苏常柴Ｂ(200570)2007年年度报告（英文版）

CHANGCHAI COMPANY, LIMITED ANNUAL REPORT 2007 April 2008 1 Important Notes The Board of Directors, the Supervisory Committee, Directors, Supervisors and Senior Executives of the Changchai Company, Limited (hereinafter referred to as “the Company”) warrant that this report does not contain any false or misleading statements or omit any material facts and all information set forth herein was true, accurate and complete. All Directors of the Company attended this Board meeting. Jiangsu Gongzheng Certified Public Accountants Co., Ltd. produced a standard unqualified Auditors’ Report for the Company. Person in charge of the Company Mr. Xue Guojun, person in charge of the accounting Mr. He Jianguang and person in charge of accounting affairs Mr. Tang Jianzhong hereby confirm that the Financial Report enclosed in this Annual Report was true and complete. 2 Contents I. Company Profile-----------------------------------------------------------------------------------------------4 II. Summary of Financial Highlights and Business Highlights---------------------------------------------5 III. Changes in Share Capital and Particulars about Shareholders-----------------------------------------7 IV. Particulars about Directors, Supervisors, Senior Management and Employees--------------------11 V. Corporate Governance--------------------------------------------------------------------------------------16 VI. Shareholders’ General Meeting---------------------------------------------------------------------------21 VII. Report of the Board of Directors------------------------------------------------------------------------22 VIII. Report of the Supervisory Committee-----------------------------------------------------------------29 IX. Significant Events------------------------------------------------------------------------------------------31 X. Financial Report---------------------------------------------------------------------------------------------35 XI. Documents Available for Reference------------------------------------------------------------------------96 3 I. Company Profile (I). Legal Name of the Company In Chinese: 常柴股份有限公司 In English: CHANGCHAI COMPANY, LIMITED Abbr.: CHANGCHAI CO., LTD. (II) Legal Representative: Mr. Xue Guojun (III) Secretary of the Board of Directors: Mr. Shi Jianchun Securities Affairs Representative: Mr. He Jianjiang Contact Address: No. 123, Huaide Middle Road, Changzhou, Jiangsu, China Tel: (86) 519-86603656-3155, (86) 519-86610041 Fax: (86) 519-86630954 E-mail: sjc000570@changchai.com, hjj000570@changchai.com (IV) Registered Address and Office Address: No. 123, Huaide Middle Road, Changzhou, Jiangsu, China Post Code: 213002 Internet Website: http://www.changchai.com.cn E-mail: cctqm@public.cz.js.cn (V) Newspapers Chosen for Disclosing Information of the Company: Securities Times and Ta Kung Pao The Place Where the Annual Report is Prepared and Placed: Secretariat of the Board Internet Website Designated by CSRC for Publishing the Annual Report of the Company: http://www.cninfo.com.cn (VI) Stock Exchange Listed with: Shenzhen Stock Exchange Short Form of the Stock: Suchangchai A Stock Code: 000570 Suchangchai B 200570 (VII) Other Relevant Information of the Company 1. Initial registration date: May 5, 1994; The registered institution with: Changzhou Municipal Administration Bureau for Industry and Commence 2. The changed registration date: Aug. 30, 2007 The registered institution with: Jiangsu Changzhou Provincial Administration Bureau for Industry and Commence 3. Registered number of the business license for enterprise legal person: 3204001104784 4. Registered number of tax: 320401137155863 5. Name of the Certified Public Accountants engaged by the Company: Domestic: Jiangsu Gongzheng Certified Public Accountants Co., Ltd. Office address: 5/F, Yintong Bldg., Changzhou, Jiangsu 4 II. Summary of Financial Highlights and Business Highlights (I) Amount of total profit of this year and its breakdown (Unit: RMB Yuan) Item Amount Operating profit 188,854,248.03 Total profit 233,959,642.84 Net profit attributable to listed companies’ shareholders 168,116,392.28 Net profit after deducting non-recurring gains and losses 136,604,433.75 attributable to listed companies’ shareholders Net cash flow from operating activities 93,259,316.60 Note: Items of non-recurring gains and losses and amount Items of non-recurring gains and losses Amount Profits and losses from disposal of non-current assets 50,141,373.68 Government grants recorded into the profits and losses of 1,523,073.35 current period Profits and losses from debts restructuring -169,587.63 Switching back balance of welfare payable 3,958,640.89 Net non-operating income and expenses -6,970,393.40 Total 48,483,106.89 Less: Impact on income tax 16,971,148.36 Total 31,511,958.53 Difference of net profit under IFRS and PRC GAAP Item Net profit as of 2007 Net assets as of Dec. 31, 2007 Under PRC GAAP 168,116,392.28 1,483,136,395.02 Under IFRS 168,116,392.28 1,483,136,395.02 Explanation on difference No difference (II) Major accounting data and financial index over the past three years as ended the report period (Unit: RMB Yuan) Increase/ 2007 2006 decrease than 2005 last year（％） Before adjustment After adjustment After Before After adjustment adjustment adjustment Operating income 2,042,027,051.07 1,842,642,939.76 1,879,053,302.36 8.67% 1,854,930,711.03 1,874,340,763.00 Total profit 233,959,642.84 101,344,957.71 101,344,957.71 130.85% 45,737,645.82 45,737,645.82 Net profit attributable to shareholders of 168,116,392.28 106,026,982.37 91,918,374.43 82.90% 49,296,879.81 101,355,911.52 listed company Net profit after deducting non-recurring gain 136,604,433.75 38,622,762.99 100,664,688.07 35.70% 35,147,118.69 87,206,150.40 and loss attributable to shareholders of listed company Net cash flow arising from operating 93,259,316.60 181,181,682.05 181,181,682.05 -48.53% 70,276,048.94 70,276,048.94 activities Increase/ decrease than At the end of 2007 At the end of 2006 At the end of 2005 the end of the last year（％） Before adjustment After adjustment After Before After adjustment adjustment adjustment 5 Total assets 2,310,463,736.43 1,798,196,864.45 1,951,517,075.99 18.39% 1,830,769,349.58 1,884,653,567.48 Owners’ equity 1,483,136,395.02 987,076,362.99 1,091,307,499.48 35.90% 902,221,137.20 951,538,116.17 (shareholders’ equity) Increase/ 2007 2006 decrease than 2005 last year（％） Before adjustment After adjustment After Before After adjustment adjustment adjustment Basic earnings per 0.45 0.28 0.25 80.00% 0.27 0.13 share Diluted earnings per 0.45 0.28 0.25 80.00% 0.27 0.13 share Basis earnings per share after deducting 0.37 0.10 0.27 37.04% 0.23 0.09 non-recurring gain and loss Fully diluted return on 11.34% 10.74% 8.42% 2.92% 5.46% 10.65% equity Weighted average 11.92% 11.23% 9.38% 2.54% 11.34% 5.46% return on equity Fully diluted return on equity after deducting 9.21% 3.91% 9.22% -0.01% 3.90% 9.16% non-recurring gain and loss Weighted average return on equity after deducting 9.69% 4.09% 10.27% -0.58% 9.75% 3.90% non-recurring gain and loss Net cash flow per share arising from 0.25 0.48 0.48 -47.92% 0.19 4.01 operating activities Increase/ decrease than At the end of 2007 At the end of 2006 At the end of 2005 the end of the last year（％） Before adjustment After adjustment After Before After adjustment adjustment adjustment Net assets per share attributable to 3.96 2.72 2.92 35.62% 2.52 2.41 shareholders of listed company (III) The profit calculated according to the No. 9 Guideline on Contents and Format for Information Disclosure of Companies That Make Public Offering of Securities- Calculation and Disclosure of Return on Equity and Earnings Per Share released by CSRC Supplementary Statement of Profit Return on equity (%) Earnings per share ( Yuan per share) Profit in the report period Fully diluted Weighted average Fully diluted Weighted average Net profit attributable to the listed companies’ 11.34 11.92 0.45 0.45 shareholders Net profit after deducting non-recurring gains and losses attributable to the 9.21 9.68 0.37 0.37 listed companies’ shareholders III. Changes in Share Capital and Particulars about Shareholders (I) Changes in share capital 1. Changes in shares 6 During the report period, the Company’s shares were changed due to implementation of share merger reform as follows: Increase/ Before the change decrease in this After the change time Amount Proportion Bonus shares Amount Proportion (share) (%) (share) (%) (share) I. Shares subject to 127,695,824 34.12 -28,768,978 98,926,846 26.43 moratorium 1. Shares held by the State 117,631,824 31.43 -18,712,478 98,919,346 26.43 2. Shares held by state-owned legal persons 3. Shares held by other 10,064,000 2.69 -10,056,500 7,500 0.00 domestic investors Among which: Shares held by domestic 10,064,000 2.69 -10,064,000 0 0.00 legal persons Shares held by domestic 0 0 7,500 7,500 0.00 natural persons 4. Shares held by foreign investors Among which: Shares held by overseas legal persons Shares held by overseas natural persons II. Shares not subject to 246,553,727 65.88 28,768,978 275,322,705 73.57 moratorium 1. RMB ordinary shares 146,553,727 39.16 28,768,978 175,322,705 46.85 2. Domestically listed 100,000,000 26.72 0 100,000,000 26.72 foreign shares 3. Overseas listed foreign shares 4. Others III. Total shares 374,249,551 100 0 374,249,551 100.00 2. Changes in shares subject to moratorium Number of Number of Number of Number of shares subject shares subject shares subject Reason for Date of terminating shares subject Name of shareholder to moratorium to moratorium to moratorium conditional shares subject to to moratorium at the terminated in increased in sales moratorium at the year-end year-begin this year this year State-owned Assets 18,712,478 shares share reform Supervision and 117,631,824 18,712,478 0 98,919,346 terminated on Jun. commitment Administration 19, 2007 Commission of 18,712,478 shared Changzhou Municipal terminated on Jun. Government 19, 2007 7 80,206,868 shares Jun. 19, 2007 Changzhou Wujin 80,000 0 0 Jun. 19, 2007 Benniu Agricultural 1,760,000 Machinery Factory 1,680,000 0 0 Nov. 12, 2007 57 legal person 8,304,000 8,304,000 0 0 Jun. 19, 2007 shareholders Frozen the Abiding by the Lu Gang 0 7,500 7,500 shares held by regulations of stock the Directors exchange Total 127,695,824 28,776,478 7,500 98,926,846 3. Issuance and listing of shares (1) The Company had neither issued shares nor changed the share capital over the past three years ended the report period. (2) In the report period, the share capital of the Company remained unchanged. (3) There existed no inner employee’s shares in the Company. (II) About shareholder 1. Number of shareholders and particulars about shares held Total number of 77,905 shareholders in total (58,495 shareholders of A-share and 19,410 shareholders of B-share) shareholders Particulars about shares held by the top ten shareholders Number of Increase/ Number of Proportion shares subject Nature of Total number of shares Name of Shareholder in total decrease as of shareholders shares held pledged or shares (%)) to moratorium the year frozen held 1. State-owned Assets Supervision and State-owned Administration Commission 31.43% 117,631,824 0 98,919,346 56,137,432 shareholder of Changzhou Municipal People’s Government Domestic 2. Wu Dawei natural 1.28% 4,800,954 4,800,954 0 Unknown person 3. LGT BANK IN Foreign LIECHTENSTEIN 0.58% 2,180,061 2,180,061 0 Unknown shareholder AKTIENGESELLSCHAFT Domestic 4. Li Yifen natural 0.52% 1,935,520 1,935,520 0 Unknown person 5. Changzhou Wujin Benniu Domestic Agricultural Machinery natural 0.42% 1,580,000 180,000 0 Unknown person Factory Domestic 6. Zhang Rong natural 0.36% 1,330,000 1,330,000 0 Unknown person 8 Domestic 7. Song Mingqin natural 0.28% 1,055,098 99 0 Unknown person 8. Changzhou Wujin Diesel Domestic natural 0.26% 973,014 -4,356,986 0 Unknown Engine Block Co., Ltd. person Domestic 9. Yu Hui natural 0.19% 706,500 706,500 0 Unknown person Domestic 10. Chen Xinqiong natural 0.16% 611,254 611,254 0 Unknown person Particulars about shares held by the top ten shareholders not subject to moratorium Shareholders’ name Number of shares subject to moratorium held Type of shares 1. State-owned Assets Supervision and A-share Administration Commission of Changzhou 18,712,478 Municipal People’s Government 2. Wu Dawei 4,800,954 A-share 3. LGT BANK IN LIECHTENSTEIN B-share 2,180,061 AKTIENGESELLSCHAFT 4. Li Yifen 1,935,520 A-share 5. Changzhou Wujin Benniu Agricultural A-share 1,580,000 Machinery Factory 6. Zhang Rong 1,330,000 A-share 7. Song Mingqin 1,055,098 A-share 8. Changzhou Wujin Diesel Engine Block Co., Ltd. 973,014 A-share 9. Yu Hui 706,500 A-share 10. Chen Xinqiong 611,254 A-share It is unknown whether there was any associated relationship among the top ten tradable shareholders and among the top ten shareholders not subject to Explanation on associated relationship and moratorium, or whether there is any action-in-concert among them as action-in-concert among the top ten shareholders described by Measures for the Administrative of Disclosure of Shareholder Equity Changes. Note: (1) The shareholder who held the 5% shares of the Company was State-owned Assets Supervision and Administration Commission of Changzhou Municipal Government with 117, 631, 824 stated-owned shares, representing 31.43% of the total share capital. There was no change in the report period. On Oct. 10, 2006, 56,137,432 shares (representing 15% of total share capital) held by State-Owned Assets Supervision and Administrative Commission of Changzhou Municipal Government was pledged to Industrial & Commercial Bank of China Ltd. Changzhou Zhonglou Sub-branch. 2. The number of shares subject to moratorium held by the top ten shareholders and conditional sales Unit: share Number of shares Number of additional Name of shareholders holding Date of listing for Conditional No. subject to shares could list for shares subject to moratorium trade sales moratorium held trade State-owned Assets Supervision Jun. 19, 2008 18, 712, 478 and Administration Commission Legal 1 98, 919, 346 of Changzhou Municipal commitment People’s Government Jun. 19, 2009 80, 206, 868 3. State-owned Assets Supervision and Administration Commission of Changzhou Municipal Government was the controlling shareholder of the Company as non-legal person organ. Property right and controlling relationship between the actual controller of the Company and the 9 Company were as follows: STATE-OWNED ASSETS SUPERVISION AND ADMINISTRATION COMMISSION OF CHANGZHOU MUNICIPLE PEOPLE’S GOVERNMENG 31.43% CHANGCHAI COMPANY, LIMITED 10 IV. Particulars about Directors, Supervisors, Senior Executives and Employees (I) Basic information about Directors, Supervisors and Senior Executives: Number of Number holding of holding Reason for Name Position Sex Age Office Term shares at shares at change the the year-begin year-end Xue Guojun Chairman of the Board Male 44 2007.4.13-2010.4.13 Director, He Jianguang General Manager, Chief Male 43 2007.4.13-2010.4.13 Engineer Lu Jiaxiang Director Male 53 2007.4.13-2010.4.13 Director, Deputy Shi Jianchun General Manager, Male 45 2007.4.13-2010.4.13 Secretary of the Board Director, Deputy Zhu Xinmin Male 60 2007.4.13-2010.4.13 General Manager Director, Deputy Xu Zhenping Male 51 2007.4.13-2010.4.13 General Manager Deputy General Yin Lihou Male 44 2007.5.24-2010.4.13 Manager Deputy General 2007.5.24-2010.4.13 Xu Yi Male 44 Manager Deputy General 2007.5.24-2010.4.13 Ni Shiyuan Male 52 Manager Qian Shufa Independent Director Male 51 2007.4.13-2010.4.13 He Yihua Independent Director Male 45 2007.4.13-2010.4.13 Buy-in from Lu Gang Independent Director Male 43 2007.4.13-2010.4.13 0 7500 secondary market Chairman of the Supervisory Committee, Lv Weimin Male 53 2007.4.13-2010.4.13 Secretary of Party Committee Ni Mingliang Supervisor Male 41 2007.4.13-2010.4.13 Lu Zhonggui Supervisor Male 40 2007.4.13-2010.4.13 Sell-out through Wu Keyun Supervisor Male 44 2007.4.13-2010.4.13 264 0 secondary market Yan Gang Supervisor Male 50 2007.4.13-2010.4.13 (II) Status of Directors, Supervisors, Senior Executives in employment in shareholders’ companies or other units 1. Status of Directors, Supervisors, Senior Executives in employment in shareholder’ companies Position in shareholders’ Starting time of the office Name Shareholders’ company company term State-owned Assets Supervision and Lu Jiaxiang Administration Commission of Changzhou Deputy Director Jun. 2007 Municipal People’s Government 2. Status of Directors, Supervisors, Senior Executives in employment in other units Starting time of the office Name Other units Position in term School of Economics, Nanjing University of Qian Shufa President Jun. 2006 Finance & Economics 11 Jiangsu Zhongtian Assets Appraisal Office Chairman of the Board, General He Yihua Dec. 1999 Co., Ltd. Manager Lu Gang Jiangsu Changzhou Changlian Law Firm Director May 2000 (II) Main work experience of the present Directors, Supervisors and Senior Executives in past five years. Xue Guojun, successively took the posts of Deputy Factory Director and Factory Director of Foundry Branch Factory of Changchai Company, Limited, Deputy General Manager and General Manager of Changchai Company, Limited. Now he acts as Chairman of the Board, Deputy Secretary of Party Committee of the Company. He Jianguang, successively took the posts of Technician and Deputy Section Chief of Design Section in Changzhou Diesel Engine Factory, Engineer of Products Development Division in Changzhou Diesel Engine Factory, Deputy Director of Joint Venture Office in Changchai Company, Limited, Director of the 2nd Board of Directors of Changchai Company, Limited, Deputy Director of Technology Center Changchai Company, Limited, Chief Engineer of the Company. Now he acts as Chairman of the Board, General Manager, and Chief Engineer of the Company. Lu Jiaxiang, successively took the posts of Deputy Section Chief of Propaganda Section and Office Manager in Changzhou Chemical Factory; Deputy General Manager of Changzhou Border Trade Development Corporation; Division Chief of Enterprise Administrative Division, Division Chief of Comprehensive Administration Division, Assistant Director and full-time Commissary in Changzhou Municipal Economic Committee; Deputy General Manager of Changzhou Textile State-owned Assets Operation Co., Ltd., Deputy Secretary of Party Committee, Secretary of the Discipline Inspection Committee and Deputy General Manager in Changzhou Electromechanical State-owned Assets Operation Co., Ltd. Now he acts as Deputy Director of State-owned Assets Supervision and Administration Commission of Changzhou Municipal Government, Director of the Company. Shi Jianchun, successively took the posts of Teacher of Xi’an Polytechnic University, Deputy Director of Technology Reformation Office of Changzhou Diesel Engine Factory, Deputy Director of Changzhou Industry Promotion Planning Office, Deputy Director of Technology Reformation Office of Changzhou Municipal Economic Committee, Deputy Chief Engineer of Changchai Company, Limited, and General Manager of Changzhou Vehicle Co., Ltd. Now he acts as Director, Deputy General Manager and Secretary of the Board of the Company. Zhu Xinmin, successively took the posts of Deputy Secretary and Director of Box-body Factory and Section Chief of Sales Section of Wujin Diesel Engine Block Factory; Deputy Manager of Wujin Tractor Industry Company, Deputy Manager of Wujin Machinery Industry Company, Deputy Factory Director of Wujin Diesel Engine Block Factory, Assistant to General Manager of Changchai Company, Limited, General Manager of Changchai Yinchuan Diesel Engine Co., Ltd., Chairman of the Board of Changchai Yinchuan Diesel Engine Co., Ltd., Chairman of the Board of Changchai Group Import & Export Co., Ltd.. Now he acts as Director and Deputy General Manager of the Company. Xu Zhenping, successively took the posts of Deputy Director of Jintan Diesel Engine Factory; Director, Deputy General Manager of Changchai Jintan Diesel Engine Co., Ltd., Director and Assistant to General Manager, Manager of Sales Company of the Changchai Company, Limited. Now he acts as Director, Deputy General Manager of the Company. 12 Yin Lihou, successively took the posts of Deputy Secretary, Secretary of the Communist Youth League, Director of Human Resource Department of Changchai Company, Limited, Assistant to General Manager of Changchai Company, Limited. Now he acts as Deputy General Manager of the Company. Xu Yi, successively took the posts of Deputy Director of Product Development Department; Deputy Director and Director of Technology Center, Assistant to General Manager of Changchai Company, Limited. Now he acts as Deputy General Manager of the Company. Ni Shiyuan, successively took the posts of Deputy Director of No.1 workshop of Foundry Branch Factory of Changzhou Diesel Engine Factory, Deputy Section Director of Production Section of Changzhou Diesel Engine Factory; Deputy President of Foundry Branch Factory of Changchai Company, Limited, Director of Material Management Departement of Support Company of Changchai Company, Limited, Assistant to General Manager of Changchai Company, Limited. Now he acts as Deputy General Manager of the Company. Qian Shufa, successively took the posts of Deputy Secretary of Communist Youth League of Jiangsu College of Chemistry, Deputy Head of Propaganda Section of the College’s Party Committee, Director and Associate Professor of Social Science Department in Jiangsu Petroleum Chemical University; Director and Professor of Business Administration Department in Jiangsu Petroleum Chemical University. Now he acts as Vice Dean of School of Economics in Nanjing University of Economy and Independent Director of the Company. He Yihua, successively took the posts of Clerk of Propaganda & Education Section Changzhou Municipal Finance and Tax Bureau, Officer of Education Section of Changzhou Municipal Bureau of Finance, Section Chief of Training Section of Changzhou Municipal Finance & Accounting Training Center, and Deputy Director of Changzhou Assets Appraisal Firm. Now he acts as Chairman of the Board, General Manager of Jiangsu Zhongtian Assets Appraisal Firm, and Independent Director of the Company. Lu Gang, successively took the posts of Clerk of Changzhou Municipal Justice Bureau, Lawyer of Changzhou No. 1 Law Firm, and Lawyer of Changzhou Union Law Firm. Now he acts as Director of Jiangsu Changzhou Changlian Law Firm and Independent Director of the Company. Lv Weimin, successively took the posts of Deputy Secretary of Communist Youth League, Vice Chairman of Labor Union and Chairman of Labor Union in Changzhou Diesel Engine Factory, Deputy Secretary of Party Committee, Secretary of Discipline Inspection Committee and Chairman of Federation of Trade Unions in Changchai Group Co., Ltd.; and Secretary of Party Committee in Changchai Company, Limited. Now he acts as Secretary of Party Committee of Changchai Company, Limited and Chairman of the Supervisory Committee of the Company. Yan Gang, successively took the posts of Teacher of Zhaoming Middle School in Jianhu County, Jiangsu, Financial Teacher in Jiangsu Yancheng School of Business; Clerk, Deputy Section Chief and Section Chief of Financial & Trade Auditing Section in Changzhou Bureau of Auditing; Assistant Researcher of Changzhou Bureau of Auditing and Division Chief of Economy & Trade Auditing Division. Now he acts as Standing Director in Changzhou Institute of Auditing, Supervisor of the Company. Wu Keyun, successively took the posts of Technician of Shanghai Water Pump Plant; Clerk of Preparing General Office of New Foundry Factory in Changzhou Diesel Engine Factory, Clerk and 13 Assistant of Division Chief of Supervision and Auditing Division in Changchai Company, Limited. Now he acts as Deputy Director of Enterprise Management Department and Supervisor of the Company. Ni Mingliang, successively took the posts of Technician of Foundry Branch Factory in Changzhou Diesel Engine Factory, Cadre of Labor Union in Changchai Company, Limited. Now he acts as Vice Chairman of Labor Union and Supervisor of the Company. Lu Zhonggui, successively took the posts of worker in the No. 1 Factory of Changzhou Diesel Engine Factory, Cadre of Organization and Personnel Section in Changchai Company, Limited, special Discipline Inspector of Supervision and Auditing Department Changchai Company, Limited. Now he acts as special Discipline Inspector of Discipline Inspection Committee and Secretary of Organ Party General Branch in Changchai Company, Limited and Supervisor of the Company. (III) Particulars about the annual compensation 1. In 2007, the annual remuneration received by Directors, Supervisors and Senior Executives from the Company were paid on monthly according to the relevant provisions of wage management and rank standard established by the Company, and paid bonus at the end of the year based on the Company’s benefit situation and checking results. Mr. Lu Jiaxiang, Director of the Company, received the payment from shareholders’ company. 2. About annul remuneration received by Directors, Supervisors and Senior Executives Total annual remuneration Name Position (RMB’0,000) Xue Guojun Chairman of the Board 50.63 Director, General Manager, Chief He Jianguang 41.53 Engineer Director, Deputy General Manager, Shi Jianchun 41.37 Secretary of the Board Zhu Xinmin Director, Deputy General Manager, 41.57 Xu Zhenping Director, Deputy General Manager 35.77 Yin Lihou Deputy General Manager 35.80 Xu Yi Deputy General Manager 35.80 Ni Shiyuan Deputy General Manager 35.92 Qian Shufa Independent Director 5.00 He Yihua Independent Director 5.00 Lu Gang Independent Director 5.00 Chairman of the Supervisory Lv Weimin Committee, 50.86 Secretary of Party Committee Ni Mingliang Supervisor 8.34 Lu Zhonggui Supervisor 7.85 Wu Keyun Supervisor 7.08 Total 407.52 (V) The Directors and Supervisors who were elected and left office, Name of Senior Executives 14 who were engaged or dismissed and their reason in the report period On Apr. 13, 2007, the Proposal of General Election of the Board of Directors and the Proposal of General Election of the Supervisory Committee were examined and approved by Shareholders’ General Meeting 2006 of the Company. Zhang Junyuan, Xue Guojun, Shi Jianchun, Zhu Xinmin, Lu Jiaxiang, Xu Zhenping were elected as Directors of the 5th Board of Directors; Qian Shufa, He Yihua, Lu Gang as Independent Directors of the 5th Board of Directors; Lv Weimin, Yan Gang, Lu Zhonggui as Supervisors of the 5th Supervisory Committee, whom established the 5th Supervisory Committee with Ni Mingliang, Wu Keyun, Staff Representatives of the Company. On Apr. 13, 2007, Zhang Junyuan was elected as Chairman of the Board through the 1st Meeting of the 5th Board of Directors; based on the nomination from Chariman of the Board, Shi Jianchun was engaged as Secretary of the Board of the Company, Xue Guojun as General Manager of the Company; based on the nomination from General Manager of the Company, Shi Jianchun, Zhu Xinmin were engaged as Deputy General Manager of the Company, He Jianguang as Chief Engineer. On Apr. 13, 2007, Lv Weimin was elected as Chairman of the Supervisory Committee of the Company through the 1st Meeting of the 5th Supervisory Committee. On May 21, 2007, Xu Zhenping, Yin Lihou, Xu Yi, Ni Shiyuan were engaged as Deputy General Manager of the Company approved by the Temporary Meeting of the Board of Directors, On Jul. 25, 2007, the resolution of the 3rd Meeting of the 5th Board of Directors was that Zhang Junyuan was agreed to resign the post of Chairman of the Board of Directors of the Company; Xue Guojun was elected as Chairman of the Board of Directors; Mr. Xue Guojun was agreed to resign the post of General Manager of the Company, Mr. He Jianguang was engaged as General Manager of the Company. On Sep. 20, 2007, the 1st Temporary Shareholders’ General Meeting 2007 examined and approved the Proposal of the resignation from Mr. Zhang Junyuan as Director of the Company and the Proposal of Nominating Mr. He Jianguang as Director of the Company, agreed the resignation from Mr. Zhang Junyuan as Director, elected the Mr. He Jianguang as Director of the Company. (VI) About employees: As at the end of 2007, the Company had totally 3867 employees registered in book, including 3132 production personnel; 74 salespersons; 142 technicians; 35 financial personnel, 350 administration personnel. Education Background: 9 postgraduate; 202 bachelor degree; 264 persons graduated from three-year regular college; 96 persons graduated from polytechnic school; 1315 persons graduated from senior high school and 1981 persons graduated from junior high school or lower. No costs of retirees need be paid by the Company. 15 V. Corporate Governance (I) Corporate Governance In the report period, according to the requirements of Notice of Concerning Matters on Special Campaign to Strengthen the Corporate Governance of Listed Companies with ZJGSZi [2007] Document No. 28, the Company carried out the special campaign of corporate governance, and finished self-inspection work on Jul. 25, 2007. Subsequently, the Company collected the public suggestions on corporate governance through telephone, fax, e-mail and website etc. methods. Then the Company received the on-site inspection from Jiangsu Securities Regulatory Commission during Aug.15, 2007 to Aug. 17, 2007. In compliance with the result of the self-inspection and rectification advice, the Board of Directors paid great attentions to put forward the reasonable and feasible rectification measures, and confirmed the person who was in charge this work to put it into effect. Please refer to the 4th paragraph of this section. (II) Duty performance of the Independent Directors According to the Articles of Association, laws and regulations, Guiding Opinions of Independent Directors, the Independent Directors performed their duty earnestly, expressed the independent opinions in terms of significant related transaction, Directors and Senior Executives’ remuneration, the Directors’ nomination and matters which will harm the interests and rights of medium-, small-shareholders believed by other Directors. Independent Directors played the key role in scientific decision-making of the Board of Directors, the operation and development of the Company actively. 1. Particulars about Independent Directors attending the Board meeting Times of Times of Times of Name of Independent Times of meeting meetings be meetings should be meeting Note Director attended in person attended by attended absent agent Qian Shufa 12 12 0 0 He Yihua 12 10 2 0 Lu Gang 12 11 1 0 2. There was no objection put forward by three Independent Directors on proposals from Boarding meeting and other issues. (III) Separation from the holding shareholders in personal, business, assets, organization and financing 1. In respect of personal: the Company established special HR department, drew independent labor personal and remuneration system, checked, trained, encouraged and punished the employees through strict regulations and systems. Engagement and dismission of the Directors, Supervisors and Senior Executives were performed in conformity with legal procedure. Directors, Supervisors, Senior Executives and employees in all departments of the Company have taken no position in the Shareholding Company. 2. In respect of business: the Company’s the production and operation, R&D and administration were independent completely with the holding shareholders. There existed no competition in the same industry from the holding shareholder in term of products. 3. In respect of assets: the Company has independent production, auxiliary production system, auxiliary facilities, land use right, industrial property right and non-patent technology, established independent system of purchase and sale service. The assets are independent and integral and the property right is clear. 4. In respect of organization: the establishment of the Company’s organizations is independent and integral and the office address and the sites of production and operation of the Company are separated from the holding shareholder. There existed neither affiliation relationship between the function departments of the Company and the holding shareholders nor mixed operation and 16 offices. 5. In respect of business: the Company set up independent financing department, has independent accounting personals and bank account, paid taxes according to laws and has independent accounting settlement system and perfect financing management system. (IV) The establishment and improvement of internal control 1. Summary of internal control of the Company In the report period, according to the requirements of Notice of Concerning Matters on Special Campaign to Strengthen the Corporate Governance of Listed Companies with ZJGSZi [2007] Document No. 28 and Guidelines for Internal Control of Listed Companies from Shenzhen Stock Exchange, combining to self-inspection of corporate governance and rectification plan, aiming to built a sound internal control system, the Company established more perfect internal control system which covered all parts and links in the Company such as legal person governance, production operation, finance management, information disclosure. The Company established Enterprise Management Department which responsible for internal audit of the Company, which covered all business and departments of the Company, and there were 6 audit personnel with professional knowledge. The supervisory system of internal control operated efficiently. In the report period, the Company carried out the special campaign of the corporate governance. In compliance with the requirements of the special campaign of corporate governance, in Aug. 2007, the Company set down the Rules on Internal Control, Rules on Reception and Work Popularization, Management Rules on Share Holding by Directors, Supervisors and Senior Executives, revised the Rules of Procedure of Shareholders’ General Meeting, Rules of Procedure of the Board of Directors, Rules of Procedure of the Supervisory Committee, Management Rules on Raised Capital, Management Rules on Information Disclosure Affairs, revised the Rules on External Guarantee, Rules on Financial and Accounting; among which, the Rules of Procedure of Shareholders’ General Meeting, Rules of Procedure of the Board of Directors, Rules of Procedure of the Supervisory Committee and Articles of Association were approved by the 1st Temporary Shareholders’ General Meeting 2007 on Sep. 20, 2007. The special campaign further regulated the corporate governance, efficiently improved the level of the Company’ management. The further information of the special campaign of corporate governance was published in Securities Times and Ta Kung Pao on Oct. 31, 2007. 2. Key control activities (1) Control structure of controlling subsidiaries and shareholding proportion: 17 Changchai Company, Limited Shareholding proportion 60% Shareholding proportion 75% Shareholding proportion 100% Changchai Wanzhou Diesel Changchai Beiniu Diesl Nanjing Changli Agraturatual Engine Co., Ltd. Engine Fitting Co., Ltd. Machinery Fitting Co., Ltd. Shareholding proportion 100% Changniu Machinery Co., Ltd. (2) Self-inspection of internal control 1) Internal control on shareholding subsidiaries of the Company. The Company established the Management Rules on External Investment, which regulated that all shareholding subsidiaries must unify to implement all rules issued by the Company, planed to operate in line with general plan of the Company. 2) Internal control on related transaction. The Company established the Decision-making Rule on Related Transaction, which regulated in terms of the principle of related transaction, related person, and related relationship, the procedure of decision-making and procedure of disclosing at length. There was no significant related transaction occurring. 3) Internal control on external guarantee. The Company established the Rules on External Guarantee to sound the management detail on external guarantee, which regulated the basic principle of external guarantee, examination procedure for guarantee objects, examination procedure of external guarantee, management procedure and procedure of information disclosure. The Company offer guarantee for wholly-owned subsidiaries of the shareholding subsidiaries of the Company amounted to RMB 9.50 million. 4) Internal control on use of the raised proceeds. The Company established the Management Measures on Raised Proceeds, which regulated in terms of deposit, use of raised proceeds and supervision for that in keeping with the relevant requirements from CSRC. There were neither new raised proceeds increased nor use of the proceeds raised in last time in the report period. 5) Internal control on significant investment. The Company established the Rule of Procedure of the Board of Directors, which regulated the basic principle of investment, examination procedure and power limit of investment, investment appraisal, progress of investment plan, responsibility investigation definitely. In the report period, there was no over examination right etc rule-breaking behaviors. 6) Internal control on information disclosure. The Company established the Management Rules on 18 Information Disclosure Affairs and Rules on Reception and Popularization, to make sure that all information disclosed in time, accurately, truly, completely in term of the content of the information, requirement and procedure. 3. Problems existing and rectification plan In the report period, the Company carried out the special campaign of the corporate governance. (1) The result of self-inspection and solution 1) Some management rules need to be established and revised Explanation on rectification situation: The Company set down the Rules on Internal Control, Rules on Reception and Work Popularization, Management Rules on share holding by Directors, Supervisors and Senior Executives, revised the Rules of Procedure of Shareholders’ General Meeting, Rules of Procedure of the Board of Directors, Rules of Procedure of Supervisory Committee, Management Rules on Raised Capital, Management Rules on Information Disclosure Affairs and Articles of Association, among which, the Rules of Procedure of Shareholders’ General Meeting, Rules of Procedure of the Board of Directors, Rules of Procedure of Supervisory Committee and Articles of Association were approved by the 1st Temporary Shareholders’ General Meeting 2007 on Sep. 20, 2007. 2) Articles of Association still didn’t been revised till now, the “occupiers frozen” mechanism was implemented to most shareholders. Explanation on rectification situation: The Company revised the Articles of Association according to the requirement from ZJGAZi [2006] Document No.92, built the “occupiers frozen” mechanism to most shareholders. The Articles of Association (Revised) had been examined and approved by the 3rd Meeting of the 5th Board of Directors and the 1st Temporary Shareholders’ General Meeting 2007. 3) It was necessary for Directors, Supervisors and Senior Executive to enhance normal operation awareness Explanation on rectification situation: What was brought forward in the 5th Meeting of the 5th Board of Directors and the 4th Meeting of the 5th Supervisory Committee, that the relevant trains were arranged for the Directors, Supervisors and Senior Executives for learning policy document about corporate governance and other rules. From now on, the Company would carry out similar activities to improve the Directors, Supervisors and Senior Executives’ normal operation awareness. (2) The rectification suggestion and situation from Jiangsu Securities Bureau 1) The Company neither established special Working Rules for Secretary of the Board of Directors also nor revised the Management Rules on External Guarantee, Financial and Accounting Rules of Changchai Co., Ltd. against the latest regulations, Jiangsu Securities Bureau advised the Company to amend and perfect the related rules in line with present laws and regulation. Explanation on rectification situation: Working Rules for Secretary of the Board had been revised in accordance in conformity to the requirements and approved by the 5th Meeting of the 5th Board of Directors. Management Rules on External Guarantee and Financial and Accounting Rules were examined and approved by the Temporary Meeting of the Board on Oct. 30, 2007. 2) It was necessary for the Company to improve its normal operation level Explanation on rectification situation: All special committees and members were requested to play their key role in deed; to carry out their work strictly abiding by relevant retails by the 5th Meeting of the 5th Board of Directors. What’ s more, the Directors, Supervisors and Senior Executives were organized to learn policy document about corporate governance and other rules specially on Management Rules on share holding by Directors, Supervisors and Senior Executives which was 19 deliberately calculated to violating regulation impossible. 3) The Company was suggested to revise the Management Rules on Information Disclosure Affairs, build and perfect the written approval procedure. Explanation on rectification situation: Management Rules on Information Disclosure Affairs was revised in conformity to requirement and examined and approved by the 5th Meeting of the 5th Board of Directors. 4. General appraisal on internal control of the Company expressed from the Board of Directors The Board of Directors believed that: the present rules on internal control which was established and improved was in line with the requirement of management and demand for company’s development in the future, supported reasonable warranty for compiling the true and fair financial statement, for healthy operation of all business activities and carrying out the rules on internal control from the Company, national laws, regulations. 5. General appraisal on internal control of the Company expressed from the Supervisory Committee The Supervisory Committee believed that: in accordance with the relevant regulation from CSRC and Shenzhen Stock Exchange, abiding by the basic information of internal control, the Company established and perfected the rules on internal control which covered all parts and links of the Company according to its actual condition, to ensure normative operation of all business activities, safeguard the assets of the Company in safety and completeness, The internal audit department was complete with enough and professional personnel to warrant that implementation and supervision of the key activities of internal control efficiently. In 2007, there was no situation that the Company disobeyed the regulations of Guidelines on Internal Control of Listed Companies and Rules on Internal Control of the Company. 6. General appraisal on internal control of the Company expressed from the Independent Directors The Independent Directors believed that: in compliance with relevant regulation of CSRC and Shenzhen Stock Exchange, the Company set down and revised a series of the rules on internal control such as Articles of Association, Rule of Procedure of the Board of Directors; all above rules on internal control was in conformity with the relevant national laws and regulations and the requirements of supervisory organization. The key activities of internal control run in line with the all rules on internal control, the internal control on subsidiaries of the Company, related transaction, external guarantee, and use of raised proceeds, significant information and information disclosure to ensure the smooth operation of the Company strictly, completeness, efficiently. (V) Performance appraisement and incentive mechanism for Senior Executives In early 2007, the Company determined the Annual Remuneration Assessment Plan 2007 based on operation target proposed by the Board of Directors. The Board of Directors and Staff Representative Meeting assessed the Senior Executives’ achievement in compliance with the remuneration assessment plan and other information like the audited financial statements then encouraged them based on the assessment results. 20 VI. Shareholders’ General Meeting In the report period, the Shareholders’ General Meetings were held twice. 1. The Annual Shareholders’ General Meeting 2006 was held on Apr. 13, 2007, the resolutions were published in Securities Times and Ta Kung Pao on Apr. 14, 2007. 2. The 1st Temporary Shareholders’ General Meeting 2007 was held on Sep. 20, 2007, and the resolutions were published in Securities Times and Ta Kung Pao on Sep. 21, 2007. 21 VII . Report of the Board of Directors (I) Retrospection of operation of the company in the report period 1. Total status of operation in the report period In 2007, with improvement of efficiency and rapid adjustment as core, with prompting innovational ability as the masterstroke, the Company actively pushed forward technology innovation and product research & development and actualized new construction of the base with annual production capability of cylinder diesel engines 150,000 sets. With one year’s effort, the Company got achievements of economic operation and great project construction, and achieved annual operation target. With the fierce market competition, The Company overcame influence of price increase of raw materials and auxiliary materials and high requirements of emission of diesel engines, strengthened inner management, and pushed market construction. After one year’s effort, the Company got excellent achievements, improved the quality of capital, kept good trend of marketing of multi-cylinder diesel engines, enhanced the competition competence of products of the Company, and preferably achieved annual operating target. In the report period, the Company accumulatively sold various diesel engines amounting to 1,100,900 sets, up 4.38% compared with the same period of last year, including 85,400 multi- cylinder diesel engines, up 15.99% compared with the same period of last year; the Company realized sales revenues of RMB 2,042,027,100, up by 8.67%, and realized a net profit of RMB 168,116,400, up by 82.90% year-on-year. The net profit increased greatly in the report period, main reasons was sales of all the shareholdings of Northwest Bearing and parts shareholdings of Foton Motor Co., Ltd, which increased net profit RMB 102 million. 2. About main operations of the Company and its operation (1) In the report period, the breakdown of income from main operations of the Company classified according to product is as follows: Income from main operations Cost of main operations Profit rate of main Indexes operations Increase Increase Increase Amount Percentage Amount (RMB) year-on-year year-on-year year-on-year (RMB) (%) Product (% ) (% ) (% ) Diesels engine and fittings of 2,042,027,051.07 8.67 1,810,357,382.25 11.94 10.39 4.53 diesels Total 2,042,027,051.07 8.67 1,810,357,382.25 11.94 10.39 4.53 (2) In the report period, the breakdown of income from main operations of the Company classified according to area is as follows: Area Operating income (RMB) Operating profit (RMB) East China 1,013,561,159.29 105,305,582.57 Northeast 163,143,108.05 16,950,018.14 Southwest 163,002,873.89 16,935,448.28 Central China 189,301,999.73 19,667,838.67 North China 177,979,093.99 18,491,426.99 Northwest 81,048,477.87 8,420,663.22 South China 150,449,319.47 15,631,176.36 Export 103,541,018.78 10,757,562.29 Total 2,042,027,051.07 212,159,716.52 (3) Main suppliers and client of the Company: In 2007, the purchase amount of the top five suppliers of the Company took up 18.77% of the total annual amount of purchase and the sales amount of the top five clients took up 23.51% of the total amount of sales of the Company. 22 3. Particulars about changes in the Company’s assets structure and expenses in the report period compared with the same period of last year: Unit: RMB Proportion in total Proportion in total Increase/decrease Items At the end of 2007 assets at the end At the end of 2006 assets at the end (%) of 2007 (%) of 2006(%) Tradable financial 59,040,000.00 2.56% 0.00 0.00% 2.56% assets Accounts receivable 219,326,634.59 9.49% 234,679,882.65 12.74% -3.24% Other receivable 33,677,504.81 1.46% 37,381,124.39 2.03% -0.57% Inventories 304,592,189.76 13.19% 290,536,065.73 15.77% -2.59% Financial asset available 473,960,000.00 20.52% 164,343,900.00 8.42% 12.10% for sale Long-term equity 93,026,880.79 4.03% 92,254,266.58 5.00% -0.97% investment Fixed assets 388,310,743.34 16.81% 309,477,386.09 16.80% 0.01% Construction in process 22,442,799.22 0.97% 45,282,670.28 2.46% -1.49% Short-term loans 29,700,000.00 1.29% 172,000,000.00 9.34% -8.05% Long-term loans 0.00 0.00% 29,324,500.00 1.59% -1.59% Increase/decrease compared with the 2007 2006 year 2006(%) Operating expense 61,760,030.60 80,871,768.90 -23.63% Administrative expense 151,698,903.69 122,372,560.74 23.96% Financial expense -10,461,861.87 850,841.61 -1329.59% Income tax 64,328,150.43 9,901,320.52 549.69% Analysis on reason for changes: (1) Increase of trading financial assets was because in the report period, the Company sold 10 million of 46.125 million shareholdings of Foto Motor Co., Ltd as trading financial assets, which was reviewed and approved by the Board of Directors of the Company. At the end of report, it remained 4.5 million shareholdings. (2) Increase of financial assets available for sale was because at the end of report, the Company still held 36.125 million shareholdings of Foton Motor Co., Ltd. (3) Decrease of short-term loan was because in the report period, the Company paid off all the loans of bank. 4. Particulars about analysis on cash flow arising from operating activities, investing activities and financing activities of the Company in the report period: Unit: RMB Items 2007 2006 Explanation on changes I. Net cash flows arising from operating activities 93,259,316.60 181,181,682.05 Cash received from selling commodities and providing 2,294,133,757.17 2,084,006,202.30 labor services Cash paid for purchasing commodities and receiving labor 1,924,932,026.55 1,723,002,062.36 service II. Net cash flows arising from investing activities 97,264,387.32 -10,523,822.33 Cash received from investment income Gained cash due from that the Company sold shares of 104,629,275.45 908,026.07 Northwest Bearing and Foton Motor Net cash paid for purchasing fixed, intangible and other Input by the Company for long-term assets technology renovation of 99,113,810.65 16,963,749.84 multi-cylinder diesel engines base during the report period III. Net cash flows arising from financing activities -200,036,783.08 -111,644,442.60 Cash received from loans 122,700,000.00 345,500,000.00 Cash paid for settling debts 286,700,000.00 429,500,000.00 23 Cash paid for dividend and profit distributing or interest 36,036,783.08 27,644,442.60 paying 5. About operations of major affiliated companies and controlling subsidiary companies: Unit: RMB’0000 Name of companies Main products Registered capital Total assets Net profit Changchai Wanzhou Diesel Diesel engine 3500.00 11840.61 7.00 Engine Co., Ltd. Changchai Benniu Diesel Parts and fittings 3378.64 11047.85 338.01 Engine Fittings Co., Ltd. of diesel engine Nanjing Changli Agricultural 500.00 503.55 3.55 Agro-engine Fitting Market machinery Co., Ltd products (II) Prospect of the Company 1. Development tendency of industry Along with the technology advancement of global engine, increasing improvement and strict of emission standard and high-speed development of domestic industry, period of “The eleventh five-year plan” was the key five years of extensive upgrade and replacement of domestic engine. By marketing experience of many years, domestic diesel engine enterprises realized that the core technology was the most important and only with bringing forward, digesting, assimilating and mastering core technology, enterprises would develop and got the method of sustainable development. Owing to issue of standards of emission and notice control in China, the diesel engine enterprises committed themselves to improve technology of manufacturing engines. The technology of diesel engine in our country was higher and higher in the future, which require the enterprise upgrade and replacement of the products, improve capacity and level of equipments to adapt type changes of products. At present, the country concerned problems of agriculture, countryside and farmer and sparked plug development of manufacturing industry with advanced equipment and circular economy, constructed new countryside, which would provide good base to development of farm-machinery industry and internal combustion engine industry. But the country implemented tightened monetary policy since 2008 and the price of raw material consecutively rose, which brought pressure of exchange rate, interest rate, cost of raw materials and cost of human resources to the enterprise. The Company must analyze macro development trend of country and industry, current actual situation of the Company, faced difficulty and challenge, and expanded new situation of overall work. 2. Development stratagem of the Company and particulars about development of new products: The development stratagem of the Company is “standing on the farm machinery, strengthening the power and entering mobile area”. Developed both single cylinder diesel engines and multi-cylinder diesel engines, engaged in both automobile and industry, offered environmental protection green power for nice life. The Company will strengthen the fundamental research of single-cylinder diesel engine product in accordance with new market demand, not only focus on the continuous appearance improvement but also on radical renovation of the inner structure of products in order to enhance the technology content and resolve the problems of security, fuel economy and emission. The Company will establish professional technology support system, and develop & research exported products with concept of higher and upgrade to expand oversea market. The Company will program overall technology authentication of emission of non-road diesel engine, improve research & development, method and procedure of multi-cylinder diesel, accelerate digitalization of technology management and actualize target of digitalization of structure design of products. Meanwhile, the Company will accelerate research, bring forward advanced method and learn experience of foreign countries and prompt the research & development level. 3. The Company will plan to adopt the following measures in order to achieve the operation target in 2008: Operation target in 2008: realized sales of product amounting 1,200,000, sales income RMB240 24 million export USD20 million Adopted measures: (1) To strengthen marketing function, actualize maximum of marketing and efficiency (2) To accelerate research & development of high-ended products, optimize and upgrade product structure (3) To increase investment of technology improvement, improve the manufacturing technology of products (4) Standardize management and concern efficiency to prompt integrated quality of the Company (5) Strengthen control of cost and fund to accelerate sustainable development of the Company (6) To implement stratagem of strong enterprise with talents, establish high quality and creative talent team 4. The estimated amount of technical renovation project funds demand of the Company in 2007 and use plan: In 2008 the Company will organize to actualize series of important technology reforms as construction of such taste base in processing, technology improvement of foundry of line 103 etc, including taste base in processing devoting RMB 30 million, P and technology improvement of foundry RMB 40 million. The Company will solve the problem of funds this project needs primarily with self-owned funds. (III) Investment in the report period 1. There was no refinancing of the Company over the previous three years. 2. Project invested with proceeds not raised through share offering in the report period: As reviewed and approved by the 19th meeting of the 4th Board of Directors of the Company held on Jan. 12, 2007, the Company agreed to invest in Nanjing Changli Agro-engine Fitting Co., Ltd. with the registered capital of RMB 5 million. All registered capital would be invested by the Company. This company was mainly engaged in various agro-engine products, electric machinery products, fitting and maintenance service. On 15 Jan. 2007, resolution on actualization of technology reform project of new type multi-cylinder diesel engine in high-tech district was reviewed and approved at the special meeting of the Board of Directors, taking advantage in current workshop in Changzhou High-tech development Zone and actualizing technology reform project of multi-cylinder diesel engine. Fixed assets of the project contributed RMB87 million, and the resource of funs is self-preparation of the Company. Content of reform including: establishing assembly production line, out-of-kit warehouse and finished products warehouse etc, term of construction was one year. The project achieved annual production capacity of new type multi-cylinder diesel engine 150,000, which was accessory engine of large-medium tractor, small-sized engineering machinery, truck and light-sized bus. The project was completed on 28 Dec. 2007, and fully-line put into test batch production. (IV) Routine work of the Board of Directors 1. About the meetings and resolutions of the Board of Directors in the report period: In the report period, 12 meetings were held by the Board of Directors of the Company. 1) The 19th meeting of the 4th Board of Directors was held on 12 Jan. 2007, reviewed and approved the following items: (1) Guideline and target of operation in 2007 (2) Resolution on development of Changli agricultural machinery accessory market (3) Resolution on examination and verification of remuneration of senior managements of the Company in 2007 (4) Resolution on implementation of examination and verification of remuneration of senior managers of the Company in 2006 2) The special session of the Board of Directors was held on 15 Jan. 2007, reviewed and approved Resolution on Implementation of Technology Reform Project of new multi-cylinder diesel engine in 25 New District, and the public notice on resolutions of such meeting was published in Securities Times and Hong Kong Ta Kung Pao dated 16 Jan. 2007. 3) The 20th meeting of the 4th Boar of Directors was held on 18 Mar. 2007, reviewed and approved Annual Report of 2006 and Its Summary, and the public notice on resolutions of such meeting was published in Securities Times and Hong Kong Ta Kung Pao dated 20 Mar. 2007. 4) The 1st meeting of the 5th Board of Directors was held on 13 Apr. 2007, reviewed and approved Resolution on election of the Chairman of the Board and Other Senior Managements of the Company and the public notice on resolutions of such meeting was published in Securities Times and Hong Kong Ta Kung Pao dated 14 Apr. 2007. 5) The 2nd meeting of the 5th Board of Directors was held on 27 Apr. 2007, and reviewed and approved the following items: (1) The 1st Quarter Report of 2007; (2) Resolution on implementation of new accounting standards; (3) Resolution on Sale of shareholdings of Northwest Bering (4) Resolution on examination and bonus of senior managements of the Company in 2006 6) The special session of the Board of Directors was held on 21 May 2007, reviewed and approved Resolution on Appointment of Vice General Manager of the Company, and the public notice on resolutions of such meeting was published in Securities Times and Hong Kong Ta Kung Pao dated 24 May 2007. 7) The special session of the Board of Directors was held on 4 Jun. 2007, reviewed and approved Resolution on Sale parts of Shareholdings of Foton Motor and the public notice on resolutions of such meeting was published in Securities Times and Hong Kong Ta Kung Pao dated 5 Jun. 2007. 8) The special session of the Board of Directors was held on 19 Jun. 2007, reviewed and approved Resolution on Changzhou Land Purchase and Reserve Center to purchase and reserve land assets of Changyi Industrial Mold Factory, and the public notice on resolutions of such meeting was published in Securities Times and Hong Kong Ta Kung Pao dated 21 Jun. 2007. 9) The 3rd meeting of the 5th Boar of Directors was held on 25 Jul. 2007, reviewed and approved Resolution on Semi-annual Report 2007 of the Company and its Summary Report, and the public notice on resolutions of such meeting was published in Securities Times and Hong Kong Ta Kung Pao dated 27 Jul. 2007. 10) The 4th meeting of the 5th Boar of Directors was held on 4 Sep. 2007, reviewed and approved Resolution on Implementation on Non-public Issuance A-Share Stock of the Company, and the public notice on resolutions of such meeting was published in Securities Times and Hong Kong Ta Kung Pao dated 5 Sep. 2007. 11) The 5h meeting of the 5th Board of Directors was held on 22 Oct. 2007, reviewed and approved Resolution on the 3rd Quarter Report of the Company in 2007, and the public notice on resolutions of such meeting was published in Securities Times and Hong Kong Ta Kung Pao dated 24 Oct. 2007. 12) The special session of the Board of Directors was held on 30 Oct. 2007, reviewed and approved Resolution on Rectification Report on Special Campaign to Strengthen Corporate Governance of listed Companies, and the public notice on resolutions of such meeting was published in Securities Times and Hong Kong Ta Kung Pao dated 31 Oct. 2007. 2. Execution on resolutions of Shareholders’ Annual Meeting by the Board of Directors In the report period, the Board of Directors performed responsibilities carefully, operated regularly, made decisions prudently, continuously perfect legal person governance structure, consecutively strengthen inner control and management, kept the excellent operation status. 1) Shareholders’ Annual Meeting of 2006 was held on 13 Apr. 2007, and the resolution on profit distribution plan of 2006 was reviewed and approved: distributing cash dividends at the rate of RMB 0.75 for every 10 shares. The Company published notice on implementation of dividend of 2006 on 10 May 2007. 26 2) The 1st special shareholders’ meeting of 2007 was held on 20 Sep. 2007, and resolution on Non-public issuance of Share A was reviewed and approved. The Company announced notice that the application on non-public issuance of Share A was not approved by the Issuance Examination Committee of China Securities Regulatory Commission on 28 Feb. 2008. 3. Summary report on liability performance of the Audit Committee of the Board of Directors: The Audit Committee consisted of three directors, including two Independent Directors, and Chairman of the Committee was acted by Independent Directors majored in Accountancy. (1) Major works of Audit Committee of 2007: 1) Periodically examined and approved the plan and execution of inner control of the Company. 2) Communicated with accountants on plan and content of audit 3) Supervised and urged the accountants to summit report in planned time. 4) The Audit Committee verified the financial statement of the Company before the audit and after opinion expression of accountants, communicated with accountants on some important items and major accounting estimation items, adjustment of audit and important accounting policy which possibly influence the financial statement, and considered that the financial statements reflected the integrated situation of the Company truly, accurately and completely. 5) Submitted summary annual report on audit which audited by accountants. 6) Advised to reappoint Jiangsu Gongzheng Certified Public Accountants Co., Ltd as auditors of the Company in 2008. (2) Written opinions on financial statements of the Company issued by the Audit Committee 1) On 29 Jan. 2008, the Audit Committee examined the financial statements of the Company without audit and issued written opinions of examination as follows: The Audit Committee examined financial statements of the Company and considered that the statements reflected current financial status of the Company in all important aspects. The Audit Committee kept communion with auditors and examined the financial statements of the Company again after the auditor issued primary opinions. 2) On 2 Apr. 2008, the Audit Committee examined and approved the financial statement of the Company, on which the certified public accountants issued primary opinion, and issued written opinions as follows: The financial statement of the Company, which was made in accordance with New Accounting Standards for Enterprise and relevant regulations of financial system, faithfully reflected the financial status of the Company as of 31 December 2007 in all important aspects, and of the results of its operations and cash flows for the year 2007. The financial statement of the Company was authentic and accurate. 3) On 9 Apr. 2008, the Audit Committee examined financial statement of 2007 and approved the resolutions as follows: the Audit Committee examined financial statement of 2007 audited by auditors, considered that the statements gave a true and fair view of the financial status of the Company as of 31 December 2007 in all important aspects, and of the results of its operations and cash flows for the year 2007, and approved to submit to the Board of Directors for approval. (3) Summary annual audit report of the Company 2007 According to the annual audit plan which was consulted by the Audit Committee and Jiangsu Gongzheng Certified Public Accountants Co., Ltd and actual situation of the Company, Jiangsu Gongzheng Certified Public Accountants Co., Ltd began the audit on 25 Feb. 2008 to guarantee the accomplishment of annual audit of 2007 as scheduled. Auditors communed with managers of the Company and members of the Audit Committee on consolidation of statements, accounting adjustment, accounting policy adopted and other accounting work to be perfected, which made both parties known more about the operation of the Company, finance status and application of New Accounting Standards for Business Enterprise and supplied evidence for the fair audit conclusion issued by the certified public accountant. The Audit Committee considered accountants executed audit sufficiently in accordance with provisions stipulated in Independent Auditing Standards of CPA of the PRC, practicing of the 27 auditors was competent and the issued audit report sufficiently reflected the financial status of the Company as of 31 December 2007, and of the results of its operations and cash flows for the year, and the audit conclusion accorded with actual situation of the Company. (4) Resolution on reappointment of accountants The meeting of the Audit Committee was held on 8 Apr. 2008, which reviewed and approved resolution on appointment of audit institution and auditing fee in 2007, the opinions were as follows: Jiangsu Gongzheng Certified Public Accountants Co., Ltd completed the audit of the Company of 2007; the audit report reflected the actual finance status of the Company 2007 objectively and fairly. The Audit Committee was satisfied with audit of Jiangsu Gongzheng Certified Public Accountants Co., Ltd and planned to reappoint them as auditors of the Company in 2008. Resolution submitted to the 7th meeting of the 5th Board of Directors for approval. 4. Summary report on liability performance of Remuneration & Appraisal Committee of the Board of Directors Remuneration & Appraisal Committee of the Board of Directors consisted of three directors, including two Independent Directors and one Inner Director, the Chairman of the Committee was acted by Independent Director. In the report period, according to fulfillment of the main financial indicators and operation targets of 2007 confirmed in the Contract of Appraisal of Senior Managers in 2007 reviewed and approved by the 19th meeting of the 4th Board of Directors on 12 Jan. 2007, Remuneration & Appraisal Committee adopted resolution on execution of appraisal of senior managers of 2007. In the report period, in accordance with relevant regulations, the Remuneration & Appraisal Committee examined and verified the remuneration of the senior managements of the Company in 2007 and issued opinions as follows: Remuneration & Appraisal Committee considered that, the senior managements of the Company draw from their remuneration in accordance with amount confirmed by Contract of Appraisal of Senior Managements in 2007. There are no differ or branch of the contract. (V) Preplan on profit distribution and preplan on converting capital public reserve into share capital Audited by Jiangsu Gongzheng Certified Public Accountants Co., Ltd, the net profit of the Company in 2007 was RMB 168,116,392.28. The total profit available for distribution in the consolidated statement as of the year was RMB 372,844,737.18. The Board of Directors planed to distribute cash dividends amounting to RMB 0.75 (tax included) for every 10 shares based on the total share capital amounting to 374,249,551 shares as at the end of the year 2007, and distributed cash amounting to RMB 28,068,716.33 in total. The retained profit of RMB 344,776,020.85 was carried down to the next year. The aforesaid distribution preplan should be submitted to the Shareholders’ General Meeting 2007 for examination. (VI) Other reporting issues The newspapers of information disclosure designated by the Company in 2007 were Securities Times and Hong Kong Ta Kung Pao, which remained unchanged. 28 VIII. Report of the Board of Supervisors In the report period, according to relevant laws such as Company Law and the Articles of Association of the Company etc., the Board of Supervisors seriously performed its duties, strictly supervised over the significant decisions made by the Board of Directors and the management group, production and operation financial management in an all-round way, boosted the company’s standardized operation, ensured the veracity and legitimacy of its economic operation. (I) The meetings of the Board of Supervisors The meetings of the Board of Supervisors of the company and its resolutions in the report period: 1. The 14th meeting of the 4th Board of Supervisors was held on 18 Mar. 2007, which examined and approved the following proposals: (1) Annual report 2006 and its summary; (2) 2006 work report of Board of Supervisors; (3) Resolution on election of the Board of Supervisors. 2. The 1st meeting of the 5th Board of Supervisors was held on 13 Apr. 2007, which examined and approved the resolution on election of the Chairman of the Board of Supervisors. 3. The 2nd meeting of the 5th Board of Supervisors was held on 27 Apr. 2007, which examined and approved the 1st Quarterly Report for 2007. 4. The 3rd meeting of the 5th Board of Supervisors was held on 25 Jul. 2007, which examined and approved the following proposals: (1) Interim Report 2007 and its summary; (2) The Rules of Procedure of the Board of supervisors. 5. The 4th meeting of the 5th Board of Supervisors was held on 22 Oct. 2007, which examined and approved the following proposals: (1) The 3rd Quarterly Report for 2007; (2) Organization of study on documents of governance policy and systems of the Company (II) Independent opinions from the Board of Supervisors: 1. Operation according to Laws: In an opinion of the Board of Supervisors, the Board of Directors and the management group of the Company run in a patient and responsible way, normatively operated strictly according to Company Law of the P.R.C., Securities Law of the P.R.C. and the Articles of Association of the Company and basically established good internal control system and the procedures of decision-making were legal. 2. Inspection of Finance of the Company: The Supervisory Committee seriously and carefully inspected the Company’s financial systems and financial status, believed that the financial report of 2007 factually reflected the Company’s financial status and operation results, and the auditor’s opinion and assessment on relevant events issued by the domestic and overseas Certified Public Accountants were objective and fair. 3. Associated transactions of the Company: There was no associated transaction without fair and was not harmful for the interests the Company. 4. Situation of purchase and sale of assets of the Company: The transaction price of purchase and sale of assets was confirmed by Evaluation Report issued by agent. There are neither low-down transactions nor damage part shareholders’ equity & assets of the Company 5. In accordance with relevant regulations stipulated in Guidelines of Shanghai Stock Exchange for the Internal Control of List Companies and Circular on Properly Handling the 2007 Annual Reports of Listed Companies and the Related Work. Supervisors Committee issued opinions on self-evaluation of internal control of the Company as follows: According to relevant regulations issued by China Securities Regulatory Commission and Shenzhen Stock Exchange, complied with the basic principle of internal control, combined the actual situation, the Company set up and perfected internal control system covered all the affairs of the Company, guaranteed the normal running of the business of the Company, and protected the safety and 29 completeness of the assets of the Company. The organization structure of the internal control of the Company was perfect and staff and equipments were available, which guaranteed the efficiency of execution and supervision of the significant activities of the internal control of the Company. In 2007, there was no status of breach of Guidelines of Shanghai Stock Exchange for the Internal Control of List Companies and Circular on Properly Handling the 2007 Annual Reports of Listed Companies and the Related Work. In conclusion, the Supervisors Committee considered that, the self-evaluation of internal control of the Company was complete, authentic and accurate, and reflected the actual situation of the Company. 30 IX. Significant Events (I) Lawsuits and arbitrations in the report period In the report period, the accumulative amount of the lawsuits and arbitrations involved by the Company were RMB 60.941 million, taking up % of net assets as at the end of the report period. The detailed matters are as follows: Involved sum Name of Defendants Date of Name of Lawsuits & Arbitration (RMB’0000) Accepting & organ hearing Lawsuits without judge from previous years to the report period: 1.Tongshan county Tengyu Changzhou Intermediate Agro-engine Trade Center 27 Jun. 2001 People’s Court 493.06 2.Nanjing Jinwan Share-holding Changzhou Intermediate Co., Ltd 9 Jul. 2002 People’s Court 1,419.00 3.Shandong Hongli Group Co., Ltd Changzhou Intermediate 27 Jun. 2001 People’s Court 1,436.00 4.Shandong Shuangli Group Co., Ltd. Jan. 2006 The 1st Intermediate People’s 2746.04 Court of Beijing Total 6094.10 Explanation of the cases: 1. The lawsuit case on Tongshan County Tengyu Agro-engine Trade Center was disclosed by the Company in Annual Report 2001-2006, the Company sued for enforcement execution to Changzhou Intermediate People’s Court on Apr. 13, 2002, but the defendant still failed to pay RMB 4,930,600. Now the Company is entrusting Xuzhou Roadway Court to execute. 2. The lawsuit case on Nanjing Jinwan Share-holding Co., Ltd, the Company has signed a settlement agreement which LiShui County Public-owned Assets Operation Co., Ltd refund the RMB 14.19 million owed by Nanjing Jinwan Share-holding Co., Ltd with 80 mu instead of Nanjing Jinwan Share-holding Co., Ltd. The agreement is in execution. 3. The lawsuit case on Shandong Hongli Group Co., Ltd was disclosed by the Company in Annual Report 2001-2006. Shandong Hongli Group Co., Ltd accumulatively owed the loan of the Company RMB 14,360,000. The Company sued to Changzhou Intermediate People’s Court in 2001 and sued for enforcement execution on Apr. 2002. At present, Shandong Hongli Group Co., Ltd was in the procedure of going bankrupt. 4. The lawsuit case on guarantee loan of Shangdong Shuangli Group Co., Ltd. was disclosed in the Annual Report 2006. Owing to poor operation of Shuangli Group, Shandong Liaocheng Intermediate People’s Court declared Shuangli Group was in the procedure of going bankrupt. The Company applied to bankruptcy liquidation group of Shuangli Group with prior right to pay a debt RMB 27,460,400. The Company was actively transacting the land use right of 93454.43 ㎡ provided by Shuangli Group as anti-guarantee in order to refund debts of the Company. In 2007, the Company received RMB 9,000,000, and balance RMB 18,460,400 was still in recovery. The evolution would be disclosed in time according to regulations of information disclosure. (II) Securities investment in the report period Sequence Securities Securities Name of Investment Shareholding Book Value at Proportion of securities Profit & loss in No. kind code Securities amount at the (Share) the end of investment at the end of the report beginning report (RMB) report (%) period (RMB) (RMB) 1 Stock 600166 Foton Motor 5204700 4500000 59040000 100% 53835300 Other securities holding at the end of report 0 0 0 0 0 31 Profit & loss from securities investment has been sold in the report period — — — — 102229275.45 Note Total 5204700 — 59040000 100% 156064575.45 1. Transaction monetary assets Note: (1) In the report period, reviewed and approved by special meeting of the Board of Directors, the Company sold 1,440,000 shares of shareholdings of Northwest Bearing (Securities Code: 000595), and achieved profit RMB 15,480,259.04 after deducted initial cost RMB 1,540,000.00. (2) In the report period, reviewed and approved by special meeting of the Board of Directors, the Company sold 5,500,000 shares of shareholdings of Foton Motor Co., Ltd (Securities Code: 600166), and achieved profit RMB 86,749,016.41 after deducted initial cost RMB 6,361,300.00. The two aforesaid profits totaled RMB 102,229,275.45. 2. Shareholdings of other listed companies Investment Book Value at Profit & loss in Change of owner’ Subject of Securities Name of Proportion of Resource amount at the the end of the report s equity in the Accounting code securities shareholding of share beginning (RMB) report (RMB) period (RMB) report period calculation 600166 Foton Motor Financial assets Exchange available for s assets of 41782175.00 4.45% 473960000.00 0 432177825 ale Changchai Group in 1999 900953 Kaima B Long-term invest By 31706441.63 5.49% 31706441.63 0 0.00 ment on stocks lawsuits 600377 Ninghu Long-term invest Agreement 90500.00 435500.00 0 345000 Expressway ment on stocks transfer Total 73579116.63 — 506101941.63 0 432522825 3. Equity of non-listed financial enterprises and companies to be listed held by the Company Name of Amount of Amount of Proportion in Book value Profits or Changes of Subjectof Resource object initial shares held equity of the at losses in the owners’ equity Accounting of share investment (share) Company period-end report period in the report calculation (RMB) (RMB) (RMB) period Long-term Sharehold Bank of 38000000 38000000 0.48% 38000000 0 0 investment on ings of Jiangsu stocks promoter Total 38000000 38000000 0.48% 38000000 0 0 (III) Purchase and sales of assets of the Company during the report period The Company signed the Land Reserve Agreement with Changzhou Land Purchase and Reserve Center on 19 Jun. 2007, which agreed Changzhou Land Purchase and Reserve Center to purchase and reserve land assets of Changyi Industrial Mold Factory which belonged to the Company and the price was RMB 56,190,000. The details were published in Securities Times and Ta Kung Pao dated 21 Jun. 2007. (IV) During the report period, control shareholders and related enterprise have never kept a significant related transaction. (V) Significant Contract and situation of performance 1. During the report period, there were no events of significant entrustment, contracting, and lease of other companies’ assets by the Company or vice versa. 2. During the report period, the Company provided loan guarantee of RMB 9.5 million to Changniu Machinery Audio & Vedio Co., Ltd, wholly owned subsidiary company of the Changchai Benniu 32 Diesel Engine Fittings Co. Ltd, which was a subsidiary enterprise of the Company. Term of the loan was fro 21 Nov. 2007 to 21 Oct. 2008. 3. During the report period, there is no management of cash assets for commission. (VI) The commitments of the Company or shareholders whose shareholding exceed 5% of the whole equities The commitments and their implementation of original non-tradable shareholders in the share merger reform: Serial No. Name of shareholder commitment Implementation 1. No trading and transfer may be taken within 12 months as of the the State-owned Assets date when the share merger reform was implemented. 18,712,478 shares were Supervision and 2. After expiration of the aforesaid undertaking, original non-tradable released from 1 Administration Commission shares could be sold through listing and trading on Shenzhen Stock forbiddance according of Changzhou People’s Exchange, but proportion of number of shares in total shares of the to regulations Government Company shall not exceed 5 percent within 12 months, as well as not exceed 10 percent within 24 months. Shares were released Shareholders of raised legal No trading and transfer may be taken within 12 months as of the date from forbiddance 2 person’s shares when the share merger reform was implemented. according to regulations on Jun. 19, 2007. (VII) Appointment of accountants The 20th meeting of the 4th Board of Directors examined and approved to reappoint Jiangsu Gongzheng Certified Public Accountants Co., Ltd. as auditor of the Company in 2007. The public notice was published in Securities Times and Hong Kong Ta Kung Pao dated 20 Mar. 2007. The auditing fee the Company paid to Jiangsu Gongzheng Certified Public Accountants Co., Ltd for the year 2007 was RMB 880,000. The above auditor audited the annual financial report of the Company for six successive years. (VIII) In the report period, the Company and its directors, supervisors, senior management persons, actual controller and purchaser were not checked, adopted compulsory measures by judicial and discipline inspection department, claim against for criminal ability, administratively punished, checked by China Securities Regulatory Commission, and was not condemned in public by Stock Exchanges. Main content of discussion Reception time Reception place Reception way Reception object and information it provided The 3rd meeting room of the Main operation and future 8 Feb. 2007 Field research Huatai Securities Company development of the Company The 3rd meeting room of the Main operation and future 9 Feb. 2007 Field research China AMC Company development of the Company The 3rd meeting room of the Baoying Fund Main operation and future 28 Feb. 2007 Field research Company Management Co., Ltd. development of the Company The 3rd meeting room of the Main operation and future 21 Mar. 2007 Field research China Fund Company development of the Company The 3rd meeting room of the Main operation and future 21 May 2007 Field research Huatai Securities Company development of the Company 5 Jun. 2007 The 3rd meeting room of the Field research Citic Securities Main operation and future 33 Company development of the Company Natural person Operation and future 20 Sep. 2007 The Company Field research shareholder development of the Company Natural person Operation and future 20 Sep. 2007 The Company Field research shareholder development of the Company Marketing of current products, China Universal Asset 15 Nov. 2007 The Company Field research prospect of development and Management Co., Ltd development of industry (IX) Particulars about reception of researches, communications and interviews in the report period (X) Other events The Independent Director Lu Gang purchased 10,000 A-share of the Company at the price of RMB 11.83 per share on 24 May 2007, and sold 2,500 shares on 26 Jun. 2007. This transaction lost RMB 863 and details was punished in Securities Times and Hong Kong Ta Kung Pao dated 28 Jun. 2007. 34 X. Financial Report (I) Auditors’ Report To all the Shareholders of Changchai Co., Ltd, We have audited the accompanying financial statements of the Company, which comprise the consolidated balance sheet and balance sheet as at 31 December 2007, the consolidated income statement and income statement, the consolidated statement of changes in equity and statement of changes in equity, the consolidated cash flow statement and cash flow statement for the year then ended, and notes to the financial statements. Management’s Responsibility for the Financial Statements The Company’s management is responsible for the preparation of these financial statements in accordance with China Accounting Standards for Business Enterprises issued by the Ministry of Finance of the People’s Republic of China. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditor's Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with China Standards on Auditing for Certified Public Accountants. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements comply with the requirements of China Accounting Standards for Business Enterprises issued by the Ministry of Finance of the People’s Republic of China and present fairly, in all material respects, the consolidated financial position and financial position of the Company as at 31 December 2007, and the consolidated results of operations and results of operations and the consolidated cash flows and cash flows of the Company for the year then ended. Jiangsu Gongzheng Certified Public Accountants Co., Ltd Certified Public Accountants of the PRC: Zhang yan Certified Public Accountants of the PRC: Sheng Jinrong Changzhou City · China 35 (Ⅱ) Accounting Statements Balance Sheet Prepared by Changchai Company, Limited 31 Dec. 2007 Unit: RMB Yuan Amount at the period-end Amount at the period-begin Items Consolidation Parent company Consolidation Parent company Current Assets: Monetary funds 443,234,034.61 417,975,515.87 452,747,113.77 443,546,323.18 Settlement fund reserve Dismantle fund Transaction financial asset 59,040,000.00 59,040,000.00 Notes receivable 52,244,643.94 50,742,531.00 58,824,892.25 58,544,892.25 Account receivable 219,326,634.59 179,407,272.03 234,679,882.65 184,106,435.85 Account paid in advance 35,394,071.23 35,520,970.68 4,984,827.27 3,406,183.97 Premium receivables Receivables from reinsurers Reinsurance contract reserve receivables Interest receivable Other account receivable 33,677,504.81 33,095,700.83 37,381,124.39 35,198,813.62 Financial assets purchased under agreements to resell Inventories 304,592,189.76 257,646,950.38 290,536,065.73 257,188,518.51 Non-current assets due within 1 year Other current assets 351,224.31 351,224.31 Total current assets 1,147,509,078.94 1,033,428,940.79 1,079,505,130.37 982,342,391.69 Non-current assets: Loans and advance Available for sale financial 474,486,000.00 474,486,000.00 164,343,900.00 164,343,900.00 assets Held to maturity investments 0.00 0.00 Long-term account 0.00 0.00 receivable Long-term equity 92,936,380.79 143,276,180.79 92,254,266.58 137,594,066.58 investment Investing property 74,947,756.43 74,947,756.43 77,156,097.23 77,156,097.23 Fixed asset 388,310,743.34 332,707,583.04 309,477,386.09 254,477,316.79 Project in construction 22,442,799.22 31,569,234.65 45,282,670.28 44,419,216.28 Engineering material 0.00 Fixed asset disposal 0.00 0.00 Bearer biological asset 0.00 0.00 Oil assets 0.00 0.00 Intangible assets 108,957,970.04 106,550,100.61 139,117,012.82 136,766,147.59 Development expense 0.00 0.00 Goodwill 0.00 0.00 Long-term expense to be 171,326.44 0.00 423,801.08 apportioned Deferred tax assets 701,681.23 701,681.23 43,956,811.54 43,956,811.54 Other non-current assets 0.00 0.00 Total of non-current assets 1,162,954,657.49 1,164,238,536.75 872,011,945.62 858,713,556.01 Current liabilities: 2,310,463,736.43 2,197,667,477.54 1,951,517,075.99 1,841,055,947.70 Short-term borrowings Borrowing from Central 29,700,000.00 0.00 172,000,000.00 145,000,000.00 Bank Deposits and due to banks and other financial institutions 36 Placements from banks and other financial institutions Transaction financial liabilities Notes payable Account payable 56,300,000.00 47,000,000.00 28,790,000.00 26,090,000.00 Account received in 428,095,753.10 397,000,704.50 405,924,269.88 366,708,203.87 advance Financial assets sold under 45,035,644.02 44,889,241.14 41,692,277.70 41,006,940.14 agreements to repurchase Handling charges and commission payable Employee’s compensation payable Tax payable 29,946,856.38 26,228,034.16 34,633,008.05 27,173,707.91 Interest payable -10,259,273.84 -5,772,128.42 -3,447,445.73 -234,602.23 Other account payable Dividend payable 105,996,952.49 100,664,577.67 89,024,422.36 84,801,787.58 Due to reinsurers Insurance contract reserve Customer deposits Amount payables under security underwriting Non-current liabilities due 8,500,000.00 0.00 within 1 year Other current liabilities 4,294,741.37 3,301,240.01 4,024,621.30 3,260,656.84 Total current liabilities 697,610,673.52 613,311,669.06 772,641,153.56 693,806,694.11 Non-current liabilities: Long-term borrowings 29,324,500.00 20,000,000.00 Debentures payable Long-term payables 15,852,824.06 15,852,824.06 Specific purpose account 90,000.00 90,000.00 payables Provisions for contingent liabilities Deferred tax liabilities 121,611,700.00 121,611,700.00 36,089,922.00 36,089,922.00 Other non-current liabilities 0.00 0.00 Total non-current liabilities 121,701,700.00 121,701,700.00 81,267,246.06 71,942,746.06 Total liabilities 819,312,373.52 735,013,369.06 853,908,399.62 765,749,440.17 Owner’s equity Share capital 374,249,551.00 374,249,551.00 374,249,551.00 374,249,551.00 Capital surplus 495,672,761.92 507,502,934.95 243,891,542.34 256,317,787.95 Less: Treasury Stock Reserved fund 240,369,344.92 240,369,344.92 215,734,669.38 215,734,669.38 General risk provision Retained earnings 372,844,737.18 340,532,277.61 257,431,736.76 229,004,499.20 Foreign exchange difference Total owners' equity attributable to holding 1,483,136,395.02 1,462,654,108.48 1,091,307,499.48 1,075,306,507.53 company Minority interest 8,014,967.89 6,301,176.89 Total owner’s equity 1,491,151,362.91 1,462,654,108.48 1,097,608,676.37 1,075,306,507.53 Total liabilities and owner’s 2,310,463,736.43 2,197,667,477.54 1,951,517,075.99 1,841,055,947.70 equity 37 Income Statement Prepared by Changchai Company, Limited Jan.-Dec. 2007 Unit: RMB Yuan Amount of this period Amount of last period Items Consolidation Parent company Consolidation Parent company I. Total sales 2,042,027,051.07 2,045,641,233.66 1,879,053,302.36 1,869,125,529.52 Including: Sales 2,042,027,051.07 2,045,641,233.66 1,879,053,302.36 1,869,125,529.52 Interests income Premium income Handling charges and commission income II. Total cost of sales 2,013,719,492.70 2,020,541,018.79 1,773,244,823.96 1,755,442,682.47 Including: Cost of sales 1,810,357,382.25 1,830,553,542.04 1,617,187,100.34 1,620,348,660.54 Interests expenses Handling charges and commission expenses Claim expenses-net Provision for insurance liability reserve Expenses for reinsurance accepted Payments on surrenders Policyholder dividends Taxes and associate charges 1,494,637.63 1,196,514.77 726,399.61 246,026.55 Selling and distribution 61,760,030.60 59,539,959.43 80,871,768.90 79,589,626.12 expenses Administrative expenses 151,698,903.69 144,888,570.38 122,372,560.74 114,205,866.08 Financial expense -10,461,861.87 -12,601,114.39 850,841.61 -1,625,767.41 Impairment loss -1,129,599.60 -3,036,453.44 -48,763,847.24 -57,321,729.41 Add: gain/(loss) from change 53,835,300.00 53,835,300.00 in fair value (“-” means loss) Gain/(loss) from investment 106,711,389.66 106,711,389.66 4,051,133.60 4,051,133.60 (“-” means loss) Including: income form investment on affiliated enterprise and jointly enterprise Foreign exchange difference (“-” means loss) III. Business profit (“-” 188,854,248.03 185,646,904.53 109,859,612.00 117,733,980.65 means loss) Add: non-business income 54,470,449.24 52,205,668.80 6,761,799.46 5,672,387.29 Less: non-business expense 9,365,054.43 9,309,525.76 15,276,453.75 14,572,973.83 Including: loss from non-current asset disposal IV. Total profit (“-” means 233,959,642.84 228,543,047.57 101,344,957.71 108,833,394.11 loss) Less: Tax expense 64,328,150.43 64,311,877.30 9,901,320.52 9,927,406.36 V. Net profit (“-” means 169,631,492.41 164,231,170.27 91,443,637.19 98,905,987.75 loss) Attributable to parent 168,116,392.28 91,918,374.43 company Minority interest 1,515,100.13 -474,737.24 VI. Earnings per share (I) basic earnings per share 0.45 0.25 (II) diluted earnings per 0.45 0.25 share 38 Cash Flow Statement Prepared by Changchai Company, Limited Jan.- Dec. 2007 Unit: RMB Yuan Amount of this period Amount of last period Items Consolidation Parent company Consolidation Parent company 1. Cash flows for operating activities: Cash received from sales of 2,294,133,757.17 2,334,029,019.90 2,084,006,202.30 2,123,635,998.85 goods or rending of services Cash received on deposits and from banks and other financial institutions Net increased cash received on borrowings from central bank Cash received on placements from other financial institutions Premium received Cash received from reinsurance Net increased amount received on policyholder deposit and investment Cash received from disposal of held for trading financial assets Interests, handling charges and commission received Cash received on placements from bank, net Cash received under repurchasing, net Refund of tax and fare 13,922,215.96 12,147,451.49 10,524,640.59 10,455,874.75 received Other cash received relating 6,685,710.74 5,681,010.74 28,291,935.38 27,820,320.35 to operating activities Sub-total of cash inflows 2,314,741,683.87 2,351,857,482.13 2,122,822,778.27 2,161,912,193.95 Cash paid for goods and 1,924,932,026.55 2,006,651,312.56 1,723,002,062.36 1,798,316,301.30 services Loans and advances drawn Cash paid to central bank, banks and other financial institutions, net Claims paid Interests, handling charges and commission paid Dividends paid to policyholders Cash paid to and on behalf of 174,360,811.02 156,853,644.39 118,777,025.12 103,948,844.64 employees Tax and fare paid 36,762,810.52 31,320,922.43 16,955,419.36 9,999,065.59 Other cash paid relating to 85,426,719.18 81,626,025.94 82,906,589.38 76,236,383.85 operating activities Sub-total of cash outflows 2,221,482,367.27 2,276,451,905.32 1,941,641,096.22 1,988,500,595.38 Net cash flow from operating 93,259,316.60 75,405,576.81 181,181,682.05 173,411,598.57 activities 39 2. Cash Flows from Investment Activities: Cash received from return of 9,301,300.00 9,301,300.00 127,050.00 127,050.00 investments Cash received from 104,629,275.45 104,629,275.45 908,026.07 908,026.07 investment income Net cash received from disposal of fixed assets, 82,447,622.52 82,359,152.16 4,376,834.04 4,333,758.44 intangible assets and other long-term assets Proceeds from sale of subsidiaries and other operating units Other cash received relating 1,030,000.00 1,030,000.00 to investment activities Sub-total of cash inflows 196,378,197.97 196,289,727.61 6,441,910.11 6,398,834.51 Cash paid for acquiring fixed assets, intangible assets and 99,113,810.65 93,670,690.65 16,963,749.84 13,883,880.64 other long-term assets Cash paid for acquiring 5,000,000.00 investments Net cash used in loans Net cash used in acquiring subsidiaries and other operating units Other cash paid relating to 1,982.60 investment activities Sub-total of cash outflows 99,113,810.65 98,670,690.65 16,965,732.44 13,883,880.64 Net cash flow from investing 97,264,387.32 97,619,036.96 -10,523,822.33 -7,485,046.13 activities 3. Cash Flows from Financing Activities: Cash received from absorbing investment Including: Cash received from increase in minority interest Cash received from 122,700,000.00 61,500,000.00 345,500,000.00 301,000,000.00 borrowings Cash received from issuing debentures Other proceeds relating to financing activities Sub-total of cash inflows 122,700,000.00 61,500,000.00 345,500,000.00 301,000,000.00 Cash paid for settling debt 286,700,000.00 226,500,000.00 429,500,000.00 383,000,000.00 Cash paid for distribution of dividends or profit or 36,036,783.08 33,595,421.08 27,644,442.60 25,166,682.62 reimbursing interest Including: dividends or profit paid to minority interest Other cash payments relating to financing activities Sub-total of cash outflows 322,736,783.08 260,095,421.08 457,144,442.60 408,166,682.62 Net cash flow from financing -200,036,783.08 -198,595,421.08 -111,644,442.60 -107,166,682.62 activities 4. Effect of foreign exchange rate changes 5. Increase in cash and cash -9,513,079.16 -25,570,807.31 59,013,417.12 58,759,869.82 40 equivalents Add : Cash and cash 452,747,113.77 443,546,323.18 393,733,696.65 384,786,453.36 equivalents at year-begin 6.Cash and cash equivalents 443,234,034.61 417,975,515.87 452,747,113.77 443,546,323.18 at the end of the year 41 Statement of Change in Owners’ Equity Prepared by Changchai Company, Limited 31 Dec. 2007 Amount of this period Owners’ equity attributable to parent company Owners’ equity attrib Total of Items Lessen: Surplus General Minority Lessen: S share Capital Retained owners’ share Capital treasury public risk Others equity treasury p capital reserve profits equity capital reserve stock reserve reserve stock re I. balance at the end of last year 374,249,55 170,618,06 210,907,66 250,799,80 -19,498,72 987,076,36 374,249,55 170,568,62 194 1.00 4.34 7.81 9.41 9.57 2.99 1.00 2.42 1. Change of accounting policy 73,273,478 4,827,001. 6,631,927. 19,498,729 6,301,176. 110,532,31 6,1 .00 57 35 .57 89 3.38 2. Correction of errors in previous period II. balance at the beginning of this year 374,249,55 243,891,54 215,734,66 257,431,73 6,301,176. 1,097,608, 374,249,55 170,568,62 200 1.00 2.34 9.38 6.76 89 676.37 1.00 2.42 III. Increase/ decrease of amount in this 251,781,21 24,634,675 115,413,00 1,713,791. 393,542,68 73,322,919 14, year (“-” means decrease) 9.58 .54 0.42 00 6.54 .92 (I) Net profit 168,116,39 1,515,100. 169,631,49 2.28 13 2.41 (II)Gain/loss listed to owners’ equity 251,781,21 251,979,91 73,322,919 198,690.87 directly 9.58 0.45 .92 1. Net amount on changes in book value 323,248,10 323,248,10 109,363,40 of financial assets available for sale 0.00 0.00 0.00 2.Effect on changes in other owners’ equity of invested units under equity 596,072.58 596,072.58 49,441.92 method 3. Effect on income tax related to items -72,062,95 -72,062,95 -36,089,92 42 listed to owners’ equity 3.00 3.00 2.00 4. Others 198,690.87 198,690.87 Subtotal of (I)and (II) 251,781,21 168,116,39 1,713,791. 421,611,40 73,322,919 9.58 2.28 00 2.86 .92 (III) Input an reduced capital of owners 1. Input capital of owners 2.Amount of Shares included in the owners’ equity 3. Others (IV) Profit distribution 24,634,675 -52,703,39 -28,068,71 14, .54 1.86 6.32 1. Withdrawing surplus public reserve 24,634,675 -24,634,67 14, .54 5.54 2. Withdrawing general risk reserve 3. Distribution to all owners -28,068,71 -28,068,71 (shareholders) 6.32 6.32 4. Others (V)Internal carrying forward of owners’ equity 1. New increase of capital (share capital) from capital reserves 2. Convert surplus reserves to capital(share capital) 3. Surplus reserves make up losses 4. Others IV. Balance at the end of this period 374,249,55 495,672,76 240,369,34 372,844,73 8,014,967. 1,491,151, 374,249,55 243,891,54 215 1.00 1.92 4.92 7.18 89 362.91 1.00 2.34 43 (III) Notes to Accounting Statements Note 1: General information Changchai Company Limited (the Company for short hereafter) was founded in People’s Republic of China in 1994. The domestic A share and the overseas B share of the Company were respectively listed in 1994 and 1996. The Company mainly engaged in the production and sales of small and medium-sized single cylinders and multi-cylinder diesel engine with the label of Changchai Brand. The diesel engine produced and sold by the Company were mainly used in tractors, combine harvest models, light commercial vehicle, small-sized construction machinery, generator units and ships, etc. The Company has become one of the largest domestic enterprises producing small and medium-sized power cylinders and multi-cylinder diesel engines, of which the capability of development and production ranked ahead in the same industries in our country. There were such departments as Office Room of the Company, Financial Department, Political Department, Investment and Development Department, Enterprise Management Department, Human Recourses Department, Production Department, Procurement Department, Sales Company, Marketing Department, Chief Engineer Office, Technology Center, Quality Assurance Department, Foundry Branch, Machine Processing Branch, Single-cylinder Engineer Branch, Multi-cylinder Engineer Branch and Harvest Model Branch in the Company. Note 2: Change in accounting policies, accounting estimate and prior period errors 1. The transactions or events which adopt retroactive adjustment method The Company has executed New Accounting Standard since Jan. 1, 2007. The events which were required to be made a retroactive adjustment had been adjusted and the financial statements had been compiled again when the Company made the financial statements according to the related content of Accounting Standard for Business Enterprises No.38 – First time adoption of Accounting Standard for Business Enterprises Article 5 to Article 19, the related regulations of Questions and Answers on the Standards for Information Disclosure by Companies That Offer Securities tthe Public (No. 7): Preparation and Disclosure of Financial and Accounting Information for Comparison During the Period of Transition from the Old Accounting Standards the New Accounting Standards. (i) Long-term equity investment ① In line with regulations, the Company should make a retroactive adjustment to the long-term equity investment which was measured through equity method before. The adjustment of profits and losses arisen from previous accumulation was RMB -29,276,656.45 as if the Company adopted cost method to measure at the very beginning. Furthermore, the Company correspondingly adjusted the withdrawal reserved capital and the retained earnings of the parent company by the capital reserves of RMB 1,840,387.13 arisen from the previous accumulation. The long-term equity investment of the parent company at the year-begin was accordingly increased RMB 27,436,269.32, which had no influence on the relevant items in consolidated balance sheet. 44 ② The Company confirmed that the subsidiaries had over lost the uncertain investment loss of RMB 19,498,729.57 measured by the shareholding proportion of the parent company, which made the owners’ equity reduce. (ii) Income tax The total equity influenced by deferred income tax assets was RMB 43,956,811.54 since the Company adopted balance sheet liability method for measuring income tax on Jan. 1, 2007, which made the retained earnings increase. The total by adjustment in the above (i) and (ii) increased the owners’ equity of RMB 24,458,081.97, and the shareholders’ equity belonging to the parent company was increased by RMB 24,458,081.97. (2) Changes in accounting policies measured by prospective application method Apart from the changes in accounting policies mentioned in the above (i), the following major changes in accounting policies occurred while the Company executed new accounting standard for the first time, of which the accounting treatment was employed prospective application method. The details include: Impairment of long-term assets Before executing new accounting standard, the withdrawn assets impairment provision could be switched back if the related evidence for impairment was disappeared. After executing new accounting standard, the Company would respectively withdraw impairment provision of financial assets, inventories and long-term assets according to regulation for financial asset impairment, inventory falling price provision and long-term asset impairment mentioned in Note 5, of which the impairment loss of long-term assets could not be switched back. Welfare expense for the employees Before executing new accounting standard, the welfare expenses for the employees should be withdrawn in accordance with the regulation by the company and included into the current profits and losses. After executing new accounting standard, the Company would recognize the employee compensation payable (welfare for the employees) according to the actual situation and the plan of welfare expenses for the employees but not the fixed proportion to withdraw welfare expenses for the employees, which should be recorded into the current profits and losses. The difference between the employee compensation payable based on new standard and the employee compensation that switched to before should be recorded into the current profits and losses during the first accounting period after the initial implementation date. 2. No changes in accounting estimates and correction for accounting errors occurred at the end of the report period. 45 Note 3: Declaration on following Accounting Standard for Business Enterprises Declaration from the Company: the Financial Report made by the Company was in line with Accounting Standard, which reflected the financial status, business result and cash flow of the Company truly and objectively. Note 4: Compiling foundation of financial statements On the basis of continue management, according to the occurred transactions and events, recognizing and measuring by the new Accounting Standard for Business Enterprises published on Feb. 15, 2006 by Ministry of Finance and the application guidance, the Income Statement and Balance Sheet in the comparative period were made a retroactive modulation when they were worked out, in accordance with the requirement about retroactive modulation mentioned Accounting Standard for Business Enterprises No.38 – First time adoption of Accounting Standard for Business Enterprises Article Five to Nineteen. Moreover, the financial statements also listed and disclosed the related financial information according to Standards for Information Disclosure by Companies That Offer Securities the Public (No. 15) – General Rules for Financial Report (amended in 2007). Note 5: The main accounting policies, accounting estimation of the Company and the way of working out the consolidated financial statements 1. Accounting periods The accounting periods were divided into accounting year and metaphase, the accounting year was from Jan. 1 to Dec. 31 and as the metaphase included monthly, quarterly and semi-yearly periods. 2. Functional currency RMB was the functional currency of the Company. 3. The items of the statements of which the measurement attributes changed and the adopted measurement attributes in the report period. The Company measured according to the canonical accounting measurement attributes. In the report period, measurement attributes were not changed. The Company conducted the measurement of the accounting elements commonly by historical cost. If using the way of replacement cost, net realizable value, present value and fair value, the measurement should be on the basis of the amount of the accounting element which could be obtained and measured reliably. 4. The standard for recognizing cash equivalent when making cash flow statement Cash equivalent means the highly liquid, very safe investment which can be easily converted into cash, and the company can hold it for a very short time (3 months from the date of purchase). 5 Method of foreign currency translation When foreign currency translation occurs, the spot exchange rate on the date of translation (i.e., the middle price of the intraday foreign exchange rate of RMB published by People’s Bank of China) shall be converted into RMB for keeping accounts while the occurred foreign currency exchange or the foreign exchange transactions shall be translated according to exchange rate 46 adopted in actual transactions. On the balance sheet date, the foreign currency monetary items and foreign currency non-monetary items shall be treated in accordance with the following provisions: The foreign currency monetary items shall be translated at the spot exchange rate on balance sheet date, of which happen during the normal business period shall be recorded into gains and losses at the current period; of which happen during organization period shall be recorded into long-term deferred expense. The exchange gains or losses caused by the borrowing belonging to acquiring fixed assets shall be treated by the capitalization of borrowing costs. Currency monetary items refer to the currency funds, assets charged from the fixed or confirmed amount or debt payable, including cash on hand, bank deposit, accounts receivable, other accounts receivable, long-term accounts receivable, short-term accounts receivable, account payable, other account payable, long-term borrowing, debentures payable and long-term account payable, etc. Foreign currency non-monetary items shall be translated at spot rate on the date of transaction, not changing the amount of functional currency. Foreign currency non-monetary items refer to the items other than the monetary ones. The foreign currency non-monetary items measured through fair value shall be translated at the spot rate on the date of confirming the fair value. The difference between the amount of functional currency after translation and that of original functional currency shall be treated as fair value fluctuation (exchange rate fluctuation), being recorded into gains of losses at the current period. 6. The recognition and measurement of financial instruments and the transfer of the financial instruments 1) Recognition of the financial assets When an enterprise becomes a party to a financial instrument, it shall recognize a financial asset or financial liability. Where a financial asset satisfies any of the following requirements, the recognition of it shall be terminated: (1) Where the contractual rights for collecting the cash flow of the said financial assets are terminated; (2) Where the said financial asset has been transferred and meets the conditions for recognizing the termination of financial assets as provided for in Accounting Standard for Business Enterprises No. 23 – Transfer of Financial Assets. Only when the prevailing obligations of a financial liability are relieved in all or in part may the recognition of the financial liability be terminated in all or partly. 2) The classification, recognition and measurement of financial assets and financial liabilities The financial assets or financial liabilities got or born by the Company are measured according to the following classifications: 47 (1) The financial assets or financial liabilities which are measured at their fair value and the variation of which is recorded into the profits and losses of the current period The interest rate or cash dividend which was gained in the period when the financial assets held by the Company are measured at its fair value and of which the variation is recorded into the profits and losses in the current period shall be recognized as investment income. On balance sheet date, the in change in the fair value of the financial asset or financial liability which is measured at its fair value and of which the variation is recorded into the profits and losses of the current period, shall be recorded into the profits and losses of the current period; When the said financial assets of financial liabilities are on disposal, the difference between the fair value and the amount in initial account shall be recognized as investment income, meanwhile, the profits and losses arising from the change in fair value shall be adjusted. (2) The investments which will be held to their maturity The investments which will be held to their maturity will regard the sum between the gained fair value and the transaction expense thereof as the initially recognized amount. The interest on bonds in payment, of which the mature interest is not drawn, shall be solely recognized as the receivables. The interest revenue which is measured and recognized by the amortized cost and actual interest rate during the period of the investments which will be held to their maturity shall be recorded into investment income. The actual interest rate which is recognized in the period of gaining the investments which will be held to their maturity, shall maintain unchanged within the predicted term of existence or within a shorter applicable term of the said investment which will be held to their maturity. The little difference between actual interest rate and coupon rate of which interest revenue can be measured at the coupon rate shall be recorded into the profits of losses in the current period. When the investments which will be held to their maturity are on disposal, the difference between the obtained price and investment book value shall be recorded into the profits and losses in the current period. (3) The accounts receivables The creditor’s right receivable formed during the Company selling commodity outside or offering labor shall be regarded as the initially recognize amount in according with the receivable price stipulated in the contract or agreement signed between the Company and the buyers. When the Company recovers or disposes the accounts receivable, the difference between the obtained price and the book value of the accounts receivable shall be recorded into the profits and losses in the current period. (4) Financial assets available for sale The financial assets available for sale will be regarded as the initial recognized amount in according with the sum between the fair value obtained from the said financial assets and the transaction expense thereof. The interest on bonds of which the mature interest rate is not drawn in the payment or the cash dividend which is declared but not extended in the payment shall be 48 solely recognized as the receivables. The interest rate or cash dividend gained during the period of holding the financial assets available for sale shall be recorded into investment income. On balance sheet date, the financial assets shall be measured through fair value, while the change in fair value is recorded into capital reserves (other capital reserves). When the financial assets are on disposal, the difference between the obtained price and the book value of the financial assets shall be recorded into investment income, meanwhile, the amount on proposal transferring out from the accumulated amount which is directly recorded into shareholders’ equity and arises from the variation of the fair value, shall be recorded into investment income. (5) Other financial liabilities Other financial liabilities are regarded as the initial recognized amount in accordance with the sum between the fair value and the transaction expense thereof. The Company shall make subsequent measurement on other financial liabilities on the basis of the post-amortization costs. 3) Main recognition method for the fair value of the financial assets or financial liabilities (1) The quotation in the active market shall be used to recognize the fair value of the financial assets or financial liabilities existing in active market. (2) If the financial instruments do not exist in the active market, the fair value shall be recognized by value appraisal techniques. (3) As for the financial assets initially obtained of produced at source and the financial liabilities assumed, the fair value thereof shall be determined on the basis of the transaction price of the market. 4) Main impairment test method of the financial assets and impairment provision method The recognition standard for impairment provision of the financial assets: the Company shall carry out an inspection, on the balance sheet day, on the carrying amount of the financial assets other than those measured at their fair values and of which the variation is recorded into the profits and losses of the current period. Where there is any objective evidence proving that such financial asset has been impaired, an impairment provision shall be made. The withdrawal method for impairment provision of the financial assets: as for the impairment provision of the financial assets is measured on the basis of post-amortization costs, if the current value of the predicted future cash flow of the financial assets is below the difference in the carrying amount of the said financial asset, the impairment provision of the financial assets shall be made; as for the impairment provision of the financial assets available for sale, if the recoverable amount is below the difference in the carrying amount, the impairment provision shall be made. Where a sellable financial asset is impaired, even if the recognition of the financial asset has not been terminated, the accumulative losses arising from the decrease of the fair value of the 49 owners’ equity which was directly included shall be transferred out and recorded into the profits and losses of the current period. 7. The recognition standard and the withdrawal method for the bad debt provision of the accounts receivable 1) Receivables are considered uncollectible after liquidation with statutory procedures for debtors are in canceling or bankrupt, due death of debtors who has no bequest and no undertaker on obligation, or caused by debtors fail to perform their obligation to pay a debt over three years, and it will be recognized as bad debt. 2) The bad debt losses are accounted by the allowance method. The Company recognized the bad debt provision on the basis of the accounts age analysis method based on the actual financial status and the cash flow of the debt units, which shall be recorded into the profits and losses of the current period. The proportion taking up the withdrawal of the bad debt provision for the accounts receivable in every account age phase is described as follows: Account age Proportion taking up the bad Proportion taking up the bad debt provision for the accounts debt provision for the other receivable (%) accounts receivable (%) Within one year 5 5 One to two years 10 10 Two to three years 20 20 Three to five years 50 50 Over five years 100 100 Withdrawal policies for bad debt reserves of related parties: according to the 9th meeting of the 4th Board of Directors, as for the accounts receivable of the related party of the Company with continuous operation ability, the withdrawal of bad debt reserves could not excess 60% at most. 8. The classification, pricing and accounting methods for inventories; the recognition standard and withdrawal method of the inventories falling price reserves 1) Classification of the inventories: inventories refer to the raw material, packing material, unfinished products, finished products and low-value consumption which have not been sold and consumed in the production operation process. 2) The inventory system is on the basis of perpetual inventory method. 3) The inventories are priced by the historical cost method, so are the raw material and auxiliary material, the sold material cost is carried over on the basis of first-in first-out method; the product cost is accounted through standard cost method, the difference between the standard cost and historical cost is undertaken by the cost of the finished goods in process, while the cost of sales is carried over on the basis of weighted average method; low-value consumption goods will be amortized once when drawn. 4) As for the inventory falling price reserve: the inventories at the end of the report period will be 50 priced according to the lower of the product cost and the net realizable value. When all the inventories are checked roundly, those which were destroyed, outdated in all or in part, sold at a loss, etc, shall be withdrawn the inventory falling price reserve. Where the coat of the single inventory item is higher than the net realizable value, the inventory falling price reserve shall be withdrawn and recorded into profits and losses of the current period. The net realizable inventory falling price reserve refers to the value minus the predicted expense needed in the process of completing the production and sales from the predicted price for sale when the Company runs normally. If the value of the inventory with inventory falling price reserve can be resumed, the inventory falling price reserve and the current income shall be adjusted in line with the increase amount by being resumed (the increase amount should be limited by the original withdrawal amount). 9. The method for measuring long-term equity investment Long-term equity investment includes the equity investment to its subsidiaries by the Company, the equity investment to the joint enterprises and the associated enterprises by the Company, and the long-term equity investment of the Company that does not do join t control or does not have significant influences on the invested entity, and has no offer quotation in the active market and its fair value cannot be reliably measured. 1) Equity investment to the subsidiaries Subsidiary refers to the invested entity that can be controlled by the Company, i.e., the Company has the rights to decide the policies of finance and operation also can be benefited from such operating activities. When ascertaining whether or not it is able to control an invested entity, the Company shall take into consideration the invested entities’ current convertible corporate bonds and the current executable warrants held by the Company, as well as other potential factors concerning the voting rights. As for the investment to the subsidiary, the amount recognized on the basis of cost method shall be listed in the individual financial statements of the Company, and shall be merged after making an adjustment by employing the equity method when it works out consolidated financial statements. The price of a long-term equity investment measured by employing the cost method shall be included its initial investment cost. The dividends or profits declared to distribute by the invested entity shall be recognized as the current investment income. The recognized investment income shall be limited to the amount received from the accumulative net profits or cash dividends obtained by the investing entity exceeds the aforesaid amount, it shall be regarded as recovery of initial investment cost. The Company purchased a few equity held by the minority shareholders of the Company. When the Company made the consolidated financial statements, goodwill was recognized by the difference between attributable share of the fair value of the subsidiaries’ identifiable net assets on the transaction date which was measured and recognized by employing the new equity proportion, and the increase long-term equity investment cost owing to buying the equity. Apart from the part for goodwill, the difference between the increase long-term investment cost and the attributable share of the fair value of the subsidiaries’ identifiable net assets which began to account constantly 51 since the purchase date (or combination date) and was measured and recognized by employing the new equity proportion, was adjusted to capital reserves and retained earnings. 2) The investment to the joint enterprise and the associated enterprise Where the Company and other parties do joint control over an invested entity, the invested entity shall be their joint enterprise; where the Company is able to have significant influences on an invested entity, the invested entity shall be its associated entity. The initial measurement of the joint enterprise and the associated enterprise is carried out on the basis of historical cost, and the subsequent measurement of them is conducted by employing the equity method. If initial investment cost in more than the investing enterprise’ attributable share of the fair value of the invested entity’s identifiable net assets for the investment, the difference shall be included in the initial investment cost. If the initial investment cost is less than the investing enterprise’ attributable share of the fair value of the invested entity’s identifiable net assets for the investment, the difference shall be included in the current profits and losses and the investment cost shall be adjusted simultaneously. When measuring by employing equity method, the Company firstly makes an adjustment for the net profits and losses of the invested entity, including the adjustment on the basis of the fair value of the invested entity’s identifiable net capital when obtaining the investment, and the adjustment conducted during the period of unifying the accounting and its policies, then recognized the investment profits and losses of the current period according to the attributable share of the net profits and losses of the invested entity. The Company shall recognize the net losses of the invested enterprise until the book value of the long-term equity investment and other long-term rights and interests which substantially form the net investment made to the invested entity are reduced to zero. However, the Company has the obligation to undertake extra losses, the investment losses and predicted liabilities shall be recognized continuously. The other change in shareholders’ equity of the invested entity except the net profits and losses, shall be directly recorded into capital reserve by the Company in accordance with attributable or undertaken part measured by employing the proportion of holding equity, which are carried out under the condition of unchanged proportion of holding equity. The Company shall, in the light of the profits or cash dividends declared to distribute by the invested entity, calculate the proportion it shall obtain, and shall reduce the book value of the long-term equity investment correspondingly. 3) Other long-term equity investment An long-term equity investment of the Company that does not do joint control or does not have significant influences on the invested entity, and has no offer in the active market and its fair value cannot be reliably measured, which was measured by employing cost method. 10. The measure of measuring investment real estates 1) The classification of investment real estate The investment real estate includes the right to use land which has already been rented, the right to use any land which is held and prepared for transfer after appreciation, and the right to use any building which has already been rented. 52 2) The initial measurement of the investment real estate shall be made at its cost. (1) The cost of an investment real estate by acquisition consists of the acquisition price, relevant taxes, and other expense directly relegated to the asset. (2) The cost of a self-built investment real estate composes of the necessary expenses for building the asset to the hoped condition for use. (3) The cost of an investment real estate obtained by other means shall be recognized in accordance with the relevant accounting standards. 3) The investment real estate shall be measured by means of cost pattern on balance sheet date, depreciation or amortization for investment real estate shall be conducted in the light of such relevant policies as depreciation or amortization of fixed assets and intangible assets. 11. The method of measuring fixed assets 1) The standard of fixed assets: are the houses, buildings, machines, engines, tanks, transportation vehicles and other equipments, apparatus and instruments related to production and operation which have been used over one year. So are the articles with value of over RMB 2000 and over two years’ service life, which do not belonged to the major equipments for production an operation. 2) The initial measurement of a fixed asset shall be made at its cost. The cost of a purchased fixed asset is based on the actual expense; the cost invested to a fixed asset by the investor shall be ascertained in accordance with the value as stipulated in the investment contract or agreement; the cost of a self-constructed fixed asset shall be formed by the necessary expenses incurred for bringing the asset to the expected condition for use; the costs of fixed assets acquired through the exchange of non-monetary assets, recombination of liabilities, merger of enterprises, and financial leasing shall be respectively ascertained in accordance with the Accounting Standard for Business Enterprises No. 7 - Exchange of Non-monetary Assets, the Accounting Standard for Business Enterprises No. 12 – Debt Restructuring, the Accounting Standard for Business Enterprises No. 21 – Leases. 3) If the relevant economic benefits are likely to flow into the enterprise and the cost of the fixed asset can be measured reliably, the subsequent expenses related to a fixed asset shall be included in the cost of fixed assets; otherwise, they shall be included in the current profits and losses. 4) The depreciation shall be made when the fixed assets reach to the expected condition for use, which shall be measured through straight-line method. The predicted useful life, net salvage value rates and yearly depreciation rates of kinds of fixed assets were respectively as follows: Kinds of fixed assets Predicted useful life Yearly depreciation (year) rates Houses and buildings 20-30 3.33%-5% 53 Machine equipments 6-15 6.67%-16.67% Transportation 5-10 10%-20% equipments Other equipments 5-10 10%-20% For a fixed asset, the provision for depreciation has been made, the depreciable amount shall be measured on the basis of deducting the accumulative amount of the provision for impairment of the depreciated fixed asset. 5) The Company shall, at the end of each year, have a check on the useful life, expected net salvage and depreciation method of the fixed assets. If the fixed asset is in a state of disposal or the fixed asset is unable to generate any economic benefits through use or disposal as expected, the recognition of the fixed assets shall be terminated. When the Company sells, transfers or discards any fixed asset, or any fixed asset of the Company is damaged or destroyed, the Company shall deduct the book value and relevant taxes from the disposal income, and include the amount in the current profits and losses. If the recoverable amount of the fixed assets is less than the book value, the book value shall be reduced to the recoverable amount. 12. The method of measuring construction in process The construction in process refers to the workshops, equipments and other facilities under construction, consisting of the necessary expense for building the asset to the hoped condition for use. The self-build one includes the material cost, direct labor, direct equipment construction cost, and the expense of building works and erection works in contract engineering, as well as the expense to be apportioned. The borrowing costs with the condition of capitalization shall be handled according to Accounting Standard for Business No. 17 – Borrowing Costs. The construction in process, of which the fixed assets reach to the predicted condition for use, shall carry forward fixed assets on schedule. The one that hasn’t audit the final accounting shall recognize the cost and make depreciation in line with valuation value. The construction in process shall adjust the original valuation value at its historical cost but not adjust the depreciation that has been made after auditing the final accounting. 13. The pricing and amortizing method of intangible assets 1) Pricing of the intangible assets The intangible assets shall be initially measured according to its cost. (1) The cost of outsourcing intangible assets shall include the purchase price, relevant taxes and other necessary expenditure directly attributable to intangible assets for the expected purpose. (2) The cost of self-developed intangible assets shall include the total expenditures incurred during the period from the time when it meets the following conditions to the time when the expected purposes of use are realized, except that the expenditures which have already been treated prior to the said period shall not be adjusted. ① It is feasible technically to finish intangible assets for use or sale; ② It is intended to finish and use or sell the intangible assets; 54 ③ The usefulness of methods for intangible assets to generate economic benefits shall be proved, including being able to prove that there is a potential market for the products manufacturing by applying the intangible assets or there is a potential market for the intangible assets itself or the intangible assets will be used internally. ④ It is able to finish the development of the intangible assets, and able to use or sell the intangible assets, with the support of sufficient technologies, financial resources and other resources; ⑤ The development expenditures of the intangible assets can be reliably measured. (3) The cost invested into intangible assets by investors shall be determined according to the conventional value in the investment contract or agreement. (4) The costs of intangible assets acquired from non-monetary assets transaction, debt recombination, government subsides, and merger of enterprises shall be determined respectively according to the Accounting Standard for Business Enterprises No. 7 - Non-monetary Assets, Accounting Standard for Business Enterprises No. 12 – Debt Restructurings, Accounting Standard for Business Enterprises No. 16 – Government Grants and Accounting Standard for Business Enterprises No. 20 – Business Combinations. 2) Amortization of the intangible assets (1) As for the intangible assets with limited service life, which are amortized by straight-line method when it is available for use within the service period, shall be recorded into the current profits and losses. The Company shall, at least at the end of each year, check the service life and the amortization method of intangible assets with limited service life. When the service life and the amortization method of intangible assets are different from those before, the years and method of the amortization shall be changed. (2) Intangible assets with uncertain service life may not be amortized. However, the Company shall check the service life of intangible assets with uncertain service life during each accounting period. Where there are evidences to prove the intangible assets have limited service life, it shall be estimated of its service life, and be amortized according to the above method mentioned in (1). (3) The rights to use land of the Company shall be amortized according to the rest service life. 14. The evidence and recognition method for withdraw the impairment provision of long-term assets (1) At the end of accounting period, the Company shall check the long-term assets. There may be an impairment of assets when the following signs occur. The recoverable amount shall be estimated and the asset impairment loss shall be made in light of the difference that the recoverable amount of assets is less than the book value when the impairment happens. The signs are stated as follows: (1) The current market price of assets falls, and its decrease is obviously higher than the expected drop over time or due to the normal use; (2) The economic, technological or legal environment in which the enterprise operates, or the 55 market where the assets is situated will have any significant change in the current period or in the near future, which will cause adverse impact on the enterprise; (3) The market interest rate or any other market investment return rate has risen in the current period, and thus the discount rate of the enterprise for calculating the expected future cash flow of the assets will be affected, which will result in great decline of the recoverable amount of the assets; (4) Any evidence shows that the assets have become obsolete or have been damaged substantially; (5) The assets have been or will be left unused, or terminated for use, of disposed ahead of schedule; (6) Any evidence in the internal report of the enterprise shows that the economic performance of the assets has been or will be lower than the expected performance, for example, the net cash flow created by assets or the operating profit (or loss) realized is lower (higher) than the expected amount; (7) Other evidence indicates that the impairment of assets has probably occurred. 2) The evidences to withdraw the impairment provision of long-term investment, fixed assets, construction in process and intangible asset: at the end of the report period, the Company will withdraw the asset impairment provision according to the difference that the recoverable amount of single asset is less than the book value. The recoverable value shall be recognized according to the high one between the net amount of fair value deducting disposal charge and the current value of the expected future cash flow of assets. If the recoverable amount of the single asset cannot be obtained, the recoverable amount shall be recognized on the basis of the asset group to which the asset belongs. 3) The business reputation formed by merger of enterprises shall be distributed into the related asset group at the end of every year, then the asset group shall have the impairment test to measure the recoverable amount, comparing to the book value, if the recoverable amount of the asset group is less than the book amount, the difference shall first charge against the book value of the business reputation which is apportioned to the asset group; if the book value of the business reputation is not enough to charge against the difference, the uncharged balance shall be distributed by the other assets of the asset group in accordance with the book value. 4) The recognition of the asset group under impairment test: the related minimum of asset groups that can share the synergetic benefit brought from merger through the prediction of the Company. 5) The above impairment losses of assets cannot be reversed as soon as they are recognized. 15. The amortization method of long-term deferred expenses The long-term deferred expenses occurred in the Company shall be priced at its historical cost and 56 conducted average amortization at the expected beneficial period. As for the long-term deferred expenses item that cannot bring benefit in the afterward accounting period, the amortized value in the said item shall be recorded into the current profits and losses in total when it is recognized. The expenses during organization period (except the acquiring long-term asset), shall be first accumulated in the long-term deferred expenses, then recorded into the current profits and losses in total when the production and operation starts. 16. Measurement method of borrowing costs 1) The borrowing costs of the Company shall include interest on borrowings, amortization of discounts or premiums on borrowings, ancillary expenses, and exchange balance on foreign currency borrowings. 2) Where the borrowing costs incurred to the Company can be directly attributable to the acquisition and construction or production of assets eligible for capitalization, it shall be capitalized and recorded into the costs of relevant assets. Other borrowing costs shall be recognized as expenses on the basis of the actual amount incurred, and shall be recorded into the current profits and losses. 3) The borrowing costs shall be capitalized when the asset disbursements, the borrowing costs and the acquisition and construction or production activities which are necessary to prepare the asset for its intended use or sale have already incurred. Where the acquisition and construction or production of a qualified asset is interrupted abnormally and the interruption period lasts for more than 3 months, the capitalization of the borrowing costs shall be suspended. When the acquisition and construction assets reach the predicted condition for use, the capitalization of the borrowing costs shall be suspended, and the borrowing costs occur afterwards which are used in the current period shall be recognized as profits and losses. 4) The to-be-capitalized amount in each accounting period shall be measured and recognized on the basis of the weighted average amount of the accumulative expenses from acquisition and construction assets and capitalization rate at the end of the current period. As for specifically borrowed loans for the acquisition and construction or production of assets eligible for capitalization, the to-be-capitalized amount of interests shall be determined in light of the actual cost incurred of the specially borrowed loan at the present period minus the income of interests earned on the unused borrowing loans as a deposit in the bank or as a temporary investment. Where a general borrowing is used for the acquisition and construction or production of assets eligible for capitalization, the enterprise shall calculate and determine the to-be-capitalized amount of interests on the general borrowing by multiplying the weighted average asset disbursement of the part of the accumulative asset disbursements minus the general borrowing by the capitalization rate of the general borrowing used. 17. Measurement method of estimated debts The obligation pertinent to Contingencies shall be recognized as estimated debts when 57 the following conditions are satisfied simultaneously: (1) That obligation is a current obligation of the enterprise; (2) It is likely to cause any economic benefit to flow out of the enterprise as a result of performance of the obligation; (3) The amount of the obligation can be measured in a reliable way. The Company shall check the book value of the estimated debts on the balance sheet date. If there is any exact evidence indicating that the book value cannot really reflect the current best estimate, the Company will adjust the book value in accordance with the current best estimate. 18. Measurement method of the deferred income tax assets or the deferred income tax liabilities Where there is difference (temporary difference) between the carrying amounts of the assets or liabilities and its tax base, the deferred income tax assets or the deferred income tax liabilities shall be determined. According to tax law, the deductible loss and tax deduction which can deduct the taxable amount in the subsequent years, regarding as temporary difference, shall be recognized as the corresponding deferred income tax assets. As for the temporary difference arising from the initial recognition of the goodwill, the corresponding deferred income tax liabilities. When the temporary difference is arisen from the initial recognition of the assets or liabilities incurring in the transaction which is not business combination and does not affect the accounting profits or the taxable amount (or the deductible loss), the corresponding deferred income tax assets and deferred income tax liabilities shall not recognized. On the balance sheet date, the deferred income tax assets and deferred income tax liabilities shall be measured at the tax rate applicable to the period during which the assets are expected to be recovered or the liabilities are expected to be settled. The Company shall recognize the deferred income tax assets to the extent of the amount of the taxable income which it is likely to obtain and which can be deducted from the deductible temporary difference, deductible loss and tax deduction. The deferred income tax liabilities arising from the temporary differences related to the investments of subsidiary companies, associated enterprises and joint enterprises shall be recognized. However, the deferred tax income assets and deferred income tax liabilities shall not recognized which meet the conditions that the Company can control the time of the reverse of temporary differences which are likely to be reversed in the expected future. 19. Measurement method of revenues 1) The recognition of the revenue from selling goods: the revenue from selling shall be recognized by the following conditions: The significant risks and rewards of ownership of the goods have been transferred to the buyer by the Company; the Company retains neither continuous management right that usually keeps relation with the ownership nor effective control over the sold goods; the relevant amount of revenue can be measured in a reliable way; the relevant revenue and costs of selling goods can be measured in a reliable way. 2) The recognition of the revenue from providing labor services: When the total revenue and costs 58 from providing labor can be measured in a reliable way; the relevant economic benefits are likely to flow into the enterprise; the schedule of completion under the transaction can be measured in a reliable way, the revenue from providing labor shall be recognized. 3) The recognition of the revenue from abalienating the right to use assets: When the relevant economic benefits are likely to flow into the enterprises and the amount of revenues can be measured in a reliable way, the revenue from abalienating the right to use assets shall be recognized. 20. The recognition and measurement of the transfer of financial assets 1) The recognition of the transfer of financial assets: Where the Company has transferred nearly all of the risks and rewards related to the ownership of the financial assets to the transferee under the following circumstances, it shall recognize the transfer of the financial assets and stop recognizing the financial asset. (1) The Company shall sell the financial assets without the right of recourse; (2) The Company shall sell the financial assets while signs the agreement with the buyer, and repurchase at the fair value of the intraday financial asset during stipulated time; (3) The Company shall sell the financial assets while signs the put option contract with the buyer, which is regarded as a significant out-of-money option judged by the contract items. 2) The measurement of the transfer of financial assets (1) The measurement of the transfer of the entire financial assets: The difference between the book value of the transferred financial asset and the sum of consideration received from the transfer, and the accumulative amount of the changes of the faire value originally recorded into the owners’ equity, shall be recorded into the profits and losses of the current period. (2) The measurement the transfer of partial financial asset: As for the transfer of partial financial asset, the entire book value of the transferred financial asset shall, between the portion whose recognition has been stopped and the portion whose recognition has not been stopped, be apportioned according to their respective relative fair value, and the difference between the book value of the portion whose recognition has been stopped and the portion of the accumulative amount of changes in the fair value originally recorded in the owners’ equity which corresponds to the portion whose recognition has been stopped, shall be recognized after the apportionment of the accumulative amount according to the relative fair value of the portion of financial asset whose recognition has been stopped the portion of financial asset whose recognition has not been stopped. 21. The accounting treatment of income tax expense The accounting treatment of income tax expense was adopted balance sheet debt method. The income taxes of the current period and deferred income tax of an enterprise shall be treated as income tax expenses or incomes, and shall be excluding the income tax incurred under the following circumstances: 59 1) The business combination; 2) The transactions or events directly recognized as the owners’ rights and interests. Note 6: Tax and its advantage The major tax categories and tax rates applicable to the Company are described as follows: (1) Turnover tax Tax on value added: the tax rate of selling farm diesel engine shall be 13%, while the tax rate of other sales income shall be 17%. Business tax: the tax rate of the business tax applicable to the common labor and other revenue shall be 5%. (2) Tax on city maintenance and construction and extra-charges for education Tax on city maintenance and construction, extra-charge for education: shall be paid by measuring according to the rules of the tax paying unit which belongs to the Local Taxation Bureau. (3) Income tax: income tax shall be measured at 33% in total. (4) Tax on real estate: the tax rate of the real estate for self-use of which tax is measured at 70% of the original value of the real estate at the end of last year, shall be 1.2%. The tax rate of the real estate for renting, of which tax is measured according to the revenue from leasing real estate, shall be 12%. Note 7: Business combination and consolidated financial statements 1). By Dec. 31, 2007, the situation of the three holding subsidiaries of the Company was described as follows: Name of company Registered place Representative Registered Actual Shareholdi Major business of legal person capital investments ng proportion Changchai No. 1101, Xiamen Yi Lihou 35,000,000 21,000,000 60% Production and sales Wanzhou Diesel Road, Wanzhou, of diesel engine Engine Co., Ltd. Chongqing (Changwan) Changzhou Nanguan Village, Qiang Jinlong 33,786,400 25,339,800 75% Production and sales Changchai Benniu Benniu, Wujin of diesel engine Diesel Engine fittings Fittings Co., Ltd. (Benniu) Nanjing Changli Lishui’s Economy Xue Guojun 5,000,000 5,000,000 100% Agricultural Agricultural Development mechanization Machinery Fittings Zone, Nanjing production, Co., Ltd. electromechanical product, spare parts 60 and maintenance service 2). Change of the consolidated statement scope The Company invested RMB 5 million to set up Nanjing Changli Agricultural Machinery Fittings Co., Ltd., holding 100% of the its equity in Jan., 2007, and brought the said company into the consolidated statement scope in 2007. 3). There were no joint enterprises in the Company by Dec. 31, 2007. 2. Measure method of business combination 1) The business combination under the same control: the consideration paid by combining party and the net assets obtained by the combining party shall be measured according to the book value. As for the balance between the carrying amount of the net assets obtained by the combining party and the carrying amount of the consideration paid by it and the total par value of the shares issued, the additional paid-in capital shall be adjusted. The direct cost for the business combination of the combining party shall be recorded into the profits and losses at the current period. The bonds issued for a business combination or the handling fees, commissions and other expenses for assuming other liabilities shall be recorded into the amount of initial measurement of the bonds or other debts. 2) The business combination not under the same control: the combination costs of the acquirer and the identifiable net assets obtained by the acquirer shall be measured based on fair value. The acquirer shall recognize the positive balance between the combination costs and the fair value of the identifiable net assets it obtains from the acquiree as business reputation. The combination costs are less than the fair value of the identifiable net assets it obtains from the acquiree, it shall record the balance into the profits and losses of the current period. The direct cost for the business combination of the combining party shall be recorded into costs of business combination. The bonds issued for a business combination or the handling fees, commissions and other expenses for assuming other liabilities shall be recorded into the amount of initial measurement of the bonds or other debts. 3. Method for compiling consolidated financial statements The consolidation scope of the consolidated financial statements includes the Company and its subsidiaries. Since the actual control right of the subsidiary was obtained, the Company has started to bring it into combination, which shall be suspended since the actual control date ends. All the significant current balance, transactions and unrealizable profits of the Group shall be offset when the consolidated financial statements were made. The shareholder’s interest of the subsidiaries which doesn’t belong to the portion that the Company owns shall be represented solely as the minority interest in the shareholders’ interest of the consolidated financial statements. When the accounting policies or accounting period between the Company and its subsidiaries, 61 when the consolidated financial statements are made, the financial statements of the subsidiaries shall be adjusted and combined according to the accounting policies or accounting period of the Company. As for the subsidiaries obtained from business combination not under the same control, when the financial statements are made, the specific financial statements shall be adjusted on the basis of the fair value of identifiable net assts on the acquisition date. As for the subsidiaries obtained from business combination under the same control, when the financial statements are made, the sides anticipated in the combination shall exist at the present situation when the final controller started to implement control. Note 8: Annotations to the main projects of the consolidated financial statements (The amount unit shall be based on RMB if there are no special explanations.) 8-01 Currency funds 1） Items 2007-12-31 2006-12-31 Cash 179,743.66 117,441.98 Bank deposit 442,806,667.46 452,029,671.79 Other currency funds 247,623.49 600,000.00 total 443,234,034.61 452,747,113.77 2) Particular about foreign currency funds in the currency funds 2007-12-31 2006-12-31 Foreign RMB Original Exchang RMB Original Exchang currency converted currency e rate converted into currency e rate into USD 23,441.66 7.3046 171,231.95 8,496.60 7.8087 66,347.40 HKD 174.75 0.9363 163.62 174.75 1.0046 175.57 171,395.57 66,522.97 8-02 Trading financial assets content 2007-12-31 2006-12-31 Explanation Legal shares of Beiqi Foton Holding 4.5 million share at the Motor Co., Ltd 59,040,000.00 end of 2007 8-03 Note receivable 1） Item 2007-12-31 2006-12-31 Bank acceptance 52,244,643.94 58,824,892.25 Total 52,244,643.94 58,824,892.25 2) No notes with overdue account that hadn’t received, mortgage or frozen account occurred at the year-end, which would exist significant limitation to cashability. 62 8-04 Accounts receivable 1） Account age 2007-12-31 analysis Proportion Net amount of Proportion Bad debt Amount of bad accounts (%) provision debt (%) receivable Within one 4.03 year 143,667,120.20 27.42 5,794,040.66 137,873,079.54 One to two 19.92 years 74,069,632.56 14.14 14,757,882.46 59,311,750.10 Two to three 88.94 years 18,953,654.93 3.62 16,857,974.33 2,095,680.60 Three to four 54.63 years 13,955,751.31 2.66 7,623,976.25 6,331,775.06 Four to five 63.04 years 32,374,343.77 6.18 20,409,994.48 11,964,349.29 Over five 45.98 99.27 years 240,930,699.19 239,180,699.19 1,750,000.00 Total 523,951,201.96 100.00 304,624,567.37 219,326,634.59 2006-12-31 Proportion Net amount of Proportion Bad debt Amount of bad accounts (%) provision debt (%) receivable Within one 12.40 year 181,729,066.32 33.77 22,526,230.32 159,202,836.00 One to two 67.40 years 20,244,470.25 3.76 13,645,096.16 6,599,374.09 Two to three 38.78 years 15,304,508.48 2.84 5,935,750.82 9,368,757.66 Three to four 31.77 years 52,614,765.88 9.78 16,716,765.93 35,897,999.95 Four to five 60.59 years 59,918,133.47 11.13 36,307,218.52 23,610,914.95 Over five 38.72 100 years 208,377,483.11 208,377,483.11 Total 538,188,427.51 100.00 303,508,544.86 234,679,882.65 2) Classified by account nature Propor Item Bad debt Bad debt Amount tion Amount Proportion (%) provision provision (%) Significan t single 422,976,431.86 80.73 283,060,265.25 amount Insignifica nt single 100,974,770.10 19.27 21,564,302.12 amount 523,951,201.96 100.00 304,624,567.37 3) Particular about foreign currency accounts receivable in accounts receivable Currency 2007-12-31 2006-12-31 63 Original currency RMB converted to Original currency RMB converted to USD 1,873,414.00 13,684,539.91 837,056.20 6,536,320.75 Euro 38,730.00 413,129.04 Total 14,097,668.95 6,536,320.75 4) No arrearage from the shareholders holding over 5% (including 5%) of the equity of the Company existed in the balance of accounts receivable. 5) The arrearage total of the first five arrearage entities listed in the balance of accounts receivable at the end of 2007 was RMB 99,591,200, taking up 19.01% of the balance of accounts receivable at the end of 2007. 8-05 Account paid in advance 2007-12-31 2006-12-31 1） Account Proportion age Amount Proportion (%) Amount (%) Within one year 33,971,239.54 95.98 3,939,845.06 79.04 One to two 383,323.82 1.08 175,025.04 3.51 years Two to three 173,078.18 0.49 5,231.34 0.10 years Three to four years Four to five 64,179.65 1.29 years Over five years 866,429.69 2.45 800,546.18 16.06 Total 35,394,071.23 100.00 4,984,827.27 100.00 2) No account from shareholders holding over 5% (including 5%) of the equity of the Company existed in the account paid in advance at the year-end. 3) The arrearage total of the first five arrearage entities listed in the account paid in advance at the end of 2007 was RMB 31,191,082.70, taking up 88.13% of the account paid in advance of the Company at the end of the report period. 4) The main reason for the account paid in advance of which account age exceeded one year was not balanced was 5) The main reason for the amount at the year-end increased 610% compared to that at the year-begin was: the price of raw material increased in a relatively large scale, the payment for goods to paid in advance given to suppliers by the Company could ensure the production and reduce the purchase costs. 8-06 Other accounts receivable 1） Account 2007-12-31 64 age Proportion of bad Net amount of Proportion Bad debt Amount debt other accounts (%) provision provision receivable (%) Within one year 15,140,596.93 18.40 2.11 319,237.17 14,821,359.76 One to two years 543,165.40 0.66 5.00 27,158.27 516,007.13 Two to three years 33,711.66 0.04 26.90 9,067.82 24,643.84 Three to four years 88,258.62 0.11 34.37 30,336.56 57,922.06 Four to five years 15,075,797.60 18.32 61.19 9,225,030.76 5,850,766.84 Over five years 51,392,949.26 62.47 75.86 38,986,144.08 12,406,805.18 Total 82,274,479.47 100.00 48,596,974.66 33,677,504.81 2006-12-31 Proportion of bad Net amount of Proportion Bad debt Amount debt other accounts (%) provision provision receivable (%) Within one year 11,613,782.33 13.13 2.00 232,275.64 11,381,506.69 One to two years 81,292.16 0.09 5.00 4,064.61 77,227.55 Two to three years 89,345.80 0.10 15.00 13,401.87 75,943.93 Three to four years 17,124,763.72 19.37 31.69 5,426,825.54 11,697,938.18 Four to five years 301,769.92 0.34 82.32 248,418.39 53,351.53 Over five years 59,211,164.14 66.97 76.20 45,116,007.63 14,095,156.51 Total 88,422,118.07 100.00 51,040,993.68 37,381,124.39 2) No arrearage from the shareholders holding over 5% (including 5%) of the equity of the Company existed in other accounts receivable at the end of the report period. 3) The arrearage total from the first five arrearage entities was RMB 48,128,300, taking up 58.07% of other accounts receivable of the Company at the end of report period. 4) Other accounts receivable with large amount were listed as follows: Entity Amount Nature of account Changzhou Vehicle Co., Ltd. 17,241,063.41 Loan Changchai Combined Harvester Co., Ltd. 13,034,025.91 Loan 65 Changzhou xintuo investment Co., Ltd. 10,000,000.00 Loan Lanzhou Changchai Northwest Vehicle Co., Ltd. 5,000,000.00 Loan Changzhou yasuoji Co., Ltd. 2,940,000.00 Current account 8-07 Inventory 1） Item 2007-12-31 Proportion Falling price Net amount of Amount (%) reserves inventory Raw material 90,228,217.35 29.32 1,497,268.20 88,730,949.15 Customers’ material to be processed 4,464,264.20 1.45 4,464,264.20 Unfinished products 56,317,338.23 18.30 496,218.76 55,821,119.47 Finished products 156,166,234.78 50.75 1,117,459.89 155,048,774.89 Low-value consumption 527,082.05 0.18 527,082.05 Total 307,703,136.61 100.00 3,110,946.85 304,592,189.76 2006-12-31 Proportion Falling price Net amount of Item Amount (%) reserves inventory 158,322,212.48 52.35 7,318,280.50 151,003,931.98 Raw material 4,176,246.30 1.38 4,176,246.30 Customers’ material to be processed 56,443,851.04 18.66 496,218.76 55,947,632.28 Unfinished products 83,110,811.29 27.48 4,069,157.25 79,041,654.04 Finished products 366,601.13 0.13 366,601.13 Low-value consumption 302,419,722.24 100.00 11,883,656.51 290,536,065.73 2) On balance sheet date, the inventory was measured according to the lower between cost and the net realizable value. The inventory cost which was higher than the net realizable value should be withdrawn falling price reverses. The net realizable value should be recognized in accordance with the predicted price in the process of normal production and operation minus the amount of the cost which was estimated to happen at the time of completion, the estimated sales expenses and related tax expenses. 3) No capitalization amount of borrowing costs existed in the inventory of the Company, neither 66 did such inventory of which right was restricted as mortgage in the inventory at the end of the report period. 8-08 Financial assets available for sale Content 2007-12-31 2006-12-31 note Legal shares of Beiqi Foton Motor Co., Ltd 474,486,000.00 164,343,900.00 8-9 Long-term equity investment (1) The investment on stocks at the end of the report period was RMB 31,796,941.63, of which details were as follows: Proportion taking Nature of Initial up the equity of Balance at the Name of invested compan share investment cost the invested period-end company (%) Kama Co., Ltd Legal share 31,706,441.63 5.49 31,706,441.63 Sub-total 31,796,941.63 1.44 million Xibei Bearing equities were sold in the report period according to the resolution of the Extraordinary meeting of the Board of Directors with initial investment costs of RMB 1.45 million. (2) The balance of other equity investment at the period-end was RMB 61,229,939.16, of which: Proportio n taking Balance of Invest up the Original Name of invested Equity of the Accumulated impairment Balance of the ment equity of investment company report period equity reserves at the year-end term the amount period-end invested company Changzhou Fushi Changchai Robin 1999- 33% 12,294,546.00 2,082,114.21 4,935,393.16 17,229,939.16 Gasline Engine Co., 2049 Ltd. Beijing Tsinghua Xingye Investment 1999- 25% 2,500,000.00 -2,500,000.00 0.00 Management Co., 2049 Ltd. Shenzhen Gamma 1999- 34% 2,388,157.00 5,048,232.00 7,436,389.00 0.00 Web System Co., 2014 67 Ltd. Bank of Jiangsu 38,000,000.00 38,000,000.00 Lanzhou Changchai Northwest Vehicle 5% 5,000,000.00 5,000,000.00 Co., Ltd Yang Dong Shares 0.43% 1,000,000.00 1,000,000.00 Chengdu changwan 510,000.00 510,000.00 0.00 diesels co. Ltd. Chongqing wanzhou changwan diesels 290,000.00 290,000.00 0.00 auxiliary products co. Ltd. Others 410,000.00 410,000.00 0.00 Total 62,392,703.00 2,082,114.21 7,483,625.16 8,646,389.00 61,229,939.16 Notes: Others: RMB 20,000 was invested to Changzhou Economic and Technology Development Company, RMB 100,000 was invested to Changzhou Tractor Plant, RMB 200,000 was invested to Industry Fund Fraternity of Changzhou Economic & Trade Commission, RMB 90,000 was invested to Beijing Project Machine Agricultural Machinery Co., Ltd.. The above four items were hard to take back fully withdrawn devaluation reserve. RMB 1,400,000 of Changzhou High-tech Venture Investment Company was calculated by cost method. There is no withdrawn devaluation reserve in this term. Shenzhen Gamma Web System Co., Ltd. failed to do annual inspection of industry and commerce administration for four years. It is in disorganization actually, so the Company withdrawn devaluation reserve fully. 8-10 Investment properties Increase in the Decrease in the Name of item 2006-12-31 2007-12-31 report period report period Houses and 87,632,571.14 buildings Less: amortization 10,476,473.91 2,208,340.80 of cost Net value of investment 77,156,097.23 2,208,340.80 properties The investment property in the report period was Changchai Mansion. 8-11 Fixed asset 1) Increase or decrease change in fixed assets 68 Increase in the Decrease in the Original value 2006-12-31 2007-12-31 report period report period Houses and buildings 352,100,448.65 46,548,634.83 29,623,126.68 369,025,956.80 Machinery equipment 366,326,547.28 69,935,021.29 14,036,146.56 422,225,422.01 Transportation instrument 24,856,809.62 1,360,059.91 1,151,911.29 25,064,958.24 Other equipment 40,718,200.54 1,339,612.00 2,672,365.32 39,385,447.22 784,002,006.09 119,183,328.03 47,483,549.85 855,701,784.27 Accumulated Increase in the Decrease in the depreciation 2006-12-31 report period report period 2007-12-31 Houses and buildings 129,665,765.05 12,356,077.78 4,760,936.61 137,260,906.22 Machinery equipment 261,800,757.82 18,966,685.18 7,730,726.94 273,036,716.06 Transportation instrument 17,058,104.45 1,559,458.69 865,945.29 17,751,617.85 Other equipment 25,867,391.79 3,054,173.47 2,636,043.98 26,285,521.28 434,392,019.11 35,936,395.12 15,993,652.82 454,334,761.41 Impairment Increase in the Decrease in the provision 2006-12-31 report period report period 2007-12-31 Houses and buildings 29,270,236.02 21,636,907.49 7,633,328.53 Machinery equipment 10,862,364.87 94,326.00 5,533,739.88 5,422,950.99 Transportation instrument Other equipment 40,132,600.89 13,056,279.52 2) The original value of fixed assets was RMB 133,703,463.96 from the construction in progress in 2007. 3) The main reason for the increase of fixed assets in 2007 was: the fixed asset of the newly-built multi-cylinder was transferred in by RMB 113,910,734.06 from construction in progress. The said item listed in the long-term accounts payable before appropriated funds to reduce the cost of newly-built fixed assets by RMB 15,852,824.06. The main reason for the decrease in the report period was selling the original value of houses of RMB 23,859,017.09 and original value of RMB 1,668,561.00 from the compressor workshop of the Company. 4) No capitalization interest amount existed in the increase of the fixed assets. 5) Mortgage of the fixed assets Mortgage of the fixed assets on Dec. 31, 2007 Asset item Original book Net book value According loan amount 69 value Houses and The mature non-current liability of buildings Changwan Company was RMB 6.8 12,614,700 9,709,500 million within one year Machinery The mature non-current liability of equipment Changwan Company was RMB 1.7 6,592,900 2,214,400 million within one year Houses and Beiniu Company borrowed RMB 2.5 buildings million from Changzhou Zhonglou 7,664,100 4,011,400 Branch, Commercial Bank Houses and Benniu Company borrowed RMB 3.2 buildings million from Changzhou Wujin Credit 6,001,000 3,140,900 Cooperatives Houses and Benniu Company borrowed RMB 7 buildings million from Changzhou Wujin Branch, 14,992,400 7,847,100 Agricultural Bank 6) The amount at the year-begin of the fixed assets impairment provision was RMB 40,132,600.89. In 2007, Changzhou Changchai Benniu Diesel Engine Fittings Co., Ltd, the subsidiary of the Company, made impairment provision for machinery equipment by RMB 94,326.00. The Company switched back by RMB 21,636,907.49 for the withdrawal of impairment provision for the disposed houses and buildings, and RMB 5,533,739.88 for the withdrawal of impairment provision for the disposed machinery equipment. 8-12 Construction in progress 1) Construction items The transferred-in Sources Balance at the Increase in the Balance at the fixed assets in the of period-begin report period period-end report period capital Modification of Self-fina 25,278,840.89 72,779,069.18 98,057,910.07 multi-cylinder ncing Temporary office Self-fina 921,581.80 921,581.80 room ncing Self-fina Other constructions 1,070,000.00 853,000.00 1,923,000.00 ncing 485 economy line of Self-fina PJ06005 at the third 18,933,829.39 20,457,117.86 17,869,729.83 21,521,217.42 ncing phase Total 45,282,670.28 95,010,768.84 117,850,639.90 22,442,799.22 2) No capitalization of interest existed in the construction in progress in the report period, neither did the withdrawal of impairment provision. 8-13 Intangible assets 70 The rest Increase in Amortizatio Transferred-o duration Original Balance at the Balance at the Item the report n in the ut in the for amount period-begin period-end period report period report period amortiza tion Right to 131,205,858.40 138,770,007.85 116,800.00 3,052,946.99 27,071,191.79 108,762,669.07 36..5-44.8 use land Special 5,835,117.00 347,004.97 151,704.00 195,300.97 technology Total 137,040,975.40 139,117,012.82 116,800.00 3,204,650.99 27,071,191.79 108,957,970.04 The term “transferred-out” referred to the Company transferred the subordinated Changyi Tools Mould Pressing Co., Ltd which was located at No. 65 Garden Road, Changzhou to Changzhou Land Purchase Reserve Center, with net transferring value of RMB 22,249,776.03. The removal of the store front reduce the net value of the right to use land of RMB 4,821,415.76. 8-14 long-term expenses to be apportioned 2007-12-31 2006-12-31 Classification Civil fragmentary engineering 171,326.44 403,676.08 Model 20,125.00 Total 171,326.44 423,801.08 8-15 Deferred income tax assets 1） Ascertained deferred income tax assets 2007-12-31 2006-12-31 Bad debt provision 701,681.23 934,364.88 Recoverable loss 11,779,322.81 Recoverable investment loss 21,636,715.62 Impairment provision of fixed assets 9,606,408.23 Total 701,681.23 43,956,811.54 2） Deductible temporary difference 2007-12-31 2006-12-31 Bad debt provision 2,806,724.93 2,831,408.72 Recoverable loss 35,694,917.61 Recoverable investment loss 65,565,804.90 Impairment provision of fixed assets 29,110,327.98 Total 2,806,724.93 133,202,459.21 8-16 Short-term borrowing 71 1）classification of 2007-12-31 2006-12-31 borrowing Secured borrowing 17,000,000.00 94,500,000.00 Collateralized borrowing 12,700,000.00 77,500,000.00 Total 29,700,000.00 172,000,000.00 2) The reason for the decrease of short-term borrowing compared to last year was the parent company initiatively discharged the bank loan in 2007. 3) Collateralized borrowing with details Yearly rate of Amount at the Loan bank Loan condition interest Loan term period-end Changzhou Wujin Branch, Agricultural mortgage 7.128 2007.12.14-2008.6.10 7,000,000.00 Bank of China Changzhou Zhonglou Branch, Commercial mortgage 7.128 2007.9.20-2008.3.10 2,500,000.00 Bank of China Changzhou Wujin mortgage 8.10 2007.8.8-2008.7.30 3,200,000.00 Credit Cooperatives 1,2700,000.00 Please refer to notes to fixed assets 8-12 (5) with the details about mortgage of machinery equipment. 4) Secured borrowing with details Yearly rate of Amount at the Loan bank Secured entity interest Loan term period-end Gaosuntang Branch, Wanzhou 8.568 2007.3.15-2008.3.14 1,500,000.00 Wanzhou Commercial State-owned 8.541 2007.5.15-2008.5.14 3,000,000.00 Bank Guarantee Co., Ltd 8.541 2007.5.15-2008.5.14 3,000,000.00 Business Department Changchai of Changzhou Branch, Company Limited 7.29 2007.11.21-2008.10.21 9,500,000.00 Bank of Communications 17,000,000.00 72 5) No borrowing that hadn’t been paid with mature term or needed to apply for extension existed in the short-term borrowing at the period –end. 8-17 Notes payable 1）classification of notes 2007-12-31 2006-12-31 Bank acceptance 56,300,000.00 28,790,000.00 Total 56,300,000.00 28,790,000.00 2) The main reason for the increase of balance at the year-end compared to that of year-begin in the notes payable was: the Company paid the payment for goods mostly by the means of bank acceptance. 8-18 Accounts payable 2007-12-31 2006-12-31 437,556,188.53 405,924,269.88 437,556,188.53 405,924,269.88 1) Classified by the nature of accounts payable 2007-12-31 2006-12-31 Proportion Amount Proportion (%) Amount (%) Operating accounts payable 426,006,383.29 97.36 403,834,900.07 99.49 Engineering accounts payable 11,549,805.24 2.64 2,089,369.81 0.51 437,556,188.53 100.00 405,924,269.88 100.00 2) No account which was owed to the shareholders holding over 5% (including 5%) of the Company existed in the accounts payable. 8-19 Accounts paid in advance 2007-12-31 2006-12-31 45,035,644.02 41,692,277.70 45,035,644.02 41,692,277.70 2) No accounts paid in advance with large amount of which account age was over one year existed in the balance at he period-end. 73 3) No account which was owed to the shareholders holding over 5% (including 5%) of the Company existed in the accounts paid in advance. 8-20 Employee’s compensation payable Item 2006-12-31 本期增加 本期减少 2007-12-31 Wage, premium allowance and the subsidy 21,382,366.19 126,455,781.93 123,923,500.94 23,914,647.18 Welfare expenses for the employees 7,529,403.92 7,529,403.92 Encouragement for employees and welfare fund 5,721,237.94 3,180,942.81 2,869,971.55 6,032,209.20 Social security expenses Of which：endowment plan 17,283,304.94 17,283,304.94 Basic Medical insurance 7,898,971.04 7,898,971.04 Unemployment insurance 1,204,242.40 1,204,242.40 Injury insurance 859,031.92 859,031.92 34,633,008.05 156,882,275.04 161,568,426.71 29,946,856.38 8-21 Tax payable Item 2007-12-31 Tax rate in the report 2006-12-31 period Tax on value added Refer to Note 6 of the -22,240,100.22 Accounting -6,995,095.19 Statements Tax on city maintenance Refer to Note 6 of the and construction 830,385.67 Accounting 902,456.74 Statements Enterprise income tax Refer to Note 6 of the 8,063,609.57 Accounting 494,745.32 Statements Tax on real estate Refer to Note 6 of the 345,780.52 Accounting 206,465.00 Statements Individual income tax Withholding and 19,287.00 5,410.84 collection Extra-charges for education Refer to Note 6 of the 58.19 Accounting 47,488.42 Statements Comprehensive charge Refer to Note 6 of the 2,721,705.43 Accounting 1,891,083.14 Statements Total -10,259,273.84 -3,447,445.73 The main reason for the decrease of the balance at the year-end compared to that at the year-begin in the tax payable was: the Company increased stock for the production in midseason, the input tax of tax on value added was increased accordingly. 74 8-22 Other account payable 2007-12-31 2006-12-31 105,996,952.49 89,024,422.36 105,996,952.49 89,024,422.36 1) No account which was owed to the shareholders holding over 5% (including 5%) of the Company existed in the other account payable. 8-23 Mature non-current liabilities within one year 1 ） classification of 2007-12-31 2006-12-31 borrowing Collateralized borrowing 8,500,000.00 Total 8,500,000.00 2) Borrowing with details Loan bank/loan condition mortgage Gaosuntang Branch, 8,500,000.00 Wanzhou Commercial Bank Total 8,500,000.00 Please refer to disclosure of fixed assets with details about mortgage. 8-24 Other current liabilities Classification 2007-12-31 2006-12-31 Accrued interest 45,247.50 35,710.60 Electricity charge 80,000.00 Pollutant charge 300,000.00 Dividend 3,949,493.87 3,908,910.70 Total 4,294,741.37 4,024,621.30 8-25 Long-term borrowings 1）classification of 2007-12-31 2006-12-31 borrowings Collateralized borrowing 29,324,500.00 75 Total 29,324,500.00 2) There were no long-term borrowings at the year-end, because the funds of the Company in 2007 were relatively abundant, and paid the long-term borrowing in advance. The long-term borrowings of the subsidiary Changwan at the year-end would be mature within a year, which would be measured by being converted to the non-current liabilities which would be mature within a year. 8-26 Deferred income tax liabilities 2007-12-31 2006-12-31 1)Ascertained deferred income liabilities Profits and losses of change in fair value of trading financial assets 13,458,825.00 Profits and losses of change in fair value of financial assets available for sales 108,152,875.00 36,089,922.00 Total 121,611,700.00 36,089,922.00 The reason for the increase of deferred income tax liabilities in the period was the Company divided the shares of Foton Motor into the corresponding profits and losses of change in fair value of trading financial assets and the financial assets available for sales. 8-27 Capital stock Change of capital stock in the report period (unit: share) Increase in the Decrease in the Item 2006-12-31 report period report period 2007-12－31 1.circulating share subject to moratorium 127,695,824 28,768,978 98,926,846 2.Listed circulating share (A share) 146,553,727 28,768,978 175,322,705 3.Listed circulating share (B share) 100,000,000 100,000,000 Total 374,249,551 28,768,978 28,768,978 374,249,551 8-28 Capital reserves Increase in the Decrease in the Item 2006-12-31 report period report period 2007-12-31 Premium on capital 153,053,986.32 153,053,986.32 stock Other capital reserves 90,837,556.02 251,781,219.58 342,618,775.60 Total 243,891,542.34 251,781,219.58 495,672,761.92 76 The reason for the increase of the capital reserves in the report period was: the net amount of RMB 324,132,000 influenced by the alteration amount of the financial assets available for sale (legal share of Beiqi Foton Motor Co., Ltd) which were held by the Company and measured and recognized according to the fair value, and the corresponding deferred income tax. The capital reserves of the subsidiary Changwan were increased by RMB 596,072.58 by employing equity method in the report period. 8-29 Surplus reserves Increase in the Decrease in the Item 2006-12-31 report period report period 2007-12-31 Statutory surplus reserves 210,789,369.99 16,423,117.03 227,212,487.02 Other surplus reserves 4,945,299.39 8,211,558.51 13,156,857.90 Total 215,734,669.38 24,634,675.54 240,369,344.92 The increase of the surplus reserves in 2007 was because the statutory reserved capital and other reserved capital were withdrawn respectively on the basis of 10% and 5% of the net profit of the Company in 2007. 8-30 Retained profit Item 2007-12-31 2006-12-31 Balance at the end of last year 250,799,809.41 179,596,681.95 Add: changes in accounting policies 6,631,927.35 19,465,056.10 Balance at the beginning of 2007 257,431,736.76 199,061,738.05 Add：net profit of 2007 168,116,392.28 91,918,374.43 Profit available for distribution 425,548,129.04 290,980,112.48 Less：withdrawal statutory surplus reserves 16,423,117.03 9,890,598.78 Withdrawal other surplus reserves 8,211,558.51 4,945,299.39 Common stock dividends payable 28,068,716.32 18,712,477.55 Common stock dividends change to stock Retained profit at the end of 2007 372,844,737.18 257,431,736.76 8-31 Minority interest 2007-12-31 2006-12-31 Minority interest 8,014,967.89 6,301,176.89 8,014,967.89 6,301,176.89 77 8-32 Income from business Revenue Cost Item 2007 2006 2007 2006 Diesel engine and fittings 2,014,175,212.14 1,842,642,939.76 1,791,696,627.05 1,590,307,577.45 Sub-total of major business income and costs 2,014,175,212.14 1,842,642,939.76 1,791,696,627.05 1,590,307,577.45 Sales of raw material 24,529,577.56 34,163,771.02 16,268,028.89 24,546,496.26 fangzu 3,322,261.37 2,246,591.58 2,392,726.31 2,333,026.63 Sub-total of other business income and expenses 27,851,838.93 36,410,362.60 18,660,755.20 26,879,522.89 Total 2,042,027,051.07 1,879,053,302.36 1,810,357,382.25 1,617,187,100.34 The total sales income of the first five clients of the Company was RMB 480,036,500, taking up 23.51% of the whole sales income of the Company. 8-33 Business tax and extra charges Item 2007 2006 Paying standard Tax on city Refer to Note 6 of the maintenance and construction 1,018,753.63 423,190.23 Accounting Statements Refer to Note 6 of the Extra-charges for education 475,884.00 303,209.38 Accounting Statements Total 1,494,637.63 726,399.61 8-34 Financial expenses Item 2007 2006 Interest expenses 8,018,186.83 14,677,958.48 Less：interest income 3,412,119.30 3,899,461.74 Exchange gains or losses 2,096,226.60 1,006,506.56 Others -17,164,156.00 -10,934,161.69 Total -10,461,861.87 850,841.61 The main reason for the decrease of the financial expenses in the report period was: the Company discharged the bank loan and the sales promotion for preference offered by suppliers was increased. 78 8-35 Assets impairment loss Item 2007 2006 Bad debt provision -1,223,925.60 -41,905,740.93 Inventory falling price reserves -6,354,540.30 Long-term investment impairment provision 410.000.00 Fixed assets impairment provision 94,326.00 -913,566.01 Total -1,129,599.60 -48,763,847.24 The main reason for the increase in the report period compared to that of last period was: the bad debt provision of last period was switched back with large amount. 8-36 The profits and losses on the changes in fair value Item 2007 2006 Profits and losses on the changes in fair value of trading financial assets 53,835,300.00 8-37 Investment income Item 2007 2006 Dividend allotted by cost method 1,900,000.00 65,076.07 Income measured by equity method 2,582,114.21 3,113,107.53 Income from sales of equity 102,229,275.45 872,950.00 Total 106,711,389.66 4,051,133.60 The main reason for the increase of investment income was: the Company sold the legal share of Beiqi Foton Motor Co., Ltd and transferred the equity of Xibei Bearing Co., Ltd. 8-38 Non-operating income Item 2007 2006 Income from fixed assets 51,577,910.17 3,881,103.88 Insurance compensation 155,635.69 124,898.00 Amercement income 136,272.03 40,821.25 Subsidy income 1,994,764.47 900,000.00 Others 605,866.88 1,814,976.33 79 Total 54,470,449.24 6,761,799.46 1) The main reason for the increase of the non-operating income in the report period was: according to city planning, the Company transferred the right to use land and the houses and buildings of the subordinated Changyi Tools Mould Pressing Co., Ltd which was located at No. 65 Garden Road, Changzhou to Changzhou Land Purchase Reserve Center, also the compensation for removal of the store front of the Company received net income. 2) The subsidy income in the report period was from: the holding company received the subsidy from Bureau of Environment Protection , Changzhou, the subsidiary received the subsidiary for navigation-obstruction and the subsidiary received the common value-added tax from finance in accordance with SJT Zi [2007] No. 27. 8-39 Expenditure from non-operating expense Item 2007 2006 Loss on liquidation of fixed assets 1,411,528.25 627,485.62 Food risks & price allowance funds 1,870,006.95 1,244,668.40 Donation amount 22,151.87 688,000.00 Expense on penalty 213,302.57 282,267.86 Loss on debt restructuring 230,347.15 7,410,685.50 Flood prevention & security funds 1,771,060.70 1,844,668.40 Other 3,846,656.94 3,178,677.97 Total 9,365,054.43 15,276,453.75 The main reason for the decrease of the amount occurred in the report period was: the Company liquidated the diesel engines returned from customers in the last report period so that lots of loss on debt restructuring was caused. 8-40 Income tax expense Item 2007 2006 Current income tax expense 7,614,195.12 -26,085.84 Deferred income tax expense 56,713,955.31 9,927,406.36 Total 64,328,150.43 9,901,320.52 8-41 Other received cash related to the operating activities The amount occurred during Jan. to Dec., 2007 was RMB 6,685,700, of which the items with 80 relatively large amount were as follows: (RMB’ 0000) Item 2007 Interest income 341.21 Margin for performance 222.38 8-42 Other paid cash related to the operating activities The amount occurred during Jan. to Dec., 2007 was RMB 85,426,700, of which the items with relatively large amount were as follows: (RMB’ 0000) Item 2007 Travel charge 1508.36 Freight, repair charge, 1260.24 Office allowance 744.07 Fees for R & D 737.50 8-43 Net increase of cash and cash equivalents Item 2007 2006 Monetary funds at the period-end 443,234,034.61 452,747,113.77 Less：pledged time deposits Cash at end of year 443,234,034.61 452,747,113.77 Monetary funds at the period-begin 452,747,113.77 393,733,696.65 Less：pledged Cash at beginning of year 452,747,113.77 393,733,696.65 Net increase of cash and cash equivalents -9,513,079.16 59,013,417.12 8-44 Complementary information for consolidated cash flow statement Item 2007 2006 Net profit 169,631,492.41 91,443,637.19 Add：asset impairment provision -1,129,599.60 -48,763,847.24 Fixed assets depreciation, depletion of oil and gas 38,144,735.92 38,225,926.81 assets、depreciation of capitalized biological assets Amortization of intangible assets 3,204,650.99 3,228,413.54 Amortization of long-term deferred expenses 252,474.64 256,499.64 Loss on disposal fixed assets, intangible assets and -51,577,910.17 -3,253,618.26 long-term assets ( “－” means income) Losses on scrapping of fixed assets ("－" means income) 1,411,528.25 81 Losses on change of fair value ("－" means income) -53,835,300.00 Financial expenses ("－" means income) 8,018,186.83 14,677,958.48 Losses arising form investment ("－" means income) -106,711,389.66 -4,051,133.60 Decrease of deferred income tax assets ("－" means 43,255,130.31 9,927,406.36 increase) Increase of deferred income tax assets ("－" means 13,458,825.00 decrease) Decrease in inventories ("－" means increase) -5,283,414.37 54,824,159.13 Decrease in operating receivables ("－" means increase) -12,985,674.65 54,888,388.31 Increase in operating receivables ("－" means decrease) 47,405,580.70 -29,981,770.52 Other -240,337.79 Net cash flows from operating activities 93,259,316.60 181,181,682.05 2. Investing and financing activities that do not involving cash receipts and payment: Conversion of debt into capital Reclassify convertible bonds to be expired within one year as current liability Fixed assets financed by finance leases 3. Net increase in cash and cash equivalents Cash at the end of the period 443,234,034.61 452,747,113.77 Less: cash at the beginning of the period 452,747,113.77 393,733,696.65 Add: cash equivalents at the end of the period Less: cash equivalent at the beginning of the period Net increase in cash and cash equivalents -9,513,079.16 59,013,417.12 Note IX: Annotations for main projects in accounting statements of parent company (The amount unit shall be based on RMB if there are no special explanations.) 9-01 Account receivable 2007-12-31 1）Account Proportion Net amount of Proportion Bad debt age Amount of bad accounts (%) provision debt (%) receivable Within one 4.04 143,316,189.15 29.85 5,786,635.47 137,529,553.68 year One to two 44.20 33,285,440.66 6.93 14,711,423.44 18,574,017.22 years Two to three 96.84 17,010,069.13 3.54 16,472,159.79 537,909.34 years Three to four 76.56 1.13 years 5,402,687.92 4,136,484.06 1,266,203.86 Four to five 95.28 1.75 years 8,420,292.16 8,022,747.99 397,544.17 82 Over five 92.26 56.80 years 272,611,492.38 251,509,448.62 21,102,043.76 Total 480,046,171.40 100.00 300,638,899.37 179,407,272.03 2006-12-31 Account age Proportion Net amount of Proportion Bad debt Amount of bad accounts (%) provision debt (%) receivable Within one 12.75 year 176,578,891.46 36.36 22,515,175.62 154,063,715.84 One to two 74.04 years 17,980,347.65 3.70 13,312,845.12 4,667,502.53 Two to three 54.69 years 6,656,595.56 1.37 3,640,251.30 3,016,344.26 Three to four 89.34 years 8,459,809.46 1.74 7,557,913.61 901,895.85 Four to five 87.47 years 17,814,940.68 3.67 15,583,010.76 2,231,929.92 Over five 53.16 92.55 258,140,265.18 238,915,217.73 19,225,047.45 years Total 485,630,849.99 100.00 301,524,414.14 184,106,435.85 2) Classified by account nature Propor Propor Item Bad debt Bad debt Amount tion Amount tion provision provision (%) (%) Significan t single 397,757,769.53 82.86 236,939,014.68 401,552,293.80 82.69 239,362,613.68 amount Insignifica nt single 82,288,401.87 17.14 63,699,884.69 84,078,556.19 17.31 62,161,800.46 amount Total 480,046,171.40 100.00 300,638,899.37 485,630,849.99 100.00 301,524,414.14 3) Particular about foreign currency accounts receivable in accounts receivable 2007-12-31 2006-12-31 Currency Original currency RMB converted to Original currency RMB converted to USD 1,873,414.00 13,684,539.91 837,056.20 6,536,320.75 Euro 38,730.00 413,129.04 Total 14,097,668.95 6,536,320.75 4) The arrearage total of the first five arrearage entities listed in the balance of accounts receivable at the end of 2007 was RMB 99,591,200, taking up 19.01% of the balance of accounts receivable at the end of 2007. 83 5) No arrearage from the shareholders holding over 5% (including 5%) of the equity of the Company existed in the balance of accounts receivable at the end of the report period. 9-02 Other accounts receivable 2） Account 2007-12-31 age Proportion of bad Net amount of Proportion Bad debt Amount debt other accounts (%) provision provision receivable (%) Within one year 14,888,878.24 18.79 2.08 309,777.56 14,579,100.68 One to two years 543,165.40 0.69 5.00 27,158.27 516,007.13 Two to three years 5,021.66 0.01 72.88 3,659.82 1,361.84 Three to four years 85,092.82 0.11 34.54 29,386.82 55,706.00 Four to five years 14,290,680.49 18.04 61.26 8,753,960.49 5,536,720.00 Over five years 49,423,225.14 62.36 74.09 37,016,419.96 12,406,805.18 Total 79,236,063.75 100.00 46,140,362.92 33,095,700.83 2006-12-31 Proportion of bad Net amount of Proportion Bad debt Amount debt other accounts (%) provision provision receivable (%) Within one 11,474,579.65 13.74 2.00 229,491.59 11,245,088.06 year One to two 21,602.16 0.03 5.00 1,080.11 20,522.05 years Two to three 79,580.00 0.10 15.00 11,937.00 67,643.00 years Three to four 14,371,143.46 17.21 32.01 4,600,739.46 9,770,404.00 years Four to five 168,391.10 0.20 100 168,391.10 years Over five 57,374,818.84 68.72 75.43 43,279,662.33 14,095,156.51 years Total 83,490,115.21 100.00 48,291,301.59 35,198,813.62 2) No arrearage from the shareholders holding over 5% (including 5%) of the equity of the Company existed in other accounts receivable at the end of the report period. 3) The arrearage total from the first five arrearage entities was RMB 48,128,300, taking up 58.07% of other accounts receivable of the Company at the end of report period. 84 4) Other accounts receivable with large amount were listed as follows: Entity Amount Nature of account Changzhou Vehicle Co., Ltd. 17,241,063.41 Loan Changchai Combined Harvester Co., Ltd. 13,034,025.91 Loan Changzhou xintuo investment Co., Ltd. 10,000,000.00 Loan Lanzhou Changchai Northwest Vehicle Co., Ltd. 5,000,000.00 Loan Changzhou yasuoji Co., Ltd 2,940,000.00 Current account 9-03 Long-term equity investment (1) The investment on stocks at the end of the report period was RMB 31,796,941.63, of which details were as follows: Proportion taking Nature of Initial up the equity of Balance at the Name of invested compan share investment cost the invested period-end company(%) Kama Co., Ltd Legal share 31,706,441.63 5.49 31,706,441.63 Sub-total 31,796,941.63 1.54 million Xibei Bearing equities were transferred in the report period according to the resolution of the Board of Directors. (2) The balance of other equity investment at the period-end was RMB 61,229,939.16, of which: Nanjing Changli 2007- Agriculture Fittings Proporti 100% 5,000,000.00 2022 5,000,000.00 5,000,000.00 Co., Ltd on Changzhou Fushi taking Balance of 500,000.00 Changchai Robin Invest 1999- up the Original Decrease in impairment Name of invested 33% 12,294,546.00 15,147,824.95 Increase in the 2,582,114.21 Gasline Engine Co., ment 2049 equity of investment 2006-12-31 the report reserves at 17,229,939.16 2007-12-31 company report period Ltd. term the amount period the Beijing Tsinghua invested period-end Xingye Investment 1999- compan 25% 2,500,000.00 Management Co., 2049 y Changchai Wanzhou Ltd. 1996- Diesel Shenzhen Engin Gamma 60% 21,000,000.00 21,000,000.00 21,000,000.00 2011 1999- Co.,LtdSystem Co., Web 34% 2,388,157.00 2014 7,436,389.00 Changzhou Ltd. Changchai Bennie 1996- Bank of Jiangsu 75% 25,339,800.00 38,000,000.00 38,000,000.00 25,339,800.00 38,000,000.00 25,339,800.00 Diesel Engine Co., 2011 Lanzhou Ltd Changchai 5% 5,000,000.00 5,000,000.00 5,000,000.00 85 Northwest Vehicle Co., Ltd Other 410,000.00 1,400,000.00 1,400,000.00 410,000.00 Total 111,932,503.00 105,887,624.95 7,582,114.21 1,900,000.00 7,846,389.00 111,569,739.16 ① The reason for increase in the report period: The Company invested RMB 5 million to set up Nanjing Changli Agricultural Machinery Fitting Co., Ltd, and Changzhou Fushi Changchai Robin Gasline Engine Co., Ltd increased investment income by measuring through equity method in the period. ② The reason for decrease in the report period: The equity of Changzhou Fushi Changchai Robin Gasline Engine Co., Ltd was received in the report period, and the long-term investment for it was reduced correspondingly by measuring through the equity method. The investment of RMB 1.4 million from Changzhou High-tech Venture Investment Company represented in others before was transferred to Jiangsu High-Tech Investment Group Co., Ltd in the period. ③ Others: RMB 20,000 was invested to Changzhou Economic and Technology Development Company, RMB 100,000 was invested to Changzhou Tractor Plant, RMB 200,000 was invested to Industry Fund Fraternity of Changzhou Economic & Trade Commission, RMB 90,000 was invested to Beijing Project Machine Agricultural Machinery Co., Ltd.. The above four items were hard to take back fully withdrawn devaluation reserve ④ The net asset of Beijing Tsinghua Xingye Investment Management Co., Ltd in the period was negative, so the long-term investment measured by equity method was reduced to zero. Shenzhen Gamma Web System Co., Ltd. failed to do annual inspection of industry and commerce administration for four years. It is in disorganization actually, so the Company withdrawn devaluation reserve fully. 9-04 Income from business Operating income Operating cost Item 2007 2006 2007 2006 Diesel engine and fittings 2,020,060,199.09 1,835,984,913.05 1,812,671,639.31 1,594,155,346.33 Total of major business income and costs 2,020,060,199.09 1,835,984,913.05 1,812,671,639.31 1,594,155,346.33 Sales of raw material 22,258,773.20 30,894,024.89 15,489,176.42 23,860,287.58 fangzu 3,322,261.37 2,246,591.58 2,392,726.31 2,333,026.63 Total of other business income and expenses 25,581,034.57 33,140,616.47 17,881,902.73 26,193,314.21 Total 2,045,641,233.66 1,869,125,529.52 1,830,553,542.04 1,620,348,660.54 86 The total sales income of the first five clients of the Company was RMB 480,036,500, taking up 23.47% of the whole sales income of the Company in 2007. The total sales income of the first five clients of the Company was RMB 429,789,400, taking up 22.99% of the whole sales income of the Company in 2006. 9-05 Investment income Item 2007 2006 Dividend allotted by cost method 1,900,000.00 65,076.07 Income measured by equity method 2,582,114.21 3,113,107.53 Income from sales of equity 102,229,275.45 872,950.00 Total 106,711,389.66 4,051,133.60 The main reason for the increase of investment income was: the Company sold the legal share of Beiqi Foton Motor Co., Ltd and transferred the equity of Xibei Bearing Co., Ltd. 9-06 Complementary information for consolidated cash flow statement Item 2007 2006 Net profit 164,231,170.27 98,905,987.75 Add：asset impairment provision -3,036,453.44 -57,321,729.41 Fixed assets depreciation, depletion of oil and gas assets、depreciation of capitalized biological assets 32,570,802.86 32,289,003.61 Amortization of intangible assets 3,144,855.19 3,166,257.06 Amortization of long-term deferred expenses Loss on disposal fixed assets, intangible assets and -51,489,581.16 -3,235,645.72 long-term assets ( “－” means income) Losses on scrapping of fixed assets ("－" means income) 1,411,528.25 Losses on change of fair value ("－" means income) -53,835,300.00 Financial expenses ("－" means income) 5,567,287.93 12,133,230.07 Losses arising form investment ("－" means income) -106,711,389.66 -4,051,133.60 Decrease of deferred income tax assets ("－" means 43,255,130.31 9,927,406.36 increase) Increase of deferred income tax assets ("－" means decrease) 13,458,825.00 Decrease in inventories ("－" means increase) 8,314,277.79 46,506,064.03 Decrease in operating receivables ("－" means increase) -21,532,419.51 55,707,282.06 Increase in operating receivables ("－" means decrease) 40,056,842.98 -20,615,123.64 Other Net cash flows from operating activities 75,405,576.81 173,411,598.57 2. Investing and financing activities that do not involving cash receipts 87 and payment: Conversion of debt into capital Reclassify convertible bonds to be expired within one year as current liability Fixed assets financed by finance leases 3. Net increase in cash and cash equivalents Cash at the end of the period 417,975,515.87 443,546,323.18 Less: cash at the beginning of the period 443,546,323.18 384,786,453.36 Add: cash equivalents at the end of the period Less: cash equivalent at the beginning of the period Net increase in cash and cash equivalents -25,570,807.31 58,759,869.82 Note 10: Relationships of related parties and their transactions Unit: RMB’0000 (I) Related parties with controlling relationship Name of Registered Main business Relationship Nature of Legal Code of organization enterprise address with the enterprise representative Company Changchai Wanzhou Manufacture and Controlling Limited Yin Lihou Wangzhou District, sale of diesels subsidiaries liabilities 20793370-5 Diesels Co., Ltd. Chongqin of the Company Company Changchai Benniu Manufacture and Controlling Limited Qiang Jinlong Benniu Diesel town, sale of diesels’ subsidiaries liabilities 25083232-8 Engine Fittings Changzhou fittings of the Company Co., Ltd. Company Nanjing Changli Lishui, Manufacture and Controlling Limited Zhang Junyuan Agriculture Nanjing sale of products subsidiaries liabilities Machinery of agricultural of the Company Fittings Co., Ltd. machinery; Company manufacture and 66065240-X sale of machinery and electronic Product and its fittings 88 (II) The registered capital by the aforesaid related parties with controlling relationships and its changes Name of related parties Increase in Decrease in 2006-12-31 the period the period 2007-6-30 State-owned Assets Supervision and Administration Commission of Changzhou Provincial Government Changchai Wanzhou Diesels Co., 35,000,000 35,000,000 Ltd. － Changchai Benniu Diesel Engine 33,786,400 33,786,400 Fittings Co., Ltd. Nanjing Changli Agriculture Machinery Fittings Co., Ltd. 0 5,000,000 － 5,000,000 (III) The shares or equity held by the related parties with controlling relationships and its changes Related party Balance at year-end Balance at year-begin Amount Proportion Amount Proportion State-owned Assets 117,631,824 31.43% 117,631,824 31.43% Supervision and Administration Commission of Changzhou Municiple Government Changzhou Wanzhou Diesel 21,000,000 60% 21,000,000 60% Co., Ltd. Changchai Benniu Diesel 25,339,800 75% 25,339,800 75% Engine Fittings Co., Ltd. Nanjing Changsu Agriculture 5,000,000 100% Machinery Fittings Co., Ltd. (IV) Nature of related parties without controlling relationships Related party Relationship with the Company Fushi Changchai Robin Gasline Affiliated company of the Company Engine Co., Ltd. (V) Balance of accounts receivable and payable for related party Entity 2007-12－31 Proportion 2006-12-31 Proportion 89 (%) (%) Fushi Changchai Robin Gasline 0.2 Engine Co., Ltd. 174,493.12 Note 11: Contingent events (I) Lawsuits and arbitration case in the report period Name of Defendants Date of Name of Lawsuits & Involved sum Accepting & Arbitration organ (RMB’0000) hearing Lawsuits without judge from previous years to the report period: 1.Tongshan county Tengyu 27 Jun. 2001 Changzhou Intermediate 493.06 Agro-engine Trade Center People’s Court 2.Nanjing Jinwan 9 Jun. 2002 Changzhou Intermediate 1,419.00 Share-holding Co., Ltd People’s Court 3.Shandong Hongli Group 27 Jun. 2001 Changzhou Intermediate 1,436.00 Co., Ltd People’s Court 4.Shandong Shuangli Group Jan. 2006 Changzhou Intermediate 2746.04 Co., Ltd. People’s Court Total 6094.10 Explanation of the cases: 1. The lawsuit case on Tongshan County Tengyu Agro-engine Trade Center was disclosed by the Company in Annual Report 2001-2006, the Company sued for enforcement execution to Changzhou Intermediate People’s Court on Apr. 13, 2002, but the defendant still failed to pay RMB 4,930,600. Now the Company is entrusting Xuzhou Roadway Court to execute. 2. The lawsuit case on Nanjing Jinwan Share-holding Co., Ltd, the Company has signed a settlement agreement which LiShui County Public-owned Assets Operation Co., Ltd refund the RMB 14.19 million owed by Nanjing Jinwan Share-holding Co., Ltd with 80 mu instead of Nanjing Jinwan Share-holding Co., Ltd. The agreement is in execution. 3. The lawsuit case on Shandong Hongli Group Co., Ltd was disclosed by the Company in Annual Report 2001-2006. Shandong Hongli Group Co., Ltd accumulatively owed the loan of the Company RMB 14,360,000. The Company sued to Changzhou Intermediate People’s Court in 2001 and sued for enforcement execution on Apr. 2002. At present, Shandong Hongli Group Co., Ltd was in the procedure of going bankrupt. 4. Owing to poor operation of Shuangli Group, Shandong Liaocheng Intermediate People’s Court declared Shuangli Group was in the procedure of going bankrupt. The Company applied to bankruptcy liquidation group of Shuangli Group with prior right to pay a debt RMB 27,460,400. The Company was actively transacting the land use right of 93454.43 ㎡ provided by Shuangli Group as anti-guarantee in order to refund debts of the Company. In 2007, the Company received RMB 9,000,000, and balance RMB 18,460,400 was still in recovery. The evolution would be disclosed in time according to regulations of information disclosure. 90 (II) Guarantee In the report period, the Company offered loan guarantee of RMB 9.5 million for Changniu Machine Co., Ltd, the wholly-owned subsidiary of the holding company Changchai Benniu Diesel Engine Fittings Co., Ltd with the loan term from Nov. 21, 2007 to Oct. 21, 2008. Note 13: Non-adjusting events after balance sheet date According to the resolution at the Board of Directors on Apr. 9, 2008, the statutory reserved capital and other reserved capital were withdrawn respectively on the basis of 10% and 5% of the net profit of the Company in 2007, and the whole shareholders would obtain cash dividends of RMB 0.75 from every 10 shares (including tax). Note 14: Commitment events By Dec. 31, 2007, there were no commitment events that needed explanation from the Company. Note 15: Rate of return on common stockholders’ equity 1) Rate of return on common stockholders’ equity 2007 2006 Earnings per Earnings per Return on equity（%） Return on equity（%） share( RMB) share( RMB) Profit in the report Basic Diluted Diluted period Basic Fully Weighted earnings earnings Fully Weighted earnings earnings diluted average per per diluted average per per share share share share Net profit attributed to the ordinary 11.34 11.92 0.45 0.45 8.42 9.38 0.25 0.25 shareholders of the Company Net profit attributed to the ordinary shareholders of the 9.21 9.68 0.37 0.37 9.22 10.27 0.27 0.27 Company after deducting non-recurring profits and losses (1) When earnings per share were measured, the numerator should be the current net profit attributed to the ordinary shareholders of the Company 2007 2006 91 Current net profit attributed to the ordinary shareholders of the Company 168,116,392.28 91,918,374.43 Total 168,116,392.28 91,918,374.43 (2) When basic earnings per share were measured, the denominator should be the weighted average of the ordinary share published in the public; the process of measurement was as follows: 2007 2006 The amount of ordinary share published in the public at the 374,249,551.00 374,249,551.00 year-begin Add：weight of ordinary share published in the report period Less：weight of ordinary share repurchased in the report period The amount of ordinary share 374,249,551.00 374,249,551.00 published in the public at the year-end (3) When the diluted earnings per share were measured, the process of measuring the weight average of ordinary share published in the public was as follows: 2007 2006 the weighted average number of ordinary shares in calculating the basic 374,249,551.00 374,249,551.00 earnings per share Add：weighted average of ordinary share increasing on supposing that the diluted potential ordinary shares convert into ordinary shares already issued the weighted average number of ordinary shares in calculating the diluted earnings per share Total 374,249,551.00 374,249,551.00 2) Non-recurring profits and losses Item 2007 2006 Gain/loss from disposal of non-current 50,141,373.68 3,248,948.84 assets Government subsidy recorded into current 1,523,073.35 540,000.00 profits and losses 92 Profits and losses on debt restructuring -169,587.63 -7,410,685.50 Release surplus of welfare payable 3,958,640.89 Other net income and expense from -6,970,393.40 -5,124,576.98 non-operation Total 48,483,106.89 -8,746,313.64 Less：affected amount of income tax from 16,971,148.36 non-recurring profits and losses Total 31,511,958.53 -8,746,313.64 Note 16: Supplementary Information (I) The reconciliation of difference in consolidation net profit of 2006 In accordance with the regulations of Questions and Responses of Information Disclosure Standard by Companies Publicly Issuing Securities No. 7 --- Compilation and Disclosure of the Comparative Financial Accounting Information during the Transition Period between the New and Old Accounting Standard, the Company compiled the income statement of the same period in the last year and balance sheet of the beginning of 2007 after adjustment, the retroactive adjustment of difference on the income statement of the same period in the last year is as follows: Item Amount Net profit of 2006（former accounting standards） Total influence on retroactive adjustment items 106,026,982.37 Among which： 1. Income tax expenses 9,927,406.36 2. Minority interest (former system) -2,147,217.87 3. Uncertain investment loss 2,508,720.95 Net profit of 2006 (new accounting standards) 91,443,637.19 Supposing to execute the reference information in new accounting standard roundly Total influence on other items 0.00 The net profit of RMB 91,443,637.19 in 2006 from simulating the new accounting standard roundly Explanation on the above adjustment for difference of profit： (1) Income tax expenses: the deferred income tax assets of RMB 53,884,217.90 at the 93 beginning of 2006 was recognized by the Company, so was the indeferred income tax assets of RMB 43,956,811.34 at the end of 2006 and the income tax expenses that were switched back in 2006 of RMB 9,927,406.36. (2) Minority interest: the minority of the subsidiary represented solely in the consolidated statements complied by the Company was RMB -2,147,217.87, which was represented as the net profit of the Company according to the new accounting standard. (3) Uncertain investment loss: the current overrun loss for the parent company by the subsidiaries, which was represented solely in the consolidated statements complied by the Company, was RMB 2,508,720.95 measured by shareholding proportion, which was represented as the net profit of the Company according to the new accounting standard. . (4) If the Company started to execute new accounting standard on Jan. 1, 2006, there would be no difference between the net profit from simulating to execute new accounting standard and the net profit of 2006 disclosed again after retroactive modulation. 2. Adjustment of difference on consolidated shareholders’ equity at the beginning of 2007 In accordance with the requirement of Accounting Standards for Enterprises No. 38 - Initial Implementation of Accounting Standards for Business Enterprises and No. 1 to Accounting Standard for Business Enterprise Note with CK〔2007〕Document No. 14, the reconciliation process of owner’s (shareholder’s) equity at the beginning of the year, items changed, influence amount and their reason is as follows: Former amount Amount disclosed in Item disclosed in Annual Difference Annual Report 2007 Report 2006 Shareholders’ equity as at Dec. 31,2006 ( Former 987,076,362.99 987,076,362.99 0.00 Accounting Standards) 1. 73,273,478.00 73,273,478.00 2. Income tax 43,956,811.54 43,956,811.54 0.00 3. Minority interest was brought into shareholders’ -6,697,976.16 -6,697,976.16 0.00 equity of consolidated statements Shareholders’ equity as at Jan. 1, 2007 ( New 1,097,608,676.37 1,024,335,198.37 73,273,478.00 accounting standards) Among which ： shareholders’ equity 1,091,307,499.48 0.00 attributed to the parent company Minority interest 6,301,176.89 0.00 94 Explanation on the above adjustment for difference of shareholders’ equity at the year-begin: (1) Income tax The method for measuring income tax had been change into balance sheet liability method since Jan. 1, 2007 by the Company. The influence on equity arising from income tax expenses totaled RMB 43,956,811.54, adjusting and increasing retained earnings, which showed no difference from the former amount disclosed in Annual Report 2006. (2) Minority interest The attributable interest for minority shareholders represented solely in the former consolidated accounting statements of the Company on Dec. 31, 2006 was RMB -6,697,976.16. Because the overrun loss of the subsidiaries for investment loss of RMB 1299,153.05 measured by the shareholding proportion of the minority shareholders was undertaken by the parent company fully, the minority interest was correspondingly increased by RMB 12,999,153.05. The minority interest represented solely in the shareholders’ equity according to new accounting standard was RMB 6,301,176.89, which showed no difference from the former amount disclosed in the Annual Report 2006. 3. Amendment form for difference of shareholders’ equity at the beginning of 2007 Item Affected amount Shareholders’ equity as at Dec. 31,2006 ( Former 987,076,362.99 Accounting Standards) 1. Income tax 73,273,478.00 2. Minority interest was brought into shareholders’ 43,956,811.54 equity of consolidated statements Shareholders’ equity as at Jan. 1, 2007 ( New -6,697,976.16 accounting standards) 95 XI. Documents available for reference Including the following documents: 1. Text of Annual Report in 2007 with personal signatures of the Chairman of the Board. 2. Accounting statements with personal signatures and seals of legal representative, chief accountant and person in charge of accounting organization. 3. Text of Auditors’ Report with the seals of accountant office and the signatures and seals of certified public accountant. 4. The texts of all the Company’s documents and the original of public notices disclosed publicly in Securities Times and Ta Kung Pao designated by CSRC in the report period. 5. The Article of Association of the Company. The above documents were all located in the Secretary of the Board Room integrally. This report has been prepared in Chinese and English version respectively. In the event of difference in interpretation between the two versions, the Chinese report shall prevail. Board of Directors of Changchai Company Limited Apr. 11, 2008 96