE regarding the works of Auditing Committee, the Auditing Committee performed the following duties: (1) Before the CPAs started working with the Company, the Auditing Committee convened meetings along with the CPAs and the financial departments of the Company, read the annual auditing working plan for 2007 and relative materials. The schedule of auditing works of year 2007 was decided together with Deloitte Touche Tohmatsu (Shanghai) CPA Ltd. (2) Read the initial financial statements prepared by the Company carefully and issued favorable opinion. (3) Since the CPAs entered the Company, the Auditing Committee conducted active communication with the CPAs and issued urge letters to make sure the Auditors’ Report would be provided on time. (4) Upon issuing of primary opinions by the CPAs, the Auditing Committee reviewed the financial statements again, and deemed that the financial statements are reflecting the overall situation of the Company frankly, accurately, and completely. (5) At the 1st meeting of the Auditing Committee, the Auditing Committee examined the work report of the CPAs on the auditing works they’ve done. 4. 4. Work report of the Remuneration and Assessment Committee The Remuneration and Assessment Committee was setup under the Board, which is in charge of the assessment on the directors and executives and produce the remuneration plan. It reports to the Board of Directors. In the report term, the Committee produced the Annual Remuneration Plan 2006 for the directors and executives and submitted to the Board of Directors. X. VI. Profit distribution plan of year 2007 As audited by Deloitte Touche Tohmatsu CPA Ltd., for year 2007, the net profit in the consolidated statements was RMB1,218,541,189.29, in which the net profit attributable to the shareholders of the parent company was RMB967,636,172.39, the net profit in the parent company statements was RMB810,513,519.05. According to the Articles of Association, RMB81,051,351.9 was provided as statutory reserves, thus the distributable profit realized in year 2007 was RMB886,584,820.49, less dividend paid for year 2006 of RMB204,761,512.92, plus the retained profit of RMB1,894,827,041.81 at the beginning of year after adjusted, the distributable profit at this time was RMB2,576,650,349.38. Upon the total capital shares of 1,706,345,941, RMB1.6 (tax included) of cash dividend will be distributed to each 10 shares. Totally RMB273,015,350.56 (tax included) will be distributed. Accounted of 30.79% of the of the net profit attributable to the shareholders of the Company in the consolidated financial statements after deducting of statutory reserves, and 37.43% of the net profit of the parent company’s financial statements after deducting of statutory reserves. The Balance of RMB2,303,634,998.82 will be retained over to next year. 8. Chapter XIII. Report of the Supervisory Committee Y. I. Performing of duties In the report term, the whole supervisors were performing there duties in accordance with the Company Law, the Articles of Association, Meeting Criteria of Supervisory Committee, and under the principle of diligent. They monitored the legal operation of businesses, finance, and related transactions of the Company and inspected the subsidiaries regarding their accounting, purchasing of raw materials, sales of goods, and related transactions. They have been supporting the legal operation and healthy development of the Company. Z. II. Meetings of the Supervisory Committee 1. The 8th meeting of the 4th term of Committee was held on April 6, 2007. The proposal about the Annual Report 2006, proposal on initial figures of financial statement of year 2006 under IAS, and proposal to elect the new term of Supervisory Committee. Resolutions were announced by China Securities Journal, Hong Kong Commercial Daily and www.cninfo.com.cn dated April 10, 2007. 2. The 1st meeting of the 5th term of Supervisory Committee was held on April 30, 2007. Proposals adopted at the meeting were the election of Chairman of Committee and the Supervisory Committee Meeting Criteria. Resolutions were announced by China Securities Journal, Hong Kong Commercial Daily and www.cninfo.com.cn dated May 9, 2007. 3. The 2nd meeting of the 5th term of Supervisory Committee was held on August 23, 2007. The Interim Report 2007 was examined at the meeting. 4. The 3rd meeting of the 5th term of Supervisory Committee was held on October 28, 2007. The 3rd Quarterly Report 2007, the proposal about leasing the assets of Heilongjiang Sida Paper Co. ,Ltd. were examined at the meeting. Resolutions were announced by China Securities Journal, Hong Kong Commercial Daily and www.cninfo.com.cn dated October 30, 2007. AA. III. Independent opnions of the Supervisory Committee 1. Operation According to the Law (1) In the report term, the Company has been conducting its businesses according to the Company Law, Securities Law, Articles of Association and relative national regulations. Information disclosures were conducted under the principles of truthfulness, completeness, accuracy, and duly. No false or misleading information was released. (2) The Board of Directors and the executives have undertaken all of the rights and responsibilities set out by the Company Law, Securities Law, and the Articles of Association, fully executed the resolutions adopted by the Shareholders’ Meeting and Board of Directors. The decision making processes and business operations were legal. A mature internal control system has been established. No illegal behaviour was found which offends the interests of the Company. 2. Inspection on finance Deloitte Touche Tohmatsu CPA Ltd. has issued the Standard Auditors’ Report without qualified opinion on the Financial Statements of the Company. The committee deems that the auditors’ reports is reflecting the financial status and business results of the company frankly, objectively, and justly. 3. Using of proceeds from share placing. In the report term, the proceeds from the latest financing action were used in accordance with the descriptions of the Placing Prospectus. No investment has been made to projects other than that of set by the prospectus. 4. Purchasing or disposing of assets In the report term, the Company incorporated Fuyu Chenming Paper Co., Ltd., and leased the assets of Heilongjiang Sida Paper Co., Ltd. for 2 years. This transaction was conducted with fairness and justice, and fair price. No under-table trade or offending the interests of the Company or the shareholders happened. 5. Related transactions Related transactions occurred during the report term was on a fair and reasonable base, harmed no benefit of the company. 9. Chapter X. Significant Events BB. I. Significant lawsuit or arbitration events occurred in the report term 1. In the report term, the Company raised lawsuit against Foshan Shunde Xingchen Paper Co., Ltd. (referred as “Xingchen Paper” hereinafter). Upon careful investigation, the Company has raised lawsuit against this company, and adopted certain legal measures to retrieve the accounts. At present, Shandong Shouguang People’s Court has issued Civil Mediation Agreement and Civil Judgment to require Xingchen Paper to pay the debts of RMB8.1323 million, RMB7.2808 million, and RMB26.7618 million respectively and the overdue penalties. The Company is doing its best to retrieve the debts through lawsuit and mediation actions. In the report term, the Company has provided bad debt provisions amounted to RMB89 million. Details are available in the announcements released with China Securities Journal, Hong Kong Commercial Daily and http://www.cninfo.com.cn on July 10th 2007. 2. Lawsuit raised in previous years: in the report term, Shandong Provincial High Court has issued the civil judgment and the Company is judged to pay the contractors RMB689,600 and related interests. This issue has been disclosed in annual report 2004. CC. II. Liquidation of controlled subsidiaries in the report term Xiangfan Chenming Art Paper Co., Ltd. was one of the Company’s indirectly controlled subsidiaries. It was incorporated in 1998 with registered capital of RMB32.2580 million. The company inputted RMB6.452 in term of intangible assets, and took 20% of the capital shares; Wuhan Chenming Hanyang Paper Co., Ltd. (50.93% of shares held by the Company) inputted RMB10 million in term of goods and cash, took 31% of the shares; Hubei Hanyang Paper Mill inputted RMB6.129 million in term of converting from credits, took 19% of the shares; Xiangfan Bailan Group Co., Ltd. inputted RMB9.677 million in term of goods, took 30% of the total capital shares. For Xiangfan Chenming was suffering from out-of-date equipments, simplex product, and less than 20K ton of productivity, it will be eliminated according to the national industrial policies. At present Xiangfan Chenming has stopped production and entered the liquidation procedures as approved at the Shareholders’ Meeting. The Company provided RMB8,074,288.89 of impairment provision on this part of assets. DD. III. Asset acquisition, disposal or merger occurred in the report term The proposal on disposing the share equities in Zhanjiang Forestry and Yangjiang Forestry and increase the shareholding in Zhnajiang Chenming Pulp Co., Ltd. was approved at the 21st meeting of the 4th term of Board. In the report term, the share equity transferring procedures have been completed. Zhanjiang Chenming has become the Company’s fully-owned subsidiary, meanwhile Zhanjiang Forestry and Yangjiang Forestry have become the fully-owned subsidiaries of Zhanjiang Chenming Pulp Co., Ltd. For all of the above Companies are the fully-owned subsidiaries of the Company, directly or indirectly, thus the above changes made neither influence on the Company’s shareholding portion, nor on the consistency and stability of the Company. Details of above are available with the relative announcements released by China Securities Daily, Hong Kong Commercial Daily and www.cninfo.com.cn dated April 10, 2007. EE. IV. Material related transactions No major related transaction occurred in the report term. FF. V. Material contracts and fulfilling 1. In the report period, the Company offered no external guarantee (exclude the guarantees provided to the controlled subsidiaries) or illegal guarantee. Ended December 31, 2007, the Company offered RMB902820000 of guarantees for its controlled subsidiaries, accounted for 8.53% of the net assets of the Company. Jiangxi Chenming Paper Ltd. 420,000,000.00 Jilin Chenming Paper Co., Ltd. 321,913,800.00 Wuhan Chenming Paper Holding Ltd. 100,910,885.62 Wuhan Chenming Qianneng Power Plant Ltd. 5,000,000.00 Heze Chenming Board Ltd. 35,000,000.00 Juancheng Chenming Plates Co., Ltd. 20,000,000.00 Total 902,824,685.62 Notes: 1. Jilin Chenming, and Juanchen Chenming have exceeded 70% in liability/asset ratio. Guarantees provided to these companies were approved by the Shareholders’ Meeting. 2. According to the “Proposal on providing of convertible counter-guarantee by pledging of partial assets of the controlled subsidiary” passed at the 1st Shareholders’ Special Meeting 2006, Wuhan Chenming, Qihe Chenming, and Jilin Chenming entered the “Counter-guarantee and Pledge Contract” respectively with China Industrial and Commercial Bank Shandong Weifang Branch, to provide counter-guarantee to the Company for the loan of RMB2 billion. “Chenming Convertible Bonds” has been delisted on May 21, 2007, thus the above “Counter-guarantee and Pledge Contract” were terminated automatically. All terminating procedures have been completed. Relative announcements were released by China Securities Journal, Hong Kong Commercial Daily and www.cninfo.com.cn dated August 31, 2007. 3. In the report term, to save financial costs and increase revenue, and regulate capital transaction with the controlled subsidiaries. The Company provided capital of RMB2.489 billion to Jilin Chenming, Wuhan Chenming, and Yanbian Chenming through banks in term of entrusted loans. GG. VI. Commitments made by holders of non-negotiable shares in share relocation program The share relocation plan has been accomplished on March 29th 2006, Shouguang State-owned Asset Administration Bureau and other holders of non-negotiable shares will pay part of their shares to A-share holders at 2.6 shares upon each 10 shares. In the report term, Shouguang State-owned Asset Administration Bureau was replaced by Shouguang Chenming Share Holding Co., Ltd. as the controlling shareholder of the Company. Shouguang Chenming Share Holding Co., Ltd. has committed to carry forward the commitments made by Shouguang State-owned Asset Administration Bureau, which are: 1. According to the financial statements of 2005-2007 (standard auditing report without qualified opinion), in case the integrated increment of net profit during 2005-2007 is lower than 20% (namely the cube root of the multiplied increasing ratios over the previous year during 2005-2007 is lower than 20%), the equal supplementary share equity registration date shall be confirmed within 5 working days after the Annual Report 2007 is published (The 10th day after the Annual Report 2007 is published.) and announcement on the supplementary of share equity. The supplementary share equity shall be implemented on consideration price at the day next to the registration day. Shouguang State-owned Asset Bureau shall transfer the shares at ratio of 5% of the total A shares upon the closing of market at the registration date to the holder of shares without subscription limitation. (In case of the share capital is changed due to distribution of bonus shares or capitalizing of common reserves during the registration date of this plan and the supplementary registration date, the amount of supplementary shares shall be adjusted correspondingly.) 2. Shouguang Chenming Share Holding Co., Ltd. shall not put the shares in market in 48 months from the launching of share relocation plan. 3. Whenever the share equity relocation scheme was approved, Shouguang Chenming Share Holding Co., Ltd. shall propose dividend plan in the Shareholders’ General Meetings of 2005, 2006, and 2007. The proposed dividend distribution shall not lower than 30% of the distributable profit realized in the current year (namely the balance of net profit realized in the current year which has deducted the common reserves and statutory public welfares), and promises to vote affirmative on the proposal in the Shareholders’ General Meeting. In the report term, the controlling shareholder was fulfilling the commitment made for the relocation plan. All of the shares held are conditional negotiable shares. The shareholding status is not changed comparing with the negotiable day of the conditional shares. HH. VII. The 7th meeting of the 5th term of Board reviewed and approved the proposal on renewing engagement of certified public accountants. Deloitte Touche Tohmatsu Certified Public Accountants Co., Ltd. was engaged as the Company’s auditor for the year 2007 with the service term of one year. The auditing fee would be RMB3.8 million and the Company undertakes the transportation fees of the accountants. This issue is subject to the examination of the Shareholders’ Meeting. Since 2004, Deloittee Touch Tohmatsu has been the auditing body of the Company successively for 4 years. II. VIII. In the report period, the Company, the Board of Directors or any director had never been criticized by China Securities Regulatory Commission, or by Shenzhen Stock Exchange. JJ. IX. Employ multiple channels in communication, enhance investor relationship management In the report term, beside the appropriate and timely information disclosure according to the related criteria, the Board carried out investor relationship management and communication approach in various of ways. This was to enforce the direct communication with the investors, new medias, and the public, and properly promote the Company’s good reputation, outstanding advantages, sound business performance, and expectable future development. These was to enable the investors further comprehend the investment value of the Company. In 2007, the Company accepted investigations and visiting of organizations and individuals for over 100 times. The investors’ hotlines were fully used to enhance the communications with the shareholders. Inquiries of the shareholders were answered patiently. Special forum was established in the Company’s website to communicate through the Internet. 6 staffs were arranged to response all of the questions asked by the investors. Summary of reception of investigations and visiting Main content involved and Time/date Place Way Visitors material provided Shandong Onsite Particulars about business Jan 2007 Researcher from Yifangda Fund Shouguang investigation operation and convertible bond Jiangxi Onsite Business operation and sales Feb 2007 Manager of China International Finance Co., Ltd. Chenming investigation situation of Jiangxi Chenming Particulars about business Shandong Onsite Yifangda Fund, CICB Ruixin Fund, China Merchants Fund, Xinda Mar 2007 operation, new projects, and Shouguang investigation Aoyin Fund, Changsheng Fund, Xiaoyang Investment Co. convertible bonds Shandong Onsite The latest operation and mid- May 2007 Jiacheng Asia Co., Ltd. Shouguang investigation long-term development plan Strategic plan, business Shandong Onsite operation, sales, financial May 2007 Manager of Fuda Fund Shouguang investigation situation, and particulars about placing of H shares Particulars about construction Zhanjiang Onsite June 2007 Researchers from Guangfa Securities Co. of Zhanjiang project and Chenming investigation forestry base Industrial situation, placing of Shandong Onsite June 2007 Researching Dept. of Boshi Fund Management Co., Ltd. H shares, and the latest Shouguang investigation operation Business plan and operation, Shandong Telephone Foundation manager of Blue Ridge Global Foundation Management Jul 2007 sales and market, progress of H Shouguang conference Co., Ltd. share placing Shandong Onsite Analyzers from Huatai Securities Co., Ltd., Citic Funds Management Business operation, progress of Aug 2007 Shouguang investigation Co., Ltd., and Lionfund Funds Management Co., Ltd. H share placing. Analyzers from Guojin Securities, Zhongyin International Fund, Gaohua Securities, Wanjia Fund, Zhongtou Securities, China Business operation, financial Shandong Onsite Sept 2007 International Fund Management Co., Ltd., and joint researching teams situation, sales and market, Shouguang investigation from Guangfa Securities, AIG Huatai, Bank of Communications progress of H share placing Schroder Fund, and Franklin Templetion Sealand Fund The Company’s business operation, financial position, October Shandong Onsite CITIC Securities, Jianxin Fund, Puyin Ansheng Fund, and Qilu purchasing of raw materials and 2007 Shouguang investigation Securities sales, progress of H share placing The Company’s business Shandong Onsite General Manger of Baoding Chingming Glass Co., Ltd., Shanghai Nov 2007 operation, development plan, Shouguang investigation Xiquan Industrial Co., Ltd. progress of H share placing December Shandong Onsite Investigators from Jinhua Zhongjin Investment Consultant Co. and The Company’s business 2007 Shouguang investigation Paijie Asia Securities Co., Ltd. operation, sales and market. KK. X. Other material events In the report term, Mr. Ren Wei, the Vice General Manager of the Company, gained illegal profit of RMB24278.80 from trading of the Company’s stocks. He has turned in all of the profit to the Company on May 24, 2007, and promised never do this again. After this, the Company enforce the legal training for the directors, supervisors, and executives to prevent things like this from happening again. Details have been announced by China Securities Journal, Hong Kong Commercial Daily and www.cninfo.com.cn dated May 25, 2007. LL. X. Index of information disclosure in 2007 Date Subjects Medias B12 China Securities Journal, B2 HKCD 2007-1-5 Announcement on Movement of Shareholding Structure http://www.cninfo.com.cn C007 China Securities Journal, A6 HKCD 2007-1-19 Disposal of share equities of Shanghai Chenming http://www.cninfo.com.cn Prompting announcement about the possibility of satisfying the B12 China Securities Journal, B2 HKCD 2007-1-30 repurchasing of convertible bonds http://www.cninfo.com.cn C004 China Securities Journal, A5 HKCD 2007-2-10 Prompting announcement on change of shareholding structure http://www.cninfo.com.cn A16 China Securities Journal, B3 HKCD 2007-3-17 Resolutions of the 20th Meeting of the Board of Directors http://www.cninfo.com.cn Announcement on adjusting of face interest rate of Chenming D004 China Securities Journal, B3 HKCD 2007-3-20 Convertible Bonds http://www.cninfo.com.cn C104 China Securities Journal, A4 HKCD 2007-3-27 Public notice on convening of the 1st shareholders’ special meeting http://www.cninfo.com.cn Resolutions of the 1st Shareholders’ Special Meeting 2007 C008 China Securities Journal, B6 HKCD 2007-4-3 Announcement on Movement of Shareholding Structure http://www.cninfo.com.cn Summary of Annual Report 2006 Resolutions of the 21st Meeting of the 4th Term of Board Resolutions of the 8th Meeting of the 4th Term of Supervisory Committee Notice on convening of the Shareholders’ Annual Meeting 2006 Special Statement on Using of the Proceeds Obtained from Previous C049 China Securities Journal, B9 HKCD 2007-4-10 Securities Placing http://www.cninfo.com.cn C032 China Securities Journal, B10 HKCD 2007-4-13 Prompt announcement on releasing of conditional shares http://www.cninfo.com.cn Prompt announcement on repurchasing of Chenming Convertible C005 China Securities Journal, B4 HKCD 2007-4-18 Bonds http://www.cninfo.com.cn Prompt announcement on repurchasing of Chenming Convertible C005 China Securities Journal, B8 HKCD 2007-4-19 Bonds http://www.cninfo.com.cn Prompt announcement on repurchasing of Chenming Convertible A09 China Securities Journal, B3 HKCD 2007-4-20 Bonds http://www.cninfo.com.cn The 2nd Notice on convening of the Shareholders’ Annual Meeting C009 China Securities Journal, B12 HKCD 2007-4-20 2006 http://www.cninfo.com.cn The 1st Quarterly Report 2007 C005 China Securities Journal, B1 HKCD 2007-4-30 Resolutions of the 22nd meeting of the 4th term of Board http://www.cninfo.com.cn The Resolutions of Shareholders’ Annual Meeting 2006 Resolutions of the 1st Meeting of the 5th Term of Board Resolutions of the 1st Meeting of the 5th Term of Supervisory Committee Prompt announcement on repurchasing of Chenming Convertible C009 China Securities Journal, B6 HKCD 2007-5-9 Bonds http://www.cninfo.com.cn Prompt announcement on repurchasing of Chenming Convertible A09 China Securities Journal, B6 HKCD 2007-5-10 Bonds http://www.cninfo.com.cn Announcement of repurchasing results of Chenming Convertible Bonds C009 China Securities Journal, B6 HKCD 2007-5-19 Announcement of Delisting Chenming Convertible Bonds http://www.cninfo.com.cn B09 China Securities Journal, A5 HKCD 2007-5-22 Announcement of Rectification http://www.cninfo.com.cn C004 China Securities Journal, A8 HKCD 2007-5-25 Announcement about trading of the Company’s shares by executives http://www.cninfo.com.cn C013 China Securities Journal, B4 HKCD 2007-6-21 Announcement of Dividend Distribution for Year 2006 http://www.cninfo.com.cn C016 China Securities Journal, A6 HKCD 2007-6-30 Resolutions of the 2nd Meeting of the 5th Term of Board http://www.cninfo.com.cn Internal Inspection Report and Improving Plan Resolutions of the 1st Special Meeting of the 5th Term of Board A05 China Securities Journal, A8 HKCD 2007-7-10 Prompt notice http://www.cninfo.com.cn Summary of Interim Report 2007 Resolutions of the 3rd Meeting of the 5th Term of Board Announcement of Business Growth Circular about Convening of the 2nd Shareholders’ Special Meeting C014 China Securities Journal, A8 HKCD 2007-8-25 2007 http://www.cninfo.com.cn D009 China Securities Journal, B7 HKCD 2007-8-31 Provisional notice of the Board http://www.cninfo.com.cn Secondary Notice on Convening of the 2nd Shareholders’ Special D005 China Securities Journal, B3 HKCD 2007-9-7 Meeting 2007 http://www.cninfo.com.cn Announcement on issuing of RMB500 million short-term bonds by A04 China Securities Journal, B6 HKCD 2007-9-11 Jiangxi Chenming http://www.cninfo.com.cn D005 China Securities Journal, B6 HKCD 2007-9-13 The Resolutions of Shareholders’ 2nd Special Meeting of 2007 http://www.cninfo.com.cn The 3rd Quarterly Report 2007 Resolutions of the 4th Meeting of the 5th Term of Board Announcement of Resolutions The 3rd Meeting of the 5th Term of Supervisory Committee D036 China Securities Journal, B7 HKCD 2007-10-30 Report on Special Administrative Improvement Operation http://www.cninfo.com.cn Prompt notice about granting of approval by People’s Bank of China D004 China Securities Journal, B7 HKCD 2007-11-27 for issuing of short-term bonds in 2007 http://www.cninfo.com.cn Announcement on changing of continuous sponsors of the share D013 China Securities Journal, A7 HKCD 2007-11-30 equity relocation http://www.cninfo.com.cn 10. Chapter XI. Financial Report Financial Report 2007 is attached hereafter. 11. Chapter XII. Documents for Reference I. Financial Report carrying signatures and seals of the legal representative, Chief Financial Officer and Manager of the Accounting Department; II. Original of Auditors’ Report carrying the seals and signatures of the CPAs. III. All the originals of the Company’s documents and public notices disclosed in the newspapers designated by China Securities Regulatory Commission in the report period; SHANDONG CHENMING PAPER HOLDINGS LIMITED April 15, 2008 SHANDONG CHENMING PAPER HOLDINGS LIMITED Financial Statements and Auditor's Report For the Year Ended December 31, 2007 SHANDONG CHENMING PAPER HOLDINGS LIMITED FINANCIAL STATEMENTS AND AUDITOR'S REPORT FOR THE YEAR ENDED DECEMBER 31, 2007 TABLE OF CONTENTS PAGE AUDITORS' REPORT 1-2 THE COMPANY'S AND CONSOLIDATED BALANCE SHEET 3-4 THE COMPANY'S AND CONSOLIDATED STATEMENT OF PROFIT 5 THE COMPANY'S AND CONSOLIDATED CASH FLOW STATEMENT 6 THE COMPANY'S AND CONSOLIDATED STATEMENT OF CHANGE IN SHAREHOLDERS' EQUITY 7-8 NOTES TO THE ACCOUNTING STATEMENTS 9 - 115 Auditor's Report DE SHI BAO (SHEN) (08) NO. P0262 To All Shareholders of Shandong Chenming Paper Holdings Limited: We have audited the accompanying financial statements of Shandong Chenming Paper Holdings Limited (hereinafter referred to as Chenming Group), including the Company's and Consolidated Balance Sheet ended December 31, 2007, the Company's and Consolidated Statement of Profit, the Company's and Consolidated Cash Flow Statement, the Company's and Consolidated Statement of Change in Shareholders' Equity, the Company's and Consolidated Cash Flow Statement, and the Notes to the Financial Statements of the Year 2007. I. The Management's Responsibility for the Financial Statements The financial statements prepared according to the enterprise accounting standards is the responsibilities of the Chenming Group's management. These responsibilities include: (1) design, implementation and maintenance of the internal control in connection with preparation of the financial statements so that there exist no fraudulence or error which may lead serious misstatement; (2) choosing and application of proper accounting policy; (3) making reasonable accounting estimate. II. Responsibilities of the Certified Public Accountants Our responsibility is to express auditor's opinion of the financial statements on the basis of implementation of the audit. We implemented the audit work according to the auditing standards for Chinese certified public accountants. These standards demand use to abide by the professional ethics, plan and implement the audit work so as the make reasonable assurance that there exist no material misstatement in the financial statements. The audit work involves implementation of the audit procedures so as to obtain audit evidences in connection with the amounts as disclosed in the financial statements. The choice of the auditing procedures depends on the judgment of certified public accountants, including assessment of the risk of serious misstatement of financial statements caused by fraudulence or mistakes. In process of risk assessment, we have taken the internal control in connection with the financial statements into consideration so as to design proper audit procedures but not for the purpose of expressing effective opinion on such internal control. The audit work also includes the suitability of the accounting policy the management has chosen and the reasonability of the accounting estimate made as well as assessment of the overall presentation of financial statements. We believe, the audit evidences we have obtained are adequate and appropriate and have provided base for use to express auditor's opinions. -1- III. Auditor's Opinion In our opinion, the financial statements of Chenming Group have been prepared according to the accounting standards for enterprises and have fairly reflected, in all material aspects, the Chenming Group's and consolidated financial position ended December 31, 2007 and the Company's and consolidated operation result and cash flow as of the year 2007. Deloitte Touche Tohmatsu Certified Public Accountants Ltd. Chinese Certified Public Accountant Shanghai China Tong Chuanjiang Zhang Kouti Date: April 11 2008 -2- SHANDONG CHENMING PAPER HOLDINGS LIMITED Balance Sheet December 31, 2007 Consolidated Company Assets Notes December 31, 2007 December 31, 2006 December 31, 2007 December 31, 2006 in RMB in RMB in RMB in RMB (restated already) (restated already) Current assets Monetary funds IX.1 740,621,843.91 826,269,791.68 348,948,724.68 431,939,246.80 Transactional financial assets IX.2 5,955,480.00 - - - Notes receivable IX.3 1,676,684,054.95 939,705,242.42 998,809,409.00 530,093,631.70 Accounts receivable IX.4 1,660,020,696.84 1,720,291,295.31 1,466,109,588.60 1,507,460,934.43 Advance to suppliers IX.5 574,014,801.43 499,099,133.80 279,890,382.88 240,994,361.18 Dividend receivable - - 42,933,862.14 11,192,644.92 Other receivables IX.6 196,162,672.11 139,917,156.53 776,521,148.45 1,186,663,494.27 Inventories IX.7 1,744,492,612.36 1,841,184,203.10 721,354,749.54 767,688,945.32 Entrusted loan due within a year IX.8 - - 1,864,000,000.00 - Total current assets 6,597,952,161.60 5,966,466,822.84 6,498,567,865.29 4,676,033,258.62 Non-Current Assets Entrusted loan due after a year IX.8 - - 625,000,000.00 1,934,000,000.00 Long-term equity investment IX.9 96,289,936.43 85,801,487.18 2,194,652,949.31 2,016,138,436.26 Investment based real estate IX.10 29,902,980.19 30,601,525.68 29,902,980.19 30,601,525.68 Fixed assets: IX.11 13,243,156,039.93 9,523,489,397.32 6,555,767,873.32 3,908,343,238.61 Construction-in-progress IX.12 904,753,634.02 4,111,992,678.09 275,351,308.78 3,011,176,204.28 Engineering supplies 44,433,213.61 22,009,470.38 6,850,752.92 8,821,504.25 Intangible assets IX.13 822,301,826.32 691,526,824.69 377,022,979.83 218,322,484.07 Goodwill IX.14 20,283,787.17 20,283,787.17 - - Long-term expenses to be apportioned IX.15 56,513,234.75 48,744,147.79 - - Asset of deferred income tax IX.16 103,361,571.98 38,129,986.39 72,516,429.65 38,386,721.36 Consumable biologic assets IX.17 92,159,871.29 19,514,433.24 - - Total non-current assets 15,413,156,095.69 14,592,093,737.93 10,137,065,274.00 11,165,790,114.51 Total assets 22,011,108,257.29 20,558,560,560.77 16,635,633,139.29 15,841,823,373.13 -3- SHANDONG CHENMING PAPER HOLDINGS LIMITED Consolidated Company Liabilities and minority shareholders' equity Notes December 31, 2007 December 31, 2006 December 31, 2007 December 31, 2006 in RMB in RMB in RMB in RMB (restated already) (restated already) Current liabilities Short-term Loan: IX.19 3,594,000,057.28 1,298,654,533.79 3,350,420,391.17 883,743,888.55 Notes payable IX.20 130,056,316.74 47,201,892.31 121,487,222.14 - Accounts payable IX.21 1,656,706,980.62 1,511,968,573.51 1,332,552,331.70 1,385,033,481.89 Advance from customers IX.22 170,286,629.21 193,388,136.60 92,126,887.49 147,372,278.27 Salaries Payable to Staff IX.23 234,880,219.06 158,086,526.80 119,224,432.42 89,211,807.99 Taxes payable IX.24 102,444,450.86 76,276,789.18 100,151,250.80 25,901,541.84 Dividends payable IX.25 36,075.17 699,815.30 36,075.17 699,815.30 Other payables IX.26 305,050,016.38 305,164,253.22 278,838,344.66 291,092,497.92 Due within a year Non-Current Liabilities IX.27 667,746,417.91 249,100,117.61 586,144,500.00 201,540,000.00 Short term financing bills payable IX.8 506,212,916.67 2,026,019,444.42 - 2,026,019,444.42 Total current liabilities 7,367,420,079.90 5,866,560,082.74 5,980,981,435.55 5,050,614,756.18 Non-Current Liabilities Long-term Loan IX.29 4,056,194,662.35 5,028,028,939.36 2,899,617,835.94 3,713,779,535.94 Bonds payable IX.30 - 1,769,029,413.28 - 1,769,029,413.28 Deferred income IX.31 830,000.00 5,690,000.00 - 1,000,000.00 Liabilities of deferred income tax IX.32 6,103,850.08 - - - Total non-current liabilities 4,063,128,512.43 6,802,748,352.64 2,899,617,835.94 5,483,808,949.22 Total liabilities 11,430,548,592.33 12,669,308,435.38 8,880,599,271.49 10,534,423,705.40 Shareholders' Equity: Equity capital IX.33 1,706,345,941.00 1,365,670,155.00 1,706,345,941.00 1,365,670,155.00 Capital reserve IX.34 3,737,991,906.21 2,248,456,018.32 3,827,378,359.74 2,326,171,951.80 Surplus reserve IX.35 723,742,920.58 642,691,568.68 711,553,338.67 630,501,986.77 Retained earnings IX.36 2,576,650,349.38 1,894,827,041.81 1,509,756,228.39 985,055,574.16 Cumulative translation adjustments 303,894.68 -2,440.00 - - Shareholders' equity attributable to the parent company Total 8,745,035,011.85 6,151,642,343.81 7,755,033,867.80 5,307,399,667.73 Minority shareholders' equity IX.37 1,835,524,653.11 1,737,609,781.58 - - Total of shareholder's equity 10,580,559,664.96 7,889,252,125.39 7,755,033,867.80 5,307,399,667.73 Total liabilities and shareholders' equity 22,011,108,257.29 20,558,560,560.77 16,635,633,139.29 15,841,823,373.13 Notes to the financial statements are the integrated party of the financial statements. Financial statements from Page 3 to Page 115 are executed by the following leaders: Company Leader Chief financial officer Leader of the accounting department -4- SHANDONG CHENMING PAPER HOLDINGS LIMITED Profit Statement The year ended Dec. 31, 2007, Consolidated Company Accumulative amount in Accumulative amount in Accumulative amount in Accumulative amount in Notes the report year the previous year the report year the previous year in RMB in RMB in RMB in RMB Business income IX.38 15,164,742,450.26 11,983,464,568.89 12,552,589,262.55 9,995,012,923.32 Less: Business costs IX.39 12,074,481,475.02 9,708,209,802.96 10,887,601,388.35 8,918,947,928.44 Business Taxes and Surcharge IX.40 17,854,424.80 19,527,738.30 282,690.99 2,915,266.62 Sales expenses 783,289,341.85 678,174,266.91 397,932,244.92 349,623,630.37 Overheads 530,820,858.29 516,548,939.45 210,224,821.41 210,126,069.56 Financial expenses IX.41 392,163,050.56 451,449,468.40 303,883,491.96 291,318,847.32 Loss from impairment of assets IX.42 102,198,629.26 35,234,471.95 4,908,666.11 -33,090,181.73 Plus: Income from change of the fair value IX.43 30,370,880.31 - - - Investment income IX.44 (9,461,550.75) 80,100,746.64 222,885,767.76 185,604,918.78 Including: investment to associates and joint ventures Return on Investment (9,461,550.75) (447,423.62) (9,461,550.75) (447,423.62) Operating profit 1,284,844,000.04 654,420,627.56 970,641,726.57 440,776,281.52 Plus: Non-operating income IX.45 232,218,083.67 200,909,734.73 47,503,266.20 75,281,815.84 Less: Non-operating expenses IX.46 27,725,881.15 239,639,605.01 10,417,366.26 234,698,849.20 Including: Loss from disposal of non- current assets 27,181,945.34 7,988,440.80 10,400,342.17 4,412,413.20 Total profit 1,489,336,202.56 615,690,757.28 1,007,727,626.51 281,359,248.16 Less: Income tax expense IX.47 270,795,013.27 100,741,186.90 197,214,107.46 56,284,478.89 Net profit 1,218,541,189.29 514,949,570.38 810,513,519.05 225,074,769.26 Net profit attributable to the parent company 967,636,172.39 356,907,182.90 810,513,519.05 225,074,769.26 Minority shareholders' equity 250,905,016.90 158,042,387.48 - - Earnings per share (Consolidated net profit attributable to the shareholders of ordinary shares of the parent company) Basic earning per share IX.49 0.60 0.26 0.50 0.17 Diluted earning per share IX.49 0.59 不适用 0.50 不适用 Notes to the financial statements are the integrated party of the financial statements. -5- SHANDONG CHENMING PAPER HOLDINGS LIMITED Cash Flow Statement The year ended Dec. 31, 2007, Consolidated Company Accumulative amount in the Accumulative amount in the Accumulative amount in Accumulative amount in the Notes report year previous year the report year previous year in RMB in RMB in RMB in RMB Cash flows arising from operating activities Cash received from sales of goods and supply of labor 15,346,933,191.88 10,769,181,718.98 14,486,782,584.79 7,739,197,098.18 Rebated taxes received 75,372,967.36 10,902,714.70 - - Other business related cash receipts IX.53 118,085,044.97 190,595,684.89 539,291,856.66 895,513,753.64 Subtotal of cash flow in from operating activity 15,540,391,204.21 10,970,680,118.57 15,026,074,441.45 8,634,710,851.82 Cash paid for purchase of goods and reception of labor services 11,811,905,431.94 8,003,818,969.28 12,261,934,180.86 6,333,971,738.70 Cash paid to and for employees 487,126,693.03 412,570,576.56 180,749,301.33 155,608,913.68 Taxes paid 1,039,124,100.69 836,855,006.21 561,696,003.74 316,469,932.96 Other business related cash payments IX.54 877,971,853.54 700,877,389.68 470,013,272.89 627,528,747.98 Subtotal of cash flow out from operating activity 14,216,128,079.20 9,962,121,941.73 13,474,392,758.82 7,433,579,333.32 Net cash flows arising from operating activities 1,324,263,125.01 1,008,558,176.84 1,551,681,682.63 1,201,131,518.50 Cash flow arising from investment activities Cash received from recovery of investment - 136,880,491.49 620,000,000.00 168,742,730.70 Cash received from investment income - 555,074.17 200,606,101.29 136,054,534.00 Cash received from disposal of fixed assets, intangible asset and other long term asset 15,746,133.62 6,748,567.10 962,227.06 998,906.35 Other investment related cash receipts - 5,610,000.00 - 1,000,000.00 Subtotal of cash flow in from investment activity 15,746,133.62 149,794,132.76 821,568,328.35 306,796,171.05 Cash paid for purchase/construction of of fixed assets, intangible asset and other long term asset 884,022,116.21 2,814,159,750.79 677,874,762.20 1,981,383,117.12 Cash paid for investment 108,725,512.44 133,842,195.20 1,338,426,063.80 2,517,353,310.00 Other investment related cash payments - - - - Subtotal of cash flow out from investment activity 992,747,628.65 2,948,001,945.99 2,016,300,826.00 4,498,736,427.12 Net cash flow arising from investment activities (977,001,495.03) (2,798,207,813.23) (1,194,732,497.65) (4,191,940,256.07) Cash flow arising from fund raising activities Cash received from absorption of investment 37,554,000.00 25,500,000.00 - - Cash received from borrowings 8,076,267,182.50 9,631,688,684.69 6,241,624,261.50 7,848,743,769.78 Cash received from bond issuing 496,965,000.00 2,000,000,000.00 - 1,992,000,000.00 Subtotal of cash flow in from fund raising activity 8,610,786,182.50 11,657,188,684.69 6,241,624,261.50 9,840,743,769.78 Cash paid for liabilities repayment 6,137,101,438.52 9,278,895,054.00 4,053,206,228.24 6,545,880,803.36 Cash paid for dividend/profit distribution or repayment of interest 897,534,770.36 675,860,480.85 620,902,705.10 408,771,000.37 Cash paid for repayment of short term financing bills 2,000,000,000.00 - 2,000,000,000.00 - Other fund raising related cash payments IX.55 89,146,310.05 41,949,396.50 117,291,492.65 - Subtotal of cash flow out from fund raising activity 9,123,782,518.93 9,996,704,931.35 6,791,400,425.99 6,954,651,803.73 Net cash flow arising from fund- raising activities (512,996,336.43) 1,660,483,753.34 (549,776,164.49) 2,886,091,966.05 Influence upon cash due to change of exchange rate (4,759,232.11) 16,333,899.38 (3,154,716.00) 3,137,355.62 Net increase in cash and cash equivalents IX.51 (170,493,938.56) (112,831,983.67) (195,981,695.51) (101,579,415.90) Plus: Balance of cash and cash equivalents at the beginning of the period IX.51 784,320,395.18 897,152,378.85 431,939,246.80 533,518,662.70 Balance of cash and cash equivalents at the end of the period IX.51 613,826,456.62 784,320,395.18 235,957,551.29 431,939,246.80 Notes to the financial statements are the integrated party of the financial statements. -6- SHANDONG CHENMING PAPER HOLDINGS LIMITED Statement of Change in Shareholders' Equity The year ended Dec. 31, 2007, Consolidated Statement in foreign Attributable to parent currency company Conversion Minority shareholders' Total of shareholder's Equity capital Capital reserve Surplus reserve Retained earnings Discrepancy Shareholders' Equity: equity equity Equity cap in RMB in RMB in RMB in RMB in RMB in RMB in RMB in RMB in RMB I. Ending balance of the previous year 1,365,670,155.00 1,917,835,010.34 677,829,746.88 2,048,792,497.87 (2,440.00) 6,010,124,970.09 1,739,491,572.97 7,749,616,543.06 1,365,670,1 Plus: Change in accounting policy - 330,621,007.98 (35,138,178.20) (153,965,456.06) - 141,517,373.72 (1,881,791.39) 139,635,582.33 II. Opening balance of the report year 1,365,670,155.00 2,248,456,018.32 642,691,568.68 1,894,827,041.81 (2,440.00) 6,151,642,343.81 1,737,609,781.58 7,889,252,125.39 1,365,670,1 III. Amount of increase/decrease in the year (decrease is stated with "-") 340,675,786.00 1,489,535,887.89 81,051,351.90 681,823,307.57 306,334.68 2,593,392,668.04 97,914,871.53 2,691,307,539.57 340,675,7 (I) Net profit - - - 967,636,172.39 - 967,636,172.39 250,905,016.90 1,218,541,189.29 (II) Gain and loss directly charged to shareholders' equity - 1,000,000.00 - - 306,334.68 1,306,334.68 - 1,306,334.68 1. Net change in fair value of financial assets available for sale - - - - - - - - 2. Influence from change of other owners' equity in the investees under the equity method - - - - - - - - 3. Others - 1,000,000.00 - - 306,334.68 1,306,334.68 - 1,306,334.68 Subtotal of the above (I) and (II) - 1,000,000.00 - 967,636,172.39 306,334.68 968,942,507.07 250,905,016.90 1,219,847,523.97 (III) Shareholders' input and decrease of capital 340,675,786.00 1,488,535,887.89 - - - 1,829,211,673.89 37,554,000.00 1,866,765,673.89 340,675,7 1. Capital invested by shareholders - - - - - - 37,554,000.00 37,554,000.00 2. Amount of payment for shares charged to shareholders' equity - - - - - - - - 3. Capital converted from convertible bonds 340,675,786.00 1,488,535,887.89 - - - 1,829,211,673.89 - 1,829,211,673.89 340,675,7 4. Others - - - - - - - - (IV) Profit Distribution - - 81,051,351.90 (285,812,864.82) - (204,761,512.92) (139,553,201.91) -344,314,714.83 1. Provision of surplus reserve - - 81,051,351.90 (81,051,351.90) - - - - 2. Distribution to the shareholders - - - (204,761,512.92) - (204,761,512.92) (139,553,201.91) -344,314,714.83 3. Others - - - - - - - - (V) Acquisition of minority shareholders' equity - - - - - - (50,990,943.46) -50,990,943.46 1. Conversion of capital reserve into capital stock - - - - - - - - 2. Conversion of surplus reserve into capital stock - - - - - - - - 3. Loss made up with surplus reserve - - - - - - - - 4. Others - - - - - - (50,990,943.46) (50,990,943.46) IV. Balance at the end of the report year 1,706,345,941.00 3,737,991,906.21 723,742,920.58 2,576,650,349.38 303,894.68 8,745,035,011.85 1,835,524,653.11 10,580,559,664.96 1,706,345,9 SHANDONG CHENMING PAPER HOLDINGS LIMITED Statement of Change in Shareholders' Equity - Cont'd The year ended Dec. 31, 2006, Consolidated Statement in foreign Attributable to parent currency company Conversion Minority shareholders' Total of shareholder's Equity capital Capital reserve Surplus reserve Retained earnings Discrepancy Shareholders' Equity: equity equity Equity cap in RMB in RMB in RMB in RMB in RMB in RMB in RMB in RMB in RMB I. Ending balance of the previous year 1,353,539,920.00 1,824,530,228.15 616,169,850.22 1,671,365,444.72 - 5,465,605,443.09 1,724,775,485.03 7,190,380,928.12 1,353,539,9 Plus: Change in accounting policy - 132,268,797.96 -35,138,178.20 92,094,556.41 - 189,225,176.17 -14,667,797.26 174,557,378.91 II. Opening balance of the report year 1,353,539,920.00 1,956,799,026.11 581,031,672.02 1,763,460,001.13 - 5,654,830,619.26 1,710,107,687.77 7,364,938,307.03 1,353,539,9 III. Amount of increase/decrease in the year (decrease is stated with "-") 12,130,235.00 291,656,992.21 61,659,896.66 131,367,040.68 -2,440.00 496,811,724.55 27,502,093.81 524,313,818.36 12,130,2 (I) Net profit - - - 356,907,182.90 - 356,907,182.90 158,042,387.48 514,949,570.38 (II) Gain and loss directly charged to shareholders' equity - - - - - - - - 1. Fair value of financial assets available for sale Change of net amount - - - - - - - - 2. Influence from change of other owners' equity in the investees under the equity method - - - - - - - 3. Others - - - - - - - - Subtotal of the above (I) and (II) - - - 356,907,182.90 - 356,907,182.90 158,042,387.48 514,949,570.38 (III) Shareholders' input and decrease of capital 12,130,235.00 291,656,992.21 - - -2,440.00 303,784,787.21 - 303,784,787.21 12,130,2 1. Capital invested by shareholders - 229,399,276.97 - - - 229,399,276.97 - 229,399,276.97 2. Amount of payment for shares charged to shareholders' equity - 62,257,715.24 - - - 74,387,950.24 - 74,387,950.24 3. Capital converted from convertible bonds 12,130,235.00 - - - - - - - 12,130,2 4. Others - - - - -2,440.00 -2,440.00 - -2,440.00 (IV) Profit Distribution - - 61,659,896.66 -225,540,142.22 - -163,880,245.56 -84,228,918.38 -248,109,163.94 1. Provision of surplus reserve - - 61,659,896.66 -61,659,896.66 - - - - 2. Distribution to the shareholders - - - -163,880,245.56 - -163,880,245.56 -84,228,918.38 -248,109,163.94 3. Others - - - - - - - (V) Acquisition of minority shareholders' equity - - - - - - -46,311,375.29 -46,311,375.29 1. Conversion of capital reserve into capital stock - - - - - - - - 2. Conversion of surplus reserve into capital stock - - - - - - - - 3. Loss made up with surplus reserve - - - - - - - - 4. Acquisition of equity held by minority shareholders - - - - - - -46,311,375.29 -46,311,375.29 IV. Ending balance of the report year 1,365,670,155.00 2,248,456,018.32 642,691,568.68 1,894,827,041.81 -2,440.00 6,151,642,343.81 1,737,609,781.58 7,889,252,125.39 1,365,670,1 Notes to the financial statements are the integrated party of the financial statements. SHANDONG CHENMING PAPER HOLDINGS LIMITED Notes to the Accounting Statements The year ended Dec. 31, 2007 I. Company Profile Shandong Shandong Chenming Paper Holdings Limited (hereinafter referred to the Company, whose predecessor was Shandong Shouguang County General Paper Mill, was incorporated as a joint stock company with limited liability through designated IPO through reorganization in May 1993. In December 1996, through approval by Shandong Provincial People's Government with Document LU GAI ZI [1996] No. 270 and by China Securities Regulatory Commission of the State Council with Document ZHENG WEI [1996] No. 59, the Company was reorganized as a joint stock company with limited liability through IPO. Ended December 31, 2007, the total number of the Company's shares was changed to be 1,706,345,941 shares For the detail about the types of shares and the corresponding number refer to Note IX.33. The business scope of the Company and its subsidiaries (hereinafter referred to as the Group) is: processing, production and sales of paper products (including machine-made paper and boards and paper making materials), paper-making machinery, production and sales of electric power and heat, tree planting, seedling culturing, wood processing and sales, wood products production, processing and sales, production and sales of artificial board and forceful wooden floor board. II. Accounting policies In the report period, the Company initially implemented the accounting standards (hereinafter referred to as the new accounting standard) for enterprises promulgated on February 15, 2006. Commencing from January 1, 2007, the Group started implementing the new accounting standards promulgated on February 15, 2006 and has made retroactive adjustment of the financial statements of the comparable years according to Articles 5 to 19 of the Accounting Standards for Enterprises No. 38 – Initial Implementation of the Accounting Standards for Enterprises (hereinafter referred as CAS No. 38) and the Accounting Standards for Enterprises Interpretation No. 1, Document of the Ministry of Finance (CAI KUAI [2007] No. 14); for the influences of the initial implementation of the new accounting standards upon the financial statements of the financial statements of the comparable years, refer to Note VI. In addition, the Company is a listed company of both A- and B-shares which needs to issue financial statements prepared both according to the Domestic Accounting Standards and the International Financial Reports. According to Article 1 of the Accounting Standards for Enterprises Interpretation of Announcement No. 1, for the transactions or matters in which there exists no discrepancy in standards between the New Accounting Standards and the International Standards for Financial Report, in addition to the retroactive adjustment according to Articles 5 to 19 of Standard No. 38 and other relevant regulations, the Company also made retroactive adjustment of the other transactions and matters which had not been regulated according to Articles 5 to 19 of Standard No. 38 and other relevant regulations for which had experienced change in accounting policy due to implementation of the new accounting standards as well as the financial statements of the comparative years according to the relevant information the Company collected with the financial statements prepared according to the international standards for financial report. For the influence upon the comparable years' financial statements from implementation of the new accounting standards, refer to Note VI. -9- SHANDONG CHENMING PAPER HOLDINGS LIMITED In the report period, the Company initially implemented the accounting standards (hereinafter referred to as the new accounting standard) for enterprises promulgated on February 15, 2006. - continued For the change in the way of presentation, such as classification of the items, titles of financial statements, the financial statements during the comparable periods have been restated according to the new accounting standards. Continuous Operation Ended December 31, 2007, the total amount of current liabilities of the Company exceeded the total current assets by RMB 761,776,080.29.As the Company is able to pay back the due liabilities with the cash flow produced from the operation activities and the bank credit line as obtained in the foreseeable future, in the opinion of the Company's management, the Company is able to continue the operation. Therefore, these financial statements were prepared based on the assumed continuous operation. III. Declaration on Adherence to the Accounting Standards for Enterprises The financial statements prepared by the Company comply with the new accounting standards, and have truly and fully reflected the Company's and the consolidated financial position as at December 31, 2007 and the Company's and the consolidated operation result and cash flow of the year ended December 31, 2007. IV. Principal Accounting Policies and Accounting Estimation The following principal accounting policies and accounting estimation are formulated according to the new accounting standards. Fiscal year The Group's fiscal year is a calendar year, namely from January 1 to December 31 of a year. Function currency Renminbi is the currency applied in the principal economic environment where the Group is conducting the operation and the Group takes Renminbi as the function currency for bookkeeping. Basis of Presentation and Principle of Pricing The Group takes the accrual basis as the bookkeeping base in accounting. Except that the consumable biological assets and some financial instruments are measured based on the fair value, these financial statements are measured based on the historical cost. In case some asset experiences impairment, provision for impairment is made correspondingly according to the relevant regulations. - 10 - SHANDONG CHENMING PAPER HOLDINGS LIMITED IV. Principal Accounting Policies and Accounting Estimation - continued Cash equivalents Cash equivalents refer to the investments held by the Group with short term, high liquidity, easy to be converted into cash with known amount, with very small risk of value variation. Foreign Currency Translation Transaction in foreign currency is recognized through translation based on the spot rate of the date when the transaction takes place. On the balance sheet day, the foreign currency based items are translated into Renminbi based on the spot rate of that day. The exchange difference in amount between the spot rate of that day and the spot rate as initially recognized or the day before the balance sheet day is charged to the current gain and loss except that the exchange difference of the special borrowings in foreign currency in compliance with the capitalization conditions which is capitalized during the capitalization period and charged to the cost of the relevant asset and the exchange difference of the hedging instrument use for hedging in order to avoid foreign exchange risk is treated according to the hedging accounting method. The foreign currency based non-monetary items measured based on the historical cost is measured still based on the function currency translated based on the spot exchange rate as of the date of incurrence of the transaction. Financial instruments When the Group becomes a party to the financial instrument contract, a financial asset or liability is recognized correspondingly. The initially recognized financial asset and liability are measured based on the fair value. For the financial asset or liability which is measured based on the fair value and the change is charged to the current gain and loss, the relevant transaction expenses are directly charged to the current gain and loss; For other types of financial asset or liability, the relevant transaction expenses are charged to the initially recognized amount. Derivative Instruments Derivative instruments are initially measured based on the fair value on the date of contract execution and the successive measurement is made based on the fair value. Except the derivative instrument designated as the hedging instrument with high efficiency of hedging whose gain or loss formed due to change of the fair value shall be determined according to the hedging accounting based on the nature of hedging relationship, the change of the fair value of all the other derivative instruments is charged to the current gain and loss. - 11 - SHANDONG CHENMING PAPER HOLDINGS LIMITED IV. Principal Accounting Policies and Accounting Estimation - continued Classification and Measurement of Financial Assets Financial assets are classified in initial recognition according to their nature and the purpose of holding. The Group's financial assets are mainly transactional financial assets, loans and accounts receivable. Transactional financial assets Transactional financial assets refer to the financial asset which satisfies one of the following conditions: (1) the purpose of obtaining the financial asset is mainly to sell or buyback in the recent period; (2) it belongs to part of the recognizable financial instrument combination in the centralized management while there is objective evidence showing that the Group recently adopts the short term profit earning approach to manage that combination; (3) It belongs to derivative instrument, but is designated as derivative instrument of effective hedging instrument and belongs to the derivative instrument of the financial guarantee contract except the derivative instrument for which there is no quotation in the active market, whose fair value cannot be reliably measured and whose investment must be linked and settlement is made by delivering that equity instrument. For transactional financial asset, fair value is used for successive measurement; the gain or loss formed in the change of the fair value and the dividend and interest income in connection with such financial asset are charged to the current gain and loss. Loan and accounts receivable They refer to the non-derivative financial assets without quotation in the active market and the recoverable amount fixed or determinable. They include the entrusted loan and various accounts receivable. Actual interest rate is used for loan and accounts receivable; the follow-up measurement is made based on the amortized costs; the dividend or loss arising from the termination recognition, impairment occurrence or amortization are charged to the current gain and loss. Impairment of Loan and Accounts Receivable The Group inspects the book value of the loan and accounts receivable on each balance sheet day and makes provision for impairment when there is objective evidence showing that there is impairment incurred in any loan or account receivable. The book value of loan and accounts receivable is reduced to the present value of predicted future cash flow and the amount as reduced is recognized as loss from impairment and charged to the current gain and loss. After the loss from impairment of loan and accounts receivable is confirmed, in case there is objective evidence showing that the value of the loan and the accounts receivable has been recovered while objectively it is related with the events occurred after the loss is recognized objectively, the loss from impairment originally recognized shall be reversed, the book value after the loss from impairment reversed from the loan and accounts receivable shall not exceed the amortized cost on the date of reversal under the condition that no provision for impairment is made. - 12 - SHANDONG CHENMING PAPER HOLDINGS LIMITED IV. Principal Accounting Policies and Accounting Estimation - continued Termination of Recognition of the Financial Assets Recognition of financial assets in compliance with one of the following conditions shall be terminated: (1) the contractual right for receiving the cash flow of the financial asset is terminated; (2) the financial asset has been transferred while almost all the risks and remuneration in connection with the ownership of the financial asset has been transferred to the party of transfer in; (3) the financial assets have been transferred although the enterprise has neither transferred nor retained almost all the risks and remuneration to the ownership of financial assets but the control over the financial asset has been given up. Inventories Inventories are initially measured according to the cost; inventory costs include purchase cost, processing cost and other expenditures incurred to the inventories' arrival at the present site and status. When inventories are delivered, they are calculated according to the planned cost; at the end of a month, the cost difference shall be amortized and the planned cost shall be adjusted as the actual cost. The Company adopts the perpetual inventory method for its inventory system. Provisions for deterioration of inventories On the balance sheet day, inventories are measured based on the lower of the cost and the net realizable value. Provision for price falling of inventory is made when the net realizable value is lower than the cost. Provision for price falling of inventories is made according to the difference of the cost of the individual inventory item higher than the net realizable value. After provision for price falling of inventories, in case the influencing element for previous reduction of the inventory value has disappeared, causing the realizable net value of the inventory higher than the book value, the provision for price falling of the inventory originally made can be reversed and the reversed amount is charged to the current gain and loss. The net realizable value of the inventories refers to the amount of the estimated sales price of the inventory less the estimated sales costs to incur at the time of completion, sales expenses and relevant taxes in process of normal production and operation. In determining the net realizable value of inventory, with the obtained valid evidence as the base, the purpose of holding the inventory and the influence from the events after the balance sheet day is taken into consideration at the same time. - 13 - SHANDONG CHENMING PAPER HOLDINGS LIMITED IV. Principal Accounting Policies and Accounting Estimation - continued Consumable biologic assets Consumable biologic assets refer to the biologic assets held for the purpose of sale or as agricultural product being harvested in future, including the material forest in growing. Consumable biologic assets are initially measured based on the cost. The cost of self planted and constructed consumable biologic assets are the necessary expenditures incurred before closing, including the borrowing expenses in compliance with capitalization. The follow-up expenses incurred for management and protection after closing of the consumable biologic assets are charged to the current gain and loss. In harvesting or sales of the consumable biologic assets, such expenses are carried over to the cost according to the book value based on the rotational felling period method. All the consumable biologic assets of the Group have active trading market while the Group is able to obtain the market price of the same or similar consumable biologic assets and other relevant information from the trading market so that the fair value of the consumable biologic assets may be reasonably estimated. Therefore, the Group uses the fair value for follow-up measurement for the consumable biologic assets and the change in the fair value is charged to the current gain and loss. Investment based real estate Investment based real estate refers to the real estate held for the purpose of earning rental or added value of capital or both; the Group's investment based real estate is the building leased already. Investment based real estate is initially measured based on the cost. The follow-expenses in connection with the investment based real estate are charged to the investment based real estate costs in case the relevant economic benefit may flow into the Company while the costs can be reliably measured. Other follow-up expenses are charged to the current gain and loss at the time of incurrence. The Group adopts the cost model to make follow-up measurement of the investment based real estate and makes depreciation or amortization according to the policy of coincidence with housing and building or land use right. When the real estate for self-use is converted into investment based real estate or the investment based real estate is converted into the real estate for self-use, the book value before the conversion is taken as the entry value after conversion. The income from disposal of investment based real estate, including sale, assignment, discarding or damage, is charged to the current gain and loss after deduction of the book value and the relevant tax payment. - 14 - SHANDONG CHENMING PAPER HOLDINGS LIMITED IV. Principal Accounting Policies and Accounting Estimation - continued Long-term equity investment For long term equity investment formed from enterprise consolidation, such as the long term equity investment obtained from consolidation of the enterprises under the same control, the share of the book value of the owners' equity in the parties consolidated as obtained on the date of consolidation is taken as the initial investment cost. The long term equity investment obtained through consolidation of the enterprises not under the same control are taken as the initial investment cost of the long term equity investment according to the consolidation cost. Other long term investment other than the long term equity investment formed from consolidation of the enterprises is initially measured according to the cost. For the long term equity investment in which the investee may be controlled (limited to the Company's financial statements) and the long term equity investment which does not have common control over or significant influence upon the investee while there is no quotation in the active market and the fair value cannot be reliably measured, the cost method is used for calculation. The long term investment which has common control over or significant influence upon the investee, the equity method is used for calculation. The long term equity investment which does not control or common control over or significant influence upon the investee while the fair value can be reliably measured can be used as the financial asset available for sale in calculation. In determining if to implement control over or significant influence upon the investee, the potential voting elements, such as the current convertible debentures in the investee held by the Group and other parties, the warranty available for implementation in the current period, can be taken into consideration. Long term equity investment calculated based on the cost method In calculation based on the cost method, the long term equity investment is priced based on the initial investment cost; the current investment income is restricted to the amount of accumulated net profit as distributed obtained after the investee has accepted the investment; the amount of the profit or cash dividend announced by the investee for distribution exceeding the aforesaid amount is used as the recovery of the initial investment cost to offset the book value of investment. Long term equity investment calculated based on the equity method When the equity method is used for calculation, in case the initial investment cost of the long term equity investment is greater than the fair value of the recognizable net asset of the investee enjoyable, the initial investment cost of the long term equity investment shall not be adjusted; When the initial investment cost is less than the investment, in case the fair value share of the recognizable net asset of the investee is enjoyable, its difference is charged to the current gain and loss and at the same time the cost of the long term equity is adjusted. If the equity method is used for calculation, the current investment gain/loss is the share of the net gain/loss realized in the very year by the investee enjoyable or shareable. In confirming the share of the net gain and loss enjoyable in the investee, the Group takes the fair value of various recognizable assets of the investee at the time of obtaining the investment, and recognizes it after adjustment of the net profit of investee according to the accounting policy of the Group and during the fiscal period. For the change of the other owner's equity excluding the net gain/loss of the investee, it is necessary to adjust the book value of the long term equity investment and charge it to the owners' equity. - 15 - SHANDONG CHENMING PAPER HOLDINGS LIMITED IV. Principal Accounting Policies and Accounting Estimation - continued Long-term equity investment - continued Long term equity investment calculated based on the equity method - continued In recognizing the net loss shareable incurred to the investee, the book value of the long term equity investment and the other long term equity which substantially composes the net investment in the investee is reduced to zero as the limit. In addition, if the Group has the obligation for assuming extra loss incurred to the investee, the predicted liability is recognized based on the predicted obligation to be assumed and is charged to the current investment loss. In case of the net profit realized by the investee in the afterwards period, the Group shall restore the recognition of the share of profit enjoyable after the amount enjoyable has made up for the unrecognized loss. Disposal of long-term equity investment In disposal of long term equity investment, the difference between the book value and the payment actually obtained should be charged to the current gain and loss. For the long term equity investment calculated by means of the equity method, at the time of disposal, the part originally charged to the owner's equity shall be converted into the current gain and loss based on the corresponding proportion. Fixed assets and depreciation Fixed assets refer to intangible assets held for the purpose of producing commodities, supplying labor, lease or operation and management with service life exceeding over one fiscal year. Fixed assets are initially measured based on the costs with the influence from the predicted discarding expenses taken into consideration. Commencing from the next month after a fixed asset has reached the predicted usable status, the average service life method is used to provide depreciation within the service life. The service life, the predicted net residual value and annual depreciation rate of various fixed assets are as follows: Types Estimated residual ratio Service life Annual depreciation rate Housing and buildings 5-10% 20-40 years 2.25-4.75% Machines & equipment 5-10% 8-20 years 4.50-11.88% Motor vehicle 5-10% 5-8 years 11.25-19.00% Electronic equipment and others 5-10% 5 years 18.00-19.00% Predicted residual value refers to the amount the Group obtains from the disposal of the asset less the disposal cost when it is assumed that the predicted service life of a fixed asset expires and the fixed asset is the predicted status of termination of the service life. - 16 - SHANDONG CHENMING PAPER HOLDINGS LIMITED IV. Principal Accounting Policies and Accounting Estimation - continued Fixed assets and depreciation – continued The follow-up expenses in connection with fixed assets are charged to the costs of fixed assets if the economic benefit in connection with the fixed assets can highly probably flow into while the costs can be reliably measured and the book value of the part replaced is terminated for recognition. The other follow-up expenses except this are charged to the current gain and loss at the time of incurrence. The Group rechecks the service life, predicted net residual value and depreciation method of fixed assets at least at the end of a year; in case any change takes place, it is taken as change in accounting estimation. The income from disposal of fixed assets, including sale, assignment, discarding or damage, is charged to the current gain and loss after deduction of the book value and the relevant taxes. Construction-in-progress Construction-in-progress is determined according to the engineering expenses, including all engineering expenses incurred during the construction period, loan expenses before the construction-in-progress has reached the predicted usable status and other relevant expenses, etc. The construction in progress is transferred into the fixed assets after the works has reached the predicted usable status. Intangible assets An intangible asset refers to a recognizable non-monetary asset without physical form possessed by or under the control of the Group. Intangible assets are initially measured based on the cost. All expenses in connection with the intangible assets are charged to the costs of intangible assets if the relevant economic benefit can flow into the Group and the costs can be reliably measured. All the expenses of other intangible items except that are charged to the current gain and loss at the time of incurrence. The land use right acquired is usually calculated as intangible asset. For the buildings, such as factory building, constructed independently, the expenses in connection with the land use right and the construction cost of such building are calculated as intangible asset and fixed assets. For purchased housing and buildings, the relevant costs are distributed between the land use right and buildings; in case it is difficult to distribution rationally, they shall all be handled as fixed assets. The Group's intangible assets are all the intangible assets with limited service life. The intangible assets are amortized by installments by means of straight line method within the predicted service life. At the end of a period, the Group rechecks the service life of the intangible assets and the amortization method. The change incurred is treated as change of accounting estimation. The predicted service life of various intangible assets is stated as follows: Categories Service Life Land Use Right 50 years Software 5 years - 17 - SHANDONG CHENMING PAPER HOLDINGS LIMITED IV. Principal Accounting Policies and Accounting Estimation - continued Long-term expenses to be apportioned Long-term expenses to be apportioned are various expenses already incurred but to be borne in the report period and future periods with apportioning term of over one year. The long term expenses to be apportioned are amortized in average by installment during the predicted benefiting period. Impairment of Non-Financial Assets The Group checks the long term equity investment, investment based real estate, fixed asset, construction-in-progress, engineering supplies and intangible assets on every balance sheet day to make sure if there exists any possible impairment. In case there exists impairment in such assets, their recoverable amount is estimated. Estimation of recoverable amount of the assets is based on individual assets. In case it is difficult to estimate the recoverable amount of individual assets, the recoverable amount of the asset group is determined based on the asset group the asset is attributable to. In case the recoverable amount of the asset is lower than its book value, provision for impairment of the asset is made based on the difference in amount and is charged to the current gain and loss. For the goodwill formed due to enterprise consolidation, no matter whether there exists impairment sign, impairment test is conducted every year. In testing the impairment of goodwill, the test is carried out with combination of the related asset group or integration of asset groups. Namely, the book value of the goodwill is proportioned to the relevant asset group based on the reasonable method commencing from the purchase day. In case the recoverable amount of the asset group with content of distributed goodwill or combination of asset groups is lower than the book value, the loss of the corresponding impairment is recognized. The amount of loss from the impairment is first used to offset the book value of the asset group or asset group combination and then offset based on the proportion the book value of other assets according to the proportion of the book value of other assets in the asset group or asset group combination with goodwill exclusive. The recoverable amount is the higher of the net amount of the fair value of the assets less the disposal expenses and the present value of the predicted future cash flow. The fair value of assets is determined based on the sales agreement price in fair transaction; in case there is no sales agreement but does exist active market of asset, the fair value is determined according to the buyer's offer of the asset; in case there exists neither sales agreement nor active market of asset, the fair value of assets is estimated based on the best information obtainable. The disposal expenses include legal expenses, relevant taxes, handling fee and direct expenses incurred before the asset reaches the sellable status in connection with disposal of the assets. Loss from impairment of aforesaid asset which once is confirmed shall not be carried back in the future fiscal periods. Financial Liabilities Financial liabilities are classified into financial liabilities and other financial liabilities which are measured based on the fair value at the time of initial recognition and whose change is charged to the current gain and loss. The financial liabilities of the Group are mainly other financial liabilities, including accounts payable, borrowings and bonds payable. Other financial liabilities undergo follow-up measurement based on the amortized cost by means of actual interest rate method; the gain or loss arising from the termination of recognition or amortization, is charged to the current gain and loss. - 18 - SHANDONG CHENMING PAPER HOLDINGS LIMITED IV. Principal Accounting Policies and Accounting Estimation - continued Financial Liabilities - continued Financial guarantee contract For a financial guarantee contact of financial liability which is not specified for measurement based on the fair value and its change being charged to the current gain and loss, the initial recognition is made based on the fair value; after the initial recognition, the follow-up measurement shall be made for the higher of the amount and the initially recognized amount determined according to the Accounting Standards for Enterprises No. 13 – Contingencies less the balance of the accumulated amortized amount as determined according to the Accounting Standards for Enterprises No. 14 – Income. Salaries to Employees During a fiscal period in which the Group's on-service employees offer services, the salaries payable to the employees are recognized as liability. The Group has joined the employees' social security program provided by the governmental authority, which consists of basic endowment insurance, medical insurance, housing reserve and other social security system; the corresponding expenses are charged to the relevant asset costs or current gain and loss when they incur. In case the employment relationship of an employee is terminated before termination of an on- service employee's labor contract, or there is suggestion for providing compensation in order to encourage employees to voluntarily accept the laying off while the Group has prepared formal plan for laying off employees or addressed proposal of voluntarily laying off and such plan or proposal is to be implemented soon; meanwhile, the Group cannot withdraw the plan of terminating the employment or proposal of laying off employees unilaterally, the predicted liabilities arising from compensation for termination of the employment relation are recognized and charged to the current gain and loss. The Enhanced Early Retirement Program adopts the same principle as for the aforesaid welfare for laying off employees to handle. The Group charges the salaries to the employees of enhanced early retirement and the social insurance premium planned to pay during the period from the date when an employee stops offering service to the date of normal retirement to the current gain and loss (laying-off welfare) as long as they comply with the conditions for recognition of the predicted liabilities. Convertible Bonds The convertible bonds issued by the Company which contain liability and conversion option element are separated at the time of initial recognition and recognized respectively, where the conversion option which is settled with self equity instrument with fixed quantity exchanged with the fixed amount of cash or other financial asset is calculated as equity. In initial recognition, the fair value of the liability part is recognized based on the current market price of the bonds without convertible option. The balance of the fair value of the entire issuing price of the convertible bond less the liability part is taken as the value of convertible option of the equity instrument converted from the bond held by the bond holder and charged to the "capital reserve – other capital reserve (share conversion option)". After initial recognition, the liability part of the convertible bond is measured based on the amortized cost by means of the actual interest rate method. The value of the equity part charged to the "capital reserve – other capital reserve (share conversion option)" is charged to "capital reserve – capital stock premium" when the bond holder exercises the conversion option. The gain or loss is not recognized when the convertible bond is converted or the conversion option is due. - 19 - SHANDONG CHENMING PAPER HOLDINGS LIMITED IV. Principal Accounting Policies and Accounting Estimation - continued Revenue recognition Sales of goods Sales income is recognized when the major risk and remuneration involved in the ownership of goods have been transferred to the buyer, with neither the successive management power general in connection with the ownership retained nor effective control over the goods already solve; the income amount may be reliably measured, the relevant economic benefit may flow into the enterprise; the relevant costs incurred or to incur can be reliably measured. Interest income Interest income is determined according to calculation of the time of the Group's monetary assets and actual utilization rate. Governmental Subsidies Governmental subsidies refer to monetary or non-monetary assets obtained from the government free of charge, but do not include the capital invested by the government as the owner. Governmental subsidies consist of the governmental subsidy in connection with asset and that in connection with income. A governmental subsidy is recognized when it can satisfy the conditions of a governmental subsidy and can be received. In case a governmental subsidy is a monetary asset, it is measured based on the amount received or receivable. A governmental subsidy which is non-monetary asset is measured according to the fair value; in case the fair value cannot be reliably obtained, it is measured based on the nominal amount. The governmental subsidy measured in the name of amount is directly charged to the current gain and loss. Governmental subsidy in connection with asset should be recognized as deferred income and distributed in average over the service life of the relevant asset and charged to the current gain and loss. Governmental subsidy in connection with income, if used for compensation to the enterprise for the relevant expenses or loss in the afterwards period, is recognized as deferred income and charged to the current gain and loss during confirmation of the relevant expenses; if used for compensation or loss incurred, is directly charged to the current gain and loss. In case the recognized governmental subsidy is reimbursable, if the relevant deferred income exists, the exceeded party is charged to the current gain and loss; if there does not exist relevant deferred income, it is directly charged to the current gain and loss. - 20 - SHANDONG CHENMING PAPER HOLDINGS LIMITED IV. Principal Accounting Policies and Accounting Estimation - continued Loan expenses Loan expenses include the interest, amortization at discount or at premium and additional expenses incurred by loans, the exchange difference incurred by foreign exchange loan as well as the interest, amortization at discount or at premium and exchange difference incurred by foreign exchange loans. For the loan expenses for purchase and construction or production of an asset directly attributable to that in compliance with the capitalization conditions, capitalization starts when the asset expenses have incurred, borrowing expenses have incurred, the purchase or production activity necessary for the asset to reach the predicted usable or sellable status; when the assets to be purchased/constructed or produced in compliance with capitalization conditions have reached the predicted application status or status for sale, the borrowing costs stop being capitalized. The remaining borrowing expenses are recognized in the very period of incurrence. The interest expenses actually incurred in the current period of the special borrowings, less the interest income as acquired when the untouched borrowed fund is deposited to bank or the amount of the investment income obtained from the provisional investment is capitalized. For general borrowing, the capitalized amount is determined based on the accumulated asset expenses exceeding the weighted average of the asset expense of the special borrowing part times the capitalization rate of general borrowings as occupied. The capitalization rate is determined according to the weighted average interest rate of general borrowings. During the capitalization period, the exchange difference of special borrowing in foreign currency is all capitalized; exchange difference of general borrowing in foreign currency is charged to the current gain and loss. Assets in compliance with the capitalization conditions refer to fixed assets, investment based real estate, and consumable biological assets, etc. which can reach the predicted application status or status for sale through a long term of purchase/construction or production activities. When the assets in compliance with capitalization conditions have experienced extraordinary interruption in process of purchase/construction or production while the interruption time successively exceeds three months, the capitalization of loan expenses suspend until the purchase of asset or production activity restarts. Income tax Current Income Tax On the balance sheet day, for the current income tax liability (or asset) formed in the current period or previous period, the income tax amount predicted payable (or returnable) is measured according to the tax law. The taxable income as the basis for calculating the current income tax is calculated after the pretax accounting profit is correspondingly adjusted during the report period according to the tax law. - 21 - SHANDONG CHENMING PAPER HOLDINGS LIMITED IV. Principal Accounting Policies and Accounting Estimation - continued Income tax - continued Deferred Income Tax Asset and Deferred Income Tax Liability For the difference between the book value of some asset and liability item and the taxation base as well as the provisional difference arising from the difference between the book value of the items which have not been recognized as the asset and liability but whose taxation base may be determined according to the tax law, the balance sheet liability method is used to recognize the deferred income tax asset and deferred income tax liability. For the provisional difference in connection with the initial recognition of goodwill and initial recognition of the assets or liabilities arising from the transaction which is neither consolidation of enterprises nor affects the accounting profit and taxable income amount (or may be used to offset loss), the concerned deferred income tax liability will not be recognized. In addition, for taxable provisional difference in connection with investment in subsidiaries, associates and joint ventures, if the Group may control the provisional difference reversal time while such provisional difference may not be reversed in the foreseeable future, the concerned deferred income tax liability shall not be recognized either. In addition to the aforesaid exceptional conditions, the Group recognizes the deferred income tax liability arising from other taxable provisional difference. For the provisional difference not in connection with the enterprise consolidation and initial recognition of the assets or liabilities arising from the transaction which is neither consolidation of enterprises nor affects the accounting profit and taxable income amount (or may be used to offset loss) at the time of incurrence, the concerned deferred income tax asset will not be recognized. In addition, for the taxable income which can be used to offset the provisional difference in connection with investment in subsidiaries, associates and joint ventures, if the provisional difference cannot be possibly reversed in the foreseeable future, or in the future, is not possible to be obtained to offset the provisional difference, the concerned deferred income tax asset shall not be recognized. Except the aforesaid exceptional conditions, the Group recognizes the deferred income tax asset arising from temporary difference available for offsetting within the limit of taxable income with temporary difference available for offsetting. The corresponding deferred income tax asset is recognized within the limit of the future taxable income amount which can be carried over to the next year for offsetting loss and tax or highly possibly is to be used for offsetting the offsetable loss and tax. On the balance sheet day, the deferred income tax asset and deferred income tax liability are measured according to the applicable tax rate during the period of predicted recovery of such asset or discharge of the liabilities in compliance with the tax law. On the balance sheet day, the book value of the deferred income tax asset is rechecked. If it is highly impossible to obtain sufficient taxable income amount of offset the interest of the deferred income tax asset in the future, the book value of the deferred income tax asset is reduced. When it is predicted that sufficient taxable income amount can be obtained, the reduced amount is reversed. - 22 - SHANDONG CHENMING PAPER HOLDINGS LIMITED IV. Principal Accounting Policies and Accounting Estimation - continued Income tax - continued Income tax expense Income tax expenses include the current income tax and deferred income tax. Except that the income tax and deferred income tax in connection with the transaction and events which are directly charged to the owner's equity are charged to the owner's equity and that the deferred income tax arising from enterprise consolidation is used to adjust the book value of goodwill, the remaining current income tax and deferred income tax expenses or income are charged to the current gain and loss. Enterprise Consolidation Enterprise consolidation refers to a transaction or matter which forms a report principal consolidation of two or more individual enterprises. Enterprise consolidation consists of consolidation of enterprises under the same control and that not under the same control. The Group recognizes the assets and liabilities acquired from consolidation of enterprises on the consolidation day or acquisition day. The consolidation day or purchase day is the day when the control power over a party consolidated or acquired substantially obtained, namely the day when the control power over the net assets or production and operation decision of a party consolidated or acquired has been transferred to the Group. Consolidation of an enterprise under the same control Consolidation of an enterprise under the same control refers to an enterprise involved in consolidation is under the control by one party or more before and after consolidation while such control is not temporary. A party which acquires the control power over another party involved in the enterprise consolidation on the consolidation day is a consolidating party while the other enterprise involved in the consolidation is a party consolidated. The asset and liability obtained from the enterprise consolidation should be measured based on the book value of the consolidating party on the date of consolidation. The difference between the book value of net asset and the book value of the valuable consideration (or total book value of the issued shares) from the consolidation as paid obtained by the consolidating party is used to adjust the capital reserve; in case the capital reserve is not enough to be offset, the retained earnings is adjusted. The direct expenses incurred in enterprise consolidation to the consolidating party is charged to the current gain and loss. - 23 - SHANDONG CHENMING PAPER HOLDINGS LIMITED IV. Principal Accounting Policies and Accounting Estimation - continued Preparation of Consolidated Financial Statements The consolidation range of consolidated financial statements is determined with control as the base. Control refers to that the Group is able to decide the financial and operating policy of another enterprise, the power against which the Group is able to obtain interest from the operation activities of that enterprise. The Group takes the day of acquisition or loss of the control power over a subsidiary as the acquisition day or day of disposal. For a subsidiary to be disposed, the operation result and cash flow prior to the day of disposal have been properly included in the consolidated profit statement and consolidated cash flow statement; for a subsidiary to be disposed in the current period, the consolidated balance sheet at the beginning of the period is not adjusted. The principal accounting policy and fiscal period adopted by a subsidiary is regulated according to the principal accounting policy and fiscal period as unifiedly specified by the Company. All the material accounts and transactions between the Company and its subsidiaries and between the subsidiaries are offset at the time of consolidation. The part in the owner's equity of a subsidiary not attributable to the parent company's is taken as minority shareholders' equity which is presented as "minority shareholders' equity" under the item of owner's equity in the consolidated balance sheet. The part of the current net gain and loss of a subsidiary belonging to minority shareholders' equity is presented as "minority shareholders' gain and loss" under the item of net profit in the consolidated profit statement. The part of loss of a subsidiary shared by minority shareholders has exceeded the part enjoyable in the owner's equity of that subsidiary at the beginning of a period, in case the Articles of Association or an agreement has specified that the minority shareholders are obliged and are able to make compensation for it, it offsets the minority shareholders' equity, otherwise, it offsets the owner's equity attributable to the shareholders of the parent company of the Group. The profit realized in the later period by the subsidiary is all taken as the owner's equity attributable to the shareholder of the parent company before making up for the loss belonging to the minority shareholders assumed by the shareholder of the parent company. Foreign Currency Translation The financial statements in foreign currency for operation outside Mainland China are translated into statements in Renminbi after conversion according to the following methods: all the asset and liability items in the balance sheet are translated based on the spot rate on the balance sheet day. The item of shareholder's equity except the item "retained earnings" is translated based on the spot rate at the time of incurrence. All the items in the statement of profit and the item which reflects the amount of profit distributed is translated based on the spot rate on the date of translation. The retained earnings at year beginning is the retained profit of the previous year end after translation. The retained profit at year end is calculated and stated based on the items of the profit distribution after translation. The difference between the asset items and liability items and the total of the shareholders' equity items after translation is separately stated under the item of owner's equity in the balance sheet as the translation discrepancy of statements in foreign currency. - 24 - SHANDONG CHENMING PAPER HOLDINGS LIMITED IV. Principal Accounting Policies and Accounting Estimation - continued Foreign Currency Translation - continued In disposal of operation outside Mainland China, the difference from translation of statements in foreign currency stated under the item of shareholder's equity in the balance sheet and in connection with foreign operation is, all or based on the proportion of operation outside mainland China as disposed, charged to the disposal of current gain and loss. Cash flow in foreign currency and cash flow of subsidiaries outside mainland China are translated based on the spot exchange on the date of cash flow incurrence, the amount affected by the exchange rate change upon cash and cash equivalents is separately stated in "influence of exchange rate change upon cash and cash equivalent" in the cash flow statement as the adjustment item. The amount at year beginning and actual amount of the previous year are stated based on the amount of the financial statements of the previous year after translation. Related Parties A related party is formed when a party controls or jointly controls or exerts significant influence upon another party or two or more parties are under control or joint control or significantly influenced by another party. V. Determination of significant accounting policy depends on the key assumption and indefinite elements as adopted in the accounting estimation. In process of applying the accounting policy as described in Note IV, due to the indefiniteness within the operation activity, the Group needs to make judgment, estimation and assumption of the book value of the items in the statements which cannot be accurately measured. These judgments, estimation and assumption are based on the historical experience of the Group's management on the basis of taking other relevant elements into consideration. There may exist difference between the actual result and the estimation of the Group. The Group makes regular recheck on the aforesaid judgment, estimation and assumption on the basis of sustainable operation. In case the change in the accounting estimation only influences the change in the current period, it amount as influenced is recognized in the very period of the change; in case the change influences not only the current period but also the future period, the amount involved in the influence from change is recognized in the current period and future period respectively. Provision for bad debts The Group recognized the provision for bad debt according to the recoverability of the accounts receivable. When there exists sign showing any account receivable impossible to be recovered, provision for bad debt is recognized. Recognition of provision for bad debt needs judgment and estimation. In case there exists any difference between the result of re-estimation and the existing estimation, the difference shall influence the book value of the account receivable in the period of such change of estimation. - 25 - SHANDONG CHENMING PAPER HOLDINGS LIMITED V. Determination of significant accounting policy depends on the key assumption and indefinite elements as adopted in the accounting estimation - continued Provisions for deterioration of inventories The Group recognizes the provision for price falling with the net estimation of net realizable value of inventory. When there exists sign showing that the net realizable value is lower than the cost, provision for price falling of inventories is recognized. Recognition of net realizable value needs judgment and estimation. In case there exists any difference between the result of re-estimation and the existing estimation, the difference shall influence the book value of the inventory in the period of such change of estimation. Recognition of deferred income tax asset On various balance sheet days, the Group makes assessment on whether deferred income tax asset is recognized. When it is predicted that there is sufficient taxable income tax to offset the provisional different or offsetable loss, the Group shall recognize it as a deferred income tax asset. The Group needs to use proper estimation and judgment to assess whether there is sufficient taxable income amount to offset such provisional difference or offsetable loss in the future. Meanwhile, in calculating the deferred income tax asset, the Group needs to make estimation on the applicable tax rate during the predicted recovery of the relevant asset or clearing off the relevant liabilities. In case the estimated tax rate is different from the actual tax rate, such difference shall influence the income tax expense and deferred income tax asset during the period of making such judgment. Impairment of Goodwill In testing impairment of the goodwill, it is necessary to calculate the present value of the predicted future cash flow of the relevant asset group or asset group combination, including goodwill, and is necessary to predict the future cash flow of such asset group or asset group combination; meanwhile, it is necessary to estimate a pre-tax interest rate which can properly reflect the present market monetary time value and specific risk of asset. Influenced by the market interest rate, inflation, foreign exchange reserve and macro economic control, etc. in case the estimated interest rate is different from the actual interest rate, such difference will affect impairment of goodwill during the period of making such judgment. VI. Change in accounting policy The Group initially implemented the new accounting standards on January 1, 2007. Commencing from that day, the Group recognized, measured and reported the Group's transactions or matters according to the new accounting standards. For the change in accounting policy taken place due to initial implementation of the new accounting standards, the Group adopted the following methods for treatment. - 26 - SHANDONG CHENMING PAPER HOLDINGS LIMITED VI. Change in accounting policy - continued Change in Accounting Policy Calculated by Means of Retroactive Adjustment Method Long-term equity investment Before implementation of the new accounting standards, when the equity method was used for calculating the long term equity investment, the difference between the initial investment cost greater than the part in the owner's equity enjoyable in the investee is calculated as the equity investment debit balance and is charged to the gain and loss based on the average amortization in a certain period. The difference of the initial investment cost lower than the part of the owner's equity in the investee enjoyable is calculated as the credit balance of the equity investment before promulgation of the Document CAI KUAI [2003] No. 10 and is charged to the gain and loss according to the average amortization in a certain period; or charged to the capital reserve if it incurred after promulgation of the Document CAI KUAI [2003] No. 10. Before implementation of the new accounting standards, the long term equity investment of the subsidiaries is calculated based on the equity method in the Company's financial statements. For the detail about the accounting policy of long term equity investment after implementation of the new accounting standards, refer to Note IV "Long Term Equity Investment". After implementation of the new accounting standards, the cost method is used for calculating the long term equity in the subsidiaries. According to the Accounting Standards for Enterprises Interpretation No. 1, for the long term equity investment in subsidiaries already held before the initial implementation day, retroactive adjustment is made on the day of initial implementation, regarding it as if the cost method had been used for calculation for that subsidiary at the very beginning. Income tax Before implementation of the new accounting standards, the payable tax method is used as the method of accounting treatment of income tax. After implementation of the new accounting standards, the Group adopted the balance sheet liability method for accounting treatment of the income tax. For the detail of the accounting policy of the income tax, refer to Note IV "Income Tax". Assessment of Added Value The Group recognizes the long term equity investment cost of the physical investment in subsidiaries based on the value after the assessment according to the accounting system and the relevant regulations when the business incurs while this part of investment in the financial report for B-Shares was charged according to the book value. According to the Accounting Standards for Enterprises Interpretation No. 1, the Group makes retroactive adjustment for that added value of assessment according to the accounting treatment for B-Shares. - 27 - SHANDONG CHENMING PAPER HOLDINGS LIMITED VI. Change in accounting policy - continued Change in Accounting Policy Calculated by Means of Retroactive Adjustment Method - continued Goodwill Before implementation of the new accounting standards, the goodwill formed from consolidation of enterprises is amortized on average over a certain period. After implementation of the new accounting standards, the difference between the valuable consideration paid for acquisition of the equity and the book value enjoyable in the subsidiary on the transaction day determined through calculation based on the equity proportion as newly acquired is stated as goodwill in the consolidated balance sheet, and the goodwill shall not be amortized by means of the same treatment method adopted by the Group as that for preparation of the financial statements according to the standards for international accounting financial report. Retroactive adjustment is made on the day of initial implementation and the original amortized amount is offset. Transactional financial assets Before implementation of the new accounting standard, the short term investment is valuated based on the initial investment cost. The dividend and interest received during the holding period are used to offset the investment cost and are measured based on the lower of the cost and the market price at the end of a period. After implementation of the new accounting standards, the aforesaid investment is classified as transactional financial asset. For the detail about the accounting policy for the transactional financial asset, refer to Note IV "Classification and Measurement of Financial Assets". Change in Accounting Policy Calculated by Means of Retroactive Adjustment Method - Continued Convertible Debentures Before implementation of the new accounting standards, the Company's convertible debentures are not separable and all are measured afterwards according to the amortized cost as the bonds payable. For the detail about the accounting policy for the convertible debenture after implementation of the new accounting standards, refer to Note IV "Convertible Debenture". Governmental Subsidy in Connection with Assets Before implementation of the new accounting standards, the governmental subsidy received by the Group in connection with asset is calculated as special account receivable. After the concerned appropriation item is completed, the fixed asset or product formed is detained to the Group according to the regulation and the concerned special account payable is charged to the capital reserve. The appropriation which has not resulted in asset and is necessary to be written off and from which the asset resulted in has to be handed to the central government according to the regulations is used to offset the special account payable and the concerned asset item through approval. For the detail about the accounting policy for the governmental subsidy in connection with asset after implementation of the new accounting standards, refer to Note IV "Governmental Subsidy". - 28 - SHANDONG CHENMING PAPER HOLDINGS LIMITED VI. Change in accounting policy - continued Organization expenses Before implementation of the new accounting standards, the expenses incurred during the construction preparation period, with exception of those used for purchase/construction the fixed asset, are charged to the current gain and loss commencing from the very month starting production and operation. After implementation of the new accounting standard, the expenses incurred during the construction preparation period are charged to the current gain and loss; and retroactive adjustment is made over the concerned data as determined according to the Group's financial statements prepared according to the international standard of financial statements. Ancillary Expenses Arising from Borrowing Before implementation of the new accounting standards, the ancillary expenses arising from borrowing in the Group are charged to the current gain and loss on once-and-for-all basis or capitalized at the time of incurrence. After implementation of the new accounting standards, the ancillary expenses arising from borrowing as part of the initially recognized amount of the relevant liability is amortized based on the recognized interest rate within the borrowing term and charged to the current gain and loss or capitalized. and retroactive adjustment is made over the concerned data as determined according to the Group's financial statements prepared according to the international standard of financial statements. Change in Accounting Policy Calculated by Means of Retroactive Adjustment Method - Continued Income from debts reorganization Before implementation of the new accounting standards, in case the debtor discharges some liability with cash lower than the book value of the liability, the debtor should recognize the difference between the book value of the reorganized liability and the cash paid as the capital reserve; in case the debtor discharges some liability with non-cash asset, the debtor should recognize the difference between the book value of the reorganized liability and the sum of the book value of the non-cash asset as assigned and the relevant taxes as the capital reserve or the current gain and loss. After implementation of the new accounting standards, the income from reorganization of liability is charged to the current gain and loss. According to the Accounting Standards for Enterprises Interpretation No. 1, the Group makes retroactive adjustment for that income from the liability reorganization according to the accounting treatment principle for B-Shares. - 29 - SHANDONG CHENMING PAPER HOLDINGS LIMITED VI. Change in accounting policy – continued Change in Accounting Policy Calculated by Means of Retroactive Adjustment Method – Continued Influence from the opening balance adjusted based on the retroactive adjustm Influence of the consolidated shareholders' equity as at January 1, 2006 attributable to the shareholders' equity of the parent company at December 3 Minority shareholders' Retained earnings Surplus reserve Capital reserve equity Total Retained earnings Surp in RMB in RMB in RMB in RMB in RMB in RMB i Credit balance of investment in subsidiaries and associates 53,318,995.15 - -29,953,913.95 -2,591,917.70 20,773,163.50 44,256,717.21 Income tax -5,429,452.64 - - -1,233,775.91 -6,663,228.55 31,080,110.72 Separation of Convertible Debentures -24,525,688.86 - 205,045,897.44 - 180,520,208.58 -326,660,828.68 Assessment of Added Value 16,871,821.70 - -28,325,901.08 -15,214,616.62 -26,668,696.00 20,081,105.02 Goodwill - - - - - 895,481.50 Governmental Subsidies 36,554,047.27 -35,138,178.20 -3,027,571.41 -1,611,702.34 36,554,047.27 -35,138, Organization expenses -81,510.93 - - -17,603.35 -99,114.28 -154,003.03 Ancillary Expenses Arising from Borrowing 3,916,631.68 - - 4,390,116.32 8,306,748.00 3,916,631.68 Income from debts reorganization 11,469,713.04 - -11,469,713.04 - - 21,744,260.88 Influence from calculation based on the cost method upon subsidiaries - - - - - 14,321,021.37 - Total 92,094,556.41 35,138,178.20 132,268,797.96 -14,667,797.26 174,557,378.91 -153,965,456.06 35 _________ _________ _________ ________ ________ _________ _________ SHANDONG CHENMING PAPER HOLDINGS LIMITED VI. Change in accounting policy – continued Change in Accounting Policy Calculated by Means of Retroactive Adjustment Method – Continued Influence from the change of the aforesaid accounting policy upon the net profit of 2006 is as follows: Amount in RMB Credit balance of investment in subsidiaries and associates -4,486,378.07 Income tax 44,793,214.94 Separation of Convertible Debentures -302,135,139.82 Assessment of Added Value 3,944,123.77 Amortization of goodwill 895,481.50 Organization expenses -146,037.68 Income from debts reorganization 10,274,547.84 Influence from calculation based on the cost method upon subsidiaries 14,321,021.37 Total -232,539,166.15 - 31 - SHANDONG CHENMING PAPER HOLDINGS LIMITED VI. Change in accounting policy – continued Change in Accounting Policy Calculated by Means of Retroactive Adjustment Method – Continued Influence from the opening balance adjusted based on the retroactive adjustment upon the financial stateme Influence upon the shareholders' equity of the parent shareholder as at January 1, 2006 Influence upon the shar Retained earnings Surplus reserve Capital reserve Total Retained earnings Surplus re in RMB in RMB in RMB in RMB in RMB in RMB Retroactive adjustment of the long term equity investment in subsidiaries based on the cost method -514,334,721.38) - -236,793,605.60 -751,128,326.98 -661,332,831.38 - Income from disposal of subsidiaries - - - - 30,254,784.88 - Income tax 14,686,731.24 - - 14,686,731.24 38,386,721.36 - Derivative financial instruments -24,525,688.86 - 205,045,897.44 180,520,208.58 e-326,660,828.68 - Governmental subsidy 36,554,047.27 -35,138,178.20 -3,027,571.41 -1,611,702.34 36,554,047.27 -3 Appraised added value 11,415,643. 70 - -18,720,643.70 -7,305,000.00 12,875,625.00 - Income from debts reorganization 3,161,634.57 - -3,161,634.57 - 5,355,930.74 - Total -473,042,353.46 -35,138,178.20 -56,657,557.84 -564,838,089.50 -864,566,550.81 -3 SHANDONG CHENMING PAPER HOLDINGS LIMITED VI. Change in accounting policy - continued Change in Accounting Policy Calculated by Means of Retroactive Adjustment Method – Continued Influence from the change of the aforesaid accounting policy upon the net profit of the parent company in 2006 is stated as follows: Amount In RMB Retroactive adjustment based on the cost method over the long term equity investment in the subsidiaries (146,998,110.00) Income from disposal of subsidiaries 30,254,784.88 Income tax 23,699,990.12 Derivative financial instruments (302,135,139.82) Assessment of Added Value 1,459,981.31 Income from debts reorganization 2,194,296.17 Total (391,524,197.35) Consolidated Statement of Correction Adjustment of Shareholders’ Equity as at January 1, 2007. According to the Discrepancy Adjustment Statement of the Consolidated Shareholders’ Equity prepared respectively according to the new and old accounting standards as disclosed in 2006 Annual Report (hereinafter referred to as the Discrepancy Adjustment Statement), the Group’s consolidated shareholders’ equity under the new accounting standards as at January 1, 2007 amounted to RMB 7,900,682,287.32. In 2007, the Group made further explanation based on implementation of the new accounting standards promulgated by the State Ministry of Finance, with consideration of the Group’s practical conditions, adjustment was made in preparation of the Discrepancy Adjustment Statement based on the relevant accounting policy or significant recognition as adopted. The consolidated shareholders’ equity in the Company’s 2007 Financial Statements prepared according to the new standard as at January 1, 2007 amounted to RMB 7,889,252,125.39. According to the Accounting Standards for Enterprises Interpretation No. 1, the Group prepared the following Statement of Correction and Adjustment of the Consolidated Shareholders’ Equity as at January 1, 2007. Disclosure in 2007 Annual Amount disclosed in Description Report 2006 Annual Report Discrepancy Causes in RMB in RMB in RMB Shareholders’ equity as at December 31, 2006 (based on the old accounting standards) 6,010,124,970.09 6,010,124,970.09 - Balance in long-term equity investment 14,302,803.26 15,926,785.43 -1,623,982.17 (1) Influence from separation of financial instrument 101,332,847.99 126,859,306.80 -25,526,458.81 (2) - 33 - SHANDONG CHENMING PAPER HOLDINGS LIMITED Income tax 31,080,110.73 31,024,046.03 56,064.70 (3) Others -5,198,388.26 -22,744,394.00 17,546,005.74 (4) Change in the way of presenting minority shareholders’ gain and loss 1,737,609,781.58 1,739,491,572.97 -1,881,791.39 ___________ ___________ __________ Shareholders’ equity as at January 1, 2007 (based on the new accounting standards) 7,889,252,125.39 7,900,682,287.32 -11,430,161.93 (1) In the Discrepancy Adjustment Statement of the Consolidated Shareholders’ Equity prepared respectively according to the new and old accounting standards as disclosed in 2006 Annual Report, the Group made direct adjustment of the long term equity investment discrepancy of the Company’s subsidiaries in the consolidation range at the Group’s consolidation level and the influence upon their minority shareholders’ equity was not separately presented. In 2007, the Group made adjustment of the material recognition in preparation of the discrepancy adjustment statement according to the practical conditions and reduced through adjustment the difference in amount of the long term equity investment by RMB 1,623,982.17 on January 1, 2007. - 34 - SHANDONG CHENMING PAPER HOLDINGS LIMITED VI. Change in accounting policy – continued (I) Change in Accounting Policy Calculated by Means of Retroactive Adjustment Method – Continued Consolidated Statement of Correction Adjustment of Shareholders’ Equity as at January 1, 2007. (2) In the Discrepancy Adjustment Statement of the Consolidated Shareholders’ Equity prepared respectively according to the new and old accounting standards as disclosed in 2006 Annual Report, the Group separated the embedded derivative instrument in the convertible bonds and made valuation separately according to the fair value. In 2007, according to the new accounting standards for enterprises, the Company made rejudgment on the relevant elements in connection with the accounting treatment of the convertible debentures. in the opinion of the Company, the embedded derivative instrument of the convertible bonds was closely related with the principal contract, it was unnecessary to make separate measurement for the embedded derivative instrument. Instead, at the time of initial recognition, the liabilities as contained and the convertible option elements were separated and the liability and equity were respectively recognized and the liability and equity were respectively recognized. The Company made adjustment of the important recognition at the time of preparing the discrepancy adjustment statement according to the practical conditions, and decreased the consolidated shareholders’ equity as at January, 1, 2007. (3) Due to the influence from the equity change resulted from increase of the financial instrument separation, the Group made adjustment of the important recognition in preparation of the discrepancy adjustment statement according to the practical conditions. Therefore, on January 1, 2007, the Group added the deferred income tax asset in connection with the equity change resulted from increase of the financial instrument separation by RMB 56,064.70. (4) In the Discrepancy Adjustment Statement of the Consolidated Shareholders’ Equity prepared respectively according to the new and old accounting standards as disclosed in 2006 Annual Report, the Group only took the adjustments of the re-assessed and charged value and the accumulated depreciation of the fixed assets in the financial statements prepared according to the international standards for financial report into consideration. In 2007, according to the Accounting Standards for Enterprises - Interpretation No. 1, with general consideration of the adjustments of governmental subsidy, auxiliary expenses of loans, etc., the Company made adjustment of the important adjustment according to the practical conditions in preparation of the discrepancy adjustment statement, and reduced the consolidated shareholders’ equity by RMB 17,546,005.74 on January 1, 2007. (5) The Group adjusted up the consolidated shareholders’ equity by RMB 1,881,791.39 on January 1, 2007 as change took place in the mount of minority shareholders’ gain and loss due to discrepancy in the aforesaid long term equity investment, influence of the income tax and added value from appraisal. (6) Affected by the change of the above five causes, the Group adjusted down shareholders’ equity by RMB 11,430,161.93 as at January 1, 2007. Change in accounting policy calculated by the future applicable method Except the change of the accounting policy as described in (1), the Group also experienced the - 35 - SHANDONG CHENMING PAPER HOLDINGS LIMITED change of the following principal accounting policies due to initial implementation of the new accounting standards and accounting treatment was made by means of the future applicability method including: Impairment of non-financial assets Before implementation of the new accounting standards, the provision for impairment of assets already made may be reversed when in compliance with the relevant conditions. After implementation of the new accounting standards, the Group made provisions for impairment of loans, accounts receivable, inventories and non-financial assets according to the provisions on Note IV "Impairment of Loan and Accounts Receivable", "Provision for Price Falling of Inventories" and "Impairment of Non-financial Asset". Of them the loss from impairment of non- financial asset is not reversed. - 36 - SHANDONG CHENMING PAPER HOLDINGS LIMITED VII. Taxes The taxes payable by the Group include value added tax, business income tax, business tax, building tax and land use tax, etc. Value-added tax The payable value added tax (VAT) is the balance of output VAT less the offsetable input VAT. The specific tax rates of output VAT and input VAT of the VAT of relevant items are as follows: Items Tax rate % Products on sale on domestic market (output VAT) 17 Sales and Printing of Paper Core (output VAT) 17 Purchase of wheat straw and reed (input VAT) 13 Steam for production (input VAT) 13 Power for production (input VAT) 17 Soda and carton liner paper for production (input VAT) 17 Purchase of waste paper at home (input VAT) 10 Coal (Input VAT) 13 According to the Circular of the Circular of State Administration of Taxation on Exemption from Value Added Tax for Partial Products of Comprehensive Utilization of Resources {CAI SHUI [1995] No. 44}, the building material products produced by enterprises with raw materials mixed with no less than 30% of the gangue, stone coal, coal ash, bottom slag of coal boiler (excluding blast furnace water slag) shall be exempted from VAT. The raw materials used for production by Wuhan Chenjian New Style Wall Materials Co., Ltd., one of the Company's subsidiaries, contain over 30% of coal ash. It belongs to an enterprise which conducts production by utilization of polluting materials, it enjoys exemption from VAT according to the regulations. According to the Circular of the State Administration of Taxation on the Policy on VAT for the Business of Recycling Waste and Used Materials {CAI SHUI [2001] No. 78, commencing from 2001, a general tax payer specialized in operation of waste and used goods and materials are exempted from VAT; Qihe Chenming Waste Materials Recycling Co., Ltd. and Jilin Chenming Waste Materials Recycling Co., Ltd., two of the Company's subsidiaries enjoy the preferential policy of exemption from VAT. According to the Circular of the Circular of State Administration of Taxation on Exemption from Value Added Tax for Partial Products of Comprehensive Utilization of Resources {CAI SHUI [1995] No. 44}, and the document CAI SHUI [2001] No. 72, Shandong Chenming Panels Co., Ltd., Qihe Chenming Panels Co., Ltd., Juancheng Chenming Panels Co., Ltd. and Heze Chenming Panels Co., Ltd., four of the Company's subsidiaries, enjoy referential policy of VAT exemption upon payment for producing products by comprehensive utilization of resources. - 37 - SHANDONG CHENMING PAPER HOLDINGS LIMITED VII. Taxes - continued Other Taxes Business income tax Income Tax Rate Applicable to the Company and the Subsidiaries According to the Official Reply of the State Administration of Taxation on the Issue of Consolidation of the Concerned Taxes of Shouguang Yongli Paper Co., Ltd. and Shandong Shouguang Paper Group Co., Ltd. (GUO SHUI HAN [1997] No. 23, and the Official Reply of the Ministry of Foreign Trade and Economic Cooperation of the People's Republic of China on Conversion of Shandong Chenming Paper Holdings Limited into Foreign Investment Co., Ltd. [1997] WAI JING MAO ZI ER HAN ZI No. 415, through approval by Shouguang National Tax Bureau, Shandong Province, the Company is an enterprise with foreign investment located in the coastal open-up city. Therefore, the Company has been applying 24% business income tax rate since 2002. Hailaer Chenming Paper Company Limited, one of the Company's subsidiaries is an enterprise established in Inner Mongolia Autonomous Region, which complies with the taxation preferential policy of the central government on China's Western Development Program. According to the Document of the State Administration of Taxation GUO SHUI FA (2002) No. 47. the applicable income tax rate is 15% from 2001 to 2010. According to the Official Reply of Office of the Leading Group for Western Region Development under the State Council on Yanbian Korea Autonomous Prefecture to Refer to Implementation of the Preferential Policy for Western Region Development ([2001] No. 10) and the Official Letter of Commitment of Yanbian Prefecture Local Tax Bureau on Jilin Chenming Yasong Pulp Co., Ltd. to Enjoy Preferential Policy for Taxation (YAN ZHOU DI SHUI HAN [2001] No. 99, Yanbian Chenming Paper Co., Ltd., one of the Company's subsidiaries enjoys the referential policy of taxation, and the applicable income tax rate is 15% from 2001 to 2010. Shandong Chenming Xinli Thermal Power Co., Ltd., one of the Company's subsidiaries, is a Sino- foreign joint venture established in 2001 engaged in electric power and thermal energy production and sales. According to Article 73 of the Rules for Implementation of the Business Income Tax Applicable to Enterprises with Foreign Investment and Foreign Enterprises in the People's Republic of China and the Circular of the State Council on Extension of the Application Range of the Preferential Policy on Taxation for Projects of Energy and Traffic Infrastructure Carried out by Enterprises with Foreign Investment (GUO FA [1999] No. 13, and the Official Reply of the Sate Administration of Taxation on the Business Income Tax Rate Applicable to Shandong Chenming Xinli Thermal Power Co., Ltd. (GUO SHUI HAN [2002] No. 1032), the applicable income tax rate is 15%. Wuhan Chenming Hanyang Paper Co., Ltd., one of the Company's subsidiaries, was changed in to an enterprise with foreign investment in April 2005. According to the Income Tax Law of the Peoples Republic of China for Enterprises with Foreign Investment and Foreign Enterprises and the rules for implementation, through approval by the National Tax Bureau of Wuhan Economic and Technology Development Zone, the company was exempted from income tax by a half in 2007. - 38 - SHANDONG CHENMING PAPER HOLDINGS LIMITED VII. Taxes - continued Business income tax - continued Income Tax Rate Applicable to the Company and the Subsidiaries - continued Jiangxi Chenming Paper Co., Ltd., one of the Company's subsidiaries, was changed in to an enterprise with foreign investment in 2004, becoming a production based enterprise with foreign investment with operation term of over 10 years. According to the Income Tax Law of the Peoples Republic of China for Enterprises with Foreign Investment and Foreign Enterprises, commencing from the year of profit making, the company is exempted from business income tax for the first and second years, and by a half from the 3rd to 5th years. In 2007, it was exempted from the income tax. Jilin Chenming Paper Co., Ltd., one of the Company's subsidiaries, was established in 2005. It is an enterprise with foreign investment with operation term of over 10 years. The payable income tax amount of the company in 2005, 2006 and 2007 was negative; the company did not have to pay the business income tax. Shandong Yujing Hotel Co., Ltd., one of the Company's subsidiaries, was established in 2005. In 2007, it was still in process of construction preparation period and did not have to pay income tax. Wuhan Chenjian New Style Wall Materials Co., Ltd., one of the Company's subsidiaries, is a production based enterprise with a large quantity of coal ash supplied by the suppliers other than the Company. According to the Regulations on Several Policy Issues concerning Business Income Tax, commencing from the date of starting operation, the company shall be exempted from income tax for five years. 2007 was the fourth year of its production and operation and does not have to pay income tax. On March 16, 2007, the Business Income Tax Law of the People's Republic of China, Order No. 63 of the Chairman of the People's Republic of China (hereinafter referred to as the New Business Income Law was promulgated on March 16, 2007 and is going to come into force commencing from January 1, 2008. All the subsidiaries of the Group shall calculate and pay the business income tax according to the New Business Income Tax Law and the regulations on implementation of the business income tax law, etc. ? Investment in Home Made Equipment to Offset Income Tax According to the Circular of the State Administration of Taxation on the Investment from Enterprises with Foreign Investment and Foreign Enterprises to Purchase Home Made Equipment to Offset the Business Income Tax (CAI SHUI [2000] No. 49) and the Provisional Measures on Investment in Home Made Equipment for Technical Innovation to Offset the Business Income Tax (CAI SHUI ZI [1999] No. 290), the Group may offset the newly added business income tax over the previous year by 40% of the Group's investment for purchasing the home-made equipment. The business income tax amount offset with the investment of the previous year must not exceed the newly added business income tax for the equipment purchased by the enterprise in the year over the previous year. In case the newly added business income tax in the current year is not sufficient to be offset, the remaining amount of the investment may be used to offset the newly added business income tax of next year; but the postponed time for offsetting must not exceed five years. - 39 - SHANDONG CHENMING PAPER HOLDINGS LIMITED VII. Taxes - continued Business tax For repairing service income and interest income, business tax has to be paid based on 5%; for freight income, business tax has to be paid based on 3%. City maintenance construction tax and education surcharge The Company and its subsidiaries - Wuhan Chenming Hanyang Paper Co., Ltd., Shandong Chenming Linli Thermal Power Co., Ltd., Jiangxi Chenming Paper Co., Ltd. and Jilin Chenming Paper Co., Ltd., are all enterprises with foreign investment and therefore are exempted from the city maintenance construction tax and education surcharge; Shandong Chenming Paper Group Qihe Linerboard Paper Company Limited pays the city maintenance construction tax and education surcharge based on 5% and 3% of the paid VAT and business tax respectively; other subsidiaries pay the city maintenance construction tax and education surcharge based on 7% and 3% of the paid VAT and business tax respectively. Individual income tax The individual income tax of the Group's employees is withheld by the Group on behalf. Building Tax and Land Use Tax The Group's building tax is paid based on 70% of the cost of the real estate with tax rate of 1.2%; the land use tax is paid based on the area of the land used with the corresponding tax rate. Range of the Consolidate Financial Statements and the Controlled Subsidiaries. - 40 - SHANDONG CHENMING PAPER HOLDINGS LIMITED VII. Taxes - continued Building Tax and Land Use Tax - continued Company and/or subsidiaries Proporti on of Proportion Proportion of voting Registered direct of indirect Ownership or Legal power jointly enjoyed by Subsidiaries place holding holding Principal business type representative: the Group % % % Wuhan Chenming Paper products and paper Enterprise with Hanyang Paper Co., Ltd Wuhan 50.93 - making materials foreign investment Chen Hongguo 50.93 Machinery production and sales Qihe Panels Co., Ltd. of Shendong Chenming Qihe, Manufacture, processing and Company with Paper Holdings Limited Shandong 100 - sales limited liability Hou Huancai 100 Linerboard Paper, packaging paper, etc. Shandong Chenming Shouguan Electric power and heat Joint stock Thermal Power Co., Ltd. g, Shandong 51 - production and supply company limited Wu Wenhe 51 Yanbian Chenming Viscose acetal fiber pulp and Company with Paper Co., Ltd. Yanji, Jilin 76.73 - wood pulp limited liability Wu Bingyu 76.73 Machine-made paper, etc. Jiangxi Chenming Machine-made paper, Enterprise with Paper Co., Ltd. Nanchang 51 - cardboard, pulp sheet foreign investment Chen Hongguo 51 Paper products and paper making materials production and processing, etc. Shouguang Chenming Shouguan Company with Gardens Co., Ltd. g, Shandong 68 - Quick growing poplar and fruit limited liability Chen Guihua 68 Vegetable development and culturing and sales Processing and sales of Hailaer Chenming Hailaer machine-made paper and pulp Company with Paper Co., Ltd. City 75 - sheet limited liability Gao Ziwei 75 Production, processing, sales Chibi Chenming Chibi, and truck transport of pulp and Company with Paper Co., Ltd. Hubei 20 31 paper products limited liability Li Feng 51 Production and sales of Xiangfan Chenming copperplate paper, machine-made Copperplate Paper Co., Xiangfan, paper and other paper products, Company with Ltd. Hubei 20 31 truck transport limited liability Chen Hongguo 51 Wuhan Chenming Qianneng Thermal Hanyang, Production of electric power Company with Power Co., Ltd. Wuhan - 51 and heat limited liability Sun Xiaobo 51 Wuhan Chenjian New Style Wall Materials Co., Production, operation and sales Company with Ltd. Wuhan - 51 of flyash aerated concrete block limited liability Fan Fenglan 51 Shandong Chenming Xinli Thermal Power Shouguan Electric power and heat Enterprise with Co., Ltd. g, Shandong - 51 production and supply foreign investment Wu Wenhe 51 Shouguang Chenming Shouguan Production and sales of cement Company with Cement Co., Ltd. g, Shandong - 100 by means of furnace ash limited liability Li Xuetao 100 Shandong Chenming Shouguan Artificial board surface Company with Panels Co., Ltd. g, Shandong - 100 decorative panel wood products limited liability Liu Shusen 100 Production, processing and sales of artificial board, forceful wooden floor board, impregnated paper, etc. Production, processing and Shouguang Chenming Shouguan sales of forceful wooden floor Company with Floor Board Co., Ltd. g, Shandong - 100 board and impregnated paper limited liability Liu Shusen 100 Production, processing and sales of hdf (mdf) board, decorative surface board, melamine impregnated paper, Qihe Chenming Panel Qihe, compound floor board, wood Company with Co., Ltd. Shandong - 100 products limited liability Hou Huancai 100 Production, processing and sales of hdf (mdf) board, decorative surface board, melamine impregnated paper, Heze Chenming Panel Heze, compound floor board, wood Company with Co., Ltd. Shandong - 67 products limited liability Liu Shusen 67 - 41 - SHANDONG CHENMING PAPER HOLDINGS LIMITED VII. Taxes - continued Building Tax and Land Use Tax - continued Company and/or subsidiaries Proporti on of Proportion Proportion of voting Registered direct of indirect Ownership or Legal power jointly enjoyed by Subsidiaries place holding holding Principal business type representative: the Group % % % Yangjiang Chenming Wood planting, development Forestry Development Yangjiang, and forestry technology Company with Co., Ltd. Guangdong - 100 consulting limited liability Chen Guihua 100 Zhanjiang Chenming Forestry Development Zhanjiang, Wood planting, seedling Company with Co., Ltd. Guangdong - 100 culturing and sales limited liability Wang Zaiguo 100 timber processing, sales, forestry byproducts processing and sales Machine-made paper, Jilin City, cardboard, paper products, pulp Jilin Chenming Paper Jilin sheet, paper making machinery Enterprise with Co., Ltd. Province 100 - machining and sales, etc. foreign investment Wu Bingyu 100 Production and sales of particle Juancheng Chenming Juancheng board, decorative particle board, Company with Panels Co., Ltd. , Shandong 100 - melamine impregnated paper limited liability Hou Huancai 100 Shandong Chenming International Hotel Co., Shouguan Catering customers and Enterprise with Ltd. g, Shandong 70 - relevant customers foreign investment Zhang Desan 70 Zhanjiang Chenming Zhanjiang, Breading, breading soil Company with Paper Pulp Co., Ltd. Guangdong 100 - improvement, forestry research limited liability Yi Tongyuan 100 Pulp manufacture, production, processing and sales, etc. Chenming (Hong Hong Import and export of relevant Company with Kong) Limited Kong, China 100 - paper products limited liability Wei Keyu 100 and market survey, etc. Shouguang Chenming Modern Logistics Co., Shouguan Company with Ltd. (Note 1) g, Shandong 100 - Cargo transportation limited liability Chen Hongguo 100 Shouguang Chenming Art Paper Co., Ltd. Shouguan not yet formally started Company with (Note 1) g, Shandong 75 - operation limited liability 75 Qihe Chenming Waste Materials Recycling Co., Qihe, Waste and used materials Company with Ltd. Shandong - 98 recycling and sales limited liability Li Feng 98 Jilin Chenming Waste Materials Recycling Co., Waste and used materials Company with Ltd. Jilin - 99 recycling and sales limited liability Zhang Bangji 99 Jilin Chenming Machine Building Co., not yet formally started Company with Ltd. Jilin - 100 operation limited liability Zhang Chunlin 100 Nanchang Chenming Forestry Development Nanchang, not yet formally started Company with Co., Ltd. (Note 1) Jiangxi - 100 operation limited liability Hou Huancai 100 Fuyu Production and sales of Fuyu Chenming Paper County, machine made paper, cardboard, Company with Co., Ltd. (Note 1) Qiqihar City - 100 etc. limited liability Liu Chunshan 100 - 42 - SHANDONG CHENMING PAPER HOLDINGS LIMITED VIII. Range of the Consolidate Financial Statements and the Controlled Subsidiaries.- continued Note 1: Subsidiaries newly listed in the consolidation range of the report year: Shouguang Chenming Modern Logistic Co., Ltd. Approved by the State Ministry of Foreign Trade and Economic Cooperation, the Company registered and established Shouguang Chenming Modern Logistic Co., Ltd. in Shouguang, Shandong on March 26, 2007 with registered capital of RMB 10 million and the Company holds 100% of its equity. Chenming Art Paper Co., Ltd. Approved by Shandong Provincial Development and Reform Commission, the Company established Shandong Chenming Art Paper Co., Ltd. jointly with Arjowiggins Chenming Special Paper Co., Ltd. in Shouguang Shandong on May 25, 2007 with registered capital of USD 20 million, where the Company contributed USD 15 million by holding 75% equity; Arjowiggins Chenming Special Paper Co., Ltd. contributed USD 5 million by holding 25% equity. Jilin Chenming Machine Building Co., Ltd. Jilin Chenming Paper Co., Ltd., one of the Company's controlled subsidiaries invested and established Jilin Chenming Machine Building Co., Ltd. on April 27, 2007 with registered capital of RMB 0.60 million. Jilin Chenming Paper Co., Ltd. holds 100% of its equity. Nanchang Chenming Forestry Development Co., Ltd. Jiangxi Chenming Paper Co., Ltd., one of the Company's controlled subsidiaries invested and established Nanchang Chenming Forestry Development Co., Ltd. on June 29, 2007 with registered capital of RMB 1 million. Jiangxi Chenming Paper Co., Ltd. holds 100% of its equity. Fuyu Chenming Paper Co., Ltd. The Company invested and established Fuyu Chenming Paper Co., Ltd. on October 15, 2007 with registered capital of RMB 20 million and the Company holds 100% equity. - 43 - SHANDONG CHENMING PAPER HOLDINGS LIMITED IX. Notes to the Financial Statements 1. Monetary funds The Group December 31, December 2007 31, 2006 Amount in Amount in foreign foreign currency Conversion rate in RMB currency Conversion rate in RMB Cash on hand RMB - - 2,575,501.44 - - 5,713,746.59 US$ 15,464.00 7.3046 112,958.33 - - - Bank deposit RMB - - 480,381,438.50 - - 657,216,045.23 HK$ 25,388.73 0.9347 23,730.85 22,623.28 1.0047 22,729.61 US$ 17,855,321.74 7.3046 130,425,983.18 15,537,852.49 7.8087 121,330,428.74 Euro 30,586.86 10.0319 306,844.32 3,647.30 10.2665 37,445.01 Other Monetary Funds RMB 126,795,387.29 41,949,396.50 Total 740,621,843.91 826,269,791.68 Of the balance of other monetary fund of the Group as at December 31, 2007, the security for the banker's acceptance amounted to RMB 113,087,555.99, security for credit amounted to RMB 10,981,831.30 and security for bank guarantee amounted to RMB 2,726,000.00. The Company December December 31, 2007 31, 2006 Amount in Amount in foreign foreign currency Conversion rate in RMB currency Conversion rate in RMB Cash on hand RMB - - 11,938.36 - - 39,040.63 US$ 15,464.00 7.3046 112,958.33 - - - Bank deposit RMB - - 207,482,933.56 - - 400,795,565.30 HK$ - - - - - 3,881,077.82 7.3046 28,349,721.04 3,978,536.23 7.8087 31,067,195.86 US$ EUR 3,647.30 10.2665 37,445.01 - - Other Monetary Funds RMB 112,991,173.39 US$ - - - - - - Total 348,948,724.68 431,939,246.80 ___________ ___________ Of the balance of other monetary fund of the Company as at December 31, 2007, the security for the banker's acceptance amounted to RMB 112,317,099.99, security for credit amounted to RMB 674,073.40. - 44 - SHANDONG CHENMING PAPER HOLDINGS LIMITED IX. Notes to the Financial Statements – Continued 2. Transactional financial assets The Group 2007.12.31 2006.12.31 Types Fair Value Fair Value in RMB in RMB Derivative financial instrument Asset 5,955,480.00 - Total 5,955,480.00 - Note 1:Jiangxi Chenming Paper Co., Ltd., one of the Company's subsidiaries, executed a foreign exchange forward settlement and sale agreement respectively with Construction Bank of China Changbei Sub-branch and Bank of China Changbei Sub-branch on October 18, 2007. The Group valuated with the forward contract settlement exchange rate of the same delivery option as at December 31, 2007 as the standard and the fair value of the financial asset was RMB 5,955,480.00. 3. Notes receivable The Group 2007.12.31 2006.12.31 in RMB in RMB Bank acceptance 1,676,684,054.95 939,705,242.42 Total 1,676,684,054.95 939,705,242.42 The Group's bank acceptance as at December 31, 2007 included the bank acceptance with discount accompanied with the right of recourse amounted to RMB 428,227,235.41. The Group's bank acceptance as at December 31, 2006 included the bank acceptance with discount accompanied with the right of recourse amounted to RMB 373,742,585.50. The total balance of the draft in the Group's bank acceptance used for hypothecation was RMB 19,425,158.88. Of the notes receivable as at December 31, 2007, there was none in the shareholder holding more than 5% (with 5% inclusive) the Company's shares. - 45 - SHANDONG CHENMING PAPER HOLDINGS LIMITED IX. Notes to the Financial Statements – Continued 3. Notes receivable – continued The Company 2007.12.31 2006.12.31 in RMB in RMB Bank acceptance 998,809,409.00 530,093,631.70 Total 998,809,409.00 530,093,631.70 The Company's bank acceptance as at December 31, 2007 included the bank acceptance with discount accompanied with the right of recourse amounted to RMB 405,483,351.17. The Company's bank acceptance as at December 31, 2006 included the bank acceptance with discount accompanied with the right of recourse amounted to RMB 356,811,988.55. The total balance of the commercial draft in the Company's bank acceptance used for hypothecation was RMB 19,425,158.88. Of the notes receivable as at December 31, 2007, there was none in the shareholder holding more than 5% (with 5% inclusive) the Company's shares. 4. Accounts receivable The Group Aging of accounts receivable: 2007.12.31 2006.12.31 Provision for Amount Proportion bad debts Book value Amount Proportion Provision for bad debts Book value in RMB (%) in RMB in RMB in RMB (%) in RMB in RMB Within a year 1,787,271,407.44 95.1 -172,892,897.67 1,614,378,509.77 1,738,580,250.22 92.64 -83,216,151.34 1,655,364,098.88 1 to 2 years 45,856,276.10 2.44 -5,373,708.79 40,482,567.31 60,628,623.94 3.23 -6,519,056.97 54,109,566.97 2 - 3 years 6,830,375.88 0.36 -1,670,756.12 5,159,619.76 14,091,048.71 0.75 -3,273,419.25 10,817,629.46 3 to 4 years 10,454,274.19 0.56 -10,454,274.19 - 11,819,137.44 0.63 -11,819,137.44 - Over 4 years 28,914,026.07 1.54 -28,914,026.07 - 51,560,136.32 2.75 -51,560,136.32 - Total 1,879,326,359.68 100 -219,305,662.84 1,660,020,696.84 1,876,679,196.63 100 -156,387,901.32 1,720,291,295.31 - 46 - SHANDONG CHENMING PAPER HOLDINGS LIMITED The accounts receivable are disclosed based on types of customers are as follows: 2007.12.31 2006.12.31 Provision for bad Amount Proportion debts Book value Amount Proportion Provision for bad debts Book value in RMB (%) in RMB in RMB in RMB (%) in RMB in RMB Significant single amounts 1,582,443,231.69 84.2 -172,157,112.36 1,410,286,119.33 1,450,726,148.67 77.3 -77,114,861.70 1,373,611,286.97 insignificant single amounts Based on the character of credit risk Risk after combination Bigger amount 38,553,985.25 2.05 -34,387,291.31 4,166,693.94 77,470,322.47 4.13 -66,652,693.01 10,817,629.46 Others insignificant amounts 258,329,142.74 13.75 -12,761,259.17 245,567,883.57 348,482,725.49 18.57 -12,620,346.61 335,862,378.88 Total 1,879,326,359.68 100 -219,305,662.84 1,660,020,696.84 1,876,679,196.63 100 -156,387,901.32 1,720,291,295.31 Ended December 31, 2007, the accounts receivable which impairment have incurred as determined individually are stated as follows: Elements necessary to be taken into consideration in provision for bad debt individually Amount of provision for bad debt A debtor fails to implement the obligation for paying overdue debt and there is definite evidence showing that the debtor is unable to payment capacity. 87,677,583.55 A debtor has failed to implement the obligation for paying overdue debt for over three years while the debtor organization is in difficulty in business. The arrears is still difficult to be recovered after the Company has repeatedly urged the debtor to repay the debt through court . 39,368,300.26 Total 127,045,883.81 - 47 - SHANDONG CHENMING PAPER HOLDINGS LIMITED IX. Notes to the Financial Statements – Continued 4 Accounts receivable – Continued The Group - Continued The top five debtors are listed as follows: Proportion of the arrears owed by top five debtors in the total accounts receivable in RMB % 290,501,619.40 15.46 The Company Aging of accounts receivable: 2007.12.31 2006.12.31 Provision for bad Provision for bad Amount Proportion debts Book value Amount Proportion debts Book value in RMB % in RMB in RMB in RMB % in RMB in RMB Within a year 1,598,791,086.58 97.86 -153,712,615.62 1,445,078,470.96 1,553,094,448.82 95.54 -75,690,518.84 1,477,403,929.98 1 to 2 years 22,545,280.51 1.38 -2,254,528.05 20,290,752.46 29,118,402.71 1.79 -2,911,840.27 26,206,562.44 2 - 3 years 863,657.72 0.05 -123,292.54 740,365.18 4,813,052.51 0.3 -962,610.50 3,850,442.01 3 to 2 years 3,877,308.99 0.24 -3,877,308.99 - 4,348,407.21 0.27 -4,348,407.21 - Over 4 years 7,603,430.23 0.47 -7,603,430.23 - 34,193,676.82 2.1 -34,193,676.82 - Total 1,633,680,764.03 100 -167,571,175.43 1,466,109,588.60 1,625,567,988.07 100 -118,107,053.64 1,507,460,934.43 The accounts receivable are disclosed based on types of customers are as follows: 2007.12.31 2006.12.31 Provision for Amount Proportion bad debts Book value Amount Proportion Provision for bad debts Book value in RMB % in RMB in RMB in RMB % in RMB in RMB 1,415,437,242. Significant single amounts 18 86.65 -150,200,716.99 1,265,236,525.19 1,347,179,367.42 82.87 -72,748,982.85 1,274,430,384.57 insignificant single amounts Based on the character of credit risk Risk after combination Bigger amount 6,611,676.72 0.4 -6,180,656.34 431,020.38 43,355,136.54 2.67 -39,504,694.53 3,850,442.01 Others insignificant amounts 211,631,845.13 12.95 -11,189,802.10 200,442,043.03 235,033,484.11 14.46 -5,853,376.26 229,180,107.85 1,633,680,764. Total 03 100 -167,571,175.43 1,466,109,588.60 1,625,567,988.07 100 -118,107,053.64 1,507,460,934.43 - 48 - SHANDONG CHENMING PAPER HOLDINGS LIMITED The top five debtors are listed as follows: Proportion of the arrears owed by top five debtors in the total accounts receivable Proportion which should be taken in the tota accounts receivable RMB % 332,156,341.61 20.33 At the end of each year, there was no account in the Group's and the Company's accounts receivable from a shareholder holding more than 5% (with 5% inclusive) of the total shares. 5. Advance to suppliers The Group Aging of the advance to suppliers: 2007.12.31 2006.12.31 Amount Proportion Amount Proportion in RMB % in RMB % Within a year 480,857,224.46 83.77 479,475,042.82 96.07 1 to 2 years 93,157,576.97 16.23 19,624,090.98 3.93 Total 574,014,801.43 100.00 499,099,133.80 100.00 The advance to suppliers is disclosed based on types of customers are as follows: 2007.12.31 2006.12.31 Amount Proportion Amount Proportion in RMB % in RMB % Significant single amounts 472,934,987.83 82.39 290,780,126.64 58.26 Insignificant single amounts but the grouping has big risk after grouping based on the credit risk characteristics. - - 19,624,090.98 3.93 Others insignificant amounts 101,079,813.60 17.61 188,694,916.18 37.81 Total 574,014,801.43 100 499,099,133.80 100 - 49 - SHANDONG CHENMING PAPER HOLDINGS LIMITED The Company Aging of the advance to suppliers: 2007.12.31 2006.12.31 Amount Proportion Amount Proportion in RMB % in RMB % Within a year 265,774,588.11 94.96 227,027,695.14 94.2 1 to 2 years 14,115,794.77 5.04 13,966,666.04 5.8 Total 279,890,382.88 100 240,994,361.18 100 The advance to suppliers is disclosed based on types of customers are as follows: 2007.12.31 2006.12.31 Amount Proportion Amount Proportion in RMB % in RMB % Significant single amounts 247,160,724.92 88.31 196,038,214.25 81.35 Insignificant single amounts but the grouping has big risk after grouping based on the credit risk characteristics. 5,911,825.38 2.11 7,596,132.66 3.15 Others insignificant amounts 26,817,832.58 9.58 37,360,014.27 15.5 Total 279,890,382.88 100 240,994,361.18 100 As at December 31, 2007, there was no account in the Group's and the Company's advances to suppliers payable to a shareholder holding more than 5% (with 5% inclusive) of the total shares. 6. Other receivables The Group The age of the other receivables is analyzed as follows: 2007.12.31 2006.12.31 Provision for bad Proporti Provision for bad Amount Proportion debts Book value Amount on debts Book value in RMB (%) in RMB in RMB in RMB (%) in RMB in RMB Within a year 159,129,344.63 62.26 -2,771,058.73 156,358,285.90 96,230,636.20 48.8 -4,845,202.57 91,385,433.63 1 to 2 years 24,068,633.93 9.42 -3,573,370.18 20,495,263.75 61,522,417.93 31.36 -19,078,066.34 42,444,351.59 2 to 3 years 35,160,118.15 13.76 -15,850,995.69 19,309,122.46 9,513,248.82 4.83 -3,425,877.51 6,087,371.31 3 to 4 years 8,383,711.19 3.28 -8,383,711.19 - 7,628,120.76 3.88 -7,628,120.76 - Over 4 years 28,825,828.19 11.28 -28,825,828.19 - 21,900,289.55 11.13 -21,900,289.55 - Total 255,567,636.09 100 -59,404,963.98 196,162,672.11 196,794,713.26 100 -56,877,556.73 139,917,156.53 - 50 - SHANDONG CHENMING PAPER HOLDINGS LIMITED Other receivables are disclosed based on types of customers are as follows: 2007.12.31 2006.12.31 Provision for bad Provision for bad Amount Proportion debts Book value Amount Proportion debts Book value in RMB (%) in RMB in RMB in RMB (%) in RMB in RMB Significant single amounts 166,845,002.20 65.29 -25,576,316.60 141,268,685.60 96,060,448.23 49.22 -1,900,193.70 94,160,254.53 insignificant single amounts Based on the character of credit risk Accounts with bigger risk after grouping 52,450,199.27 20.52 -26,450,569.75 25,999,629.52 51,292,485.79 26.28 -45,205,114.48 6,087,371.31 Others insignificant amounts 36,272,434.62 14.19 -7,378,077.63 28,894,356.99 47,830,076.90 24.5 -8,160,546.21 39,669,530.69 Total 255,567,636.09 100 -59,404,963.98 196,162,672.11 195,183,010.92 100 -55,265,854.39 139,917,156.53 Change of the provision for bad debt of other receivables in 2007 is as follows: Amount at Provision in the Carry-back in the Carry-back in the year beginning report year report year report year Amount at year end in RMB in RMB in RMB in RMB in RMB Provision for bad debts - Other receivables 56,877,556.73 45,647,486.30 43,120,079.05 - 59,404,963.98 Change of the provision for bad debt of other receivables in 2006 is as follows: Amount transferred out in disposal of subsidiaries Amount transferred Amount at year Provision in the Carry-back in the out from the beginning report year report year Company Amount at year end in RMB in RMB in RMB in RMB in RMB Provision for bad debts Other receivables 59,079,437.46 15,569,408.23 -16,076,977.92 -1,694,311.04 56,877,556.73 ____________ ___________ ___________ __________ ____________ ____________ ___________ ___________ __________ ____________ - 51 - SHANDONG CHENMING PAPER HOLDINGS LIMITED Ended December 31, 2007, the accounts receivable which impairment have incurred as determined individually are stated as follows: Elements necessary to be taken into consideration in provision for bad debt individually Amount of provision for bad debt A debtor fails to implement the obligation for paying overdue debt and there is definite evidence showing that the debtor is unable to payment capacity. 2,138,855.74 A debtor has failed to implement the obligation for paying overdue debt for over three years while the debtor organization is in difficulty in business. The arrears is still difficult to be recovered after the Company has repeatedly urged the debtor to repay the debt through court . Total 2,138,855.74 The top five debtors are listed as follows: Proportion of the arrears owed by top five Proportion in the total other debtors in the total accounts receivable receivables (%) in RMB % 31,466,733.11 12.31 The Company The age of the other receivables is analyzed as follows: 2007.12.31 2006.12.31 Provision for bad Provision for bad Amount Proportion debts Book value Amount Proportion debts Book value in RMB % in RMB in RMB in RMB % in RMB in RMB Within a year 722,772,013.66 91.18 -1,960,790.29 720,811,223.37 988,759,702.34 77.20 -46,912,210.46 941,847,491.88 1 to 2 years 47,844,292.42 6.04 -1,299,726.66 46,544,565.76 272,054,977.43 21.24 -29,610,896.94 242,444,080.49 2 - 3 years 11,022,711.25 1.39 -1,857,351.93 9,165,359.32 3,804,144.99 0.3 -1,960,829.00 1,843,315.99 3 to 4 years 2,848,382.90 0.36 -2,848,382.90 - 1,057,211.85 0.08 -528,605.94 528,605.91 Over 4 years 8,174,993.62 1.03 -8,174,993.62 - 15,035,333.65 1.17 -15,035,333.65 - Total 792,662,393.85 100 -16,141,245.40 776,521,148.45 1,280,711,370.26 100 -94,047,875.99 1,186,663,494.27 - 52 - SHANDONG CHENMING PAPER HOLDINGS LIMITED Other receivables are disclosed based on types of customers are as follows: 2007.12.31 2006.12.31 Provision for bad Provision for Amount Proportion debts Book value Amount Proportion bad debts Book value in RMB % in RMB in RMB in RMB % in RMB in RMB Significant single amounts 748,545,105.73 94.43 -7,099,864.57 741,445,241.16 1,238,482,651.57 96.7 -56,101,978.82 1,182,380,672.75 Insignificant single amounts but the grouping has big risk after grouping based on the credit risk characteristics. 11,805,959.28 1.49 -6,835,422.68 4,970,536.60 33,759,219.49 2.64 -31,915,903.50 1,843,315.99 Others insignificant amounts 32,311,328.84 4.08 -2,205,958.15 30,105,370.69 8,469,499.20 0.66 -6,029,993.67 2,439,505.53 ________ ____ _______ ________ ________ ____ _______ ________ Total 792,662,393.85 100 -16,141,245.40 776,521,148.45 1,280,711,370.26 100 -94,047,875.99 1,186,663,494.27 ________ ____ _______ ________ ________ ____ _______ ________ The top five debtors are listed as follows: Proportion of the arrears owed by top five debtors in the total accounts Proportion in the total other receivables receivable (%) in RMB % 547,562,920.56 69.08 As at December 31, 2007, there was no other receivables of the Group and the Company advance receivable from a shareholder holding more than 5% (with 5% inclusive) of the total shares. 7. Inventories and Provision for price falling of inventories The Group 2007.12.31 2006.12.31 Provision for Provision for Amount price falling Book value Amount price falling Book value in RMB in RMB in RMB in RMB in RMB in RMB Raw materials 1,113,790,466.49 - 1,113,790,466.49 1,023,589,789.52 - 1,023,589,789.52 Goods in stock 564,307,993.16 -6,114,277.85 558,193,715.31 784,039,888.55 -5,232,293.42 778,807,595.13 Products in process 72,508,430.56 - 72,508,430.56 38,786,818.45 - 38,786,818.45 Total 1,750,606,890.21 -6,114,277.85 1,744,492,612.36 1,846,416,496.52 -5,232,293.42 1,841,184,203.10 - 53 - SHANDONG CHENMING PAPER HOLDINGS LIMITED Provisions for deterioration of inventories 2006 Report year Report year Report year December 31, Amount carried Amount written 2006 Amount provided back off December 31, 2007 in RMB in RMB in RMB in RMB in RMB Goods in stock 5,232,293.42 881,984.43 - - 6,114,277.85 Total 5,232,293.42 881,984.43 - - 6,114,277.85 Provision for price falling of inventories in 2006: Carry-back in the report Amount at year beginning Provision in the report year year Amount at year end in RMB in RMB in RMB in RMB Provisions for price falling of inventories Products in process 31,038.60 - -31,038.60 - Goods in stock 903,743.71 4,328,549.71 - 5,232,293.42 Total 934,782.31 4,328,549.71 -31,038.60 5,232,293.42 The Company 2007.12.31 2006.12.31 Provision for Provision for price Amount price falling Book value Amount falling Book value in RMB in RMB in RMB in RMB in RMB in RMB Raw materials 417,274,191.57 - 417,274,191.57 368,337,423.55 - 368,337,423.55 Goods in stock 301,748,451.47 -6,114,277.85 295,634,173.62 401,389,732.52 -5,232,293.42 396,157,439.10 Products in process 8,446,384.35 - 8,446,384.35 3,194,082.67 - 3,194,082.67 Total 727,469,027.39 -6,114,277.85 721,354,749.54 772,921,238.74 -5,232,293.42 767,688,945.32 Provision for price falling of inventories in 2007: December 31, Provision in the Carry-back in the Carry-back in the 2006 report year report year report year December 31, 2007 in RMB in RMB in RMB in RMB in RMB Goods in stock 5,232,293.42 881,984.43 - - 6,114,277.85 Total 5,232,293.42 881,984.43 - - 6,114,277.85 - 54 - SHANDONG CHENMING PAPER HOLDINGS LIMITED Provision for price falling of inventories in 2006: Provision in the report Carry-back in the Amount at year beginning year report year Amount at year end in RMB in RMB in RMB in RMB Provisions for price falling of inventories Products in process 31,038.60 - -31,038.60 - Goods in stock 903,743.71 4,328,549.71 - 5,232,293.42 Total 934,782.31 4,328,549.71 -31,038.60 5,232,293.42 As at December 31, 2007, there was no liability mortgage with the Group's and the Company's inventories. 7 Entrusted loans The Company Fair value at year Fair value at year end beginning in RMB in RMB Entrusted loan for subsidiaries Due within a year 1,864,000,000.00 - Due a year later 625,000,000.00 1,934,000,000.00 Less: Provision for impairment - - Entrusted loan, net 2,489,000,000.00 1,934,000,000.00 The Company entrusted banking institutions to provide fund for its subsidiaries and the term of the aforesaid entrusted loan is 2-10 years with loan interest rate of 5.265%-6.390%. - 55 - SHANDONG CHENMING PAPER HOLDINGS LIMITED 9. Long-term equity investment The Group (1) Long-term equity investments are stated as follows: Newly increased investment Equity adjustment Cash dividend Initial Investment Cost at year beginning in the report year in the report year in the report year Investees in RMB in RMB in RMB in RMB in RMB Equity method Arjowiggins Chenming Special Paper Co., Ltd. 60,000,000.00 60,000,000.00 - -8,977,244.77 ouguang Nippon Paper Co., Ltd. 19,550,000.00 19,351,487.18 - -484,305.98 79,550,000.00 79,351,487.18 - -9,461,550.75 - Cost method Qingzhou Chenming Modified Starch Co., Ltd. 540,000.00 900,000.00 - - Weifang Pioneering Investment Co., Ltd. 1,000,000.00 1,000,000.00 - - Taishan Insurance Brokerage Co., Ltd. 2,000,000.00 2,000,000.00 - - Shandong Paper Group Corporation 200,000.00 200,000.00 - - Zhejiang Guangyu Press Printing Co., Ltd. 2,000,000.00 2,000,000.00 - - Jinan Shangyou Commercial Co., Ltd. 350,000.00 350,000.00 - - Shanghai Linjiazhi E- Business Co., Ltd. - - 1,400,000.00 - Shouguang Mihe Water Supply Co., Ltd. - - 20,000,000.00 - 6,090,000.00 6,450,000.00 21,400,000.00 - - Total 85,640,000.00 85,801,487.18 21,400,000.00 -9,461,550.75 Less: Provision for impairment - Long-term equity investment, net 85,801,487.18 SHANDONG CHENMING PAPER HOLDINGS LIMITED Change of provision for impairment of long-term equity investments: Investees Opening balance Increase in the report period Amount written off in the report pe in RMB in RMB in RMB Qingzhou Chenming Mo - 900,000.00 - Shandong Paper Group Corporation - 200,000.00 - Jinan Shangyou Commercial Co., Ltd. - 350,000.00 - Total - 1,450,000.00 - SHANDONG CHENMING PAPER HOLDINGS LIMITED (2) List of associates and their financial information summary Proportion in the Proportion in the Total liabilities of Registered Registered registered capital voting power of Total assets of the the investee at Investees place Business capital of the investee the investee investee at year end year end in RMB % % in RMB in RMB Arjowiggins Chenming Special paper Paper Co., Ltd. Shandong making 200,000,000.00 30 30 455,341,205.97 285,265,355.20 Shouguang Nippon paper Paper Co., Ltd. Shandong making 74,070,000.00 26.4 26.4 76,749,549.62 5,282,954.17 The investee whose long term equity investment held by the Group as at December 31, 2007 has not been restricted in transfer of fund to the Group. The Company *Long-term equity investments are stated as follows: Newly increased Investment Equity Initial investment investment in the decreased adjustment in amount 2006.12.31 report year in the report yera the report year 2007.12.31 Investees in RMB in RMB in RMB in RMB in RMB in RMB Investment to the subsidiaries - Wuhan Chenming Hanyang Paper Co., Ltd 208,000,000.00 202,824,716.34 - - - 202,824,716.34 Shandong Chenming Paper Group Qihe Linerboard Paper Company Limited 376,000,000.00 376,000,000.00 200,000.00 - - 376,200,000.00 Shandong Chenming Thermal Power Co., Ltd. 71,436,290.00 71,434,605.00 - - - 71,434,605.00 Chibi Chenming Paper Co., Ltd. 35,483,880.00 26,270,460.90 - - - 26,270,460.90 Xiangfan Chenming Copperplate Paper Co., Ltd. 6,452,000.00 3,552,717.43 - - - 3,552,717.43 Yanbian Chenming Paper Co., Ltd. 62,633,000.00 40,083,733.01 - - - 40,083,733.01 Hailaer Chenming Paper Co., Ltd. 12,000,000.00 12,000,000.00 - - - 12,000,000.00 Jiangxi Chenming Paper Co., Ltd. 671,548,406.40 671,548,406.40 26,000,000.00 - - 697,548,406.40 Shouguang Chenming Gardens Co., Ltd. 7,199,000.00 7,199,000.00 - - - 7,199,000.00 Jilin Chenming Paper Co., Ltd. 401,350,000.00 401,350,000.00 - - - 401,350,000.00 Juancheng Chenming Panels Co., Ltd. 14,990,000.00 14,990,000.00 10,000.00 - - 15,000,000.00 Shandong Yujing Hotel Co., Ltd. 80,500,000.00 80,500,000.00 - - - 80,500,000.00 Zhanjiang Chenming Forestry Development Co., Ltd. 1,000,000.00 1,000,000.00 - -1,000,000.00 - - Yangjiang Chenming Forestry Development Co., Ltd. 1,000,000.00 1,000,000.00 - -1,000,000.00 - - Zhanjiang Chenming Pulp & Paper Co., Ltd. 19,800,000.00 19,800,000.00 200,000.00 - - 20,000,000.00 Chenming (Hong Kong) Limited 783,310.00 783,310.00 - - - 783,310.00 Chenming Modern Logistics Co., Ltd. - - 10,000,000.00 - - 10,000,000.00 Chenming Art Paper Co., Ltd. - - 113,616,063.80 - - 113,616,063.80 Chenming Paper Co., Ltd. - 20,000,000.00 - - 20,000,000.00 Sub-total 1,970,175,886.40 1,930,336,949.08 170,026,063.80 -2,000,000.00 - 2,098,363,012.88 Investment to associated companies - Shouguang Nippon Paper Co., Ltd. 19,550,000.00 19,351,487.18 - - -484,305.98 18,867,181.20 Arjowiggins Chenming Special Paper Co., Ltd. 60,000,000.00 60,000,000.00 - - -8,977,244.77 51,022,755.23 - 58 - SHANDONG CHENMING PAPER HOLDINGS LIMITED Sub-total 79,550,000.00 79,351,487.18 - - -9,461,550.75 69,889,936.43 Other Investments - Qingzhou Chenming Modified Starch Co., Ltd. 540,000.00 900,000.00 - - - 900,000.00 Weifang Pioneering Investment Co., Ltd. 1,000,000.00 1,000,000.00 - - - 1,000,000.00 Taishan Insurance Brokerage Co., Ltd. 2,000,000.00 2,000,000.00 - - - 2,000,000.00 Shandong Paper Group Corporation 200,000.00 200,000.00 - - - 200,000.00 Zhejiang Guangyu Press Printing Co., Ltd. 2,000,000.00 2,000,000.00 - - - 2,000,000.00 Jinan Shangyou Commercial Co., Ltd. 350,000.00 350,000.00 - - - 350,000.00 Shouguang Mihe Water Supply Co., Ltd. - - 20,000,000.00 - - 20,000,000.00 Shanghai Linjiazhi E-Business Co., Ltd. - - 1,400,000.00 - - 1,400,000.00 Sub-total 6,090,000.00 6,450,000.00 21,400,000.00 - - 27,850,000.00 Provision for devaluation of long-term investments - - - - - -1,450,000.00 Total 2,055,815,886.40 2,016,138,436.26 - - - 2,194,652,949.31 Note 1:On May 1, 2007, the Company executed an equity assignment agreement with Wu Xingqiang and Hou Huancai, two minority shareholders of Shandong Chenming Paper Group Qihe Linerboard Paper Company Limited, according to which the Company acquired 0.053% of the total equity of Shandong Chenming Paper Group Qihe Linerboard Paper Company Limited held by them at price of RMB 200,000.00. Note 2:On September 13, 2006, State-owned Assets Supervision and Administration Commission of Jiangxi Province issued the Official Reply on Approving Jiangxi Paper Co., Ltd. (Jiangxi Paper) to Assign the State Owned Corporate Shares of Jiangxi Chenming Paper Co., Ltd. Held by it with Discount (GAN GUO ZI CHAN QUAN ZI [2006] No. 267), the Company executed the equity assignment agreement with Jiangxi Paper on October 8, 2006, according to which Jiangxi Paper would assign all the 3.846% equity in Jiangxi Chenming held by Jiangxi Paper to the Company at the price of RMB 26 million. According to the delivery order issued by Jiangxi Provincial Assets and Equity Exchange on October 11, 2006, the 3.846% equity of Jiangxi Chenming held by Jiangxi Paper was transferred to the Company. The equity assignment was approved by the Ministry of Commerce of the People's Republic of China and Jiangxi Provincial People's Government on March 5, 2007. Note 3:On May 9, 2007, the Company executed the equity assignment agreement with Heze Chenming Panels Co., Ltd., a minority shareholder of Juancheng Chenming Panels Co., Ltd. according to which the Company would acquire 0.07% equity in Juancheng Chenming Panels Co., Ltd. held by it. Heze Chenming Panels Co., Ltd. is a subsidiary of the Company. Note 4:On April 20, 2007, the Company executed the equity assignment agreement with Zhanjiang Chenming Pulp & Paper Co., Ltd., a minority shareholder of Zhanjiang Chenming Forestry Co., Ltd. according to which the Company would acquire 1% equity in Zhanjiang Chenming Pulp & Paper Co., Ltd. held by it at the price of RMB 200,000.00.Zhanjiang Chenming Forestry Co., Ltd. is a wholly owned subsidiary of the Company. (3) The investee whose long term equity investment held by the Company as at December 31, 2007 has not been restricted in transfer of fund to the Company. - 59 - SHANDONG CHENMING PAPER HOLDINGS LIMITED IX. Notes to the Financial Statements – Continued 10. INVESTMENT BASED REAL ESTATE The Group and the Company Housing and buildings in RMB Original value 2006.12.31 37,297,762.56 Increase in the report year 993,633.14 2007.12.31 38,291,395.70 Accumulative depreciation 2006.12.31 6,696,236.88 Increase in the report year 1,692,178.63 2007.12.31 8,388,415.51 Net amount 2006.12.31 30,601,525.68 2007.12.31 29,902,980.19 The Group started implementing the new accounting standards commencing from January 1, 2007, according to which the office facility of Beijing Cyber Building (to be leased to external parties) originally calculated in the fixed asset has been classified as investment based real estate. - 60 - SHANDONG CHENMING PAPER HOLDINGS LIMITED IX. Notes to the Financial Statements – Continued 11. FIXED ASSETS The Group Housing and buildings Machinery equipment Motor vehicle Electronic equipment Total in RMB in RMB in RMB in RMB in RMB Original value 2006.12.31 2,220,857,769.23 10,054,180,017.09 118,595,291.77 338,585,956.78 12,732,219,034.87 Purchase in the report year 23,501,420.49 41,906,839.65 21,988,823.84 17,338,601.44 104,735,685.42 Construction in process transferred in in the report year 600,762,759.94 4,039,964,934.18 145,590.40 8,077,750.42 4,648,951,034.94 Decrease in the report year 10,822,949.72 22,494,647.08 19,480,959.65 2,121,023.97 54,919,580.42 2007.12.31 2,834,298,999.94 14,113,557,143.84 121,248,746.36 361,881,284.67 17,430,986,174.81 Accumulative depreciation 2006.12.31 376,630,544.67 2,602,298,978.77 46,244,234.96 175,481,590.26 3,200,655,348.66 Increase in the report year 87,830,410.99 874,496,303.88 13,297,164.53 32,901,722.12 1,008,525,601.52 Decrease in the report year 5,489,488.57 15,241,504.28 7,473,172.04 1,220,939.30 29,425,104.19 2007.12.31 458,971,467.09 3,461,553,778.37 52,068,227.45 207,162,373.08 4,179,755,845.99 Provisions for devaluation of fixed assets 2006.12.31 6,928,487.84 1,145,801.05 - - 8,074,288.89 Increase in the report year - - - - - Carry-back in the report year - - - - - Other transfers-out in the report year - - - - - 2007.12.31 6,928,487.84 1,145,801.05 - - 8,074,288.89 Net value 2006.12.31 1,837,298,736.72 7,450,735,237.27 72,351,056.81 163,104,366.52 9,523,489,397.32 2007.12.31 2,368,399,045.01 10,650,857,564.42 69,180,518.91 154,718,911.59 13,243,156,039.93 Note 1:IFC, DEG and China Construction Bank Nanchang Changbei Sub-branch executed loan agreements with Jiangxi Chenming Paper Co., Ltd., one of the Company's subsidiaries, according to which the banks would provide mortgage loans amounting to USD 40,000,000.00, USD9,411,765.00 and USD17,500,000.00 respectively to Jiangxi Chenming Paper Co., Ltd. with fixed asset and land use right of Jiangxi Chenming Paper Co., Ltd. as the mortgage. The net value of the mortgages: the fixed asset: RMB 1,205,080,871.50, the land use right, the intangible asset: RMB 76,256,180.51. Note 2:Ended December 31, 2007, the Group did not have any fixed asset without operating lease or idled fixed asset. Note 3:Ended December 31, 2007, the net value of housing and building in the fixed assets of which the Group had not acquired the property title was RMB 253,656,589.82. - 61 - SHANDONG CHENMING PAPER HOLDINGS LIMITED IX. Notes to the Financial Statements – Continued 11. FIXED ASSETS – CONTINUED The Company Housing and Electronic buildings Machinery equipment Motor vehicle equipment Total in RMB in RMB in RMB in RMB in RMB Original value 2006.12.31 675,195,279.50 5,067,358,747.50 38,423,077.04 26,686,319.40 5,807,663,423.44 Purchase in the report year 3,894,655.01 22,654,534.03 1,173,500.50 2,747,585.63 30,470,275.17 Construction in process transferred in in the report year 303,182,381.49 2,924,689,842.96 109,402.00 2,562,523.65 3,230,544,150.10 Decrease in the report year 10,060,337.09 15,365,071.43 8,309,327.00 531,625.57 34,266,361.09 2007.12.31 972,211,978.91 7,999,338,053.06 31,396,652.54 31,464,803.11 9,034,411,487.62 Accumulative depreciation 2006.12.31 142,131,466.44 1,727,294,887.97 15,470,550.45 14,423,279.97 1,899,320,184.83 Increase in the report year 48,895,327.84 540,428,373.66 3,753,908.04 3,970,305.67 597,047,915.21 Decrease in the report year 4,248,778.03 8,884,719.88 4,410,014.35 180,973.48 17,724,485.74 2007.12.31 186,778,016.25 2,258,838,541.75 14,814,444.14 18,212,612.16 2,478,643,614.30 Net value 2006.12.31 533,063,813.06 3,340,063,859.53 22,952,526.59 12,263,039.43 3,908,343,238.61 2007.12.31 785,433,962.66 5,740,499,511.31 16,582,208.40 13,252,190.95 6,555,767,873.32 Note 1:Ended December 31, 2007, the Company did not have any fixed asset without operating lease or idled fixed asset. Note 2:Ended December 31, 2007, the net value of housing and building in the fixed assets of which the Company had not acquired the property title was RMB 5,988,190.06. - 62 - SHANDONG CHENMING PAPER HOLDINGS LIMITED IX. Notes to the Financial Statements – Continued 12. CONSTRUCTION-IN-PROGRESS The Group Transferred into Amount at year Increase in the fixed assets in the Other decrease in the Amount Description beginning report year report year report period end in RMB in RMB in RMB in RMB in RM 0.30 million ton SuperClender Paper and supporting project 2,824,246,761.79 270,779,728.02 -3,095,026,489.81 - 98,000 ton waste paper de-inking 192,921.00 192,950,067.50 - 193,14 300,000 ton SuperClender Paper – waste water plant 37,887,374.25 18,284,847.90 -56,172,222.15 - 200,000 ton light weight coated paper project 91,801,299.55 17,044,247.22 -107,845,546.77 - 1,00 Chenming International Hotel 70,934,046.27 110,125,866.37 - - 181,05 180,000 ton light weight coated paper project 779,134,209.90 57,135,210.59 -836,269,420.49 - 200 ton pulp line 20,610,659.69 40,081,878.17 -60,692,537.86 - 300 ton alkaline recovery 3,629,159.90 73,590,135.81 -77,219,295.71 - Fixed asset technical innovation (Jilin) 94,260,315.15 44,651,509.23 -132,030,890.57 - 6,88 Zhanjiang Paper Pulp Project - 14,090,236.83 - - 14,09 120,000 ton art coated printing paper project - 218,289,301.08 - - 218,28 Others 189,295,930.59 384,688,962.15 -283,694,631.58 - 290,29 - Total 4,111,992,678.09 1,441,711,990.87 4,648,951,034.94 - 904,75 SHANDONG CHENMING PAPER HOLDINGS LIMITED IX. Notes to the Financial Statements – continued 12. CONSTRUCTION-IN-PROGRESS - CONTINUED The Group - continued The capitalized borrowing expense in 2007 amounted to RMB 30,470,011.03; the capitalization rate used for determining the amount of the borrowing expense capitalized is: Amount capitalized in Description the report year Capitalization rate in RMB % 180,000 ton light weight coasted paper line 17,821,993.12 6.16 300,000 ton SuperClender paper project 9,428,667.10 6.28 De-inked pulp project 2,450,705.65 5.27 Others 768,645.16 6.57 Total 30,470,011.03 The capitalized borrowing expense in 2006 amounted to RMB 64,550,181.09; the capitalization rate used for determining the amount of the borrowing expense capitalized is: Amount capitalized in Description the report year Capitalization rate in RMB % 180,000 ton light weight coasted paper project(Jilin Chenming) 2,866,797.68 4.73 3 60,000 m particle board project (Juancheng Panels) 805,838.44 5.63 300,000 ton SuperClender paper project (the Company) 60,279,823.77 5.88 Other projects 597,721.20 6.67 Total 64,550,181.09 - 64 - SHANDONG CHENMING PAPER HOLDINGS LIMITED IX. Notes to the Financial Statements – continued 12. CONSTRUCTION-IN-PROGRESS - CONTINUED The Company - continued Transferred into Other decrease Amount at year Increase in the report fixed assets in the in the report Amount at year Description beginning year report year period end in RMB in RMB in RMB in RMB in RMB 0.30 million ton SuperClender Paper and supporting project 2,824,246,761.79 270,779,728.02 -3,095,026,489.81 - ton waste paper de-inking 192,921.00 192,950,067.50 - 193,142,988 300,000 ton SuperClender Paper – waste water plant 37,887,374.25 18,284,847.90 -56,172,222.15 - Others 87,497,699.24 74,056,059.18 -79,345,438.14 - 82,208,320 Total 2,949,824,756.28 556,070,702.60 -3,230,544,150.10 - 275,351,308 SHANDONG CHENMING PAPER HOLDINGS LIMITED IX. Notes to the Financial Statements – Continued 12. CONSTRUCTION-IN-PROGRESS - CONTINUED The Company - continued The capitalized borrowing expense in 2007 amounted to RMB 11,879,372.75; the capitalization rate used for determining the amount of the borrowing expense capitalized is: Amount capitalized Description in the report year Capitalization rate in RMB % 300,000 ton SuperClender paper project 9,428,667.10 6.28 De-inked pulp project 2,450,705.65 5.27 Total 11,879,372.75 13. INTANGIBLE ASSETS The Group Land use right Software Total in RMB in RMB in RMB Original value 2006.12.31 705,634,936.21 14,838,293.05 720,473,229.26 Increase in the report year 151,786,322.04 151,786,322.04 Decrease in the report year -20,120.00 -20,120.00 2007.12.31 857,421,258.25 14,818,173.05 872,239,431.30 Accumulative amortization: 2006.12.31 26,338,385.75 2,608,018.82 28,946,404.57 Increase in the report year 19,522,461.05 1,488,859.36 21,011,320.41 Decrease in the report year -20,120.00 -20,120.00 2007.12.31 45,860,846.80 4,076,758.18 49,937,604.98 Net value 2006.12.31 679,296,550.46 12,230,274.23 691,526,824.69 2007.12.31 811,560,411.45 10,741,414.87 822,301,826.32 Note 1:Intangible asset – For mortgage with the land use right, refer to Note IX.11. Note 2:Ended December 31, 2007, the net value of the land use right among the intangible assets of the Group for which the land use right certificate had not yet been obtained was RMB 92,098,697.68. - 66 - SHANDONG CHENMING PAPER HOLDINGS LIMITED IX. Notes to the Financial Statements - Continued 13. INTANGIBLE ASSETS - continued The Company Land use right Software Total in RMB in RMB in RMB Original value 2006.12.31 230,498,873.30 14,787,993.05 245,286,866.35 Increase in the report year 167,235,621.74 - 167,235,621.74 Decrease in the report year - - - 2007.12.31 397,734,495.04 14,787,993.05 412,522,488.09 Accumulative amortization: 2006.12.31 24,376,483.46 2,587,898.82 26,964,382.28 Increase in the report year 7,056,326.62 1,478,799.36 8,535,125.98 Decrease in the report year - - - 2007.12.31 31,432,810.08 4,066,698.18 35,499,508.26 Net value 2006.12.31 206,122,389.84 12,200,094.23 218,322,484.07 2007.12.31 366,301,684.96 10,721,294.87 377,022,979.83 Note 1:Ended December 31, 2007, the net value of the land use right among the intangible assets of the Company for which the land use right certificate had not yet been obtained was RMB 92,098,697.68. 14. GOODWILL The Group Amount at year Increase in the report beginning year Amount at year end in RMB in RMB in RMB Acquisition of Jilin Chenming Paper Co., Ltd. (Note 1) 14,314,160.60 - 14,314,160.60 Acquisition of Shandong Chenming Panels Co., Ltd. (Note 2) 5,969,626.57 - 5,969,626.57 Total 20,283,787.17 - 20,283,787.17 Note 1:On August 4, 2006, the Company executed an equity acquisition agreement with Shenzhen Kaihua Technology Development Co., Ltd., according to which the Company would acquire the goodwill formed with 30% equity in Jilin Chenming Paper Co., Ltd. held by Shenzhen Kaihua Technology Development Co., Ltd. at the price of RMB 14,850,000. Note 2:On July 20, 2006, Shandong Chenming Thermal Power Co., Ltd. one of the Company's subsidiaries executed an equity acquisition agreement with Shenzhen Kaihua Technology Development Co., Ltd., according to which the Company would acquire the goodwill formed with 49% equity in Shandong Chenming Panels Co., Ltd. held by Shenzhen Kaihua Technology Development Co., Ltd. at the price of RMB 30,572,195.20. - 67 - SHANDONG CHENMING PAPER HOLDINGS LIMITED IX. Notes to the Financial Statements - Continued 15. LONG-TERM EXPENSES TO BE APPORTIONED The Group Provisional difference offsetable and Items loss offsetable Asset of deferred income tax Amount Amount at year Amount at Amount at year at year end beginning year end beginning in RMB in RMB in RMB in RMB Provision for impairment 330,112,669.62 227,914,040.36 76,061,834.86 42,709,853.47 Separation of convertible bond - -82,184,351.59 - -19,941,034.23 Annual salaries to senior executives provided in advance 76,615,517.52 43,800,000.00 18,278,879.38 10,512,000.00 Tax loss offsetable 7,072,653.00 5,467,425.88 1,768,163.25 1,366,856.47 Outstanding account payable 9,467,054.69 - 2,366,763.67 - Organization expenses 9,423,741.50 14,208,545.61 1,177,967.69 1,065,640.92 Unrealized profit of internal transaction 14,831,852.54 10,069,457.34 3,707,963.13 2,416,669.76 447,523,488.87 219,275,117.60 103,361,571.98 38,129,986.39 Total According to the result of the profit earning prediction in future, the Company may possibly acquire sufficient income tax amount taxable in the foreseeable future to offset the offsetable provisional difference and recognize the relevant deferred income tax asset within the offsetable loss limit. The offsetable loss of the unrecognized deferred income tax shall be due in the following years: Amount at Amount at year beginning year end in RMB in RMB 2008 10,297,369.77 10,297,369.77 2009 978,280.51 978,280.51 2010 53,596,314.41 48,922,216.24 2011 59,596,156.75 59,596,156.75 2012 - 80,480,974.44 - 68 - SHANDONG CHENMING PAPER HOLDINGS LIMITED IX. Notes to the Financial Statements - Continued 15. LONG-TERM EXPENSES TO BE APPORTIONED - Continued The Company Provisional difference Items offsetable and loss offsetable Asset of deferred income tax Amount at year Amount at Amount at year Amount at beginning year end beginning year end in RMB in RMB in RMB in RMB Provision for impairment 218,134,650.73214,580,910.97 52,352,316.18 53,645,227.74 Change in the fair value of convertible bond -105,244,077.71 - -25,258,578.65 - Annual salaries to senior executivesProvided in advance 43,800,000.00 67,424,634.80 10,512,000.00 16,856,158.70 Outstanding account payable 3,254,099.32 8,060,172.84 780,983.83 2,015,043.21 Total 159,944,672.34290,065,718.61 38,386,721.36 72,516,429.65 16. CONSUMABLE BIOLOGIC ASSETS The Group Amount at year Change in the fair Fair value at year Items Quantity beginning Purchase Breeding value end (1,000 mu) in RMB in RMB in RMB in RMB in RMB Wood 144 19,514,433.24 - 48,230,037.74 24,415,400.31 92,159,871.29 On December 31, 2007, the consumable biological assets of Yangjiang Chenming Forestry Development Co., Ltd. and Zhanjiang Chenming Forestry Development Co., Ltd., two of the Company's subsidiaries were appraised by Sallmanns (Far East) Limited and the fair value of the said assets was RMB92,159,871.29. On December 31, 2006, through appraisal by Sallmanns (Far East) Limited, the change in the fair value of the consumable biological assets of Yangjiang Chenming Forestry Development Co., Ltd. and Zhanjiang Chenming Forestry Development Co., Ltd., two of the Company's subsidiaries was quite small and therefore, such fair value was not recognized. - 69 - SHANDONG CHENMING PAPER HOLDINGS LIMITED IX. Notes to the Financial Statements - Continued 17. PROVISION FOR IMPAIRMENT OF THE ASSETS The Group Decrease in the report year Provision in the Amount carried Other written-off 2006.12.31 report year back amount 2007.12.31 in RMB in RMB in RMB in RMB in RMB Provision for bad debts 213,265,458.05 190,765,979.67 -90,899,334.84 -34,421,476.06 278,710,626.82 Incl.: Accounts receivable 156,387,901.32 145,118,493.37 -47,779,255.79 -34,421,476.06 219,305,662.84 Other receivables 56,877,556.73 45,647,486.30 -43,120,079.05 - 59,404,963.98 Provisions for price falling of inventories 5,232,293.42 881,984.43 - - 6,114,277.85 Provision for devaluation of long- term equity investments 1,200,000.00 1,450,000.00 - - 2,650,000.00 Provision for impairment of held- to-maturity investment 142,210.00 - - - 142,210.00 Provisions for devaluation of fixed assets 8,074,288.89 - - - 8,074,288.89 Total 227,914,250.36 193,097,964.10 -90,899,334.84 -34,421,476.06 295,691,403.56 The Company Provision in the Amount carried Other written-off 2006.12.31 report year back amount 2007.12.31 in RMB in RMB in RMB in RMB in RMB Provision for bad debts 212,154,929.63 94,353,963.64 -91,777,281.96 -31,019,190.48 183,712,420.83 Incl.: Accounts receivable 118,107,053.64 90,017,713.31 -9,534,401.04 -31,019,190.48 167,571,175.43 Other receivables 94,047,875.99 4,336,250.33 -82,242,880.92 - 16,141,245.40 Provisions for price falling of inventories 5,232,293.42 881,984.43 - - 6,114,277.85 Provision for impairment of long-term equity investments 1,200,000.00 1,450,000.00 - - 2,650,000.00 Provision for impairment of held-to-maturity investment 142,210.00 - - - 142,210.00 Total 218,729,433.05 96,685,948.07 -91,777,281.96 -31,019,190.48 192,618,908.68 18. SHORT-TERM LOAN The Group 2007.12.31 2006.12.31 in RMB in RMB Loan on credit 3,045,252,736.24 654,911,948.29 Loan against hypothecation (Note 1) - 50,000,000.00 Secured Loan (Note 2) 120,520,085.62 220,000,000.00 Discounted notes 428,227,235.41 373,742,585.50 Total 3,594,000,057.28 1,298,654,533.79 - 70 - SHANDONG CHENMING PAPER HOLDINGS LIMITED Note 1:The balance as at December 31, 2006 was the loan from China Construction Bank Nanchang Changbei Sub-branch borrowed by Jiangxi Chenming Paper Co., Ltd., one of the Company's subsidiaries by hypothecation of its deposit with balance amounting to RMB 9,940,839.59. Note 2:It was the guarantee offered by the Company for its subsidiaries. Refer to Note X(3)(e). The Company 2007.12.31 2006.12.31 in RMB in RMB Loan on credit 2,944,937,040.00 526,931,900.00 Discounted notes 405,483,351.17 356,811,988.55 Total 3,350,420,391.17 883,743,888.55 Of the Group's and the Company's short term loans ended December 31, 2007, there was no overdue loan. 19. NOTES PAYABLE The Group 2007.12.31 2006.12.31 in RMB in RMB Bank acceptance 130,056,316.74 47,201,892.31 Total 130,056,316.74 47,201,892.31 The Company 2007.12.31 2006.12.31 in RMB in RMB Bank acceptance 121,487,222.14 - Total 121,487,222.14 - At the end of the report period, there was none in the Group's and the Company's notes payable to a shareholder holding more than 5% (with 5% inclusive) of the total shares. - 71 - SHANDONG CHENMING PAPER HOLDINGS LIMITED 21. Accounts payable The Group 2007.12.31 2006.12.31 Amount Proportion Amount Proportion in RMB (%) in RMB (%) Within a year 1,533,347,279.46 92.55 1,381,407,220.08 91.37 1 to 2 years 88,003,635.88 5.31 107,369,257.63 7.1 2 - 3 years 19,819,086.27 1.2 8,935,802.50 0.59 Over 3 years 15,536,979.01 0.94 14,256,293.30 0.94 Total 1,656,706,980.62 100 1,511,968,573.51 100 The Company 2007.12.31 2006.12.31 Amount Proportion Amount Proportion in RMB (%) in RMB (%) Within a year 1,302,127,014.93 97.72 1,351,289,880.15 97.56 1 to 2 years 25,899,318.42 1.94 28,899,302.35 2.09 2 - 3 years 1,289,808.76 0.1 1,469,525.48 0.11 Over 3 years 3,236,189.59 0.24 3,374,773.91 0.24 Total 1,332,552,331.70 100 1,385,033,481.89 100 As at December 31, 2007, there was none in the Group's and the Company's balance of accounts payable to a shareholder holding more than 5% (with 5% inclusive) of the total shares. As at December 31, 2007, the Group's and the Company's accounts payable with age of over three years were all odd accounts and there was no big accounts payable with age exceeding three years. - 72 - SHANDONG CHENMING PAPER HOLDINGS LIMITED IX. Notes to the Financial Statements – Continued 22. Advance Receipts The Group 2007.12.31 2006.12.31 Amount Proportion Amount Proportion in RMB (%) in RMB (%) Within a year 162,869,863.04 95.64 188,781,421.13 97.62 Over 1 year 7,416,766.17 4.36 4,606,715.47 2.38 Total 170,286,629.21 100 193,388,136.60 100 The Company 2007.12.31 2006.12.31 Amount Proportion Amount Proportion in RMB (%) in RMB (%) Within a year 85,788,060.04 93.12 144,663,263.32 98.16 Over 1 year 6,338,827.45 6.88 2,709,014.95 1.84 Total 92,126,887.49 100 147,372,278.27 100 As at December 31, 2007, there was no account in the Group's and the Company's advance receipts from a shareholder holding more than 5% (with 5% inclusive) of the total shares. As at December 31, 2007, the Group's and the Company's advance receipts with age of over one year were all odd accounts and there was no big advance receipt with age exceeding three years. 23. Salaries Payable to Staff The Group Provision in the Payment in the 2006.12.31 report year report year 2007.12.31 in RMB in RMB in RMB in RMB Salaries, bonus, allowance and subsidy 86,746,443.09 451,630,431.79 383,337,081.72 155,039,793.16 Employee's Welfare 12,598,019.81 - 5,578,400.76 7,019,619.05 Social insurance premium 5,263,230.41 84,066,299.30 66,780,885.00 22,548,644.71 Including: 1. Medical insurance premium 327,567.68 8,629,576.99 8,775,807.81 181,336.86 2. Basic endowment insurance premium 4,057,079.56 55,344,860.67 55,371,960.78 4,029,979.45 3. Unemployment insurance premium 876,518.67 2,674,825.40 3,155,482.57 395,861.50 4. Occupational insurance premium - 541,231.98 541,191.98 40 5. Maternity insurance premium 2,064.50 117,057.21 117,017.21 2,104.50 Housing reserve 2,954,410.03 16,465,292.56 16,229,463.16 3,190,239.43 Trade union and employee's education budget 19,115,645.62 10,241,421.72 8,092,093.40 21,264,973.94 Others 31,408,777.84 1,516,939.92 7,108,768.99 25,816,948.77 Including: housing subsidy fund of the Chinese party 18,722,869.49 - - 18,722,869.49 Total 158,086,526.80 563,920,385.29 487,126,693.03 234,880,219.06 - 73 - SHANDONG CHENMING PAPER HOLDINGS LIMITED IX. Notes to the Financial Statements – Continued The Company Provision in the Payment in the 2006.12.31 reporting year report year 2007.12.31 in RMB in RMB in RMB in RMB Salaries, bonus, allowance and subsidy 61,589,297.41 174,156,656.04 144,431,647.94 91,314,305.51 Social insurance premium - 30,800,832.43 30,800,832.43 - Including: 1. Medical insurance premium - 3,546,985.88 3,546,985.88 - 2. Basic endowment insurance premium - 27,253,846.55 27,253,846.55 - 3. Unemployment insurance premium - - - - 4. Occupational insurance premium - - - - 5. Maternity insurance premium - - - - Housing reserve - 5,694,123.45 5,392,693.52 301,429.93 Trade union and employee's education budget 7,328,076.22 411,743.77 124,127.44 7,615,692.55 Others 20,294,434.36 - - 20,294,434.36 Including: housing subsidy fund 18,722,869.49 - - 18,722,869.49 Total 89,211,807.99 211,063,355.69 180,749,301.33 119,525,862.35 24. Taxes payable The Group 2007.12.31 2006.12.31 in RMB in RMB Value-added tax -37,746,067.23 13,025,489.10 Business tax 8,857,642.18 8,607,953.63 Tax for urban development and maintenance 603,652.91 944,252.17 Business income tax 95,828,694.44 41,611,377.46 Individual income tax 9,884,850.76 6,978,191.84 Real estate tax 4,235,238.17 2,212,653.30 Stamp tax 3,377,040.15 1,221,623.57 Land use tax 12,020,128.08 767,644.01 Educational Surcharge 1,097,118.40 907,604.10 Land value added tax 4,286,153.00 - Total 102,444,450.86 76,276,789.18 - 74 - SHANDONG CHENMING PAPER HOLDINGS LIMITED IX. Notes to the Financial Statements – Continued The Company 2007.12.31 2006.12.31 in RMB in RMB Value-added tax 10,924,722.22 21,258,700.51 Business tax 8,695,193.52 8,137,368.48 Business income tax 63,493,393.03 -11,524,254.74 Individual income tax 9,111,505.66 6,500,362.36 Real estate tax 1,750,586.84 1,146,210.27 Stamp tax 1,889,696.53 383,154.96 Land value added tax 4,286,153.00 - Total 100,151,250.80 25,901,541.84 25. Dividend payable The Group and the Company 2007.12.31 2006.12.31 in RMB in RMB State shares - 190,293.30 Corporate shares 36,075.17 509,522.00 Total 36,075.17 699,815.30 26. Other payables The Group 2007.12.31 2006.12.31 Amount Proportion Amount Proportion in RMB (%) in RMB (%) Within a year 107,189,167.02 35.14 93,284,791.03 30.57 1 to 2 years 121,510,348.87 39.83 130,167,018.22 42.65 2 - 3 years 40,351,763.92 13.23 27,734,744.37 9.09 Over 3 year 35,998,736.57 11.8 53,977,699.60 17.69 Total 305,050,016.38 100 305,164,253.22 100 - 75 - SHANDONG CHENMING PAPER HOLDINGS LIMITED IX. Notes to the Financial Statements – Continued The Company 2007.12.31 2006.12.31 Amount Proportion Amount Proportion in RMB (%) in RMB (%) Within a year 116,758,545.18 41.87 228,939,996.92 78.65 1 to 2 years 146,015,185.86 52.37 46,855,244.24 16.1 2 to 3 years 9,606,328.08 3.45 5,373,897.06 1.85 Over 3 year 6,458,285.54 2.32 9,923,359.70 3.4 Total 278,838,344.66 100 291,092,497.92 100 As at December 31, 2007, there was none in the Group's and the Company's balance of other payables to a shareholder holding more than 5% (with 5% inclusive) of the total shares. 27. Non-current Liabilities due within a Year The Group Amount at year Types Amount at year end beginning in RMB in RMB Long-term loan due within one year 667,746,417.91 249,100,117.61 Total 667,746,417.91 249,100,117.61 The Company Amount at year Types Amount at year end beginning in RMB in RMB Long-term loan due within one year 667,746,417.91 201,540,000.00 Total 586,144,500.00 201,540,000.00 - 76 - SHANDONG CHENMING PAPER HOLDINGS LIMITED IX. Notes to the Financial Statements – Continued 28. Other current liabilities The Group Types 2007.12.31 in RMB Short term financing bond (Note 1) 506,212,916.67 Total 506,212,916.67 Note 1: Approved by the People's Bank of China wit Document YIN FA [2007] No. 289, Jiangxi Chenming, one of the Company's subsidiaries, issued short term financing bond with total book value of RMB 500,000,000.00 with valid term of one year and China Construction Bank Co., Ltd. as the underwriter. The short term financing bond for which China Construction Bank offered full joint-responsibility guarantee. The annual interest rate of the financing bond was 4.03% and the interest would be paid on once-and-for-all basis upon maturity. The Company Types 2007.12.31 2006.12.31 in RMB in RMB Short term financing bonds (Note 2) - 2,026,019,444.42 Total - 2,026,019,444.42 Note 2: Approved by the People's Bank of China wit Document YIN FA [2006] No. 232, the Company issued short term financing bonds with total book value of RMB 1,000,000,000.00 with valid term of one year respectively on July 24, 2006 and August 29, 2006. No guarantee was provided for the financing bonds; the annual interest rate of the first issue of the short term financing bond was 3.68% and that of the second issue was 3.82%. - 77 - SHANDONG CHENMING PAPER HOLDINGS LIMITED IX. Notes to the Financial Statements – Continued 29. Long-term Loan The Group Types 2007.12.31 2006.12.31 Amount in original Conversion Amount in original Conversion currency rate in RMB currency rate in RMB Credit borrowing - RMB 1,436,896,605.93 1 1,436,896,605.93 2,923,305,865.12 1 2,923,305,865.12 Credit borrowing – USD 280,500,000.00 7.3046 2,048,940,300.00 126,126,313.28 7.8087 984,882,542.51 Mortgage loan - RMB - - - - - - Mortgage loan – USD 62,398,977.95 7.3046 455,799,574.33 66,911,765.00 7.8087 522,493,899.36 Secured loan – RMB (Note 1) 775,000,000.00 1 775,000,000.00 - - - Secured loan – USD (Note 1) 1,000,000.00 7.3046 7,304,600.00 108,397,908.74 7.8087 846,446,749.98 Total 4,723,941,080.26 5,277,129,056.97 Less: Long-term loan due within one year 667,746,417.91 249,100,117.61 Including Credit borrowing - RMB 166,204,570.00 1 166,204,570.00 199,447,268.40 1 199,447,268.40 Credit borrowing – USD 57,500,000.00 7.3046 420,014,500.00 - - - Mortgage loan - RMB - - - - - - Mortgage loan – USD 6,369,595.58 7.3046 46,527,347.91 3,529,411.76 7.8087 27,560,117.61 Secured loan - RMB 35,000,000.00 1 35,000,000.00 - - - Secured loan – USD (Note 1) - - - 2,829,245.79 7.8087 22,092,731.60 Long-term loan due after one year 4,056,194,662.35 5,028,028,939.36 The annual interest rates of the aforesaid loans were 5.265% to 6.93%. Note 1: It was the guarantee offered by the Company for its subsidiaries. Refer to Note X(3)(e). The Company Types 2007.12.31 2006.12.31 Amount in original Conversion Amount in original Conversion currency rate in RMB currency rate in RMB Credit borrowing - RMB 1,436,822,035.94 1 1,436,822,035.94 2,158,362,035.94 1 2,158,362,035.94 Credit borrowing – USD 280,500,000.00 7.3046 2,048,940,300.00 225,000,000.00 7.8087 1,756,957,500.00 Total 3,485,762,335.94 3,915,319,535.94 Less: Long-term loan due within one year 586,144,500.00 201,540,000.00 Including Credit borrowing - RMB 166,130,000.00 1 166,130,000.00 201,540,000.00 1 201,540,000.00 Credit borrowing – USD 57,500,000.00 7.3046 420,014,500.00 - - - Long-term loan due within one year 2,899,617,835.94 3,713,779,535.94 The annual interest rates of the aforesaid loans were 6.094% to 6.93%. - 78 - SHANDONG CHENMING PAPER HOLDINGS LIMITED IX. Notes to the Financial Statements – Continued 30. Bonds payable The Group and the Company Liabilities Equity Total in RMB in RMB in RMB Issuing of Convertible Debentures 1,720,046,332.20 279,953,667.80 2,000,000,000.00 Issuing costs: -34,392,596.00 -5,597,717.47 -39,990,313.47 - - - Amount received from issuing of convertible debentures 1,685,653,736.20 274,355,950.33 1,960,009,686.53 Shares converted in the report year - - - Interest provided 52,594,140.73 - 52,594,140.73 Interest paid - - - Deferred tax - -65,845,428.08 -65,845,428.08 December 31, 2004 1,738,247,876.94 208,510,522.25 1,946,758,399.19 Shares converted in the report year -41,232,673.08 -6,280,542.70 -47,513,215.78 Interest provided 99,921,297.35 - 99,921,297.35 Interest paid -32,750,520.23 - -32,750,520.23 Deferred tax - 1,507,330.25 1,507,330.25 December 31, 2005 1,764,185,980.98 203,737,309.80 1,967,923,290.78 Shares converted in the report year -72,634,071.37 -10,966,267.97 -83,600,339.34 Interest provided 115,873,104.76 - 115,873,104.76 Interest paid -38,394,892.11 - -38,394,892.11 Deferred tax - 2,631,904.31 2,631,904.31 December 31, 2006 1,769,030,122.26 195,402,946.14 1,964,433,068.40 Shares converted in the report year -1,815,151,440.06 -257,032,846.35 -2,072,184,286.41 Interest provided 46,653,405.07 - 46,653,405.07 Interest paid - - - Deferred tax - 61,687,883.12 61,687,883.12 Before Redeeming 532,087.27 57,982.92 590,070.19 Redeemed convertible bonds -532,087.27 -57,982.92 -590,070.19 December 31, 2007 - - - - 79 - SHANDONG CHENMING PAPER HOLDINGS LIMITED IX. Notes to the Financial Statements – Continued On September 15, 2004, approved by China Securities Regulatory Commission, the Company issued convertible debentures (CHENMING Convertible Bonds) with valid term of 5 years amounting to RMB 2 billion. The conversion term was from March 15, 2005 to September 15, 2009. The interest rates of the convertible bonds issued were: 1.5% for the 1st year, 1.8% for the second year, 2.1% for the third year, 2.5% for the fourth year and 2.79% for the fifth year. Should the deposit interest rate increase ordered by the People's Bank of China during the existence of Chenming Convertible Bonds, the nominal rate of Chenming Convertible Bonds would correspondingly increase based on the one-year-term lump-sum deposit and withdrawal commencing from the date of increasing the interest rate. (It refers to the net increase rate in comparison of the RMB one-year-term lump-sum deposit and withdrawal with the previous adjustment with the comparative base of the initial adjustment being the interest rate of the RMB one-year-term lump-sum deposit of the day prior to issuing convertible bonds). Should the deposit interest rate decrease ordered by the People's Bank of China, the interest rate of Chenming Convertible Bonds shall remain unchanged. According to the issuing clauses of the convertible debentures, these convertible debentures may be redeemed by the Company or bought back by the holder of the debentures. In 2007, the convertible debentures issued by the Company were all converted into Renminbi based ordinary shares (A shares) issued by the Company. On May 14, 2007, the Company redeemed all the CHENMING Convertible Bonds not yet converted amounting to RMB 552,200 at the price of RMB 577,766.86.Ended December 31, 2007, the Company had no more convertible debentures issued outside. 31. Deferred income The Group Amount Increase in the Decrease in Amount at Types at year beginning report year the report year year end in RMB in RMB in RMB in RMB Special fund for the construction project of R & D Center of key enterprises 1,000,000.00 - 1,000,000.00 - Fund for the three items in connection with technology allocated by the local financial authority 80,000.00 - - 80,000.00 Subsidy of special fund for environmental protection 710,000.00 40,000.00 - 750,000.00 Special fund for environmental protection (Wuhan Chenming) 3,900,000.00 - 3,900,000.00 - Special fund for environmental protection (Jiangxi Chenming) - 1,800,000.00 1,800,000.00 - Total 5,690,000.00 1,840,000.00 6,700,000.00 830,000.00 - 80 - SHANDONG CHENMING PAPER HOLDINGS LIMITED IX. Notes to the Financial Statements - continued 31. Deferred income - continued The Group - continued (1) In 2006, the Company received RMB 1,000,000.00 of special fund according to the Official Reply to the Application for Special Fund for the Construction Project of R & D Center of Key Enterprises in 2006 in 2006 promulgated by Shandong Provincial Department of Finance and the Economic and Trade Commission. The special account payable was mainly applied in research and development of process of various high grade cultural printing paper and purchase of key instruments and equipment. (2) Chibi Chenming Paper Co. Ltd., one of the Company's subsidiaries received special appropriation amounting to RMB 80,000.00 according to the Circular of Hubei Provincial Government on Provision of the 4th Three Types of Funds for Science and Technology in 2004. The special fund was applied for purchase of equipment for the project of refined calcium carbonate with white mud through alkaline recovery with capacity of 79 T/D. (3) In 2006, Wuhan Chenming Paper Co. Ltd., one of the Company's subsidiaries received special appropriation amounting to RMB 3,900,000.00 from Wuhan Municipal Bureau of Environmental Protection according to the Circular of Wuhan Municipal Bureau of Environmental Protection and Wuhan Municipal Bureau of Finance on Issuing the Plan of Special Fund Projects of Environmental Protection in 2006. (4) In 2006, Chibi Chenming Paper Co. Ltd., one of the Company's subsidiaries received special appropriation amounting to RMB 40,000.00 from Hubei Provincial Department of Finance according to the Circular of Hubei Provincial Department of Finance and Hubei Provincial Bureau of Environmental Protection on the Budget of Subsidy as Special Fund the Second Environmental Protection Projects at Provincial Level in 2005. So far the company has received accumulatively RMB 750,000.00. The special fund is used for purchase or improvement of environmental protection facility. (5) In 2006, Jiangxi Chenming Paper Co. Ltd., one of the Company's subsidiaries received special appropriation amounting to RMB 1,800,000 according to the Circular of Jiangxi Provincial Department of Finance and Jiangxi Provincial Bureau of Environmental Protection on the Subsidy as Special Fund the Second Environmental Protection Projects at Provincial Level. The special fund is used for purchase of environmental protection facility. 32. Liabilities of deferred income tax The Group Items of Provisional Liabilities of discrepancy Provisional discrepancy in tax payable deferred income tax Amount Amount Amount at year beginning at year end at year beginning Amount at year end in RMB in RMB in RMB in RMB Change in fair value of consumable biological assets - 24,415,400.31 - 6,103,850.08 Total - 24,415,400.31 - 6,103,850.08 - 81 - SHANDONG CHENMING PAPER HOLDINGS LIMITED 33. Capital stock a. The change of the Company's shares as at December 31, 2007 is stated as follows: Increase/decrease in the report period Shares converted Shares held Releasing from convertible by new of sales Equity Ending Balance Opening Balance bonds (Note1) director frozen restriction separation Others Sub-total (shares) Negotiable shares with sales restriction State owned corporate shares 328,573,657 - - - - - - 328,573,657 Domestic non-domestic legal entity shares 9,517,139 - - -9,517,139 -9,517,139 - Other domestic shares 16,718,345 - 16,400 -3,731,670 - - -3,715,270 13,003,075 Incl: Domestic corporate shares - - - - - - - - Domestic natural person shares 16,718,345 - 16,400 -3,731,670 - - -3,715,270 13,003,075 Total negotiable shares with sales restriction 354,809,141 - 16,400 -13,248,809 - - -13,323,400 341,576,732 listed negotiable shares A Share 453,363,529 340,675,786 -16,400 13,248,809 - - 353,908,195 807,271,724 B shares 557,497,485 - - - - - - 557,497,485 Total listed negotiable shares 1,010,861,014 340,675,786 -16,400 13,248,809 - - 353,908,195 1,364,769,209 Total Shares 1,365,670,155 340,675,786 - - - - 340,675,786 1,706,345,941 Note 1:CHENMING Convertible Bond entered the period of share conversion on March 15, 2005. Through review and approval of the 21st meeting of the Fourth Board of Directors, the Company redeemed all the remaining convertible debentures ahead of time on May 14, 2007. So far the accumulated added quantity of Chenming Paper Convertible Debentures was 359,754,087 shares. In the report period, the quantity of the convertible shares increased to 340,675,786 shares. The change of the Company's shares as at December 31, 2006 is stated as follows: Increase/decrease in the year (shares) Valuable Shares Year beginning Shares from consideration of converted Equity Others Year end (shares) convertible bonds equity separation from reserve separation (Note 1) Sub-total (shares) Circulating shares no yet listed Promoters' shares State shares 422,843,176 - -94,269,519 - -328,573,657 - -422,843,176 - - Domestic corporate shares 12,247,656 - -2,730,517 - -9,517,139 - -12,247,656 - Total non-listed negotiable shares 435,090,832 - -97,000,036 - -338,090,796 - -435,090,832 - Negotiable shares with sales restriction State owned corporate shares - - - - 328,573,657 - 328,573,657 328,573,657 Domestic non-domestic legal entity shares - - - - 9,517,139 - 9,517,139 9,517,139 Other domestic shares - - 691,083 - - 16,027,262 16,718,345 16,718,345 Incl: domestic corporate shares - - - - - - - - Domestic natural person shares - - 691,083 - - 16,027,262 16,718,345 16,718,345 Total negotiable shares with sales restriction ? - - 691,083 - 338,090,796 16,027,262 354,809,141 354,809,141 listed negotiable shares A Share 360,951,603 12,130,235 96,308,953 - - -16,027,262 92,411,926 453,363,529 B shares 557,497,485 - - - - - - 557,497,485 Total listed negotiable shares 918,449,088 12,130,235 96,308,953 - - -16,027,262 92,411,926 1,010,861,014 Total Shares 1,353,539,920 12,130,235 - - - - 12,130,235 1,365,670,155 - 82 - SHANDONG CHENMING PAPER HOLDINGS LIMITED IX. Notes to the Financial Statements - continued 33. Capital Stock - continued b. The change of the Company's shares as at December 31, 2006 is stated as follows: - Continued Note 1:They were the listed negotiable shares acquired by the senior executives from the Company which were transferred into the negotiable shares with sales restriction. The book value per the aforesaid share was RMB 1.00. On January 23, 2006, the Company announced the equity separation reform plan. On February 23, 2006, the Company obtained the Official Reply of the State Owned Assets Supervision and Administration Commission of Shandong Provincial People's Government on some Issues concerning Management of the State Owned Equity Involved in the Equity Separation Reform of Shandong Chenming Paper Holdings Limited. On February 28, 2006, the Company's Equity Separation Reform Plan was reviewed and approved by the Shareholders' General Meeting. On March 29, 2006, the Company implemented the equity separation reform plan according to which all the shareholders of negotiable shares listed in the registry would be entitled to obtain 2.6 shares as valuable consideration for every 10 negotiable A shares they are holding. Before implementation of the equity separation reform plan, the Company had totally 1,365,665,379 shares, including 435,090,832 shares of non-negotiable shares, taking 31.86% of the Company's total shares; 930,574,547 negotiable shares, taking 68.14% of the Company's total shares. Upon implementation of the equity separation reform plan, the Company had totally 1,365,665,379 shares which were all negotiable shares, including 341,439,891 shares with sales restriction (including 3,349,095 shares held by senior executives) taking 25.00% of the Company's total shares; 1,024,225,48 shares without sales restriction, taking 75.00% of the Company's total shares. Change of the aforesaid capital stock was verified by Zhongruihua Certified Public Accountants that issued the capital verification report ZHONG RUI HUA HENG XIN YAN ZI II [2006] No. 009. In 2006, the Company's convertible bonds were converted into 12,130,235 A shares. - 83 - SHANDONG CHENMING PAPER HOLDINGS LIMITED IX. Notes to the Financial Statements - continued 34. Capital reserve December 31, 2007 Amount at Increase in Decrease in the Amount at year beginning the report year report year year end in RMB in RMB in RMB in RMB Capital stock premium Incl: Exercising conversion option of the convertible debentures 1,275,601,925.70 1,695,335,664.20 - 2,970,937,589.90 Other capital public reserve Incl: Provision for added value in assets assessment 29,175,770.89 - - 29,175,770.89 Allocated accounts, transferred-in 120,681,802.18 - - 120,681,802.18 Investee's owner's equity excluding the net gain and loss Other changes 383,583,167.82 - - 383,583,167.82 Others 3,214,298.45 1,000,000.00 - 4,214,298.45 Convertible Debentures Separated equity 206,799,776.31 14,060,454.43 -220,860,230.74 - Total 2,019,056,741.35 1,710,396,118.63 -220,860,230.74 3,508,592,629.24 Increase of the capital stock premium in the report year was mainly due to the premium formed from conversion of the Company's convertible debentures into A shares in the report year by RMB 1,695,335,664.20. The equity separated from the convertible debentures was due to the convertible debentures issued in the report year; the added capital reserve from separation of the equity part was RMB 14,060,454.43. IX. Notes to the Financial Statements - continued 34. Capital reserve - continued December 31, 2006 Decrease Amount at Increase in the in the Amount at year beginning report year report year year end in RMB in RMB in RMB in RMB Capital stock premium Incl: Exercising conversion option of the convertible debentures 1,215,098,089.33 60,503,836.37 - 1,275,601,925.70 Other capital public reserve Incl: Provision for added value in asset appraisal 29,175,770.89 - - 29,175,770.89 Allocated accounts, transferred-in 120,681,802.18 - - 120,681,802.18 - 84 - SHANDONG CHENMING PAPER HOLDINGS LIMITED Investee's owner's equity excluding the net gain and loss Owner's equity other than gain and loss Other changes 383,583,167.82 - - 383,583,167.82 Others 3,214,298.45 3,214,298.45 Convertible Debentures Separated equity 205,045,897.44 1,753,878.87 - 206,799,776.31 Total 1,956,799,026.11 62,257,715.24 - 2,019,056,741.35 Increase of the capital stock premium in the report year was mainly due to the premium formed from conversion of the Company's convertible debentures into A shares in the report year by RMB 60,503,836.37. The equity separated from the convertible debentures was due to the convertible debentures issued in the report year; the added capital reserve from separation of the equity part was RMB 1,753,878.87. 35. SURPLUS RESERVE 2007 Statutory surplus Statutory public public reserve welfare fund Total in RMB in RMB in RMB Opening balance 642,691,568.68 - 642,691,568.68 Provision in the reporting year 81,051,351.90 - 81,051,351.90 Decrease in the report year - - - Ending balance 723,742,920.58 - 723,742,920.58 - 85 - SHANDONG CHENMING PAPER HOLDINGS LIMITED IX. NOTES TO THE FINANCIAL STATEMENTS - continued 2006 Statutory surplus Statutory public public reserve welfare fund Total in RMB in RMB in RMB Opening balance 298,667,606.19 282,364,065.83 581,031,672.02 Provision in the reporting year 61,659,896.66 - 61,659,896.66 Statutory surplus reserve converted from statutory reserve 282,364,065.83 -282,364,065.83 - Ending balance 642,691,568.68 - 642,691,568.68 36. RETAINED EARNINGS The Group Report year Previous year in RMB in RMB Retained earnings at year beginning (for that after adjustment, refer to Note VI) 2,124,226,318.78 1,763,460,001.13 Plus: Net profit in the report year 967,636,172.39 586,306,459.87 Less: Provision of statutory surplus public reserve -81,051,351.90 -61,659,896.66 Profit available for distribution to the shareholders 3,010,811,139.27 2,297,704,164.34 Less: Dividend payable - Cash dividend of the previous year/previous years approved by shareholders' meeting -204,761,512.92 -163,880,245.56 Retained earnings at year end 2,806,049,626.35 2,124,226,318.78 Including: Cash dividend/profit distributed after resolution on the balance sheet day. 163,880,418.60 The Company Report year Previous year in RMB in RMB Retained earnings at year beginning (for that after adjustment, refer to Note VI) 1,117,588,614.33 888,654,710.31 Plus: Net profit in the report year 810,513,519.05 454,474,046.24 Less: Provision of statutory surplus public reserve -81,051,351.90 -61,659,896.66 Profit available for distribution to the shareholders 1,847,050,781.48 1,281,468,859.89 Less: Dividend payable - cash dividend of the previous year/previous years approved by shareholders' meeting -204,761,512.92 -163,880,245.56 Retained earnings at year end 1,642,289,268.56 1,117,588,614.33 Including: Cash dividend/profit distributed after resolution on the balance sheet day. 163,880,418.60 - 86 - SHANDONG CHENMING PAPER HOLDINGS LIMITED IX. NOTES TO THE FINANCIAL STATEMENTS - continued 37. MINORITY SHAREHOLDERS' EQUITY Minority shareholders' equity of the Group's subsidiaries: Amount at Amount at year end year beginning in RMB in RMB Jiangxi Chenming Paper Co., Ltd. 753,466,734.73 722,462,891.11 Wuhan Chenming Hanyang Paper Co., Ltd 420,169,505.46 401,111,837.29 Chibi Chenming Paper Co., Ltd. 282,226,459.32 315,995,317.81 Shandong Chenming Thermal Power Co., Ltd. 232,633,036.75 190,784,974.09 Yanbian Chenming Paper Co., Ltd. 61,872,157.72 50,047,268.74 Hailaer Chenming Paper Co., Ltd. 25,252,081.12 21,218,110.70 Shandong Chenming International Hotel Co., Ltd. 33,221,256.38 34,498,414.74 Others 26,683,421.63 1,490,967.10 Total 1,835,524,653.11 1,737,609,781.58 38. BUSINESS INCOME The Group Accumulative amount in Accumulative amount in the report year the previous year in RMB in RMB Principal business Incl: Machine-made paper 13,855,610,458.39 10,780,358,238.71 Electric power and thermal power 68,995,877.17 59,883,425.23 Building materials 869,909,623.83 817,651,257.23 Chemicals for paper making 92,004,112.10 75,222,873.94 Paper making equipment - 80,779,638.45 Others 10,209,545.15 196,992.79 Other business Incl: sale of raw materials and semi-finished products 80,128,973.80 77,946,006.09 Sales of electricity and steam 176,153,459.37 73,860,567.47 Installation engineering and machine repairing shop 7,309,462.36 9,523,221.78 Rental income 3,319,551.29 2,501,793.67 Others 1,101,386.80 5,540,553.53 Total 15,164,742,450.26 11,983,464,568.89 - 87 - SHANDONG CHENMING PAPER HOLDINGS LIMITED IX. NOTES TO THE FINANCIAL STATEMENTS - continued (1) Of the income from principal business, that from paper products based on regions is as follows: Accumulative amount in Accumulative amount in the report year the previous year in RMB in RMB Mainland China 11,550,360,152.02 8,857,972,333.37 United States 250,062,700.00 336,195,598.59 Hong Kong, China 303,260,738.83 444,171,879.95 Japan 334,189,414.51 390,379,892.09 South Africa 292,530,145.09 - Other countries/regions 1,125,207,307.94 751,638,534.71 Total 13,855,610,458.39 10,780,358,238.71 (2) Proportion of income from the top five customers in all the sales income is as follows: Accumulative amount in Accumulative amount in the report year the previous year in RMB in RMB 收入前五名合计 401,949,929.62 607,457,644.09 比例 2.65% 5.07% The Company Accumulative amount Accumulative amount in the report year in the previous year in RMB in RMB Principal business Incl: Machine-made paper 12,036,416,273.57 9,755,695,672.02 Other business Incl: sale of raw materials and semi-finished products 343,032,764.09 184,089,911.41 Sales of electricity and steam 167,012,477.08 52,593,746.22 Rental income 2,945,023.35 2,501,793.67 Others 3,182,724.46 131,800.00 Total 12,552,589,262.55 9,995,012,923.32 - 88 - SHANDONG CHENMING PAPER HOLDINGS LIMITED IX. NOTES TO THE FINANCIAL STATEMENTS - continued (1) *** Reports of divisions Income of divisions Accumulative amount in Accumulative amount in the report year the previous year in RMB in RMB Income of divisions 1,234,995,251.28 736,630,020.13 Undistributable expenses -33,283,530.24 -14,260,670.81 Undistributable income 454,386,000.00 303,400,000.00 Investment income -9,461,550.75 80,100,746.64 Gain/loss from change of the fair value 30,370,880.31 - Financial expenses -392,163,050.56 -451,449,468.40 Non-operating income 232,218,083.67 200,909,734.73 Non-operating expenses -27,725,881.15 -10,240,328.04 Pre-tax profit 1,489,336,202.56 845,090,034.25 Income tax -270,795,013.27 -100,741,186.90 Net profit 1,218,541,189.29 744,348,847.35 Assets of divisions Amount at the end of the Amount at the end of the report year previous year in RMB in RMB Assets of divisions 21,100,862,585.18 16,379,914,195.51 Undistributable asset 910,245,672.11 4,178,646,365.26 Total assets 22,011,108,257.29 20,558,560,560.77 Liabilities of divisions Amount at the end of the Amount at the end of the report year previous year in RMB in RMB Liabilities of divisions 10,716,132,970.46 11,815,198,320.56 Undistributable liabilities 714,415,621.87 854,110,114.82 Total liabilities 11,430,548,592.33 12,669,308,435.38 - 89 - SHANDONG CHENMING PAPER HOLDINGS LIMITED IX. NOTES TO THE FINANCIAL STATEMENTS - continued 39. BUSINESS COSTS The Group Accumulative Accumulative amount in the report amount in the year previous year in RMB in RMB Principal business Incl: Machine-made paper 11,040,079,368.04 8,746,545,058.40 Electric power and thermal power 58,924,796.23 30,287,657.64 Building materials 727,363,739.74 674,418,658.43 Chemicals for paper making 45,891,476.41 57,169,456.42 Paper making equipment - 68,224,651.92 Others 7,495,335.42 74,631.88 Other business Incl: sale of raw materials and semi-finished products 67,980,732.21 66,443,229.73 Sales of electricity and steam 124,639,285.75 61,220,780.53 Installation engineering and machine repairing shop 1,723,814.63 1,721,753.21 Rental expense 72,238.81 - Others 310,687.78 2,103,924.80 Total 12,074,481,475.02 9,708,209,802.96 Accumulative amount in Accumulative amount in the report year the previous year in RMB in RMB Principal business Incl: Machine-made paper 10,429,603,365.23 8,695,782,050.96 Other business Incl: sale of raw materials and semi-finished products 341,858,350.99 185,560,882.44 Sales of electricity and steam 116,062,112.00 37,532,744.02 Others 77,560.13 72,251.02 Total 10,887,601,388.35 8,918,947,928.44 - 90 - SHANDONG CHENMING PAPER HOLDINGS LIMITED IX. NOTES TO THE FINANCIAL STATEMENTS - continued 40. BUSINESS TAXES AND SURCHARGE Accumulative amount in Accumulative amount in the report year the previous year in RMB in RMB Business tax 498,439.94 3,002,059.50 Tax for urban development and maintenance 10,263,741.95 10,212,755.97 Educational Surcharge 7,092,242.91 6,143,549.76 Dike protecting fee - 8,636.35 Others - 160,736.72 Total 17,854,424.80 19,527,738.30 41. FINANCIAL EXPENSES The Group Accumulative amount in Accumulative amount in the report year the previous year in RMB in RMB Interest payment 555,690,734.09 517,322,916.61 Less: interest income -11,145,945.64 -24,006,214.46 Exchange losses 3,571,013.09 8,543.10 Less: Exchange gain -176,963,179.65 -68,293,833.33 Service charge to financial institutions 21,010,428.67 26,418,056.48 Total 392,163,050.56 451,449,468.40 The Company Accumulative amount in Accumulative amount in the report year the previous year in RMB in RMB Interest payment 452,093,348.72 352,075,039.67 Less: interest income -12,604,855.41 -28,905,974.47 Exchange losses 2,221,356.26 - Less: Exchange gain -147,635,699.57 -52,994,931.07 Service charge to financial institutions 9,809,341.96 21,144,713.19 Total 303,883,491.96 291,318,847.32 - 91 - SHANDONG CHENMING PAPER HOLDINGS LIMITED IX. NOTES TO THE FINANCIAL STATEMENTS - continued 42. LOSS FROM IMPAIRMENT OF ASSETS The Group Accumulative amount in Accumulative amount in the report year the previous year in RMB in RMB Provision for bad debt 99,866,644.83 22,720,461.95 Provision for price falling of inventories 881,984.43 4,297,511.11 Provision for impairment of long term investment 1,450,000.00 142,210.00 Provision for impairment of fixed assets - 8,074,288.89 Total 102,198,629.26 35,234,471.95 The Company Accumulative amount in Accumulative amount in the report year the previous year in RMB in RMB Provision for bad debt 2,576,681.68 -37,529,902.84 Provision for price falling of inventories 881,984.43 4,297,511.11 Provision for impairment of long term investment 1,450,000.00 142,210.00 Total 4,908,666.11 -33,090,181.73 43. GAIN/LOSS FROM CHANGE OF THE FAIR VALUE The Group Accumulative amount in Accumulative amount in the report year the previous year in RMB in RMB Biological assets measured based on fair value 24,415,000.00 - Derivative financial instruments measured based on fair value 5,955,880.31 - Total 30,370,880.31 - - 92 - SHANDONG CHENMING PAPER HOLDINGS LIMITED IX. NOTES TO THE FINANCIAL STATEMENTS - continued 44. INVESTMENT INCOME The Group Accumulative amount in Accumulative amount in the report year the previous year in RMB in RMB Profit distributed from the investee calculated based on the cost method - 280,000.00 Share of net gain/loss in the investees enjoyable/sharable calculated according to the equity method -9,461,550.75 -447,423.62 Income from disposal of long-term equity investment - 80,268,170.26 Total -9,461,550.75 80,100,746.64 The Company Accumulative amount in Accumulative amount in the report year the previous year in RMB in RMB Share of net gain/loss in the associates enjoyable/sharable calculated according to the equity method -9,461,550.75 -540,042.66 Income from disposal of long-term equity investment - 69,719,538.55 Income from entrusted loan 130,859,318.51 34,657,422.89 Cash dividend announced by subsidiaries for distribution 101,488,000.00 81,488,000.00 Profit distributed from the investee calculated based on the cost method - 280,000.00 Total 222,885,767.76 185,604,918.78 - 93 - SHANDONG CHENMING PAPER HOLDINGS LIMITED IX. NOTES TO THE FINANCIAL STATEMENTS - continued 45. NON-OPERATING INCOME The Group Accumulative amount in Accumulative amount in the report year the previous year in RMB in RMB Net income from disposal of assets 17,433,602.73 3,084,476.65 Insurance benefit 7,929,504.36 10,734,070.16 Penalty income (fine) 94,670.75 1,061,320.00 Income from debts reorganization 1,088,135.44 20,514,902.18 Liability impossible to pay 3,483,335.36 - Valuable consideration payable of the minority equity acquired less than the book value of the recognizable net asset enjoyable in the investee (Note1) 24,040,943.45 4,815,507.48 Governmental subsidy (Note 48) 177,377,455.16 153,088,284.18 Others 770,436.42 7,611,174.08 Total 232,218,083.67 200,909,734.73 Note 1:The Company acquired 3.846% equity in Jiangxi Chenming Paper Co., Ltd., one of the Company's subsidiaries, held by Jiangxi Paper Co., Ltd., a minority shareholder at the price of RMB 26 million on March 5, 2007. The Company acquired 0.0266% of the total equity of Shandong Chenming Paper Group Qihe Linerboard Paper Company Limited held by Wu Xingqiang and Hou Huancai, two minority shareholders of Shandong Chenming Paper Group Qihe Linerboard Paper Company Limited, at price of RMB 200,000.00 on May 15, 2007. As the cost of the added long term equity investment due to acquisition of minority equity was smaller than the book value of the equity newly added calculated based on the equity proportion enjoyable in the subsidiary on the transaction day, the discrepancy was charged to the current gain and loss. The Company Accumulative amount in Accumulative amount in the report year the previous year in RMB in RMB Net income from disposal of assets 4,003,506.13 843,569.69 Penalty income (fine) 41,470.75 1,018,284.00 Income from debts reorganization - 11,699,810.05 Liability impossible to pay 2,740,452.41 - Valuable consideration payable of the minority equity acquired less than the book value of the recognizable net asset enjoyable in the investee - 4,815,507.48 Governmental subsidy (Note 48) 40,526,745.00 56,102,000.00 Others 191,091.91 802,644.62 Total 47,503,266.20 75,281,815.84 - 94 - SHANDONG CHENMING PAPER HOLDINGS LIMITED IX. NOTES TO THE FINANCIAL STATEMENTS - continued 46. NON-OPERATING EXPENSES The Group Accumulative amount in Accumulative amount in the report year the previous year in RMB in RMB Net loss from disposal of assets 27,181,945.34 7,460,770.06 Penalty payment 81,800.00 455,861.01 Loss from debts reorganization - 754,818.32 Others 462,135.81 1,568,878.65 Total 27,725,881.15 10,240,328.04 The Company Accumulative amount in Accumulative amount in the report year the previous year in RMB in RMB Net loss from disposal of assets 10,400,342.17 4,412,413.20 Penalty payment - 2,500.00 Loss from debts reorganization - 734,659.03 Others 17,024.09 150,000.00 Total 10,417,366.26 5,299,572.23 47. INCOME TAX EXPENSE The Group Accumulative amount in Accumulative amount in the report year the previous year in RMB in RMB Current income tax expense 324,605,204.35 143,780,522.99 Deferred income tax expense -53,810,191.08 -43,039,336.09 Total 270,795,013.27 100,741,186.90 - 95 - SHANDONG CHENMING PAPER HOLDINGS LIMITED IX. NOTES TO THE FINANCIAL STATEMENTS - continued Adjustment of income tax expense and accounting profit: Accumulative amount in Accumulative amount in the report year the previous year in RMB in RMB Pre-tax profit in the report year 1,489,336,202.56 845,090,034.25 Income tax based on the rate 24% of the head office 357,440,688.61 202,821,608.22 Tax deduction from purchase of home made equipment in the current year -49,706,706.79 -94,703,680.35 Influence from the items not taxed (including provisional discrepancy) -1,428,931.53 -212,772.73 Influence from the items not offset (excluding provisional discrepancy) 12,337,750.71 29,968,875.31 Influence from tax loss unrecognized 14,450,363.51 15,056,202.86 Influence from special tax exemption -62,186,221.27 -54,818,253.56 Influence from discrepancy of different tax rate in subsidiaries -1,819,348.17 13,857,438.73 Tax loss from previously unrecognized deferred income tax asset offset in the report year -1,904,847.01 -17,092,636.65 Income tax under-provided in the previous year 2,023,515.78 5,864,405.07 Adjustment of interest rate causing change of the balance of the deferred income tax asset at year beginning 1,588,749.43 - Income tax amount in the report year 270,795,013.27 100,741,186.90 Pre-tax profit in the report year 1,489,336,202.56 845,090,034.25 Income tax based on the rate 24% of the head office 357,440,688.61 202,821,608.22 The Company Accumulative amount in Accumulative amount in the report year the previous year in RMB in RMB Current income tax expense 207,996,547.75 78,230,590.16 Deferred income tax expense -18,474,278.30 -21,946,111.27 Total 189,522,269.45 56,284,478.89 - 96 - SHANDONG CHENMING PAPER HOLDINGS LIMITED IX. NOTES TO THE FINANCIAL STATEMENTS - continued Adjustment of income tax expense and accounting profit: Accumulative amount in Accumulative amount in the report year the previous year in RMB in RMB Pre-tax profit in the report year 1,007,727,626.51 510,758,525.13 Income tax based on the rate 24% of the head 241,854,630.36 122,582,046.03 office Tax deduction from purchase of home made (36,586,979.70) (54,508,644.37) equipment in the current year Influence from the items not taxed (including (122,086,347.82) (48,309,574.65) provisional discrepancy) Influence from the items not offset (excluding 2,843,145.52 32,867,273.67 provisional discrepancy) Influence from discrepancy of different tax rate 11,189,659.10 3,653,378.21 in subsidiaries Income tax amount in the report year 197,214,107.46 56,284,478.89 48. GOVERNMENTAL SUBSIDIES The Group Accumulative amount in Accumulative amount in the report year the previous year in RMB in RMB Rebated VAT 75,372,967.36 10,902,714.70 Governmental support fund 102,004,487.80 142,185,569.48 Total 177,377,455.16 153,088,284.18 (a) According to the Meeting Minutes of Shouguang Municipal People's Government on Coordination of Policy Issues in connection with Chenming Industrial Park (SHOU ZHENG JI [2002] No. 65-68), the municipal bureau of finance provided the Company with support and reward through "fund arrangement through expenditure channel" with reference to the amount of the local retained part from the actual tax revenue paid by the Company. The Group obtained a reward amounting to RMB 40,526,745.00 in 2007. According to the document CAI SHUI [2006] No. 102 issued by the State Administration of Taxation in August, 2006, the Company's subsidiaries that took the used materials and secondary small fuel wood as the principal materials, enjoyed the preferential policy of paying VAT first and rebating afterwards. In 2007, the Company enjoy a rebated VAT amounting to RMB 75,372,967.36. (b) According to the relevant regulations of Qihe County Finance Bureau, Shandong Chenming Paper Group Qihe Linerboard Paper Company Limited, a subsidiary of the Group, obtained RMB 30,220,458.66 as the financial subsidy allocated by the bureau of finance. Qihe Chenming Panels Co., Ltd., a subsidiary of the Group, obtained financial subsidy amounting to RMB in 2007. - 97 - SHANDONG CHENMING PAPER HOLDINGS LIMITED IX. NOTES TO THE FINANCIAL STATEMENTS - continued (c) According to the Circular of Nanchang City on Allocating Foreign Trade Export Incentive Fund in 2005 (HONG WAI JING MAO WEI BAN ZI [2006] No. 87) promulgated by Nanchang Municipal Commission of Foreign Trade and Economic Cooperation and Nanchang Municipal Bureau of Finance, Jiangxi Chenming Paper Co., Ltd., one of the Company's subsidiaries, received governmental support fund amounting to RMB 14,319,400.00 in 2007. (d) According to the Circular of Wuhan Municipal Bureau of Finance on Appropriation of Discount (Subsidy) Fund for Technical Innovation Project in 2007, Wuhan Chenming Hanyang Paper Co., Ltd., one of the Company's subsidiaries, received financial support fund amounting to RMB 7,900,000.00 in 2007. (e) According to the Circular on Issuing Instructions on Fund Expenses for Potential Probing and Innovation of Enterprises in 2005 with Document of Hailaer Municipal Bureau of Finance HAI CAI QI [2006] No. 13, HAI CAI QI [2006] No. 20 and HAI CAI QI [2006] No. 32, Hailaer Chenming Paper Co., Ltd., one of the Company's subsidiaries, received financial support fund totaling RMB 6,850,000.00 in 2007. (f) According to the Letter of Understanding of Yanbian Prefecture Bureau of Finance on Jilin Chenming Yasong Pulp Co., Ltd. to Enjoy Preferential Tax Policy, Document of Yanbian Korea Autonomous Prefecture Bureau of Finance YAN ZHOU CAI BAN [2001] No. 37 and the Informal Letter of Yanbian Korea Autonomous Prefecture Bureau of Finance on the Letter of Understanding of Yanbian Prefecture Bureau of Finance on Jilin Chenming Yasong Pulp Co., Ltd. to Enjoy Preferential Tax Policy, (YAN ZHOU DI SHUI HAN [2001] No. 99, Yanbian Chenming Paper Co., Ltd., one of the Company's subsidiaries, received financial support fund totaling RMB 1,450,000.00 in 2007. (g) The Company and the subsidiaries received other approved odd financial support fund amounting to RMB 737,884.14 in 2007. 49. EARNINGS PER SHARE Earning per share is calculated based on the following data: Accumulative amount in Accumulative amount in the report year the previous year in RMB in RMB Earnings: Current net profit attributable to the shareholders of ordinary shares (used for calculation of basic earnings per share) 967,636,172.39 586,306,459.87 Interest of diluting potential ordinary shares recognized as expenses in the recurrent year less the part influenced by the income tax attributable to shareholders of ordinary shares 46,653,405.07 115,873,104.76 Influence of deferred income tax asset attributable to part of the shareholders of ordinary shares -11,198,124.23 -18,594,771.04 Change of the fair value of the derivative financial instrument in connection with diluting potential ordinary shares recognized in the report year - - Total 1,003,091,453.23 683,584,793.60 - 98 - SHANDONG CHENMING PAPER HOLDINGS LIMITED IX. NOTES TO THE FINANCIAL STATEMENTS - continued Number of shares Accumulative amount in Accumulative amount in the report year the previous year in RMB in RMB Number of ordinary shares issued outside at year beginning 1,365,670,155.00 1,353,539,920.00 Plus: Weighted number of ordinary shares issued in the report year 246,109,035.00 10,789,803.00 Less: Weighted number of ordinary shares repurchased in the report year - - Weighted average of ordinary shares for calculating basic earnings per share 1,611,779,189.73 1,364,329,722.84 Plus: Weighted average of ordinary shares increased due to the assumption that The diluted potential ordinary shares converted into already issued ordinary shares Weighted average of ordinary shares increased after issuing of ordinary shares 94,668,092.54 285,752,245.72 Weighted average of ordinary shares for calculating diluted earnings per share 1,706,447,282.27 1,650,081,968.56 50. NET PROFIT AFTER DEDUCTION OF NON- RECURRING LOSS/GAIN Accumulative amount in Accumulative amount in the the report year previous year in RMB in RMB Net profit 1,218,541,189.29 744,348,847.35 Plus: Non-recurring profit and loss items Net gain/loss from disposal of non-current assets 9,748,342.61 4,376,293.41 Governmental Subsidies -177,377,455.16 -153,088,284.18 Net gain/loss from debts reorganization -1,088,135.44 -19,760,083.86 Valuable consideration payable of the minority equity acquired less than the book value of the recognizable net asset enjoyable in the investee -24,040,943.45 -4,815,507.48 Net income and expense of the business other than the above items -11,734,011.08 -17,381,824.58 Plus: Amount of Influence from non-recurring gain and loss upon the income tax 51,587,872.61 44,274,071.24 Net profit after deduction of non- recurring loss/gain 1,065,636,859.38 597,953,511.90 - 99 - SHANDONG CHENMING PAPER HOLDINGS LIMITED IX. NOTES TO THE FINANCIAL STATEMENTS - continued 51. CASH AND CASH EQUIVALENTS The Group December 31, 2007 December 31, 2006 in RMB in RMB Cash on hand 613,826,456.62 784,320,395.18 Including: Cash in stock 2,688,459.77 5,713,746.59 Bank deposit available for payment at any time 611,137,996.85 778,606,648.59 Balance of cash and cash equivalents 613,826,456.62 784,320,395.18 The Company December 31 December 31 in RMB in RMB Cash on hand 235,957,551.29 431,939,246.80 Including: Cash in stock 124,896.69 39,040.63 Bank deposit available for payment at any time 235,832,654.60 431,900,206.17 Balance of cash and cash equivalents 235,957,551.29 431,939,246.80 52. ADDITIONAL INFORMATION OF THE CASH FLOW STATEMENT The Group Accumulative amount in Accumulative amount in the report year the previous year in RMB in RMB Cash flow net profit arising from adjustment of net profit into operating activities 1,218,541,189.29 744,348,847.35 Plus: Provision for devaluation of assets 102,198,629.26 35,234,471.95 Depreciation of fixed assets 1,008,525,601.52 937,918,628.49 Depreciation of investment based real estate 1,692,178.63 - Amortization of intangible assets 58,324,222.55 9,205,234.22 Long-term expenses to be apportioned 13,580,649.59 20,292,715.24 Investment income 9,461,550.75 -80,100,746.64 Net losses on disposal of fixed assets 9,748,342.61 4,903,964.15 Financial expenses 382,298,567.53 449,037,626.38 Decrease (less: increase) of inventories -286,774,248.96 150,953,631.94 Decrease of consumable biological asset (less: increase) -48,230,037.74 - Loss from change of fair value (less income) -30,370,880.31 - Decrease of deferred income tax asset (Less the increase) -65,231,585.59 -38,129,986.39 Increase of deferred income tax asset (less decrease) 6,103,850.08 - Valuable consideration payable of the minority equity acquired less than the book value of the recognizable net asset enjoyable in the investee -24,040,943.45 -4,815,507.48 Decrease (less: increase) of operative items receivable -909,649,696.33 -661,669,984.58 Increase (less: decrease) of operative items payable -84,601,362.28 -550,620,717.79 Net cash flows arising from operating activities 1,361,576,027.15 1,016,558,176.84 Important investment and fund-raising activity liability converted into capital not involved cash revenue and expenditure 2,050,071,904.63 74,387,950.24 Convertible company bonds due within a year - - Fixed assets rented through financing - - Net change of cash and cash equivalents Ending cash balance 613,826,456.62 784,320,395.18 Less: Opening cash balance 784,320,395.18 897,152,378.85 Net increase in cash and cash equivalents -170,493,938.56 -112,831,983.67 - 100 - SHANDONG CHENMING PAPER HOLDINGS LIMITED IX. NOTES TO THE FINANCIAL STATEMENTS - continued 52. ADDITIONAL INFORMATION OF THE CASH FLOW STATEMENT - continued The Company Accumulative amount in Accumulative amount in the report year the previous year in RMB in RMB Net cash flows arising from adjustment of net profit into operating activities Net profit 810,513,519.05 454,474,046.24 Plus: Provision for devaluation of assets 4,908,666.11 -33,090,181.73 Depreciation of fixed assets 597,047,915.21 535,951,437.64 Depreciation of investment based real estate 1,692,178.63 - Amortization of intangible assets -8,535,125.98 4,275,496.06 Investment income -222,885,767.76 -185,604,918.78 Net losses on disposal of fixed assets 6,396,836.04 2,876,766.67 Financial expenses 306,679,005.41 299,080,108.60 Interest income charged to the capital reserve 11,670,520.05 Decrease (less: increase) of inventories 45,452,211.35 91,747,777.40 Decrease of deferred income tax asset (Less the increase) -34,129,708.29 -38,386,721.36 Decrease (less: increase) of operative items receivable -78,998,859.72 -73,059,475.72 Increase (less: decrease) of operative items payable 94,800,040.57 142,867,183.48 Net cash flows arising from operating activities 1,534,611,430.67 1,201,131,518.50 Significant investment and fund-raising activities not involved in cash income and expenses Capital converted from liabilities 2,050,071,904.63 74,387,950.24 Net change of cash and cash equivalents Ending cash balance 235,957,551.29 334,295,478.83 Less: Opening cash balance 334,295,478.83 435,874,894.73 Net increase in cash and cash equivalents -98,337,927.54 -101,579,415.90 - 101 - SHANDONG CHENMING PAPER HOLDINGS LIMITED IX. NOTES TO THE FINANCIAL STATEMENTS - continued 53. OTHER BUSINESS RELATED CASH RECEIPTS The Group Accumulative Accumulative amount in the amount in the report year previous year in RMB in RMB Governmental support fund 102,004,487.80 142,185,569.48 Interest income 11,145,945.64 24,006,214.46 Other income 4,934,611.53 24,403,900.95 Total 118,085,044.97 190,595,684.89 The Company Accumulative Accumulative amount in the amount in the report year previous year in RMB in RMB Governmental support fund 40,526,745.00 56,102,000.00 Interest income 12,604,855.41 28,905,974.47 Reimbursement received from subsidiaries 479,183,735.05 808,533,357.70 Other transfer-in 6,976,521.20 1,972,421.47 Total 539,291,856.66 895,513,753.64 - 102 - SHANDONG CHENMING PAPER HOLDINGS LIMITED IX. NOTES TO THE FINANCIAL STATEMENTS - continued 54. OTHER CASH PAID IN CONNECTION WITH OPERATION ACTIVITIES The Group Accumulative Accumulative amount in the amount in the report year previous year in RMB in RMB Transportation 607,302,287.15 504,507,437.71 Entertainment 54,713,994.20 44,505,730.41 Rent 16,277,434.12 22,324,061.08 Business travel 28,816,771.37 17,191,724.36 Office expenses 15,213,790.85 9,607,702.93 drainage 34,316,255.04 23,384,880.30 Insurance premium 19,504,157.26 14,244,919.07 Water and electricity 6,289,640.37 4,596,086.29 Repairing 9,803,453.16 2,697,544.63 Advertisement 2,806,430.72 1,042,000.00 Agency service 24,439,184.16 5,620,404.24 Quality compensation 27,709,692.63 448,484.35 Others 30,778,762.51 50,706,414.31 Total 877,971,853.54 700,877,389.68 The Company Accumulati Accumulative ve amount in amount in the the report year previous year in RMB in RMB Transportation 269,118,918.26 242,980,082.82 Entertainment 37,863,687.39 33,303,248.99 Rent 4,715,600.85 7,019,215.63 Business travel 21,006,486.39 13,229,255.67 Office expenses 9,111,985.81 5,799,653.41 drainage 11,808,733.56 7,930,505.20 Insurance premium 12,627,457.96 9,853,342.60 Water and electricity 1,388,764.66 1,385,530.77 Repairing 3,336,530.15 2,790,169.15 Advertisement 2,657,864.72 955,232.39 Agency service 22,345,609.23 4,742,839.24 Quality compensation 26,367,387.93 448,484.35 Fund paid to subsidiaries - 268,000,000.00 Others 41,036,012.41 29,091,187.76 Total 463,385,039.32 627,528,747.98 - 103 - SHANDONG CHENMING PAPER HOLDINGS LIMITED IX. NOTES TO THE FINANCIAL STATEMENTS - continued 55. OTHER FINANCING RELATED CASH PAID The Group Accumulative Accumulative amount in the amount in the report year previous year in RMB in RMB Increase of band deposit with restriction 84,845,990.79 41,949,396.50 Cash paid for redeeming the convertible bonds by the Company 577,766.86 - Guarantee for convertible bonds 3,722,552.40 - Total 89,146,310.05 41,949,396.50 The Company Accumulative Accumulative amount in the amount in the report year previous year in RMB in RMB Increase of band deposit with restriction 15,347,405.42 - Cash paid for redeeming the convertible bonds by the Company 577,766.86 - Guarantee for convertible bonds 3,722,552.40 - Total 19,647,724.68 - 56. REPORTS OF DIVISIONS The proportion of all the corresponding income of divisions taken by the income of the Group based on business divisions and regions is lower than 10%. Therefore, the Group has not disclosed the report of divisions. X. RELATED PARTIES AND RELATED TRANSACTIONS (1) Information on the Company's biggest shareholder with the exception of subsidiaries as stated in Note VIII Related party Registered place Principal business Relationship Ownership or type Legal representative Shouguang Chenming Shouguang City Investment in projects of Biggest shareholder Company with Chen Hongguo Holdings Limited paper making, electric limited liability power, thermal power, forestry Established on December 30, 2005, Shouguang Chenming Holdings Limited (hereinafter referred to as Chenming Holdings) was incorporated by Shouguang State Land and Resource Bureau with the state shares of the Company as the capital. On December 19, 2005, State Owned Assets Supervision and Administration Commission of the State Council approved the change of the nature of the shares into state corporate shares. On August 14, 2006, China Securities Regulatory Commission finally approved the acquisition activity. By then, the Company's biggest shareholder was changed from Shouguang Municipal State Owned Assets Supervision and Administration Bureau into Chenming Holdings. - 104 - SHANDONG CHENMING PAPER HOLDINGS LIMITED X. RELATED PARTIES AND RELATED TRANSACTIONS - continued (2) Other related transactions without control relationship with the Group: Organization Code Relationship with the Related Parties Shouguang Nippon Paper Co., Ltd. 61358854-8 Associate Qingzhou Chenming Modified Starch Co., Ltd. 16937769-8 Associate (3) Material related transactions between the Company and the related parties incurred in the report year are as follows (a) Sales and purchases Information on the Company's sales to and purchases from the related parties is summarized as follows: Accumulative amount in Accumulative amount the report year in the previous year Amount Proportion Amount Proportion in RMB % in RMB % 1,062,798,846.87 99.29 190,660,345.79 94.8 7,579,571.34 0.71 10,466,250.39 5.2 1,070,378,418.21 100.00 201,126,596.18 100.00 5,520,741,792.55 100.00 4,659,062,076.95 99.62 - - 17,855,640.41 0.38 5,520,741,792.55 100.00 4,676,917,717.36 100.00 The Company's sales to and purchases from the related parties were all carried out based on the market prices through mutual consultation. - 105 - SHANDONG CHENMING PAPER HOLDINGS LIMITED X. RELATED PARTIES AND RELATED TRANSACTIONS - continued (3) Material related transactions between the Company and the related parties incurred in the report year - C (b) Lending and borrowing Information on lending and borrowing between the Company and the related parties is summarize Amount incurred Balance in the Amount in Subsidiaries Annual interest rate in the report year Proportion report year Proportion the previ % in RMB % in RMB % in R Jilin Chenming Paper Co., Ltd. 5.265 ~6.156 510,000,000.00 91.89 1,230,000,000.00 49.42 720,000 Shandong Chenming Panels Co., Ltd. 5.265 (34,000,000.00) (6.13) 77,000,000.00 3.09 111,000 Wuhan Chenming Hanyang Paper Co., Ltd 5.265 ~5.508 (120,000,000.00) (21.62) 580,000,000.00 23.3 700,000 Wuhan Chenming Qianneng Thermal Power Co., Ltd. 5.508 ~5.265 - - 55,000,000.00 2.21 55,000 Shandong Chenming Paper Group Qihe Linerboard Paper Company Limited 5.265 ~5.751 107,000,000.00 19.28 120,000,000.00 4.82 13,000 Jiangxi Chenming Paper Co., Ltd. 5.508 ~6.390 (10,000,000.00) (1.8) 300,000,000.00 12.05 310,000 Heze Chenming Panel Co., Ltd. 5.508 ~5.913 31,000,000.00 5.59 56,000,000.00 2.25 25,000 Yanbian Chenming Paper Co., Ltd. 5.751 - - - - Hailaer Chenming Paper Co., Ltd. 5.751 29,000,000.00 5.23 29,000,000.00 1.17 Qihe Chenming Panel Co., Ltd. 5.751 22,000,000.00 3.96 22,000,000.00 0.88 Juancheng Chenming Panels Co., Ltd. 5.751 20,000,000.00 3.6 20,000,000.00 0.81 Total 555,000,000.00 100.00 2,489,000,000.00 100.00 1,934,000 SHANDONG CHENMING PAPER HOLDINGS LIMITED X. RELATED PARTIES AND RELATED TRANSACTIONS - continued (3) Material related transactions between the Company and the related parties incurred in the report year - continued (c) Balance of current credits and debts Items 2007.12.31 2006.12.31 in RMB in RMB Accounts receivable - with the Company's subsidiaries 178,881,249.80 47,744,000.81 - with the Company's associates - - Total 178,881,249.80 47,744,000.81 Other receivables - with the Company's subsidiaries 733,187,559.59 355,927,060.60 - with the Company's associates 1,397,183.58 1,337,292.38 Total 734,584,743.17 357,264,352.98 Advance payments - with the Company's subsidiaries 14,186,653.54 59,398,829.35 - with the Company's associates - - Total 14,186,653.54 59,398,829.35 Accounts payable - with the Company's subsidiaries 562,460,992.26 812,905,146.87 - with the Company's associates 176,409.70 2,361,431.90 Total 562,637,401.96 815,266,578.77 Advance receipts - with the Company's subsidiaries 138,875,798.30 159,776,335.66 - with the Company's associates - - Total 138,875,798.30 159,776,335.66 Dividends receivable - with the Company's subsidiaries 42,933,862.14 11,192,644.92 Entrusted loan - with the Company's subsidiaries 2,489,000,000.00 1,934,000,000.00 (d) Remuneration to senior executives Accumulative Accumulative amount in the amount in the report year previous year in RMB in RMB Remuneration to senior executives 14,013,000.00 11,403,300.00 Senior executives include the Company's directors, supervisors, general manager, deputy general managers, secretary of the board and chief financial officer. - 107 - SHANDONG CHENMING PAPER HOLDINGS LIMITED X. RELATED PARTIES AND RELATED TRANSACTIONS - continued (3) Material related transactions between the Company and the related parties incurred in the report year - continued (e) Guarantees offered to the subsidiaries Loan guarantees offered by the Company to its subsidiaries ended December 31, 2007: Total amount of Subsidiaries guarantee RMB Jiangxi Chenming Paper Co., Ltd. 420,000,000.00 Jilin Chenming Paper Co., Ltd. 321,913,800.00 Hailaer Chenming Paper Co., Ltd. - Wuhan Chenming Hanyang Paper Co., Ltd 100,910,885.67 Wuhan Chenming Qianneng Thermal Power Co., Ltd. 5,000,000.00 Heze Chenming Panel Co., Ltd. 35,000,000.00 Juancheng Chenming Panels Co., Ltd. 20,000,000.00 Total 902,824,685.67 Note: As there was small change in the fair value of the aforesaid guarantee, such change was not recognized in the report period. XI. FINANCIAL INSTRUMENTS AND RISK CONTROL The Group's major financial instruments include equity investment, loan, accounts receivable, accounts payable, convertible bonds. For the detail about financial instruments, refer to Note IX. The risks in connection with these financial instruments and the risk control poly adopted by the Group for the purpose of reducing these risks are as follows. The Group's management conducted control and supervision over the access to these risks so as to control the risk to the defined limit. 1. Risk control objectives and policy The Group's objective for the risk control is to obtain appropriate balance between the risk and income, reduce the negative influence from risk upon the Group's operation performance to the lowest level so as to maximize the shareholders' and other equity investors' interests. Based on such risk control objectives, the basic strategy of the Group's risk control is to determine and analyze various risks the Group was to be confronted with and establish appropriate maximum risk endurance level and conduct risk control and timely and reliably supervise various risks and control the risk to the defined limit. Market Risk - 108 - SHANDONG CHENMING PAPER HOLDINGS LIMITED XI. FINANCIAL INSTRUMENTS AND RISK CONTROL - continued 1. Risk control objectives and policy - continued Risk from foreign exchange The risk from foreign exchange refers to the risk of loss possibly incurred due to change of the exchange rate. The foreign exchange risk the Group bears is related with U.S. Dollars. Except purchases and sales in U.S. Dollars conducted by the Group's subsidiaries, all the other principal business activities of the Group are settled with Renminbi. As at December 31, 2007, except the balances of the said assets in the following statements are in U.S. Dollars, the balance of all the other assets and liabilities is in Renminbi. The foreign exchange risk possibly arising from the balance of assets and liabilities in foreign currencies may affect the Group's operation performances. Amount Amount at year end at year beginning in RMB in RMB Cash and cash equivalents 130,538,941.51 121,330,428.74 Accounts receivable 760,734,927.92 258,625,551.83 Accounts payable (259,852,046.39) (218,985,853.22) Advance from customers (9,094,185.29) (25,571,544.31) Other payables (5,947,322.49) - Short-term Loan: (542,239,343.22) (288,921,900.00) Long-term loan due within one year (466,541,847.91) (47,560,117.61) Long-term Loan (2,045,502,626.41) (2,306,263,074.23) Derivative financial instrument Asset 5,955,480.00 - Total (2,431,948,022.28) (2,507,346,508.80) The Group pays close attention to the influence of the exchange rate change upon the Group's foreign exchange risk. At present, the Group has not yet adopted any measures to avoid foreign exchange risk. Credit risk As at December 31, 2007, the biggest credit risk access of possibly causing the Group's financial loss is mainly from that the other party to a contract would fail to implement contractual obligations which may cause loss in the Group's financial assets and the financial guarantee offered by the Group, including: book value of financial assets already recognized in the consolidated balance sheet; as to the financial instrument measured based on the fair value, the book value would reflect the risk access but not the biggest risk access; the biggest risk access would change with the change of the fair value in future. In order to reduce the credit risk, the Group has established a group to take charge of determining the credit line, conducting credit review and approval, and implement other supervision and control procedures so as to determine to take necessary measures to recover the overdue accounts receivable. In addition, the Group check the recovery of each account receivable on the balance sheet day so as to ensure to provide sufficient provision for bad debt for the account impossible to be recovered. Therefore, in the opinion of the Group's management, the credit risk it has to undertake has been greatly reduced. The Group's current funds are deposited with the banks of high credit level and therefore the credit risk of current funds are quite low. As the Group's risk accesses are distributed over many contract parties and customers, there is no credit concentration risk in the Group. - 109 - SHANDONG CHENMING PAPER HOLDINGS LIMITED XI. FINANCIAL INSTRUMENTS AND RISK CONTROL - continued 1. Risk control objectives and policy - continued Liquidity risk In controlling the liquidity risk, in the opinion of the Group's management it is necessary to conduct sufficient monitor over cash and cash equivalents so as to satisfy the operation demand of the Group and reduce the influence upon the fluctuation of cash flow. The Group's management conducts monitor over the application of bank loans and ensures to abide by loan agreements The Group takes bank loans as the principal fund source. As at December 31, 2007, the bank credit line not yet used by the Group was RMB 1,281,835.60. The financial assets and financial liabilities held by the Group which have not expired based on the remaining contract obligations not discounted are analyzed as follows: Within a year 1 to 5 years Over 5 years Total in RMB in RMB in RMB in RMB Transactional financial assets 5,955,480.00 - - 5,955,480.00 Notes receivable 1,676,684,054.95 - - 1,676,684,054.95 Accounts receivable 1,660,020,696.84 - - 1,660,020,696.84 Other receivables 188,641,601.80 7,521,070.31 - 196,162,672.11 Short-term Loan: (3,594,000,057.28) - - (3,594,000,057.28) Long-term loan due within one year (667,746,417.91) - - (667,746,417.91) Long-term Loan - (3,482,474,197.23) (573,720,465.12) (4,056,194,662.35) Notes payable (130,056,316.74) - - (130,056,316.74) Accounts payable (1,647,269,885.55) (9,437,095.07) - (1,656,706,980.62) Other payables (290,065,688.72) (14,984,327.66) - (305,050,016.38) Other current liabilities (506,212,916.67) - - (506,212,916.67) Total (3,304,049,449.28) (3,499,374,549.65) (573,720,465.12) (7,377,144,464.05) 2. Sensibility analysis The Group adopts the sensibility analysis technique to analyze the rationality of the risk variables and the possible influence of the change upon the current gain and loss or owner's equity. Very few risk variables experience change in isolation. The relativity existing in the variables plays important role in the eventual amount affected by change of some risk variables. Therefore, the following details are assumed that change in each variable took place in isolation. Risk from foreign exchange Sensitivity Analysis of Foreign Exchange Risk: With the other variables unchanged, the pre-tax influence upon the again and loss from revaluation (decrease) of Renminbi against U.S. Dollars is reduced (increased) by around RMB 114.7736 million. The reasonable change possibly taking place in the exchange rate of Hong Kong Dollars and Euro had less pre-tax influence upon the current gain and loss and the equity. - 110 - SHANDONG CHENMING PAPER HOLDINGS LIMITED XI. FINANCIAL INSTRUMENTS AND RISK CONTROL - continued 2. Sensibility analysis - continued Sensitivity analysis of interest rate risk: Sensitivity analysis of interest rate risk is based on the following assumption: Change of market interest rate influences the interest income or expenses of the financial instruments with variable interest rate. Change of the fair value of derivative instruments and other financial assets and liabilities calculated by means of cash flow discount method based on the market interest rate as of the balance sheet day. On the basis of the aforesaid assumptions, with other variables remaining unchanged, the influence of increase (decrease) of interest rate by 1% pre-tax upon the pre-tax gain and loss would decrease (increase) by around RMB 56.7625 million. XII. Commitments (1) Capital commitment Amount at year Amount at year end beginning in RMB in RMB Commitment for purchase/construction of long term assets for which agreement has been signed but not yet recognized in the financial statements 362,388,255.96 679,185,470.72 (2) Commitment for operating leases The irrevocable operating lease contracts executed between the Group and external parties by the balance sheet day are as follows: Amount at year Amount at year end beginning in RMB in RMB Minimum rental payment for irrevocable operating lease 1st year after the Balance Sheet Day 15,744,593.37 9,835,618.63 2nd to 5th years after the Balance Sheet Day 26,274,043.94 1,549,602.80 6th and later years after the balance sheet day 38,077,285.14 10,737,798.68 Total 80,095,922.45 22,123,020.11 - 111 - SHANDONG CHENMING PAPER HOLDINGS LIMITED XIII. OTHER IMPORTANT MATTERS Short term financing bills issued According to the Circular of the People's Bank of China on Shandong Chenming Paper Holdings Limited to Issue Short Term Financing Bonds (YIN FA [2007] No. 427, the Company verified the maximum balance of the short term financing bond being RMB 1.9 billion; the valid term of the maximum amount is up to the end of November 2008. The Company shall issue the financing bonds according to the Measures on Administration of Short Term Financing Bonds. Banking Group Loans for Zhanjiang Project The banking group consisting of China Development Bank, Agricultural Bank of China Zhanjiang Branch, Industrial and Commercial Bank of China Co., Ltd. Zhanjiang Branch, China Construction Bank Co., Ltd. Zhanjiang Branch and China Merchants Bank Co. Ltd. Qingdao Branch, CITIC Bank Co. Ltd. Shenzhen Branch executed a Contract of Banking Group Loan for Zhanjiang Wood Pulp Project with Zhanjiang Chenming Pulp & Paper Co., Ltd. (hereinafter referred to as Zhanjiang Chenming), according to which the banking group was to offer loans with total amount of RMB 3000 million and USD 386.30 million to Zhanjiang Chenming. The term of the loans is 15 years from March 25, 2008 to March 24, 2023. Zhanjiang Chenming takes all the tangible and intangible assets formed in process of the project construction and after the project to be put into construction and held legally as the mortgage; the Company has offered joint responsibility guarantee for the part of the liability exceeding the mortgaged assets. About H Shares to be Issued The Company's 1st Extraordinary Shareholders' Meeting held on April 1, 2007 approved the various proposals on issuing H shares. XIV. Approval of the Financial Statements The financial statements was approved for issuing by the Board of Directors on April 9, 2008. - 112 - SHANDONG CHENMING PAPER HOLDINGS LIMITED Additional Information Furnished by the Management for the Year 2007 1. ROE and EPS calculated based on full dilution and weighted average The ROE and EPS statement was prepared by Shandong Chenming Paper Holdings Limited (hereinafter referred to as the Company) according to the Rules for Companies Issuing Securities to the Public to Disclose Information and Prepare Reports No. 09 - Calculation and Disclosure of ROE and EPS promulgated by China Securities Regulatory Commission (2007 Revision). Net profit attributable to the Company's Net profit attributable to the Company's shareholders of ordinary shares after deduction of Profit of the report period shareholders of ordinary shares the non-recurring gain and loss Return on equity Fully diluted 4.68% 4.95% Weighted average 4.85% 5.12% Earnings per share Basic earning per share 0.14 0.15 Diluted earning per share 0.14 0.14 2. Analysis on Change of Items in Financial Statements Analysis on change of items in financial statements is made by Shandong Chenming Paper Holdings Limited (hereinafter referred to as the Company) according to the Rules for Companies Issuing Securities to the Public to Disclose Information and Prepare Reports No. 15 - General Rules for Financial Report promulgated by China Securities Regulatory Commission (2007 Revision). Items in Balance Sheet Amount at year end Amount at year beginning Change rate Causes of discrepancy in RMB in RMB % Monetary funds 740,621,843.91 826,269,791.68 (10) (1) Transactional financial assets 5,955,480.00 - 100 (2) Notes receivable 1,676,684,054.95 939,705,242.42 78 (3) Advance to suppliers 574,014,801.43 499,099,133.80 15 (4) Other receivables 196,162,672.11 139,917,156.53 40 (5) Long-term equity investment 96,289,936.43 85,801,487.18 12 (6) Fixed assets: 13,243,156,039.93 9,523,489,397.32 39 (7) Construction-in-progress 904,753,634.02 4,111,992,678.09 (78) (7) Engineering supplies 44,433,213.61 22,009,470.38 102 (8) Intangible assets 822,301,826.32 691,526,824.69 19 (9) Long-term expenses to be apportioned 56,513,234.75 48,744,147.79 16 (10) Asset of deferred income tax 103,361,571.98 38,129,986.39 171 (11) Consumable biologic assets 92,159,871.29 19,514,433.24 372 (12) Short-term Loan: 3,594,000,057.28 1,298,654,533.79 177 (13) Notes payable 130,056,316.74 47,201,892.31 176 (14) Advance from customers 170,286,629.21 193,388,136.60 (12) (15) Salaries Payable to Staff 234,880,219.06 158,086,526.80 49 (16) Taxes payable 102,444,450.86 76,276,789.18 34 (17) Dividends payable 36,075.17 699,815.30 (95) (18) Non-current Liabilities due within a Year 667,746,417.91 249,100,117.61 168 (19) Short term financing bills payable 506,212,916.67 2,026,019,444.42 (75) (20) Long-term Loan 4,056,194,662.35 5,028,028,939.36 (19) (21) Bonds payable - 1,769,029,413.28 (100) (22) Deferred income 830,000.00 5,690,000.00 (85) (23) Liabilities of deferred income tax 6,103,850.08 - 100 (24) - 113 - SHANDONG CHENMING PAPER HOLDINGS LIMITED 2. Analysis on Change of Items in Financial Statements - continued Items in Profit Statement 2007 2006 Change rate Causes of discrepancy in RMB in RMB % Business income 15,164,742,450.26 11,983,464,568.89 27 (25) Business costs 12,074,481,475.02 9,708,209,802.96 24 (26) Sales expenses 783,289,341.85 678,174,266.91 15 (27) Financial expenses 392,163,050.56 451,449,468.40 (13) (28) Loss from impairment of assets 102,198,629.26 35,234,471.95 190 (29) Income from change of the fair value 30,370,880.31 100 (30) Investment income -9,461,550.75 80,100,746.64 (112) (31) Non-operating income 232,218,083.67 200,909,734.73 16 (32) Non-operating expenses 27,725,881.15 10,240,328.04 171 (33) (1) Decrease of the monetary fund of the Group as at December 31, 2007 by RMB 85.65 million as at December 31, 2006 was mainly due to that the head office of Chenming redeemed all the convertible debentures and the account of deposit for the convertible debentures (ICBC 5424) was cancelled so that the bank deposit balance of the head office of the Group reduced by RMB 203 million. meanwhile, due to sales growth of the report year the balance of the head office's other accounts increased by around RMB 36 million. In the report year, Jiangxi Chenming delivered an entrusted loan amounting to RMB 300 million to Shandong Chenming, returned the liabilities of junior bonds amounting to RMB 340 million to the head office in Shandong, returned other borrowings amounting to RMB 320 million, obtained RMB 300 million from Agricultural Bank of China so that the bank deposits of Jiangxi Chenming reduced by RMB 56.58 million at the end of the report period. In the report year, big growth of domestic and international sales resulted in increase of the balance of the monetary fund of the sales company and Hong Kong Chenming by RMB 51 million and RMB 85.54 million respectively over the previous year. All the above elements caused decrease of the monetary fund as at December 31, 2007. As the Company redeemed the convertible company debentures in the report year, the convertible bond security deposit account was cancelled. Increase of the monetary fund after deduction of the elements influenced in the report period by RMB 28.84 million was mainly due to big increase of the sales income of the Group in the report period and the monetary fund was caused to increase correspondingly. (2) Increase of the transactional financial assets by RMB 5,955,480.00 in the report year was due to that Jiangxi Chenming Paper Co., Ltd., one of the Company's subsidiaries, executed a foreign exchange forward settlement and sale agreement respectively with Construction Bank of China Changbei Sub-branch and Bank of China Changbei Sub-branch on October 18, 2007. With the forward contract settlement exchange rate of the same delivery option as at December 31, 2007 as the standard, the fair value of the financial asset as at December 31, 2007 was RMB 5,955,480.00. (3) Increase of the notes receivable in the report year by 78% was mainly due to growth of the income in the report year and majority purchasers choose notes for settlement in order to relieve the fund pressure. (4) Increase of advance payment by 15% in the report year was mainly due to growth of the Company's sales in the report year and the advance payment for purchasing raw materials increased correspondingly. (5) Increase of the other receivables in the report year by 40% was mainly due to (6) Increase of the long term equity investment by 12% in the report year was mainly due to that the Company increased investment to Shouguang Mihe Water Supply Co. Ltd., one of the Company's associates by RMB 20 million. - 114 - SHANDONG CHENMING PAPER HOLDINGS LIMITED 2. Analysis on Change of Items in Financial Statements - continued (7) Increase of the fixed assets in the report year by 39% and decrease of the construction-in- progress by 78% were mainly due to that the construction-in-progress of 180,000 Ton Light Weight Coasted Paper Production Line and 300 Ton Pulp Production Line, etc. were converted into fixed assets. (8) Increase of engineering supplies by 102% in the report year was mainly due to the engineering supplies applied for the construction-in-progress in the report year. (9) Growth of intangible assets by 19% in the report year was mainly due to newly added land use right in the Company in the report year. (10) Increase of the expenses to be apportioned by 16% in the report year was mainly due to the rental for the land and equipment hired by Fuyu Chenming Paper Co., Ltd., one of the Company's subsidiaries. (11) Increase of the deferred income tax asset by 171% in the report year was mainly due to increase of the impairment and completion of the conversion of convertible bonds into shares in the report year. (12) Increase of the biological assets by 372% in the report year was mainly due to the expenditures for forestry wood breeding and value addition in Zhanjiang Pulp & Paper Co., Ltd., one of the Company's subsidiaries. (13) Increase of the short term borrowings by 177% in the report year was mainly due to that with growth of sales in the report year, the increased part of the short term borrowings was used for making up for working capital. (14) Increase of notes payable by 176% in the report year was mainly due to increase of the sales of the Company in the report year which caused corresponding growth of purchases of materials. Most settlements were made by notes (15) Decrease of advance receipts by 12% in the report year was mainly due to that the Company speeded up turnover rate of inventories in the report year so that the amount of the advance receipts decreased greatly over the previous period. (16) Increase of salaries payable to the employees by 49% in the report year was mainly due to increase of the Company's profit and the income tax increased correspondingly. (17) Increase of taxes payable by 34% in the report year was mainly due to that the Company had not yet distributed the salaries to the senior executives provided in the report year. (18) Decrease of the dividends payable by 95% in the report year was mainly due to that most dividends were paid in the report year. (19) Increase of the non-current liabilities due within a year by 168% was mainly due to that the long term loans due in 2008 had been transferred in. - 115 - SHANDONG CHENMING PAPER HOLDINGS LIMITED 2. Analysis on Change of Items in Financial Statements - continued (20) Decrease of the short term financing bonds payable by 75% in the report year was mainly due to that the head office of the Company paid back RMB 2,026,019,444.42 of short term financing bonds and at the same time Jiangxi Chenming Paper Co., Ltd., one of the Company's subsidiaries, issued RMB 500 million of short term financing bonds. (21) Decrease of the long term borrowings by 19% in the report year was mainly due to that partial long term borrowings due in 2008 was transferred into the non-current liabilities due within a year. (22) The balance of the bonds payable being reduced to zero was due to that the Company had redeemed all the Company's convertible debentures. (23) Decrease of the deferred income by 85% in the report year was mainly due to that the environmental protection subsidy received by Wuhan Chenming Hanyang Paper Co. Ltd., one of the Company's subsidiaries, was transferred into the income. (24) Increase of the deferred income tax liabilities by 100% was mainly due to the deferred income tax liability recognized based on the provisional discrepancy of the taxes payable caused by change of the fair value of the consumable biological assets. (25) Increase of the operating income by 27% in the report year was mainly due to rise of the unit price of sales in the Company which caused big growth of sales volume. (26) Increase of the operating cost by 24% in the report year was due to rise of the operating costs and operating income on the same proportion and the growth interest rate of the comprehensive sales kept around 21% without big overall change. (27) Increase of the sales expenses by 15% in the report year was mainly due to increase of the income in the report year which caused growth of the corresponding sales expenses. (28) Decrease of the financial expenses by 13% in the report period was mainly due to that the Company redeemed the convertible debentures and paid back partial loans in the report year so that that corresponding interest payment decreased. (29) Increase of the loss from impairment of assets by 190% in the report year was mainly due to that big provision for bad debt was made in the report year. (30) Decrease of the income from change of the fair value by 141% in the report year was mainly due to that the Company redeemed the convertible debentures in the report year so that there was no more change in the fair value of the derivative financial instruments as resulted in. (31) Decrease of the return on investment by 112% in the report year over the previous year was mainly due to that there existed income from disposal of Shanghai Chenming in 2006 and the disposal of Shanghai Chenming was completed in the report year and there no longer existed this part of income. (32) Increase of the non-operating income by 16% in the report year was mainly due to increase of income from disposal of partial waste and used equipment. (33) Increase of the non-operating expenses by 171% in the report year was mainly due to loss from disposal of fixed assets in the Company. - 116 - SHANDONG CHENMING PAPER HOLDINGS LIMITED 3. Statement of Adjustment for Discrepancy in Net Profit between the New and Old Accounting Standards Circular on Issuing the No.7 Questions and Responses of Information Disclosure Standards of Public Companies ------ Compilation and Disclosure of the Comparative Financial Accounting Information during the Transition Period between the New and Old Accounting Standards (ZHENG JIAN KUAI JI ZI [2007] No. 10) promulgated by China Securities Regulatory Commission, the Group prepared the Statement of Adjustment for Discrepancy in Net Profit between the New and Old Accounting Standards, which presented the retroactive adjustment of the Profit Statement of the Year 2006. Meanwhile, the Group assumed that the accounting standards for enterprises No. 1 to No. 37 and relevant regulations had been implemented commencing from the beginning of the comparative period (i.e. January 1, 2006) and for the matters for which no retroactive adjustment was necessary other than that as specified in the Accounting Standards for Enterprises No. 38 – Initial Implementation of the Accounting Standards for Enterprises and the relevant regulations, there existed big discrepancy between the net profit analyzed based on implementation of the new accounting standards and that based on the original standards which were presented in items of the following statement of adjustment. The additional information provided by the management was signed by the following leaders of Shandong Chenming Paper Holdings Limited: Company Leader: Chief Financial Officer: Person in charge of the accounting department: April 11, 2008 Adjusted Items of the Income Statement January 1 – December 31 2006 RMB Yuan Items Not adjusted Adjusted Operation cost 9,580,565,820.78 9,708,209,802.96 Sales expense 678,174,266.91 678,174,266.91 Administrative expense 544,880,856.14 516,548,939.45 Income from change of fair value 0.00 Investment income 83,549,433.21 80,100,746.64 Income tax 143,780,522.98 100,741,186.90 Net profit 602,967,195.37 356,907,182.90 Statement of Adjustment in Net Profit Difference In RMB Yuan Items Amount 2006.1.1—12.31 Net profit (under former accounting standard) 602,967,195.37 Plus: Total of influence by retrospective adjustment -232,539,166.15 Incl. Business cost Sales expense - 117 - SHANDONG CHENMING PAPER HOLDINGS LIMITED Administrative expense Income from change of fair value Investment income -9,062,277.94 Income tax 36,509,563.36 Others -259,986,451.57 Less: Influence on minority shareholders’ gain/loss by retrospective adjustment 13,520,846.32 2006.1.1—12.31 Net profit attributable to the owners of parent company (under new accounting 356,907,182.90 standard) Reference information with assumption of the new accounting standard is fully implemented I. Plus: Total of influences of other items 232,539,166.15 Incl. R&D expenses Gain/loss from debt reorganization -10,274,547.84 Gain/loss from non-monetary assets Investment income 4,486,378.07 Income tax -44,793,214.94 Others 283,120,550.86 II. Influence of retrospective adjustment on minority shareholders’ gain/loss 13,520,846.32 III. Plus: Minor shareholders’ equity presented in original financial statements 144,521,541.16 2006.1.1—12.31 Simulative net profit 747,488,736.53 - 118 -