深深宝Ｂ(200019)2007年年度报告（英文版）

SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 M a rc h 2 0 0 8 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 Important Statement The Board of Directors and the directors of the Company guarantee that there are no significant omissions, fictitious or misleading statements carried in the Report and we will accept individual and joint responsibilities for the truthfulness, accuracy and completeness of the Report. Director Zhu Mingjun and Chen Xiaohua absented the board meeting and empowered Chairman Zeng Pai to vote on their behalves. Independent director Deng Meixi absented the meeting and empowered independent director Du Wenjun to vote on her behalf. Shenzhen Dahua Tiancheng Certified Public Accountants issued standard Auditors’ Report without qualified opinion for the Company. Chairman of the Board and General Manager Mr. Zeng Pai, and CFO Ms. Zeng Suyan hereby confirm that the Financial Report enclosed in the Annual Report is true and complete. This report was prepared in Chinese and English respectively. In the event of difference in interpretation between the two versions, the Chinese report shall prevail. 1 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 Table of Contents Table of Contents ..............................................................................................................................2 Chapter I. Company Profile ..............................................................................................................3 Chapter II. Financial Highlights........................................................................................................4 Chapter III. Change of Share Capital and Particulars about the Shareholders..................................7 Chapter IV. Particulars about the Directors, Supervisors and Executives....................................... 11 Chapter V. Administrative Structure ...............................................................................................16 Chapter VI. The Shareholders’ Meetings ........................................................................................24 Chapter VII. Report of the Board of Directors................................................................................25 Chapter IX. Significant Events .......................................................................................................45 Chapter X. Financial Report ...........................................................................................................53 Documents for Reference..............................................................................................................102 2 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 Chapter I. Company Profile I. Legal Name of the Company In Chinese: 深圳市深宝实业股份有限公司(Abbr. 深宝) In English: SHENZHEN SHENBAO INDUSTRIAL CO., LTD. (Abbr.: SBSY) II. Legal Representative: Mr. Zeng Pai III. Secretary of Board of Directors: Mr. Liu Xiongjia Liaison Address: 28/F, B&C Block of Bao’an Plaza, No. 1002 Sungang Road, Shenzhen Tel: (86) 755-25507480 Fax: (86) 755-25507480 E-mail: a0019@21cn.com IV. Registered Address of the Company: 28/F, B&C Block of Bao’an Plaza, No. 1002 Sungang Road, Shenzhen Office Address of the Company: 28/F, B&C Block of Bao’an Plaza, No. 1002 Sungang Road, Shenzhen Post Code: 518020 Internet Web Site: http://www.sbsy.com.cn E-mail: sbsy@sbsy.com.cn V. Newspapers Chosen for Disclosing the Information of the Company: Securities Times, China Securities Journal, and Hong Kong Wen Wei Po Internet Web Site for Publishing the Annual Report Designated by CSRC: http://www.cninfo.com.cn Place Where the Annual Report is Prepared and Placed: Secretariat of the Board of Directors VI. Stock Exchange Listed with: Shenzhen Stock Exchange Short Form of the Stock: SHENSHENBAO – A, SHENSHENBAO-B Stock Code: 000019, 200019 VII. Other Relevant Information of the Company 1. The initial registration date and place: July 30, 1981, Shenzhen The changed registration date and place: Mar. 21, 2005, Shenzhen 2. Registration code for business license of corporation: 4403011024443 3. Number of taxation registration: GSDZi 440301192180754 DSDZi 440303192180754 4. Organization code: 19218075－4 5. Name of the domestic certified public accountants engaged by the Company: Shenzhen Dahua Tiancheng Certified Public Accountants Address: 11/F., Tower B, United Plaza, No. 5022, Binhe Av. Futian District, Shenzhen 3 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 Chapter II. Financial Highlights Section I Main profit indices I. Main profit indices of the year In RMB Yuan Items Amount Operation profit 13,309,682.52 Total profit 46,936,227.65 Net profit attributable to the shareholders of the listed company 43,690,242.34 Net profit after deducting of non-recurring gain/loss 13,804,872.70 attributable to the shareholders of the listed company Cash flow generated by business operation, net -2,450,233.38 Note: Items and amounts involved in non-recurring gain/loss Net income of land compensation from government 34,161,577.32 Disposal of intangible assets 1,566,182.91 None business income / expense, net －141,406.15 Others －393,626.04 Total before deducting of minor shareholders’ gain/loss 35,192,728.04 Less: influence amount of minor shareholders’ gain/loss 24,396.81 Non-recurring gain/loss after deducting of minor shareholders’ gain/loss 35,168,331.23 Less: Income tax influence 5,282,961.59 Non-recurring gain/loss after deducting of income tax influence 29,885,369.64 Section II Principal Accounting Data and Financial Index over Previous Three Years up to the End of Report Year I. Principal accounting data RMB Yuan Changed Year 2006 this year Year 2005 Year 2007 over last year after Not adjusted Adjusted adjustment Not adjusted Adjusted (%) Turnover 192,241,044.90 104,021,455.44 104,021,455.44 84.81% 94,829,751.09 94,829,751.09 Total profit 46,936,227.65 39,976,078.62 33,086,078.62 41.86% 4,603,090.12 4,583,590.12 Net profit attributable to the shareholders 43,690,242.34 39,059,405.42 34,074,857.69 28.22% 5,539,860.36 6,152,808.50 of the listed company Net profit attributable to shareholders of listed company 13,804,872.70 -17,826,078.19 -11,908,626.34 215.92% 7,621,274.66 -1,008,754.84 after deducting of non-recurring gain/loss 4 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 Cash flow generated by -2,450,233.38 -30,001,648.17 -30,001,648.17 91.83% -8,102,139.60 -8,102,139.60 business operation, net End of 2006 Changed at End of 2005 the end of this year over end of End of 2007 Not adjusted Adjusted last year Not adjusted Adjusted after adjustment (%) Total Assets 468,074,812.84 469,044,876.40 473,517,999.07 -1.15% 439,106,808.72 441,534,633.71 Shareholders’ equity attributable to 320,112,065.58 278,878,929.61 276,421,823.24 15.81% 239,819,524.19 240,742,350.01 the parent company 5 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 II. Principal financial indices RMB Yuan/share Year Year 2006 Changed this year Year 2005 2007 Not over last year after Not Adjusted adjustment (%) Adjusted adjusted adjusted Basic gains per share 0.24 0.22 0.19 26.32% 0.03 0.03 Diluted gains per share 0.24 0.22 0.19 26.32% 0.03 0.03 Basic earning per share after deducting of non-recurring 0.08 -0.098 -0.07 214.29% 0.04 0.04 gains/losses Net income on asset, fully 13.65% 14.01% 12.33% 1.32% 2.31% 2.56% diluted Net income on asset, 14.65% 15.06% 13.14% 1.51% 2.34% 2.59% weighted Net income on asset, fully diluted and deducted 4.31% -6.39% -4.31% 8.62% 3.18% -0.42% non-recurring gain/loss Net income on asset after deducting of non-recurring 4.63% -6.87% -4.59% 9.22% 3.22 3.01% gain/loss Net Cash flow per share generated by business -0.01 -0.16 -0.16 93.75% -0.04 -0.04 operation End of 2006 Changed at end of this End of 2005 End of Not year over end of last Not 2007 Adjusted Adjusted adjusted year (%) adjusted Net asset per share attributable to shareholders 1.76 1.53 1.52 15.79% 1.32 1.32 of the Company 6 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 Chapter III. Change of Share Capital and Particulars about the Shareholders Section I Change of Share Capital I. Statement of change in shares (Ended December 31, 2007, in shares) Before the change Changed (+,-) After the change from reserves new shares Proportion Proportion Transferred Issuing of Sub-total Amount Amount Others Bonus shares % % I. Shares with conditional subscription 1. State-owned shares 2. State-owned legal 46,914,843 25.79 -9,096,154 -9,096,154 37,818,689 20.79 person shares 3. Other domestic 53,753,945 29.55 -9,106,752 -9,106,752 24.54 44,647,193 shares Including: Domestic 53,743,347 29.54 -9,096,154 -9,096,154 24.54 non-state-owned lega 44,647,193 person shares Domestic natura 0.01 -10,598 -10,598 10,598 person shares 4. Share held by foreign investors Including: Foreign legal person shares Foreign natural person shares Total of conditional 100,668,788 55.34 -18,202,906 -18,202,906 82,465,882 45.33 shares II. Shares with unconditional subscription 1. Common shares in 55,118,300 30.30 18,202,906 18,202,906 73,321,206 40.30 RMB 2. Foreign shares in 26,136,000 14.37 26,136,000 14.37 domestic market 3. Foreign shares in overseas market 4. Others Total of unconditional 81,254,300 44.66 18,202,906 18,202,906 99,457,206 54.67 shares III. Total of capital 181,923,088 100.00 181,923,088 100.00 shares Notes: 1. On August 8, 2007, the conditional Renminbi common shares amounted to 9,096,154 shares held by Shenzhen Agriculture Products Co., Ltd. (referred as “Agriculture Product Co.” hereinafter) and Shenzhen Investment Holdings Co., Ltd. (referred as “Investment Holdings Co.” hereinafter) respectively have been released from the restriction of selling. The rest of conditional shares will be released and placed in the market on July 27, 2008 and July 27, 2009 respectively. (For details please go to the public notices disclosed on August 4th 2007 by Securities Times, Hong Kong Wen Wei Po, and www.cninfo.com.cn ) 2. Ms. Zuo Heping, the former Chairman of the 5th Supervisory Committee has retired. Thus her 10,598 of conditional shares have satisfied the conditions to be released from selling restriction. Relative procedures of releasing these shares have been completed in the report term. 7 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 II. Statement of change in conditional shares In shares Conditional Conditional Name of the shares at Released Increased Reason of Date of shares at shareholder beginning of this year this year condition releasing end of year year Shenzhen Details are available in Agriculture 53,743,347 9,096,154 0 44,647,193 Section 3 of this chapter Products under title of “VI. Co., Ltd. Amount and conditions of Shenzhen top 10 holders of Investment conditional shares 46,914,843 9,096,154 0 37,818,689 Holdings Co., Ltd. Section II Issuing and Placing of Securities I. In the previous three years up to the end of the report period, the Company has not issued shares or derivate securities. II. Neither of the Company’s total capital share and shareholding structure has been changed in the report term. Details are available in Section 1 of this chapter under title of “I. Change of share capital”. III. The Company has no employee’s shares as of the end of report term. Section III Particulars about Shareholders I. As of the end of report term, the Company had totally 23,827 shareholders, including 19,193 shareholders of A-shares, 4,634 shareholders of B-shares. II. Ended Dec. 31, 2006, particulars about shares held by the top ten shareholders and held by the top ten shareholders of unconditional shares. Total shareholders at the end of 23,827 the report period Top Ten Shareholders Share Number of Properties of Total shares Pledged or Full name of shareholder proportion % conditional shares shareholder (shares) frozen （％） held (shares) Shenzhen Agriculture Products 53,743,347 Others 29.54 44,647,193 0 Co., Ltd. Shenzhen Investment Holdings 46,914,843 State-owned 25.79 37,818,689 0 Co., Ltd. Beijing Capital Group Ltd. Others 1.34 2,440,696 0 N/A GUOTAI JUNAN SECURIES Others 0 N/A 0.95 1,733,261 HONG KONG LIMITED Song Gang Others 0.51 922,792 0 N/A HANG SENG CONSUMER Others 0 N/A 0.38 683,711 SECTOR FLEXIPOEER FUND Chen Yongquan Others 0.36 659,372 0 N/A Huang Zhaojun Others 0.28 515,550 0 N/A Ni Hongxia Others 0.27 500,050 0 N/A Peng Ruihua Others 0.27 483,800 0 N/A 8 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 Top 10 holders of unconditional shares Number of unconditional Full name of the shareholder Category of shares shares held (shares) Beijing Capital Group Ltd. 2,440,696 A shares GUOTAI JUNAN SECURIES HONG KONG LIMITED 1,733,261 B shares Song Gang 922,792 A shares HANG SENG CONSUMER SECTOR FLEXIPOEER FUND 683,711 B shares Chen Yongquan 659,372 B shares Huang Zhaojun 515,550 A shares Ni Hongxia 500,050 B shares Peng Ruihua 483,800 B shares Beijing Qin Dynasty Telecom Technologies Co., Ltd. 440,004 A shares Sichuan Wanfeng Trade Building Management Center 350,000 A shares Notes to relationship or Shenzhen Government State-owned Asset Supervisory and Management “action in concert” among Committee is holding 22.88% of the share equity of Agriculture Products Co., and the top ten shareholders. 100% of the share equity of Investment Holdings Co. It is not to the knowledge of the Company whether any of the other shareholders listed above are related to each other as “action-in-concert” as described by “Administrative Criteria of Takeover of Listed Companies”. Notes to the shareholding Name of the shareholder Contractual shareholding term term for the strategic investors or ordinary legal persons involved in new None None share placing. Note: Agriculture Products Co., and Investment Holdings Co. are two of the shareholders holding over 5% of the Company’s capital shares. None of them has changed in total amount of shares. III. Particulars about controlling shareholders of the Company 1. Name of controlling shareholder: Shenzhen Agricultural Products Co., Ltd. Legal representative: Chen Shaoqun Date of incorporation: Jan. 14, 1989 Main business and product: the company is engaged in constructing wholesale market of agricultural products; deals in market lease and sale; domestic trading, supply and marketing of materials (excluding monopoly products); and offer auxiliary establishment to market of agricultural products wholesale, for instance, rest house, canteen, restaurant, transportation, load and unload, storage, packing (business license of specific item is to be applied in addition); service of information counseling, and wholesale of sugar, tobacco and alcohol; development in real-estates on the lands with legally obtaining the land use right. Registration capital: RMB 387,663,442 2. The top shareholder of the controlling shareholders of the Company: State-owned Assets Supervision and Administration Commission of Shenzhen Municipality Government State-owned Assets Supervision and Administration Commission of Shenzhen Municipality Government established with hanging out their shingle on Aug., 2004, as special entity directly under Shenzhen People’s Government, implements its qualification of provider on behalf of our nation and carry out supervision and administration according to law for state-owned assets which authorized to be supervised. 9 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 3. Property right and controlling relationship between the actual controller of the Company and the Company is as follows: State-owned Assets Supervision & Administration Commission of Shenzhen 100% 100% 22.88% Shenzhen Investment Shenzhen Investment Holdings Management Co., Ltd. Co., Ltd. 2.21% Shenzhen Agriculture Products Co., Ltd. 29.54% 25.79% SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Note: On October 11, 2007, Agriculture Products Co. and Investment Holdings Co. entered the “Agreement on Share Equity Transferring” with Fusion System (HK) Co., Ltd (“Fusion System”), by which Agriculture Products Co., and Investment Holdings Co. were going to transfer 76,407,697 of the Company’s shares under their possession (account for 42% of the total shares of the Company). This issue is under relative approving process at present. (For details please go to Chapter IX, Section X. Other significant issues) IV. Other legal person shares over 10% of the total share capital of the Company The second shareholder: Shenzhen Investment Holdings Co., Ltd. Legal representative: Chen Hongbo Date of foundation: Oct. 13, 2004 Main business and product: to provide guarantee to state-owned enterprise which belongs to municipality; to carry out management to the state-owned share equity excluding the enterprises directly under the supervision of State-owned Assets Supervision and Administration Commission of Shenzhen Municipality Government; assets reorganization, innovation and capital operation of subsidiary enterprise; investment and other business authorized by State-owned Assets Supervision and Administration Commission of Shenzhen Municipality Government. Registration capital: RMB 4,000,000,000 V. Schedule of releasing the conditional shares for trade In shares Newly added Balance of shares Balance of Date tradable with conditional unconditional Remarks shares subscription shares The Company’s capital shares are totaled to August 8, 2007 18,192,308 82,465,882 99,457,206 181,923,088 shares. Restriction conditions are July 27, 2008 18,192,308 64,273,574 117,649,514 available under title of “VI. Amounts and conditions of top 10 conditional share holders” July 27, 2009 64,273,574 0 181,923,088 hereafter. 10 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 VI. Amounts and conditions of top 10 conditional share holders (Ended December 31, 2007) in shares Newly Shares with Date when added No. Name of the holder conditioned trading is Conditions tradable subscription allowed shares Can’t be traded in 12 months Shenzhen Agriculture July 27, 2008 9,096,154 since the launching of share 1 44,647,193 relocating scheme (July 27, Products Co., Ltd. July 27, 2009 35,551,039 2006); upon expiring of the above term, trading of the original July 27, 2008 9,096,154 non-negotiable shares in the Shenzhen Investment Stock Exchange shall not exceed 2 37,818,689 Holdings Co., Ltd. July 27, 2009 28,722,535 5% in 12 months, and shall not exceed 10% in 24 months. Chapter IV. Particulars about the Directors, Supervisors and Executives Section I Particulars about the Directors, Supervisors and Executives I. General information Shares held Amount of Beginning At the Share Name Sex Age Position Job term conditional of term end of option shares granted term Zeng Pai M 37 Chairman of Board, 2006.10.25-2009. 10.25 0 0 － － Secretary of CCP Committee Zhu Junming M 44 Director 2006.10.25-2009. 10.25 0 0 － － He Dong M 38 Director 2006.10.25-2009. 10.25 0 0 － － Chen Xiaohua M 42 Director 2006.10.25-2009. 10.25 0 0 － － Fan Zhiqing M 58 Independent Director 2006.10.25-2009. 10.25 0 0 － － Du Wenjun F 40 Independent Director 2006.10.25-2009. 10.25 0 0 － － Deng Meixi F 36 Independent Director 2006.10.25-2009. 10.25 0 0 － － Zhen Yuxi M 46 Director, 2006.10.25-2009. 10.25 0 0 － － General Manager Zeng Suyan F 53 Director, 2006.10.25-2009. 10.25 0 0 － － CFO Zong Haiyan F 44 Chairman of the supervisory 2006.10.25-2009. 10.25 0 0 － committee Li Yiyan F 42 Supervisor 2006.10.25-2009. 10.25 0 0 － Yan Zesong M 38 Supervisor 2006.10.25-2009. 10.25 0 0 － － Fang Jianhui M 42 Standing deputy general 2006.10.25-2009. 10.25 0 0 － － manager Guan Lihua M 54 Vice General Manager 2006.10.25-2009. 10.25 0 0 － － Vice General Manager, Vice Secretary of CCP Committee Peng Ying M 47 Secretary of Discipline 2006.10.25-2009. 10.25 0 0 － － Committee, Chairman of Union Liu Xiongjia M 36 Secretary of the Board 2006.10.25-2009. 10.25 0 0 － － Notes: Particulars about directors, supervisors and senior executives holding the position in Shareholding Company 11 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 (1) Director of the Company Mr. Zhu Junming held the position of director and GM of Agricultural Products, with office term from Oct.13, 2006 to Oct.13, 2009. (2) Director of the Company Mr. Chen Xiaohua held the position of director and secretary of the Board of Agricultural Products, with office term from Oct.13, 2006 to Oct.13, 2009. (3) Director Mr. He Dong held the post of director of Asset Management Center in Investment Holdings Co., Ltd. II. Particulars about the directors, supervisors, and executives who take jobs in entities other than shareholding companies The Directors: 1. Mr. Zeng Pai, senior economist, was born in 1971 and graduated from Xi’an Jiaotong University with doctor degree of management science. He took turns of deputy general manager of futures business dept., manager of trade & development dept., assistance of general manager, etc. of agricultural company; since April 2001 he has taken the post of director and general manger of the Company and he has held the positions of chairman of the Board, general manager and secretary of the Party committee of the Company since January 2003. Now he is chairman of the Board and secretary of the Party committee of the Company. 2. Mr. Zhu Junming, an economist, was born in January 1964 with the master degree. He took turns of director, standing deputy general manager of the 3rd Board of Director of Shenzhen Agricultural Products Co., Ltd.; director and general manager of the 4th Board of Director of Shenzhen Agricultural Products Co., Ltd. Now he is director and general manager of the 5th Board of Directors of Shenzhen Agricultural Products Co., Ltd.; and director of the Company since Oct., 2006. 3. Mr. He Dong, master degree of law and economist, was born in 1969. He has ever taken the deputy director of law issue office in Shenzhen Eastern Development Group, deputy office director of Shenzhen Construction Investment Holdings Co., he is now director of assets management center of Shenzhen Investment Holdings Co., Ltd. and has taken the director of the Company since May 2005. 4. Mr. Chen Xiaohua, an economist with master degree, was born in 1966. He took turns of section chief of secretariat, director and concurrently secretary and deputy general manager of the Board of the Agriculture Products Company. He is now director, deputy general manager and secretary of the Board of Agriculture Products Company and he has taken the post of director of the Company since February 2000. 5. Mr. Fan Zhiqing, a senior accountant and senior economist with undergraduate degree, was born in 1949 and he took turns of committeeman of senior professional title and concurrently member of expert group of Guangdong Province, financial manager and financial chief supervisor of Shenzhen large-scale state-run or joint-invested enterprises, and now he is visiting professor (mainly teaching courses of company financing) of Shenzhen manager advanced study, he has held the position of independent director of the Company since July 2002. 6. Ms. Du Wenjun, an economist, was born in 1968 with the master degree of engineering. She took the turns of senior researcher of Jun’an Securities Research, business director of Purchasing and Merger Headquarters of Guotai Jun’an Securities Co., Ltd. Now she is in charger of the director and general manger of Purchasing and Merger Headquarters of Guotai Jun’an Securities Co., Ltd; and independent director of the Company since Oct. 2006. 7. Ms. Deng Meixi, MBA, was born in 1972, non-professional member of the Chinese Institute of Certified Public Accountants, senior member of Association of Chartered Certified Accountants. 12 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 She ever took the turns of auditor of Deloitte&Touche and ArthurAndersen CPA Ltd., financial manager of Shenzhen Shentou Investment Co., Ltd.; financial supervisor and development supervisor of suppliers of WAL★MART (China) Investment Co., Ltd.; senior financial supervisor of Best Buy Shanghai Limited. She takes the post of independent director of the Company since Oct. 2006. 8. Mr. Zheng Yuxi, bachelor degree of economics, was born in 1962. He has taken the post of director and deputy general manager of underling enterprise of Shenzhen Special Economic Region Free Commodities Enterprises; he took the turns of general manager assistant and deputy general manager of the Company as of May 2001. Now he is director and general manager of the Company. 9. Ms. Zeng Suyan, an accountant with junior collage degree, was born in 1955. She took the turns of chief accountant, deputy minister and minister of planning and financial dept. of the Company since 1994. She is now director and CFO the Company. Supervisors: 10. Ms. Zong Haiyan, bachelor degree and instructor, was born in 1964; she took the position of instructor of History Department in Xiangtan University from June 1986 to August 1989, instructor of Literature & History Department of Changsha University of Electric Power from Sep., 1989 to Feb., 1993, journalist and editor of Shenzhen Financial Morning Post from Apr.,1993 to Jan.,1998, general manager assistant of Agricultural Company from Feb., 1998 to June 2003, director of general manager office of Agricultural Company from Dec., 1999 to June 2003, and concurrently secretary of Chinese Communist Youth League from 1999 to 2004, and took the post of Chairman of the Board of Shenzhen Minrun Agricultural Products Dispatch Chains Co., Ltd. from June 2003 to Apr., 2005; she was elected as supervisor of the 4th Supervisory Committee of Agricultural Company in July 2003 and has taken the position of general manager of the Company since May 2005. Now she is chairman of supervisory committee of the Company. 11. Ms. Li Yiyan, bachelor degree of economist, was born in 1966. She has taken the post of the Company after graduation since Aug., 1988. She is now ministry of human resources of the Company and has taken the post of supervisor of the Company since July 2003. 12. Mr. Yan Zesong, was born in 1970 with the undergraduate degree, standing board member of China Beverage Industry Association. He ever took director and general manger of Shenzhen Shenbao Huacheng Food Co., Ltd. Now he is vice chairman of Shenzhen Shenbao Huacheng Food Co., Ltd; and supervisor of the Company since Oct. 2006. Other Senior Executives: 13. Mr. Fang Jianhui, born in 1966, he has bachelor degree and now is employee admitted to 13 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 postgraduate program in Xi’an Jiaotong University majoring in banking. Since 1993 he took turns of deputy general manager and manager of import & export dept. of the Agriculture Products Company, general manager of Shenzhen Liya Trade development Co., Ltd.; he has taken the post of deputy general manager of the Company since February 2000, and now he resigned standing deputy general manager of the Company. 14. Mr. Guan Lihua, born in 1954, a senior engineer and senior economist with master degree, doctor of management, was born in 1954. He took turns of general manager assistance of Shenzhen Huayang Bags Co., general manager of Shenzhen Yinzhu Plastic Products Co., Ltd.; since 1999 he took turns of director, deputy general manager and standing deputy general manager of the Company, and now he is deputy general manager of the Company. 15. Mr. Peng Ying, an economist with bachelor degree, was born in 1961. He took turns of office director of general manager, general manager assistant and concurrently minister of human resources of the Agriculture Products Company and chairman of Shenzhen Agriculture Products Flesh Dispatch Co., Ltd. He has taken the position of supervisor of 4th and 5th Supervisory Committee of the Company since February 2000 to October 2006 and the secretary of commission for disciplinary inspection of the Company since January 2005. Since October 2006, she is deputy general manager, vice secretary of party committee, secretary of commission for disciplinary inspection, chairman of labor union of the Company. 16. Mr. Liu Xiongjia, an economist with master degree of Economics, was born in 1972. He took turns of salesman of Shenzhen Office of SINOTRANS and office director assistance of the Board of Shenzhen Agriculture Products Co., Ltd., he has taken the post of secretary of the Board of the Company since Feb., 2002. He was successively awarded Gold Medal Secretary of Board by New Fortune during 2005 and 2006. III. Particulars about the annual remuneration of directors, supervisors and senior executives In the report year, remunerations taken by the directors, supervisors and senior executives from the Company are based on Headquarters Remuneration Plan and the actual situation of the Company and personal performance assessment results. In the report period, the Company has 16 directors, supervisors and senior executives at present. Of them, 9 persons received their salary from the Company, respectively the annual remuneration drew from the Company were as follows: Mr. Zeng Pai took RMB 699.8 thousand, Mr. Zheng Yuxi RMB601.4 thousand, Ms. Zeng Suyan RMB385.8 thousand, Ms. Zong Haiyan RMB424.9 thousand, Ms. Li Yiyan RMB 259.8 thousand, Mr. Fang Jianhui RMB389.8 thousand, Mr. Guan Lihua RMB381.2 thousand, Mr. Peng Ying RMB381.2 thousand, Mr. Liu Xiongjia RMB385.8 14 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 thousand. The current Directors, Supervisors and Senior Executives of the Company draw the annual remuneration totally amounting to RMB3.9097 million. According to the relevant regulation of Administration Rule of Listed Company and the Company’s actual situation, the Company paid allowances to independent directors per year and necessary fees (included but not limited to traffic fees and accommodation etc.), when independent directors attend the Shareholders’ General Meeting and the Board meeting or exercise other authority according to the relevant laws, regulations and Articles of Association of the Company. In the report year, the Company respectively paid RMB89,600 (tax included) respectively to independent directors Mr. Fan Zhiqing, Ms. Du Wenjun and Ms. Deng Meixi. In the report period, directors of the Company Mr. Zhu Junming, Mr. He Dong, Mr. Chen Xiaohua, and supervisor Mr. Yan Zesong received no remuneration from the Company, but Mr. Zhu Junming and Mr. Chen Xiaohua received remuneration from Agricultural Products, Mr. He Dong received remuneration from Shenzhen Investment Holdings Co., Ltd and Mr. Yan Zesong received remuneration from Shenzhen Shenbao Huacheng Food Co., Ltd. IV. No director or supervisor was newly elected or dismissed in the report term, nor senior executive was engaged or dismissed. Section II Section II. About Employees At the end of the year 2007, the Company had totally 442 employees (included the enterprise employees of consolidated statement). Profession/occupation composition Education Background Number of Ratio Education Number of Ratio Profession person (%) qualification person (%) Postgraduate or Production 191 43.21 20 4.52 above Sales & Marketing 24 5.43 Undergraduate 77 17.42 Technicians 58 13.12 College dimploma 78 17.65 Polytechnic school Finance & Accounting 24 5.43 57 12.90 graduate High school or Executive 138 31.22 210 47.51 lower Off-position person 7 1.58 Total 442 100 Retired employees whose retirement pays are undertaken by 0 0 the Company Total 442 100 15 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 Chapter V. Administrative Structure Section I Company Administration I. Summary The Company continuously consummates the governance structure of the Company and regulates the Company’s operations strictly in accordance with the PRC Company Law, the Securities Law, Administration Rule of Listed Company and Listed Rules of Shares of Shenzhen Stock Exchange, Rule of Enhancing the Administration of Listed Company issued by China Securities Regulatory Commission, Rule of Enhancing the Administration of ShenZhen’s Listed Company issued by Shenzhen Securities Regulatory Commission, Articles of Association of the SHENBAO Company etc. and the requirements of relevant laws and regulations. The reality of the Company fits for the requirements of relevant rules for listed company. II. Particulars about special administration activities From April 2007 , the Company began self-investigation according to the requirement of practice of exclusive regulation for listed company which asked by China Securities Regulatory Commission, and published the report of the result of self-investigation on JUNE 30 2007. during this period the Company accepted suggestions from public investors by phone and email etc. on October 10 2007, the Company received the official report of the Custodial Opinion on Regulation of SHENBAO Co., Ltd which issued by Shenzhen Securities Regulatory Commission{FILE No. 【2007】47}. The issues We found In self-investigation and the corresponding solutions are described as follows: 1. Consummating the Integrity of Administrative Rules Solution: the Company revised the Rule of Information Publication; constitute the Rule of Inner-control, Rule of Reception and Self-advertising, Rules of Procedures for Independent Directors and Rule of the Way of Using Raised Capitals. 2. Consummating and Regulate Activities of Inner-control. Solution: subsidiary companies were asked to set up rules of administration of inner-control, and consummate rules of using raised capitals; designate special team on major investment to track and evaluate regularity. Designate the Ministry of Audit responsible for administration of inner-control, practice investigating and report the issues and solutions to the Board of Directors and the Supervisory Committee. (published in details on June 30 2007 on newspaper of SECURITIES and WENWEIPO(HongKong) , and on website of WWW.CNINFO.COM.CN. ) The regulation-related issues found by Shenzhen Securities Regulatory Commission and corresponding solutions are described as follows. 1. The content of the Rule of Information Publication need more detail measures Solution: the Board of Director examined and signed the Amendment of the Rule of Information Publication, added the procedures of communicating with investors, security company, news company and the implementation is charged by the secretary of the Board of Directors. added procedures of information publication and issue report which involving subsidiary company. Consummated some detail rules which involving investors and actual controller on info 16 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 consultation, management and information publication. 2. Report Non-public Inner Information to Major Investors Solution: According to the decision of the Board of Directors, the Company stopped reporting non-public inner information to major investors and actual controller, and operate strictly in accordance with the Rule of Enhancing Custodial Administration on Reporting Non-public Information to Major Investors and Other Irregular Activities, the amendment of the Rule of Enhancing Custodial Administration on Reporting Non-public Inner Information to Major Investor and Other Irregular Activities. (published in details on Oct 23 2007 on newspaper of SECURITIES and WENWEIPO (HongKong) , on website of WWW.CNINFO.COM.CN . ) In the exclusive regulation the Company examined its administration rules comprehensively ,found issues and solved them. Consummating and consolidating the inner rules, regulated business operations. The company will continue to regulate operations in accordance with the Rules of Administration for Listed Company and the Suggestion for qualifying a Listed Company. Section II Current Irregular Issues I. Types of irregular issues Reporting non-public info to major investors. The detail were as follows: The State-owned Assets Supervision and Administration Commission of ShenZhen Municipality Government is the controlling shareholder of Agricultural Products which is controlling shareholder of the Company. the second largest shareholder of the Company Shenzhen Investment Holdings Co., Ltd is the wholly-funded direct control company of State-owned Assets Supervision and Administration Commission of Shenzhen Municipality Government. The Company implemented the relevant regulations on state-owned assets administration of State-owned Assets Supervision and Administration Commission of Shenzhen Municipality Government and its controlling shareholders. Relationship Date or No Objectiveness of information Type of Evidence of with listed period of . deliver information information deliver company delivering State-owned Assets Supervision and Relevant regulations Actual Report of Assets 1 Administration Commission of state-owned assets Temporary controller Appraisal, etc. of Shenzhen Municipality administration Government Financial Relevant regulations Shenzhen Agricultural The 1st largest Statement, 2 of state-owned assets Regular Products Co., Ltd. shareholder Regular Report, administration etc. The 2nd Relevant regulations Shenzhen Investment Regular Report, 3 largest of state-owned assets Temporary Holdings Co., Ltd etc. shareholder administration II. Reasons for Existence of Relevant Companies in Irregular Issues The Company submit annual reports, regular reports and relevant assets evaluation reports to the State-owned Assets Supervision and Administration Commission of Shenzhen Municipality Government according to the relevant regulations. For the State-owned Assets Supervision and Administration Commission of Shenzhen Municipality Government is the actual controller of the Company. Agricultural Products and the Company both are listed companies at Shenzhen Stock Exchange, 17 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 so the Company’s financial report has influence on the Agricultural Products’ regular report, usually the Company summit financial report before the publication of Agricultural Products’ regular report. For the second largest shareholder of the Company the Shenzhen Investment Holdings Co., Ltd is the wholly-funded direct control company of State-owned Assets Supervision and Administration Commission of Shenzhen Municipality Government, the Company summit annual reports, regular reports and relevant assets evaluation reports to the Shenzhen Investment Holdings Co., Ltd according to relevant regulations issued by the State-owned Assets Supervision and Administration Commission. III. Influence on the Company’s independence. By negotiating with the Agricultural Products, Basically the Company keep the publish time of financial report in accordance with that of the Agricultural Products for the Company have to summit its financial report to the agricultural Products before releasing its regular report. The Company do not directly summit report to its Actual Controller the State-owned Assets Supervision and Administration Commission. The company’s largest holder the Agricultural Products and the second largest shareholder the Shenzhen Investment Holdings Co., Ltd have no influence on the independence of the Company’s running, operation, administration and finance for they get relevant information through the Shareholder’s General Meeting and the Board of Directors according to the Company’s the administrative rules. IV. Improving measures On Oct 22 2007, the 6th meeting of the Board passed the Report of Regulating Operations, informing that the Company will operate strictly in accordance with the Rule of Enhancing Custodial Administration on Reporting Non-public inner Information to Major Investor and Other Irregular Activities, the Amendment of the Rule of Enhancing Custodial Administration on Reporting Non-public Inner Information to Major Investor and Other Irregular Activities and stop reporting non-public information to major holders and actual controller. Section III Particulars about Performance of Duties of Independent Directors The Company has established Rules for Independent Directors according to Guidelines Opinion on Establishing Independent Director System in Listed Companies and Code of Corporate Governance for Listed Companies in China. At present, the Company has three independent directors and conformed to the relevant regulations. In the report year, held seven meetings of the Board . Ms. Deng Meixi did not present the 9th Meeting of the 6th Board meeting due to work and entrusted independent director Ms. Du Wenjun to exert voting right on her behalf and present other meetings in person. In the report term, the independent directors of the Company has been following with the relative laws and regulations and the Articles of Association, and issued independent opinions on the issues such as change of proceed use, company administration, engaging of auditors for year 2007, and external guarantee of year 2006. The independent directors issued no dissenting opinion on the proposals examined at the board meetings nor other issues of the Company. During the period of auditing, the independent directors verified the auditing work schedule and the Financial Statements prepared by the Company, listened to the report made by the management on the Company’s business operation and material events in the report year and conducted onsite investigation. Meanwhile, when the CPAs have issued their initial opinions, the independent directors conducted communications with the CPAs on the problems discovered in the auditing process. 18 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 Section IV Separation between the Company and its Controlling Shareholder in terms of Personnel, Assets, Finance, Organization and Business The Company keep strictly in accordance with the Code of Corporate Governance for Listed Companies in China and etc to separate right between the Company and its controlling shareholder in terms of personnel, assets, finance, organization and business，the detail as follows: I. In term of business: The Company is completely independent from the controlling shareholder in business and has independent and complete business and autonomous operation capacity. The Company owned independent purchase and sales system. The Company is responsible for purchasing all raw materials and distributing products. R&D, production, purchase and distribution departments are separate from each other. The Company has already been independent legal person operating in the market. II. In term of personnel & organization: 1. The Company is absolutely independent in the management of labor, personnel and salaries. Office and production sites are different from those of the controlling shareholder. There is no such situation of “One team, two brands”, operating and working together with controlling shareholder. 2. Senior executives work for the Company in full time and draw salary from the Company, without taking concurrent position or drawing remunerations in the controlling shareholder enterprises. III. In term of assets: The Company is totally independent from its controlling shareholder in term of assets and operates completely independent. The Company not only possesses independent production system, auxiliary production system and complementary facilities, but also enjoys such intangible assets as industrial property right, trademark, non-patent technology, etc. IV. In term of finance: 1. The Company has established independent financial department, independent and complete accounting system and financial management system. 2. The Company has financial decision-making right independently without interfere of its controlling shareholder. 3. The Company has independent bank account without depositing fund into accounts of the controlling shareholder, financial company or settlement center controlled by related parties 4. The Company pays the duties in compliance with laws. 19 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 Section V Report of Self-evaluation on Inner-control I. Summary (I) Establishment of Inner-control The Company continuously consummates inner-control administration and management, settled up Shareholder’s meeting ,the Board of Directors and The Supervisory Committee and corresponding rules to operate effectively and make decision scientifically. The Board of Directors has four special administrative committees: Promotion Committee, Salary and Evaluation Committee, Audit Committee and Stratagem Committee. This four administrative committee are separately responsible for major affairs and decisions to improve the operative efficiency of the Board of Directors; and the Board of directors has a Inner Audit Department to implement inner audit according to corresponding rules; the Company has a whole set of routine administration rules which consists of the management of human resource, equipment, quality and safe-production. The Company has special financial rules for finance control, and business management based on ISO9001 quality management systems. Also the Company has professional Legal Consultants focus on sale contract, invest agreement, sponsor contract and etc to regulate the financial affairs during the contact with other company. (II) Major Activities and Achievements in the Inner-control during 2007 The Company continuously consummates the governance structure of the Company and regulates the Company’s operations strictly in accordance with the PRC Company Law, the Securities Law, Administration Rule of Listed Company and Listed Rules of Shares of Shenzhen Stock Exchange etc. during the period, according to the Note of enhancing the exclusive regulation of Listed Company issued by the China Securities Regulatory Commission and the Guidance for Listed Company issued by Shenzhen Stock Exchange, the Company revised the Rule of Information Publication; established the Rule of Inner-control, Rule of Reception and Self-advertising, Rule of Procedures for Independent Directors and Rule of the Way of Using Raised Capitals. In the exclusive regulation activity organized by the China Securities Regulatory Commission. all subsidiary companies were asked to establish rules of administration; the Company Consummated rules of using raised capitals, designated special team on major investment for tracking and evaluation regularly, And designated inner Ministry of Audit responsible for inner-control and issue investigating, report the issues and solutions to the Board of Directors and the Supervisory Committee. And the Board of Directors decided not to report non-public info to major shareholders and accrual controller any more. The affairs above are signed and published separately by the 7th Meeting of the 6th Board meeting, the 8th Meeting of the 6th Board meeting, the 11th Meeting of the 6th Board meeting and the 1st Temporary Shareholder’s Meeting. The Company consummates the inner-control and rules, regulates the inner-control and management affairs for healthy improvement through this exclusive regulation activity . 20 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 II. Principal activities (I) Summary of Holding Subsidiary Companies form 1:the effective share held proportion Company name Effective equity held No. 1 Shenzhen Shenbao Industrial Trading and 100％ Wholesaling Trading & development Co.,Ltd 2 Shenzhen Shenbao Property management Co.,Ltd 100％ 3 Shenzhen Shenbao Bio-products Manufacture of 100％ Healthy co.,Ltd 4 Shenzhen Shenbao Tri-well Food & Manufacture 100％ of Soft Beverage Co.,Ltd 5 Shenzhen Shenbao Baohua City Food 51.67％ Manufacture Co.,Ltd 6 Huizhou Shenbao Investment and logistics 100％ Co.,Ltd 7 Huizhou Shenbao technology Co.,Ltd 100％ 8 Guangdong Shenbao Food Co., Ltd. Shenzhen Shenbao Sanjing Food & Beverage Development Co., Ltd. is holding 80% of its shares 9 Wuyuan County Shenbao Huafa Tea Industry Co., Shenzhen Shenbao Huacheng Foods Co., Ltd. is Ltd. holding 60% of its shares The Company has right to manage and control the principal operating events and designate directors, Supervisors and main high-level managers to its wholly-owned subsidiary and holding subsidiary company according to the Guidance of Inner-control for Listed Company and the Rule of Inner-control. During the period, the company further emphasized the control on its wholly-owned subsidiary and holding subsidiary in terms of related transaction, main investment and information publication. The Financial Plan Department of the Company examines the implementation of business operation plan of all the holding subsidiary regularly and audit irregularly every quarter. The office of the Board of directors is responsible for examining and checking the integrity of the rules of holding subsidiaries, guiding the subsidiary to report the principal business events and financial events to the supervisors in the Company according to the Company’s corresponding rules, and report the principal events to the Board of Directors and Shareholder’s General Meeting according to relevant warranty agreement. (II) The inner-control Management of Related trade transactions The Company keeps the management of related trade transaction in compliance with the principle of honestness, fairness, free will, publicity to maintain the interests of the Company and shareholders. The Board of Directors have regulated the procedure of decision-making and publication of related trading transactions in the Articles of Association of the SHENBAO Company the Rule of Information Publication, the Procedure of Shareholders General Meeting, the Procedure of the Board of Directors, Shenbao’s Inner-control Rules and etc. during the period, no related trading transaction happened (III) The inner-control management of external guarantees The Company keep the external guarantees in compliance with the principle of legitimacy, cautiousness, mutual profitability and safety-production to control the risk strictly. The Board of Directors has regulated the signature authorization and signature procedure strictly in the Articles of Association of the SHENBAO Company and the rule of SHENBAO Inner-control. during the period, besides the guarantee for holding subsidiary company, no other external guarantee happened. (IV) The inner-control management of using raised capitals. During the period, the Company established the Rule of Management of Raised capitals to further regulate the way of using and management of investor’s capitals. In 2007, the Company changed the using of the rest of the capital raised from issued stocks to supplement the free floating capital 21 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 in strictly accordance with relevant procedure and the procedure of decision-making of the Board of directors and the Shareholder’s General Meeting, the independent directors and The Supervisory Committee also have published independent opinions and examining opinions for this change. (V) The inner-control management of major investment. The Board of Directors has kept in accordance with the detail rules constituted by themselves about investment project, investment signature, implementation, project management and information publication. During the period, the Company put more capitals in holding subsidiary of SHENBAOHUA Food Manufacture Co.,Ltd and invest Huizhou SHENBAO manufacture & logistics Co.,Ltd strictly in accordance with relevant rules. (VI) The inner-control management of information publication. The Company’s info publication continuously strictly keep in accordance with the Administration Rule of Listed Company and Listed Rules of Shares of Shenzhen Stock Exchange, the Guidance for Publication Information Fairly for Listed Company, the Administration Rule of List Company, the Rule of Publication Information for Listed Company, the rule of Reporting Inner Information, the Rule of Management for Listed Company and etc. the Company has been referred as one of the best company on Information Publication for six years. (VII) The integrity of inner-control rules of operating company. The Company established whole-set of rules, procedure, responsibility description and controlling forms on buying, sale, manufacture, technology, quality, safety and human resource to regulating the routing operations. (VIII) The integrity of rules of financial control and financial recalculation. The Company’s Financial Plan Department implement the recalculation of the financial report of the company and that of the holding subsidiaries, and its independence is not affected by other departments and relevant organizations. Based on the Law of Company, the Law of Accounting, the Rule of enterprise’s accounting and etc, The Company established the Rule of management of Company’s accounting, the Rule of Managing Real Estates, the Rule of Management of Contract, the Rule of Reimbursement, the Rule of Bonus on Debt Collection which involved almost all the financial procedure including accounting department management, financial human resource, manufacture, buy and sale, capital raising, investments and etc to consummate the financial recalculation and financial management. III. Problems and solutions (I) The inside weakness, issues, plan and solutions. See Section 1 and Section 2 in this chapter. (II) No public punishment by China Securities Regulatory Commission or Shenzhen Stock Exchange. IV. Self-evaluation to the system of inner-control The Company has established a whole-set of reasonable and integrative rules of inner-control and the rules has been kept strictly in accordance with. Generally this rules can assure the company’s routing operation and to a certain extend minimize the management risk, the rules fit with the company’s management and it’s further development, and assure the reality and the fair of the Company’s financial report. Along with the development of business operation activities, the Company will continuously revise and consummate the inner rules of management, and further consummate the inner-control rules to fit for the further development and fit for relevant rules and laws. 22 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 V. The opinions by The Supervisory Committee on the self-evaluation to the rule of inner-control According to the Guidance of Inner-control for Listed Company and the Note of 2007 Annual Report, The Supervisory Committee published out the opinions as following: Based on the own practices, the Company established a whole-set rules of inner-control involving all the operation procedures and keeps the integrity and safety of company assets according to basic principles of inner-control and relevant rules issued by the China Securities Regulatory Commission and Shenzhen Stock Exchange. The Company is an integrative organization with qualified human resources, this assure the implementation sufficiently and efficiently of the principal activities for inner-control. To the end of 2007, there is no disobeying to rules of inner-control and the Guidance of Inner-control for Listed Company issued by Shenzhen Stock Exchange. In summary, the opinion is: the Company’s self-evaluation on inner-control is reasonable and comprehensive and in compliance with the reality. VI. The opinion by independent directors on the self-evaluation about inner-control During the period, along with the exclusive regulation activity, the Board of Directors revised, consummated, examined and signed a series of rules of management, now the Company has a inner-control system which based on the rules for business, rules for accounting, rules for information control and rules for inner audit control. This inner-control system fit for the requirement of management and further development, it assure the reality and fair of annual financial report, and assure business operation and implementation of the current laws and rules. Since the principal activities settled in according with the comprehensive inner-control system which assure the operation of company, the Company’s inner-control on subsidiary companies, related trading transactions, capital raising, major investment and information publication is strict, sufficient, efficient, the operation of the Company is reasonable, integrative and effective. The self-evaluation is in compliance with the reality. Section VI Performance Evaluation, Encouragement and Binding Mechanism for Senior Executives The Company has fundamentally established scientific and reasonable performance evaluation system on senior executives, and definite responsibility division or evaluation standard on senior executives. During the report period, the Company implemented the Headquarters Remuneration Plan guided with annual operation or personnel achievements; the job (duty) salary and allowances of senior executives in the annual remuneration would be connected with the office duty; benefit salary would be connected with the Company’s operating performance. At present, the Company established no long-term encouragement mechanism on senior executives and core business backbones of the Company. 23 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 Chapter VI. The Shareholders’ Meetings In the report period, the Company held three shareholders’ general meetings I. Shareholders’ Annual Meeting 2006 Shareholders’ Annual Meeting 2006 was held on June 29, 2007. The Public Notice on Resolutions of the 2006 Shareholders’ Annual Meeting of the Company has been published on Securities Times, Hong Kong Wen Wei Po and the official Website at http://www.cninfo.com.cn dated June 30, 2007. II. The 1st Shareholders’ Special Meeting 2007 The 1st Shareholders’ Special Meeting 2007 was held on July 30, 2007. The Public Notice on Resolutions of the 1st Shareholders’ Special Meeting 2007 of the Company has been published on Securities Times, Hong Kong Wen Wei Po and the official Website at http://www.cninfo.com.cn dated July 31, 2007. III. The 2nd Shareholders’ Special Meeting 2007 The 2nd Shareholders’ Special Meeting 2007 was held on October 29, 2007. The Public Notice on Resolutions of the 2nd Shareholders’ Special Meeting 2007 of the Company has been published on Securities Times, Hong Kong Wen Wei Po and the official Website at http://www.cninfo.com.cn dated October 30, 2007. 24 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 Chapter VII. Report of the Board of Directors Section I Operation Review I. General operation of the Company in the report period In the report period, centralizing the tea industry and natural pant extra production, the Company implemented annual business plan of 2007 to establish a tea industry chain, consolidated the marketing shares, and achieved the leading position in the tea material and deep precision processing industry of natural plant, at the same time, the Company continuously adjusted and optimized the business mode of traditional industries, promoted the profit-gaining capacity according with establishing a stable foundation for further developing and promoted the capital quality by comprehensively solving history issues, activating the stock assets, increasing more productive stock resources, optimizing resource configuration and promoting the management efficiency. the Company’s revenue, operation profit, net profit and the increasing rate compared with those of the same period of last year is described as below for year 2007: RMB Yuan 2006 Compared to same 2007 （adjusted） period of last year Turnover 192,241,044.90 104,021,455.44 84.81% Operation profit 13,309,682.52 49,552,365.65 -73.14% Net Profit return to parent company 43,690,242.34 34,074,857.69 28.22% The turnover increasing compared to the same period mainly comes from tea power, tea juice and soft package series products income and the new income from the revenue of sale income of the Shenbao apartments. The reason for the decreasing of the operation profit is there is no profit by transferring Shenzhen PEPSI Cola Beverage Co., Ltd. ’s (Shenzhen PEPSI) stock equity as that in last year. The increasing of net profit comes from compensation of government’s land resumption newly received in the report term, sale income of Shenbao apartments, three kinds of reform costs and the sharply decreasing of assets compared with that of last year. Change of the industry policy and external business environment: In 2007, the government condensed the monetary policy, enhanced the examination of the food manufacturing enterprise with the blow out of new standards, new measures and more strict requirements on product quality; and also the price of the raw material and energy resources increased, marketing requirements changed quickly and suffered from tougher market competition. Operation Plan and Advantages for Developing 1. Promoting the main business stably During the period, the Company continuously promoted the development of tea industry, put more capital into the tea industry and extended to the tea plant base to set up new production line and factory for better tea quality manufacture, purchased tea garden to expand the Company’s business to manufacturing of tea essence and further process lines. In 2007, the sale income of tea powder and tea juice increasing continuously sharply with a stable increasing net profit cause the 25 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 Company not only increased the product output volume also put more attention on product quality to expand market. 2. Further adjusted the administrative model of traditional industry In 2006, after deciding to separate the food ingredients and beverage manufacturing, the operation of traditional industry goes well, it proved the adjustment on the traditional industry is successful. In 2007,the food ingredients manufacturer reduced the manufacturing cost by improving the technology effectively and efficiently, though the food ingredients manufacturer is still in loss state, but the key operating financial statistics is better by strict expense manage and controlling the period expenses through three kind of institutional reform. The soft drink manufacturer is profitable and its current flow is positive with a good perspective directed by some marketing stratagem such as specially supporting large district dealers. The innovation of management model of traditional industry show a rough success, it discovered a effective way for the Company’s traditional industry. 3. Keep cooperation with the holding company Shenzhen Pepsi Beverage Co., Ltd. On the principle of “to be active but no intervention”. The Company still keeps 30% equity of Shenzhen Pepsi Beverage Co., Ltd. (hereinafter referred to as Shenzhen Pepsi) after reducing 10% equity in proper time. In 2007, on the principle of “to be active but no intervention”, the Company kept friendly cooperative relationship with the American shareholders of Shenzhen Pepsi, created an excellent production and operation environment for Shenzhen Pepsi. 4. Solved the historical issues of external sponsion and spare employees effectively During the period, the Company solved the historical issue of external sponsion roughly, get rid of the law and finance risk possible; and enhanced the three kinds of reform, solved the historical issue of spare employee cautiously, stably and orderly by negotiating with them on releasing contract, this solution simplified the structure, reducing the cost and promoting the efficiency. 5. Improving the capital raising structure coordinating with national macro policy. In 2007, the Company cleared most of the bank debt benefit for the state of current flow improved obviously. At the end period of this report, the liability/asset rate is 21.57% which been decreased 16.36% compared to that of last year; under the contract national currency policy, the Company adjusted the stock debt and its time limit, increasing the long-term ratio to enhance short-term capacity of returning debt, and expanded the capital sources. 6. Activating the stock asset with high quality assets. Till the end of the period, the Company has no guarantee and pledge asset, the assets’ quality is good. During the period, the Company got cash flow and good profit form activating the stock asset of finish developing the Longgang Shenbao apartment building and the compensated resumption of using right of the Henggang industry land lot. 7. Store up resources to strongly support further high-speed developing Considering the comprehensive manufacturing cost and investment environment of traditional industry along with the tea industry stratagem, with researching entirely the national’s land policy and rareness of land resource, the Company plan to purchase industry land of 199,800 square meter at Huizhou Ruhu Town to establish Huizhou manufacture and logistics factory. During the period, Wuyuan Shenbao – the controlled subsidiary of SBHC plans to purchase the using right of eco-industrial land of 233.5 units of area to establish Wuyuan Shenbao first term manufacturing and processing basis for tea industry. The above stock resources can strongly support further high-speed developing 8. Brand Effect Show up Gradually 26 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 The Company respect brand construction, during the period, Shenbao Herbal Tea and Bencao Herbal Tea was ranked as the food culture heritage of Guandong province, and the soft drink business was certified the Good Standard Enterprise, achieved the AAA authentication ,ranked as “A” class authenticated enterprise in the QS annual audit procedure. The tea powder and tea concentrate business got authentication by HACCP food safety management system and quality management system of ISO9001:2000, and part products got authentication by American FDA and Judean Muslim food safety; the seasoning products business also got production permission(QS), all these improved the brand value and core competition. II. Scope of Main Operations and Its Operation Scope of main operations of the Company: production of canned food, beverage and local products; domestic commerce and supply and marketing of materials; import and export business; development and operation of property. Main operations of the Company were under the classification of food and beverage industry. The structure of the revenue from main operations and profit from main operations shows as following: 1. Formation of main operations classified according to industries and products: Increase/decrease Increase/decrease Increase/decrease Classified Gross in income from Operation Operation in cost of main in gross profit according to Profit main operations Income(RMB) Cost(RMB) operations over ratio over the last industries Ratio(%) over the last year the last year (%) year (%) (%) Manufacture of 21,385.46166 13,423.95961 37.23% 0.23% -7.43% 5.20% ingredients Manufacture of soft 40,161.07848 34,840.13084 13.25% 30.46% -1.18% 27.77% drinks Manufacture 101,838.85183 86,514.25627 15.05% 103.77% 122.75% -7.24% of teas Real Estates 24,554.83400 18,181.43901 25.96% 100.00% 100.00% 100.00% Classified according to products Sanjing’ brand 21,385.46166 13,423.95961 37.23% 0.23% -7.43% 5.20% ingredients Soft packing 40,161.07848 34,840.13084 13.25% 30.46% -1.18% 27.77% drinks Tea powder and tea juice 101,838.85183 86,514.25627 15.05% 103.77% 122.75% -7.24% series Real Estates 24,554.83400 18,181.43901 25.96% 100.00% 100.00% 100.00% The income of ingredients manufacturer is similar with that of last year, and decreasing of operating cost is caused by price decreasing of package material, and the decreasing of spare employees. The increasing of soft drink manufacturer’s income is caused by increasing of that of the southern china by marketing policy adjustment, and production output increasing, strictly controlled cost, better manufacturing technology and reducing of manufacturing cost made the decreasing of operating expenses. The sharp increasing of income and cost of tea industry comes from increasing tea powder and tea concentrate sales and merger of Wuyuan Shenbao. Operation cost increased because change of product structure and merger of Wuyuan Shenbao. 27 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 2. Main business geographic segments Increase/decrease in income from main Sales area Operation Income operations over the last year (%) South China 80,942.35645 66.92% East China 71,792.83939 103.66% Export 26,412.68001 365.51% Others 13,093.16905 -10.35% Revenue from main operation in South China increased mainly due to the sales revenue increased, revenue from main operation in East China mainly due to the sales increasing of tea powder and tea juice series products. export revenue increased is mainly due to the large market share of export in new merged Wuyuan Shenbao. During the period, the Company purchased from the top five suppliers amounting to RMB 34,444 thousand, accounting for 24.43% of total annual purchase, the Company sold to the top five customers amounting to RMB 46120 thousand, accounting for 23.99% of total annual sales. III. Formation of Assets and Changes on Expenses of The Company 1. Formation of Assets and changes on expenses of the Company Unit: RMB Yuan DEC 31 2007 DEC 31 2006 Ratio to Ratio to Increase/decrease Items total total of ratio to total Reason of Change Amount Amount assets assets assets （%） （%） （%） Current Repaying of Asset 20,238.03423 4.32% 41,016.62530 8.66% -4.34% short-term loans New merged Wuyuan Account 49,396.91823 10.55% 18,921.33317 4.00% 6.56% Shenbao and tea Receivable industry increased Account New merged Wuyuan 10,412.94133 2.22% 2,349.24098 0.50% 1.73% Prepaid Shenbao Take bake revenue from equity Other transferring of PEPSI Account 28,298.31719 6.05% 99,050.76521 20.92% -14.87% and payment for Receivable Maoye’s land purchasing Finish sale of Shenbao Stock 36,926.61466 7.89% 45,207.00609 50.23% -42.34% apartment and reduce Inventory developing products Long-term Shenzhen PEPSI had 147,121.4728 128,025.7701 Equity 31.43% 27.04% 4.39% Pre-distribute bonus in 7 4 investment 2006,not yet for 2007 More machine Fixed equipment to 96,799.26253 20.68% 92,114.31870 19.45% 1.23% Assets Shenbaocheng this term New added Huizhou Intangible Ruhu and Wuyuan 66,301.94939 14.16% 29,414.84862 6.21% 7.95% Assets land lot this term Short-term 22,000.00000 4.70% 90,000.00000 19.01% -14.31% Loan Pay short-term debt 2. The main assets’ measurement attributes during the period. The Company’s assets is accounted using real value when acquired, if value decreasing happen, corresponding assets value decreasing be considered; in the balance sheet, tradable financial assets is calculated according to fair value, and the change of fair value is considered into this term’s 28 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 gain or loss. The Company’s tradable financial asset is only Haiguoshi investment, using the marketing price as the fair value. (For details please go to Chapter IX, Section III – Holding of other listed companies’ shares) 3. The change of the Company’s expenses cost Unit: RMB Yuan Increasing/decreasing Reason of Change Items 2007 2006 （%） Sale discount and Sale Cost 994.30763 13,496.55881 -92.63% promotion activities decreased Implemented three Management kinds of innovation, 38,028.19211 46,632.72234 -18.45% Cost human resource cost decrease Less interests income Accounting 4,472.18733 2,876.53690 55.47% compared to that of last Cost year IV. Changes on data concerned in cash statement of the Company Unit: RMB Yuan Increasing/decreasing Items 2007 2006 （%） Net Cash flow generated by business operation 208,581.9722 151,473.6812 Subtotal of cash inflow 8 7 37.70% 211,032.2056 181,475.3294 Subtotal of cash outflow 6 4 16.29% Cash flow generated by business operation, net -2,450.23338 -30,001.64817 -91.83% Cash flow from investment activities 119,494.5211 123,212.8321 Subtotal of cash inflow 0 5 -3.02% Subtotal of cash outflow 79,389.73698 46,383.49682 71.16% Net cash flow generated by investment 40,104.78412 73,829.33533 -45.68% Cash flow from issuing of securities 135,000.0000 Subtotal of cash inflow 43,700.00000 0 -67.63% 163,480.2086 Subtotal of cash outflow 97,133.14181 4 -40.58% Net cash flow generated by financing -53,433.14181 -28,480.20864 87.61% The change of the operation current flow was mainly caused by cash increasing from products sale follows the increasing of operation income. The change of the investment current flow was mainly caused by increasingly purchasing fixed assets and intangible assets this term. The change of the current flow from raising capitals was mainly caused by the decreasing of new short-term loan and paying the previous load timely. 29 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 V. Discussion and Analyzing on Other Important Information Relevant to The Company’s Operation During the period, there is no other important information relevant to the Company’s operation VI. Operations and Achievements of Main Holding and share-holding Companies of The Company Unit:RMB0’000 Total Net Shareholders’ Name of Asset Profit Effective Registered Equity of the subsidiary and of the Equity Main products capital （ended Parent Co. holding parent held（%） Dec31 （ended Dec31 company Co. 2007） 2007） （2007） Shenzhen Investing enterprise; info Shenbao consultant; food Huacheng Food technology; ginger tea; manufacture condensed pumpkin Co.,Ltd 51.67 powder; liquid beverage; 10,345.13 18,276 8,158 144 condensed tea juice; instant tea powder; add-on for beverage and food; import and export。 Shenzhen Manufacturing and sale Shenbao beverage, subsidiary food, Sanjing Food & food additive, import and 100 3,015 10,624 2,694 -484 Beverage export Development Co., Ltd. Shenzhen Canned food, beverage, Shenbaoo ingredients and its package Industrial material and raw material, Trading Co.,Ltd hardware, chemicals, ceramic, car parts, electric 100 550 47 -4,546 -95 product, agriculture subsidiary product, local apgriculture product, daily necessities, antiques, cloth, import and export Shenzhen Pepsi Manufacturing and sale of Cola Beverage the American PEPSI Co., Ltd. beverages, soft drink with Chinese brand, other USD 30 74,845 43,397 11,006 carbonic acid beverage and non-carbonic acid beverage, 1,225 PEPSI cola athletic product, PEPSI cola stationery Information from subsidiaries and corresponding solutions. Establish a new company of Huizhou Shenbao , with registered capital of RMB 4 millions, major in: real estate, logistics, to service the real estate development in Huizhou for the Company. (I) Shenzhen Shenbao Huacheng Food Manufacture Co.,Ltd During the period, achieved a operation income of RMB101,838,851.83, operation profit of RMB1,361,932.53, net profit attributable to the owners of parent company of 1,439,141,11, separately increasing97.81%、254.23%、410.67% compared with those of last year. As a strongly supporting company by the Company, Shenao Huacheng keeps a stable increasing 30 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 from the establishment of 2004 and its manufacturing capacity and income have a further improvement in 2007. 1. Capital capacity increased. During the report period, the Company superadded RMB22,450 thousands to Shenbao Huacheng which also got superadded capital from another shareholder Guangdong Huacheng. Now the registered capital of Shenbao Huacheng is RMB 103,450 thousands, Shenbao Huacheng got higher capital capacity and adjusted the capital’s operation, founded a good financial basis for further development. 2. Scale merit shows with keeping increasing sale on manufacturing and marketing. Manufacturing capacity mainly comes from the progress of the change from one product manufacturing to two products’ manufacturing of tea powder and tea juice according to the solution of key technology problems and modification of device procedure in the first term reconstruction. And also the manufacturing capacity of instant tea powder of Shenzhen manufacturer has been increased form 700t to 1200t for successfully establishment of the second term Shenzhen manufacturer, the increasing highly promoted the operation income and consolidated the current market shares. And the second term reconstruction of Shenbao Huacheng Chaoyang manufacturer suppose to be finished in the May of 2008, so the manufacturing capacity of instant tea powder of Shenao Huacheng shall increase to 1700t at that time. Summarily, in 2007 , based on the keeping of settled marketing channels, Shenao Huacheng improved operation income stably, got authentication to be supplier of a series of national or foreign famous beverage manufacturer., constructed a good brand effect and basis for further stable increasing of sales income. 3. Extended to tea plant base according to formed developing stratagem. After comprehensive advance research and demonstration, Shenbaoo Huacheng decided the Jianxi Wuyuan to be of the developing bases of tea industry and held shares of Jianxi Wuyuan Shenbao Tea Industry Co.,Ltd. The Jianxi Wuyuan Shenbao Tea Industry Co.,Ltd( hereinafter referred as Wuyuan Shenbao ), has a registered capital of RMB20,000 thousands. Operate business of green tea, red tea ,pearl tea, wulong tea, info consultation, food technology development, condensed tea beverage (liquid, solid), condensed juice(coffee, bamboo leaf, liquorice, lotus leaf, honeysuckle, mulberry leaf, fishy grass, chrysanthemum), panting, tea import and export, special local agriculture products, purchasing, processing and sale etc. During the period, Wuyuan Shebao signed a contract of purchasing the transferring using right of 233.5 units of eco-industrial land lot. Till the report day, received the permission of all land lots issued by Wuyuan government, others are in processing. Till the report day, the Company signed a contract of the rental of 490 units of land of tea plant for 50 year with Wuyuan Jiangwan Town, implemented basically the extension of tea industry chain to tea plant base. 4. Issues in business operation. Manufacturing cost has a continuous pressure of the continuous increasing of raw material price; manufacturing capacity and sales have been increased highly but the increasing speed of the manufacturing capacity can’t keep up with that of sales. The sale faces challenges with progress of industry standards and tough market competition. All these led to the decreasing of gross profit rate along with the increasing of sales income, further adjustment of marketing stratagem to promote the profitable capacity is need. (II) Shenzhen Shenbao Sanjing Food & Beverage Development Co., Ltd.: During the report period, achieved operation income of RMB61,631,722.05, operation profit of RMB-3,891,456.51, net profit attributable to the owners’ of parent company of RMB-4,837,813.44, increasing 11.70%, 73.48%, 65.24% respectively compared with those of last year. Shenzhen Shenbao Sanjing Food & Beverage Development Co., Ltd manufacture and sale ingredients independently after the Company separated ingredients and beverage manufacturing. During the period, Shenbao Sanjing had some increasing of product volume; the sale income has been increased sharply and controlled the human resource cost effectively for discovering of new marketing model; decreased the wastage for equipment device for improving the devices and 31 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 manufacturing technology; the operation profit rate improved with the decreasing of operation cost because of the decreasing of some raw materials and package material; but there is a pressure for manufacturing cost for the increasing price of subsidiary raw materials and energy resources, and there is pressure for further increasing of operation profit rate for simple products structure, low rate of market share and few new products, more tough market competition and pressure from other well-known brand. The Company’s soft drink is manufactured by Guandong Shenbao Food Manufacture Co.,Ltd (referred as Guangdong Shenbbao in the following) exclusively. Guandong Shenbao is a holding subsidiary company of Shenbao Sanjin, with registered capital of RMB 6 millions. It main business consists of canned food, agriculture an subsidiary product(grain, cotton, tobacco not included), non-alcohol beverage, bean product, milky product manufacturing sale and raw material purchasing. To the end of the report period, total assets of this company is RMB11,816,832.18, net assets is 184,974.36; during the period, the operation income is RMB40,524,208.62 with operation profit of RMB1,226,743.04 and net profit of RMB1,202,659.24, increased 31.74%、118.30%、117.80% separately compared with those of last year. In 2007, the soft drink industry is profitable with a obviously increased sale income. though the price increasing of raw material and more tough market competition, Guangdong Shenbao consolidated the market shares by thoroughly using the advantage of the chain system of manufacturing, supply, sale, research, and improving the technology and recipes, decreasing the direct cost of products along with fitting for the market; by enhancing the research, Guangdong Shenbao promoted Shenbao Liquorice Chrysanthemum Tea into market and got benefit; and put effort on wastages control by enhancing the productive procedure and performing technology innovation; Guandong Shenbao reduced the productive cost sharply compared with that of last year, increased the sale income sharply with a positive current flow and be profitable by enhancing control on purchasing expenses, expanding market channels using new sale method boldly, Increasing the loan return rate, (III) Shenzhen Pepsi Cola Beverage Co., Ltd. During the period, Shenzhen PEPSI had a main business income of RMB1,606,394,033.70, main business profit of RMB375,927,789.29, net profit of RMB110,059,100.54, increasing 10.37%、 6.15%、-13.59% compared with those of last year. In 2007, faced the pressure of increased productive cost and tough market competition, Shenzhen PEPSI increased the input highly with a lower increasing speed and less profit. VII. No Special-aimed Subject Under Controlled in The Company. VIII. The Technology Innovation during The Period During the period, the Company continuously enhanced the product research, technology innovation and comprehensive environment protection, and got certain achievement on news product development, reconstruction of production line, technology stock and saving energy, reducing wastage and reducing waste distributing. Besides the eight owned patents on deep tea processing, another three new patents was applied on extraction of tea and natural plants in 2007. the new ingredients will be on marketing soon after finishing the trial-production in lab, along with the improvement on appearance, color, fluidity, and reconstruction of recipe, technology, package of part products to improve the product quality; the new researched Shenbao Liquorice Chrysanthemum Tea has been on market and got benefit by continuous research on new products; achieved good economization on electricity, water, gas, waste distribution to ease the pressure of increasing productive cost by continuous innovation on technology and equipment devices. To keep the advantage of advanced research technology in the industry and coordinate with the strategic plan centralized tea industry, Shenbao Huacheng established Shenbaoo Huacheng Tea research Center and the Deep processing Test Base of Chinese academy of agricultural sciences jointly by enhancing cooperation with universities and researches. 32 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 Section II The Prospect for Future Development and Operational Plan in The New Report Year I. The Development Tendency of The Industry of The Company and Tts Influences (I) The potential of food and beverage industry mainly depends on consumptive colony( population ), actual consumptive capacity(income) and consumptive tendency( desire and preference). In 2007, benefited from increasing income and fortune effect offered by capital market, our national economy keeps stable improvement. The average disposable income increase further to promote the consumption, which forms good conditions for fast improvement of food and beverage industry. 1. The consumption trends to pursuer quality, convenience, safety and tasty, it will promote the food and beverage consumption to brand and high-end market. The upgrade of consumption make the food safety emphasized, the government gradually implement the forcible permission into market and other relevant laws to enhance the food safety examination. It will eliminate some small manufacturer with bad productive conditions, and leads to standardization, large scale, which is better for collecting resources for brand developing. 2. Viewed from all the aspects of food and beverage, the establishment of new product and new brand usually need long time accumulation and test in the tough competitive market because of the property of dependence on some brand which used to the taste. Our national local beverage enterprises usually operate dispersedly with small scale; few real famous beverage brand exists in the country with the existence of lots of minor beverage brands. The pressure of market developing comes from less capital, few way of raising capital, low technology and poor capacity. The main threaten and challenge before the companies comes from the beats in large or small scale by international beverage brand, and competition among all the local brands. This homogeneous competition appears in the similarity of products, operation model even advertising model. In the tough competition market, All the manufacturing company emphasize dominating market channels, communications with consumer, the company’s management, the sale system and brand merit and other unique advantages show special importance to lead to the company’s success. 3. In the cost list of the food and beverage manufacturing, raw material and package occupy most of it. So the price of raw material affect the food and beverage industry badly with the increasing of agriculture products when there is high pressure of inflation. (II) The market of tea beverage consumption increase 30% annually, occupying 20% of the national beverage market, which is the third largest beverage market exceeding that of fruit juice. And there is tendency to exceed carbonic acid beverage. 1. Now there is a obvious tendency in the tea market: the tea consumption is stable with a little increasing, and the price is stale; the market prefer fame, quality and new type, and consumption preference changes from “matter” to “sense” obviously. More attention paid to the tea safety, so along with the safety sense enhancing and safety standards of heavy metal and pesticide remaining improving by import country, tea manufacturing have to emphasize the manufacturing without social effects of pollution to establish better productive environment and strict processing steps without pollution. 2. There is challenges for tea industry: the pressure of productive capacity overwhelming the market shows up gradually along with expanding tea plant area; powerful and capable company is needed to implement management in large scale for the tea production mainly accomplished by man-power instead of machine. The manufacturing equipments for extraction tea juice, asepsis, germfree can package and technology for overcoming tea turbidity, deposition, keeping flavor is insufficient compared to those of advanced country; the need from international market for ours tea is weak, and the increasing in value of RMB 33 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 along with the increasing price of raw material and high shipment price will affect the export badly from the view of export in 2007. II. The Opportunity of The Company for Future Development (I) The formed development policy which centralized on tea and natural plant extraction along with extension to both side of tea plant base and end products is accurate. Centralizing on tea and natural plant extraction is advantageous to form challenging barrier using own technology advantage, and to benefit from the huge tea beverage market. (II) The Company’s tea industry has a starting scale now, during the period, the Company established a international first-class deep tea processing and natural plant extraction base, get authenticated to be a qualified supplier of many famous beverage manufacturer in the word which lead to be the leading position manufacturer; and extended to the both side of tea plant base and end product gradually.. (III) After couples of years cultivation, the Company’s tea industry accumulated abundant industry experiences, obtained a passel professional technical talent team and either patents on deep processing of tea, the Company obtain some successful experience of quality management and sales network construction, and already have the foundation and ability of further development. III. The Development Strategy of The Company The Company continues to integrate the traditional industry, centralizes superior resources of the Company, and develops the tea industry with all our strength. Taking the finish machining and the intensive processing of the tea leaf as the core business; that is to say, to produce the condensed tea juice and tea powder, extending to the tea garden planting base and terminal product, and implement the industrialization, standardization, internationalization management, establish the leading enterprises in the Chinese tea raw material industry. IV. The Operational Plan of the Company in The New Report Year (I) Revolved around the development strategy, centralize the tea industry chain; continue to vigorously develop the tea industry. Shenbao Huacheng plans to finish the continuation of Chaoyang manufacturing line in first half year of 2008, Wuyuan Shenbao plans to finish the first term green tea processing base construction and begin manufacturing, and Wuyua tea plant base plans to be constructed in2008. the Company plans to develop good quality small package green tea and tea beverage raw material products with high add-on values to adjust the products structure and improve the profit capacity. In 2008, the Company will continue to keep rapid development in tea industry, consolidate the leading position in tea and natural plant extraction industry. (II) Adjust the traditional product structure of the Company with financial index as the judgment standard, actively carry out the operational index and administrative index of the Company, promote the product profit to lower operation risk continuously. Emphasize on the return of capitals to improve the efficiency of capital using. (III) Consummate the administration to improve management efficiency and control the productive cost, Establish and complete the inner control system, perfect the administration of the Company. Promote standardization and fine management. Strengthen the budget management, supply chain management, product quality management and supply chain management, promote the sense of cost to manufacturing, sale, purchasing and etc to improve management efficiency. (IV) Enhancing the R&D, persisting technology innovation to enhance the core competition. Guided by the market, quicken the product technology adjustment and devotion to new 34 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 product research, enhance the R&D team construction, and with the technology advantages of core products, continuously develop the highly profitable products which fit the market requirement to improve the market competition capacity and anti-risk capacity. (V) Construct perfect market channels. From the beginning of control of market channel and expanding of sale area, The Company will collect the current resources to improve pervasion of products, establish products’ brand to get more market shares. (VI) Further consummate professional human resource management system. By deepening the three institutional reforms, regulate the contract relationship between employee and company, regulate the inner management structure and work configuration, establish commercial salary system, perform long-term effect inspiring and restriction system in the proper time to form a stable human resource basis for achieving the developing strategic targets. V. The Demand of Fund and Using Plan of The Company Revolved around the development strategy, the demand of fund and using plan of the Company in the future three years are as follows: (I) Finishing the first term green tea processing base for the owned tea plant base in Jiangxi Wuyuan; expand tea plant base by acquire tea plant at the proper time to provide a stable resources of original tea materials, develop the good quality small package green tea products, expand tea industry product line. the fund of RMB 100 millions estimated to be needed. (II) Invest RMB100 millions to establish Huizhou Shenbao manufacture & logistics factory(named temporarily) in 1-3 years. (III) RMB20,000,000 for moving of ingredients manufacturing base. The funds needed in the aforesaid projects will be raised from innate funds and other finance raising methods. VI. The Disadvantages and Risks for The Development of The Company and Solutions. (I) Pressure of cost increase continuously. The cost of Standardization and regulation of products increase continuously for national enhancing examination on food industry and strict requirement for product quality; price of agricultural product and oil product increase continuously, raw material and power cost increased sharply lead to productive cost sharp increasing of the Company’s main products. More financial pressure maybe comes with contracted currency policy and increasing financial expenses and other expenses from the increasing bank rate. (II) It is difficult to form the competition barrier because of the intense competition and low threshold of food and beverages and quick change in market. In the intense market competition along with homogeneous competition, the profit contribution of the traditional products reduced and so that it attenuates the profit-gaining ability and competitive ability of the Company. There is pressure on profit because of more continuous efforts needed on the construction of industry chain of tea and natural plant extraction, push from competitors, product adaptive capacity and control capacity on market channels. Solutions and Measures: enhance budget management, supply chain management, control costs with quality; improve productive capacity by innovation on technology and equipments; quicken the new product research procedure; enhance brand construction, consolidate and expand market. 35 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 Section III Possible Changes of Accounting Policy and Accounting Estimation after Introducing New Enterprise Accounting Standard And its Effect on Finance and Achievements I. Accounting Policy Changes and The Effect on Finance and Achievements From Jan 1 2007, the Company use the enterprise accounting standard system and guidance issued by the government. According to Enterprise Accounting Standard No.38—First Time Using Enterprise Accounting Standard, Description No.1 of Enterprise Accounting Standard, and Note about Performing New Accounting Standard for Publish Relevant Accounting Information issued by China Securities Regulatory Commission [2006]No.136, along with the Company’s own property and details,, based on the financial report of Dec 31 2006, the Company made changes to financial report on the basis of item’s importance. Which as follows: (I) Retirement compensation fit for confirmation requirements of anticipated debt. According to the new Enterprise Accounting Standards, should confirm the debt of RMB6,890,000.00 from the compensation caused by retirement which in the retirement plan on Jan 1 2007, so reduce the stock income of RMB6,890,000.00 on Jan 1 2007. (II) Income tax The Company constructed own accounting policy according to the new Enterprise Accounting Standards, and extract some devalue stock. According to new standards, should transfer the difference calculation between assets tax basis and book value affected by all devalue stock and compensated losses to income tax asset, so increase the stock income of RMB4,473,122.67 on Jan 1 2007, which consists of parent company’s owner equity increasing of RMB4,432,893.63, and minority interests increasing of RMB40,229.04. (III) Minority shareholders’ equity The minority interests of RMB17,461,146.89 in the combined financial report under old Enterprise Accounting Standards, is considered into stockholder’s equity under the new Enterprise Accounting Standards, so the stockholder’s equity increase RMB17,461,146.89 on Jan 1 2007. as minority interests increased RMB 40,229.04 from transferring income tax asset caused by extraction devalue stock, the minority interests is RMB17,501,375.93 under the new Enterprise Accounting Standards on Jan 1 2007. (IV) The backward adjustment of long-term equity investment to subsidiary According to the Description No.1 of Enterprise Accounting Standards issued by accounting department of the Ministry of Finance, the long term equity investment hold by parent company from ahead of the fist executive day should be performed backward adjustment, then the subsidiary company is considered to be independent accounting from the beginning. Under the new Enterprise Accounting Standards, should confirm the investment income according to the declared cash dividend or deserved part of profit. This year the Company implemented backward adjustment of long-term equity investment for subsidiaries under the new standards, and adjusted correspondently statutory surplus reserve which should extracted in the previous years of RMB13,384,066.76. so the surplus statutory surplus reserve increase RMB13,384,066.76 with the deduction of RMB13,384,066.76 from the not yet distributed asset of the beginning of the year. 36 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 II. No Accounting Estimation Change under New Enterprise Accounting Standard III. Profit Affected by The Gain and Loss from Fair Value Changes The gain and loss of fair value changes is RMB189,000 under the new Enterprise Accounting Standards, it come from transactional financial asset calculated by Haiguo investment organization based on market price. (For details please go to Chapter IX, Section III – Holding of other listed companies’ shares.) Section IV Investment I. Use of the raised proceeds (I) Investment project and progress with the raised proceeds As approved by China Securities Regulatory Committee by document Zheng-Jian-Gong-Si-Zi (2000)54, in December 2000, the Company allotted shares to all shareholders on 3 to 10 basis and at RMB5 per share. After deducting of the promotion expenses, proceeds raised was RMB73,993,232.82. The proceeds have been colleted entirely on January 11, 2001. The proceeds were verified by Shenzhen Zhongtian CPAs and the “Capital Verification Alternation Report” Yan-Zi-Bao-Zi[2001]No. B-005 was issued thereon. The followings are the projects in which the proceeds will be invested to: RMB0’000 Amount of Name of projects Total investment proceeds to be used Project of Henggang new plant of Shenzhen Pepsi 2,900.00 2,900.00 Cola Beverage Co., Ltd. Project of Shenbao Industrial City 5,800.00 4,499.32 As of June 30, 2007, the practical investment of proceeds has amounted to RMB52,075,031.94. There still is RMB21,918,200.88 of proceeds not in use, account for 29.62% of the total. Details are as the followings: RMB0’000 Amount of Proceeds Progress of the invested Name of projects proceeds to be practically used projects used Project of Henggang new Completed in 2002 and put plant of Shenzhen Pepsi 2,900.00 1,560.64 into production Cola Beverage Co., Ltd. Project of Shenbao 4,499.32 3,646.86 Construction of factory Industrial City completed in 2005 (II) Change of investment plan by raised proceeds Under the precondition of not to influence the implementation of planned projects, and to meet the practical needs of business operation, lower financial costs, fully develop the efficiency of proceeds, as passed by the 1st Shareholders’ Special Meeting 2007 held on July 30, 2007, the investment projects of the proceeds were changed as the followings: 1. Reduce the investment scale of the aforesaid projects For the construction projects of Hengang plant of Shenzhen Pepsi Cola Beverage Co., Ltd. and 37 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 and Shenbao Industrial City have been completed and are in good operation, thus the preplanned projects are adjusted as the followings: Project of Henggang new plant of Shenzhen Pepsi Cola Beverage Co., Ltd.: This project was planned for investment of RMB29,000,000. In which RMB15,606,447.66 was practically invested. At present this project has been completed, thus no further investment is needed. Shenbao Industrial City: This project was planned for investment of RMB44,993,200. In which RMB36,468,584.28 was practically invested. At present this project has been completed, thus no further investment is needed. 2. The retained proceeds are proposed to be used to support the need of current capital For the construction projects of Hengang plant of Shenzhen Pepsi Cola Beverage Co., Ltd. and and Shenbao Industrial City have been completed and are in good operation, thus the retained proceeds obtained in share allotting implemented in year 2000 amounted to RMB21,918,200.88 will be used to support the need of current capital. (III) Reason of change the use of retained proceeds Shenzhen Pepsi Cola Beverage Co., Ltd. hasn’t requested for further investment. And the new factory of Shenbao Industrial City has been meeting with the needs of production, thus no further expanding plan was made. Meanwhile the Company’s core businesses of tea and natural essence products were in rapid growth, thus the needs greater input of operational capital. The Company is now at a crossway of business layout relocation, lack of current capital can constrain the Company’s development. Both of the above two projects have been completed, thus changing the usage of retained proceeds will make no influence on the operation of the two projects. With the support on current capital, the Company will further enforce its R&D effort, consolidate its technical advantage; the operation system may be constructed with more flexibility, and lower the costs in energy and raw material purchasing. Using of these proceeds may also reduce bank loans and save financial expenses. (IV) Decision-making procedures and opinions provided 1. On June 29, 2007, “The proposal on changing the use of retained proceeds from share allotting implemented in 2000” was passed by the 8th meeting of the 6th term of Board. 7 of the 9 directors presented the meeting. Director Zhu Junming and Chen Xiaohua absented the meeting and empowered director Zeng Pai to vote on their behalf. The above proposal was passed with unanimous affirmative. Independent directors described their independent opinions, and the Supervisory Committee issued their verification opinions at examining of the proposal. All of them were in favor of the proposal and agree to submit it to the Shareholders’ Meeting. (For details please see the “Resolutions of the 8th Meeting of the 6th Term of Board” numbered 2007-017 released by Securities Times, Hong Kong Wen Wei Po and www.cninfo.com.cn published on July 3, 2007.) This changing of proceed use forms no related transactions. 2. On July 30, 2007, the 1st Shareholders’ Special Meeting examined and passed “The proposal on changing the use of retained proceeds from share allotting implemented in 2000”. Beijing Deheng Law Firm Shenzhen Office observed the meeting and deemed the convening and holding procedures, attendee qualification, and voting procedures are complying with the Company Law, Shareholder’s Meeting Criteria of Listed Companies, and the Articles of Association. Thus the resolutions adopted at the meeting are legal and effective. 38 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 II. Investment of the proceeds of non-financed funds in the report period. (I) Investment in Huizhou Shenbao Manufacturing and Logistics Garden Considering the overall productive cost and relevant investment environments, along with the developing of the Company’s traditional industry and stratagem of developing tea industry, and based on the overall research of the national land policy and rareness of land resource, on Dec 11 2006, in the 3rd Meeting of the 6th Board of Directors the directors evaluated and signed the proposal of purchasing the using right of 199,800 square meter industrial land lot with price lowing than RMB75,724,200 in the Ruhu town of Huizhou city to construct Huizhou Shenbao manufacture processing and logistics factory. The fund consists: resumption compensation of land lot, including but not limited to land compensation, crop compensation, demolition compensation, other labor costs for finishing project and certificate fee for the use of state-owned land of the project land lot, including but not limited to land lot assignment fee, taxes and other administration fee. During the period, the certificate of using right for 83,954 square meters is ready. (For details please find the Announcement 2007-001 of the Company released by Securities Times, Hong Kong Wen Wei Po and www.cninfo.com.cn on January 13, 2007). Form the May in 2007, the Huizhou government comprehensively regulate and consummate the listed transfer procedure of land load according to the national new land policy, which increased sharply the base price of listed transferring land lot, and also administrative taxes and fees, the government resumption fund and compensations, along with regulation of listed transferring land lot. According to the increasing of the listed transferring fee of land lot and other fees, the Board of Directors agree to increase certificate fee of RMB171 per square meter for the non-certificated land lot (about 115 thousands square meters) including land lot compensation, crop compensation, demolition compensation, other labor costs for finishing this project, certificate fee for the use of state-owned land, including but not limited to land lot assignment fee, taxes and other administration fee to ensure the integrity of land lot of Huizhou Shenbao Manufacture Processing and Logistics Factory. (II) Increasing of investment in SBHC On Feb 12 2007, in the 5th meeting of the 6th Board of directors, the Company evaluated and approved a additional investment of RMB22,451.3 thousands to Shenbao Huacheng Food manufacture Co.,Ltd along with the additional investment of RMB21,000 thousands from the Shenbao Huacheng’s another shareholder Guangdong Huacheng Food manufacture Co.,Ltd. Shenbao Huacheng was originally registered with capital of RMB 60,000 thousands with 51.67% undertook by the Company and 48.33% occupied by the Guandong Huacheng; after the additional investment, ShenBao Huacheng has registered capital of 103,451.30 thousands with keeping the same share proportion for both companies (details in the declaration numbered 2007-003 of the 5th meeting of the 6th Board of Directors published on newspaper of Securities Times, Hong Kong Wen Wei Po and website of www.cninfo.com.cn ). During the report, the Company signed the Additional Investment Agreement with Guangdong Huacheng, and implemented the capital investment agreement; Shenbao Huacheng implemented the industry and commerce change registration. 39 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 Section V Auditors’ opinion and accounting policies In the report term, Shenzhen Dahua Tiancheng CPAs issued standard auditors’ report without qualified opinion. For details of change in accounting policies please go to Section III. - Possible Changes of Accounting Policy and Accounting Estimation after Introducing New Enterprise Accounting Standard And its Effect on Finance and Achievements. Section VI Daily works of the Board I. Particulars about the board meetings and resolutions The Board convened seven meetings in the report term: 1. The 5th meeting of the 6th term of Board was held on February 12, 2007. Resolutions were announced by Securities Times, Hong Kong Wen Wei Po and www.cninfo.com.cn on February 14, 2007. 2. The 6th meeting of the 6th term of Board was held on April 12, 2007. Resolutions were announced by Securities Times, Hong Kong Wen Wei Po and www.cninfo.com.cn on April 14, 2007 3. The 7th meeting of the 6th term of Board was held on May 18, 2007, the “Company Administration Internal Verification Report and Improving Plan” was examined and passed at the meeting. 4. The 8th meeting of the 6th term of Board was held on June 29, 2007. Resolutions were announced by Securities Times, Hong Kong Wen Wei Po and www.cninfo.com.cn on July 3, 2007 5. The 9th meeting of the 6th term of Board was held on August 17, 2007. Interim Report 2007 was examined and passed at the meeting. 6. The 10th meeting of the 6th term of Board was held on October 11, 2007. Resolutions were announced by Securities Times, Hong Kong Wen Wei Po and www.cninfo.com.cn on October 12, 2007. 7. The 11th meeting of the 6th term of Board was held on October 22, 2007. Resolutions were announced by Securities Times, Hong Kong Wen Wei Po and www.cninfo.com.cn on October 23, 2007. II. Execution of the resolutions of the Shareholders’ Meetings In the report period, the Board of the Company seriously implemented all resolutions passed by Shareholders’ General Meeting strictly in compliance with the resolutions and authorizations of Shareholders’ General Meeting. In 2006, the Company did not distribute profits or convert capital reserve into share capital. The Company had no shares allotment and additional issuance of new shares. III. Report of the Auditing Committee on their performing of duties Auditing Committee have been performing its duties with compliance to the “Working Criteria of Auditing Committee”, fully exercised its function of supervision. (I) Auditing Committee convened two meetings in the report term 1. The 1st meeting of the 6th term of Auditing Committee was held on April 12, 2007 40 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 (1) Examined and passed the Financial Report 2006 (2) Examined and passed the proposal of engaging the CPA for year 2007. (3) Examined and passed the 1st Quarterly Financial Report 2007. 2. The 2nd meeting of the 6th term of Auditing Committee was held on August 17, 2007 Examined and passed the Interim Financial Report 2007. (II) Confirmed the time arrangement of annual finance report audit of 2007 with Certified Public Accountants, arranged overall annual finance report audit assignments. (III) Supervision on The Audit Assignments to Certified Public Accountants The Audit Committee supervised and urged the Certified Public Accountants to promote the audit assignment by official paper report to accordance with the plan before leaving of certified accountants, before submitting the first script of audit report and before submitting the end script of audit report (IV) Two Times Evaluating and Approving Opinions to Annual Finance Report of 2007 1. The Audit Committee issued the first official report on paper to the non-audited annual finance report before the entering of certified accountants, it said: The accounting report material is actual and integrated with proper policy choice, accounting estimation is reasonable, no major mistake and misses and no occupying capital, no external irregular sponsion and abnormal relevant trading were found. Appeal the Company’s finance department to emphasize on strict disposal of relevant affairs base on the new accounting standard to ensure the fairness, realness and integrity of the finance report. The relevant finance report is fit for submitting to the certified audit accountant to audit. 2. After the basic audit opinion issued by certified audit accountant, the Audit Committee gave out the second official opinions on paper, it said: keeps the audit opinion of the first time, the Company has disposed the relevant affairs strictly according to the new enterprise accounting standards, the finance report is composed based on the new enterprise accounting standards and the Company’s relevant accounting rules, it reflect the finance state on the date of Dec 31 2007 and the operation achievements with current flow in 2007, the finance report reflect the Company’s overall state actually, accurately and fully. Summarily, we have no objection to the annual report of 2007 elementarily audited by the certified accountants of Shenzhen Dahua Tiancheng Accountants Company. (V) Summary of Audit Project Implemented by the Certified Public Accountants Company in The Last Year The Board of directors: We evaluated and approved the Annual Audit Project Plan submitted on Jan 13 2008 by the Finance Department of the company, communicated with the project leader of Shenzhen Dahua Tiancheng Accountants Company about the mentioned audit project plan, and got agreement of that: the plan is in composed detailedly and has responsible person on each step, it should assure the smooth implementation powerfully of the audit project work of 2007. According to the mentioned audit project plan, the auditors assigned by Shenzhen Dahua Tiancheng Accountants began to work on Jan 14 2008. on Feb 3 2008, they finished the field audit project of all relevant companies involved in the combined report. The project leader communicated entirely and continuously with the Audit Committee about the report combination, accounting adjustment, accounting policy deployed and other works need to be done in the audit project. In the period of field audit by certified annual audit accountants, our Audit Committee gave highly concern on the issues happened in the audit procedure, and communicated with the certified 41 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 annual audit accountants by phone and face-face conferences. The topics are mainly as the following: 1. Whether or not the finance report is based on the requirements of the new enterprise accounting standards, securities supervision departments and the relevant accounting rules of the company. 2. The accordance of the finance departments with law and rules, other external requirements and administrative policies, directions and other inner requirements. 3. Whether or not the inner accounting rules is established and completed. 4. Whether or not the cooperation between the company’s departments and certified accountants is enough to get the sufficient, proper documents and data need. The certified annual audit accountant affirmed the mentioned above positively, and submitted the basic audit opinions, which is the standard unqualified Auditors’ Report for the Company on feb 17 2008. In our opinions, the certified annual audit accountants implemented the audit strictly under the rule of Independent Audit Principle of Chinese Certified Accountants with sufficient time and properly configured fully qualified audit power. The audit report submitted entirely reflect the Company’s finance state on Dec 31 2007 and operation achievements and current flow in 2007. and the audit conclusion is in accordance with the actual state of the Company. (VI) Engagement and Disengagement of Certified Public Accountants 1. Propose to extend the service of Shenzhen Dahua Tiancheng Certified Public Accountants as the auditor of the Company for year 2008 The Audit Committee agreed with the proposal of the management: Continue to engage Shenzhen Dahua Tiancheng Certified Public Accountants as the auditor of the Company 2008 for the finance report, and the remuneration is RMB350,000. The Company won’t pay extra fees such as traveling expenses. 2. Propose not to engage international auditor. According to the statement of equality between the domestic accounting standard and Hong Kong Accounting and Auditing Standards, there is no need for engage exclusively international auditor to audit the finance report of 2007 using the international accounting standard, the management propose the Audit Committee to disengage the international auditor of 2007. The Auditing Committee agreed with the proposal of not to engage international auditor. IV. The Functions of Remuneration and Evaluation Committee The Remuneration and Evaluation Committee functioned strictly based on the Rule of procedure of the Company’s Remuneration and Evaluation Committee During the report period, the Remuneration and Evaluation Committee evaluated the remuneration of the directors, supervisors and high managers mentioned in the annual finance report, the remuneration is actual, accurate, and legal. The Company has no stock option inspiration system, the Remuneration and Evaluation Committee will comprehend the promotion of the establishment of the stock option inspiration system in the future. 42 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 Section VII Profit distribution plan 2007 Audited by Shenzhen Dahua Tiancheng Certified Public Accountants, the Company’s net profit attributable to the owners of the parent company in 2007 was RMB43,690,242.34. In which, RMB12,190,091.18 were used to makeup losses of previous years (due to adjustment done for initializing of the new accounting standard); RMB4,907,308.65 were provided as statutory surplus reserves, the undistributed profit was RMB26,592,842.51. For the relatively smaller base of undistributed profits of the Company in 2007, the Board of the Company decided neither profit distribution nor capital reserve capitalization will be carried out for year 2007. The undistributed profits would be mainly used for supporting the development of the Company’s core business. The aforesaid preplan should be submitted to Annual Shareholders’ General Meeting 2006 for deliberations. Section VIII Other significant issues On February 26, 2008, the Company added China Securities Journal as one of the official information disclosure medias. Chapter VIII. Supervisory Committee’s Report I. Summary of the Supervisory Committee’s works in the report term In 2007, in guarding the legal benefits of the Company and the shareholders, the Committee performed its duties as setout by the Company Law and the Articles of Association; presented the shareholders’ meetings held in the report term; observed the board meetings; monitored the holding procedures of the shareholders’ meetings and board meetings, as well as the execution of the resolutions adopted at these meetings. (I) In the report period, the Supervisory Committee had held 2 meetings: 1. The 3rd meeting of the 6th term of Committee was held on April 12, 2007. The following resolutions were examined and passed: (1) Work Report of the Supervisory Committee 2006; (2) Financial Settlement Report 2006; (3) Annual Report 2006 and the summary version (A and B shares); (4) The Profit Distribution Plan 2006 (5) The 1st Quarterly Report 2007 Resolutions of this meeting were released by Securities Times, Hong Kong Wen Wei Po, and www.cninfo.com.cn on April 14, 2007. 2. The 4th meeting of the 6th term of Committee was held on August 17, 2007. The following resolutions were examined and passed: The Interim Report 2007 and the summary version (A and B shares) 43 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 (II) Other works of the Supervisory Committee 1. Enforce construction of its own structure. Focus the members on improving of their own professional quality. In the report term, the members participated in training courses organized by relative organizations, did their best to perform their duties faithfully, further improved the monitoring quality. 2. Conducted onsite investigation on major projects occurred in the report term, followed up with the construction, implementation and progress of the projects. Facilitated the standard operation of major projects in view of guarding the investors’ interests. II. Independent opinions of the Supervisory Committee (I) Operation according to the laws In the report period, the Supervisory Committee conducted supervision over the procedures of holding Board meetings and Shareholders’ General Meeting, resolutions, implementation of the resolutions of the Shareholders’ General Meeting by the Board of Directors, status of the senior executives in implementing their duties and the Company’s management system according to the relevant laws and regulations of the State. It believed that in 2007, the Board of Directors carried out the operation in a standardized way strictly according to the Company Law, the Securities Law, the Stock Listing Rules, the Articles of Association and other relevant regulations. The Company’s directors and managers worked carefully and responsibly; the Company’s decision-making was religious and solid; the Company had established the relative perfect internal control system. We have found no directors or senior executives ever involved in any actions against the law, rules and regulations, or the Articles of Association or harmful to the interest of the Company and the shareholders in the process of implementation of their duties. (II) Financial inspection The Supervisory Committee had made careful and serious inspection on the Company’s financial system and financial position and believed that the Annual Report 2007 of the Company had truly reflected the Company’s financial position and operation achievements. The auditors’ report and the auditors’ opinion on the relevant issues produced by Shenzhen Dahua Tiancheng Certified Public Accountants are objective and fair. (III) The actual investment project funded by the latest proceedings is the same as the commitment. (IV) In the report period, there existed no inside transactions or actions harmful to partial shareholders’ right and interest or in connection with loss of the Company’s assets. (V) In the report term, the Company conducted no related transactions. 44 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 Chapter IX. Significant Events Section I Lawsuits and arbitrations I. The case concerning the joint-liability guarantee the Company provided for the RMB 7 million loan that Shenzhen China Bicycle Company (Holdings) Limited (hereinafter referred to as “Shen China” for short) had got from China Construction Bank Shenzhen Branch (hereinafter referred to as “Construction Bank” for short) has been closed with a reconciliation. In the year 2003, the Company and Construction Bank reached the Agreement on Interest Reduction and Cancellation, and according to the agreement, the Company had already paid back the RMB 7 million in two times for Shen China and fulfilled its guarantee liability (For details, please refer to Annual Report 2003 of the Company.); through the verdict of (1999) YFJYZZI No. 26 Civil Judgment Document made by Guangdong High People’s Court on the case concerning the joint-liability guarantee amounting to USD 800 thousand the Company provided for the Letter of Credit Shen China had applied for and opened at Bank of China Shenzhen Branch, the Company should shoulder joint repayment liability. And ended the first half year of 2004, the Company had repaid RMB 6.632 million (amounting to USD 800 thousand) for Shen China and fulfilled the guarantee liability (For details, please referred to Semi-Annual Report 2004 of the Company.). Latter, on Jul.22, 2004 the guarantee payment, which the Company had paid on its behalf, was enforced to conduct by Shenzhen Intermediate People’s Court the Company applied to. To safeguard the rights and interests of the Company, the Company sued Shen China to Shenzhen Intermediate People’s Court, and requested for a verdict to order Shen China to repay RMB 7 million, which the Company had paid on its behalf, as well as to compensate relevant loss arising from the capital occupancy in 2004. Shenzhen Intermediate People’s Court judged and ordered Shen China to repay the RMB 7 million the Company had paid on its behalf, and the interest arising during the period of capital occupancy [(2004) SZFMECZI No.448]. Since Shen China had not fulfilled its repayment duty according to the time and contents stipulated in the judgment document, the Company applied to Shenzhen Intermediate People’s Court on Dec.20, 2004 for compulsory enforcement. Shenzhen Intermediate People’s Court sent Shen China (2004) SZFZZI No.1382 Civil Award and Mandamus, as well as (2005) SZFZZI No.208 Civil Award and Mandamus on Jan.14, 2005, and ruled that the property of Shen China (RMB 14.132 million as the limit) should be sealed up and frozen, and that Shen China should fulfill the duties stipulated in effective legal papers or regulated by law within five days from the day the Mandamus arrived. Should Shen China defaulted beyond the time limit, Shenzhen Intermediate People’s Court would make compulsory enforcement according to law (For details, please refer to notifications of the Company published on Securities Times, Hong Kong Ta Kung Pao and Juchao Website dated Jul.30, 2004, Nov.20, 2004, Dec.16, 2004, Dec.29, 2004 and Jan.18, 2005.). Later, stipulated by the Higher People’s Court of Guangdong, the aforesaid two lawsuits were conducted by Guangzhou Railway Transportation Court, and the conductions were suspended in the report period because of discovering no property clues. As soon as circumstances of execution suspension end, the Company may apply to Guangzhou Railway Transportation Court for resumption of execution. II. The case concerning the joint-liability guarantee the Company provided for the RMB 30 million loan obtained by Shenzhen Nanfang Tongfa Industrial Company (hereinafter referred to as “Nanfang Tongfa”) has been closed through mediation on Jan.11, 2002 (For details, please refer to notifications of the Company published on Securities Times, Hong Kong Ta Kung Pao and Juchao Website dated Mar.13, 2002.). Ended the year 2003, the Company had repaid on behalf of Nanfang Tongfa the principal, interest, as well as the legal fare for the trial of first instance and the cost of preservation, amounting to RMB 38.003 million, and fulfilled the guarantee liability according to the requirements of Civil Mediation Agreement. The Company had applied to Shenzhen Intermediate People’s Court to compulsorily enforce the 45 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 property of Nanfang Tongfa. In November 2004 and January 2005, Shenzhen Intermediate People’s Court respectively issued the (2004) SZFZZI No.477 and No.115 Civil Order and ruled that, since Nanfang Tongfa had no executable property, (2001) YGFJEZZI No.111 Civil Mediation Agreement sent by Guangdong High People’s Court should be suspended, and that, after the case of execution suspension disappeared, the Company can applied to Shenzhen Intermediate People’s Court for resumption of execution. (For details, please refer to notifications of the Company published on Securities Times, Hong Kong Ta Kung Pao and Juchao Website on Jan.22, 2005.). The Company got informed that Nanfang Tongfa has applied to the People’s Intermediate Court of Shenzhen for bankruptcy and liquidation of debts. In July 2007, the Company has claimed its credit to the liquidation workgroup. As confirmed by the liquidation workgroup with “Credit Verification Notice”, the Company’s credit was confirmed to RMB43,561,532.50 (in which RMB38,003,311.50 was the repayment, and RMB5,558,221.00 was interests). (Details are available with the Announcement of the Board of Directors released by Securities Times, Hong Kong Wen Wei Po, and www.cninfo.com.cn dated July 18, 2007.) III. In December 2002, the case concerning the joint-liability guarantee the Company provided for the HKD 3 million loans that Guangdong Sunrise Holdings Co., Ltd. (the former Shenzhen Lionda Holdings Co., Ltd. hereinafter referred to as “Sunrise Company” for short) had obtained from Industrial and Commercial Bank of China Shenzhen Branch has been closed through mediation. On Jan.13, 2003, the Company repaid, on behalf of Sunrise Company, the principal of HKD 3 million as well as the interest amounting to HKD 100 thousand, while surplus interest was exempted. The Company would exercise relevant rights through legitimate means. IV. The case concerning the joint-liability guarantee the Company provided for the HKD 6 million loan Sunrise Company had obtained from Shenzhen Development Bank Co., Ltd. Nantou Subbranch (hereinafter referred to as “Shenfazhan”) had been closed with reconciliation. Ended the year 2003, the Company had repaid a sum of principal HKD 2 million and the interest arising on behalf of Sunrise Company. The remaining principal of HKD 4 million was made on-lending, and the Company would continue to provide guarantee (For details, please refer to notifications of the Company published in Securities Times, Hong Kong Ta Kung Pao and Juchao Website dated May 13, 2003.). In year 2004, after this loan was expired, Sunrise Company did not perform the repayment. In the report period, the Company had repaid another HKD 2,500,000 (equaling to RMB 2,550,000) of the principal on behalf of Sunrise Company. The loan has been fully calculated and withdrawn, so the repayment in the report period would not influence the Company’s net profit in the report period. Sunrise Company had not repaid this loan by the expiration day of the loan in the report period. Up to the audit report date, the Company had repaid a third HKD1,453,186.52 of the principal as well as HKD 620,734.25 of the interest (equaling to RMB2,055,920.22) on behalf of Sunrise Company. The Company had fulfilled the guarantee liability, and would exercise relevant rights through legitimate means. V. The case concerning the joint-liability guarantee the Company provided for the RMB 8 million loans which Sunrise Company had obtained from Guangdong Development Bank Co., Ltd. Shenzhen Nanyuan Subbranch (formerly Guangdong Development Bank Co., Ltd. Shenzhen Branch Nanyuan Subbranch) has been closed with reconciliation. Ended the year 2005, the Company had repaid a sum of interest amounting to RMB 2.369 million on behalf of Sunrise Company, while the remaining principal and interest amounting to RMB 8.58 million would continue to be provided as a loan to Guangdong Sunrise Holdings Co., Ltd., and the Company would continue to provide join-liability guarantee for it. The guarantee term was from Feb.6, 2005 to Aug.6, 2005. Sunrise Company had not repaid this loan by the expiration day of the loan. VI. The case concerning the joint-liability guarantee the Company provided for the HKD 32 million loans which Sunrise Company had obtained from Bank of China Shenzhen branch had been reconciled (For details, please refer to notifications of the Company published on Securities Times, Hong Kong Wen Wei Po and Juchao Website dated Jul.29, 2006 and Dec.13, 46 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 2006.), and on Dec.11, 2006, the Company signed the Reconciliation Agreement on GLENMORE INVESTMENT LIMITED Releasing Shenzhen Shenbao Industrial Co., Ltd from the Debt Guarantee Liabilities for Guangdong Sunrise Holdings Co., Ltd. with the creditor Glenmore Investment Limited; in the report period, the Company had paid RMB 29,000,000 according to the aforesaid reconciliation agreement. Shenzhen Intermediate People's Court withdrew the lawsuit against the Company，and the Company has submitted a suit of applied for recourse to appeal the Court to sentence the Shengrun company to pay back the disbursement by the Company of RMB29,000,000 and its interest. The Court has filed the case with case number Min’er’chu(pronunciation) 123 of 2007 and finished the trial of first instance. On Aug 7 2007, the Company received the judgement of Shenzhen Intermediate People's Court, which sentence the Shengrun company to pay back the disbursement of RMB29,000,000 and its interest within ten days from the sentence(from Dec 31 2006, calculate based on bank loan rate of the same period till paying off). If the Shengrun company not pay back the debt within the ten days by itself, based on the number 232 section of the CIVIL PROCEDURE LAW OF THE PEOPLE'S REPUBLIC OF CHINA, should double pay the interest of the delay days. and Shengrun should pay the lawsuit fee of RMB186800. if not agree with the sentence, Shengrun company can appeal to the Guangdong High People’s Court within 15 days from receive of the sentence. If Shengrun company not appeal within the statutory days, this sentence be legally effective(for details, please refer to notifications of the Company published on Securities times, Wehuipao and website of Www.cninfo.com.cn separately on Feb 6 2007, April 21 2007, Aug 8 2007). After the legal validity, Shengrun company had not fulfilled its repayment duty according to the time and contents stipulated in the judgment document, the Company applied to Shenzhen Intermediate People’s Court for compulsory enforcement。Till the report day, the Company received the Note of Filing case numbered Zhizi(prononciation) 127, the Shenzhen Intermediate People's Court has filed the case(for details, please refer to notifications of the Company published on the securities times, Wen Wei Po and website of Www.cninfo.com.cn on Jan 15 2008). Section II Bankruptcy and relative issues No bankruptcy or relative issued happened to the Company in the report term. Section III Holding of other listed company’s shares RMB Yuan Portion in total Amount Book value Gain/loss of Stock Stock Initial securities Stock ID held at the end of the report category Code investment investment at (shares) term term end of term (%) Stocks 400005 Haiguoshi (3rd 272,288.09 50,000 262,500.00 100% 189,000.00 board) Other stock investment held at the — — — — — end of report term Gain/loss of disposed stock — — — — — investment in the report term Total 272,288.09 50,000 272,288.09 50,000 262,500.00 47 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 Section IV Purchases and sales of assets, merger of businesses I. Investment in Huizhou Shenbao Production and Process Distribution Park For details, please see Chapter VII, Section IV, II.- Investment of the Proceeds of Non- Financing Funds in the Report Period II. Increasing of investment to SBHC For details, please see Chapter VII, Section IV, II.- Investment of the Proceeds of Non- Financing Funds in the Report Period III. Retrieving of land using rights at pay According to “Shenzhen Government Land Confiscation and Retrieving Rules” and “Decision on Retrieving of the Land Using Rights of Shenzhen Shenbao Industrial Co., Ltd.” (Shen-Guo-Fang [2007]443) issued by Shenzhen Land Resource and Property Administration, Shenzhen Land Resource and Property Administration has decided to retrieve the Company’s using right of the land located in He’ao Community, Hengang Street (Land No. G08511 -4(6)) with area of 38,526.6 square meter. Shenzhen Land Resource and Property Administration will compensate for the land using right with cash and no other compensation will be made. According to the appraisal report (Shen-Fang-Gu-Zi[2007]217) issued by Shenzhen Real Estate Appraisal Center, and also according to the meeting minute of Shenzhen Municipal Government 2007(585), the government will pay the Company RMB48,231,920 in total. Retrieving of the aforesaid land using rights was for the need of city planning and construction. The Company has entered the “Agreement on Land Using Rights Retrieving and Compensation” with Shenzhen Land Resource and Property Administration. (For details please find the Announcement of the Board of Directors numbered 2007-044 released by Securities Times, Hong Kong Wen Wei Po, and www.cninfo.com.cn dated December 6, 2007.) Retrieving of this land won’t influence the consistency of the Company’s business operation nor the stability of the Company’s executive team, but will bring the Company RMB34.16 million of income. After deducting of income tax, the net gain will be RMB29.04 million, account for 72.77% of the total net profit. IV. No merger of businesses occurred with the Company Section V Implementation of share option incentive program The Company hasn’t yet implemented any share option incentive program. Details are available in Chapter VIII. 48 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 Section VI Material Related Transactions In the report period, there were neither major related transactions nor related transactions in connection with daily operation between the Company and the related parties. Section VII Important contracts and the implementation I. Entrustment, contracting and leasing The Company had no important entrustment, contracting or leasing in the report period, nor carried down from previous years. II. Significant guarantees 1. External guarantees left over by history The external guarantees left over by history of the Company were all made before the year 1999, when, with Nanfang Tongfa, Sunrise Company, Shen China, Shen Tellus and the Company all being holding subsidiaries or wholly-owned subsidiaries of Shenzhen Investment Holdings Corporation as the historical background, the Company had provided the above-mentioned four companies loan guarantees with the guarantee principal amounting to RMB 50.28 million, HKD 41 million and USD 800 thousand. After being controlled by Shenzhen Agricultural Products Co., Ltd. in 1999, the Company set down to solve the guarantee problems left over by history. Up to the end of report term, the Company has been released from the guarantee responsibilities over Shen-Zhonghua, Shen-Teli, and Nanfang Tongfa. At present the following is the only guarantee issued left over from the previous years: The lawsuit case that the Company offered guarantee for Sunrise Company’s loan amounting to RMB 8,000,000 from Gongdong Development Bank Shenzhen branch was settled with compromise. Expect the partial principal and its interest the Company need repay for Sunrise Company, the residuals amounting to RMB 8,580,000 were renewed by Sunrise Company and guaranteed by the Company continuously. The term of guarantee is from Feb.6, 2005 to Aug.6, 2005. Sunrise Company had not repaid this loan by the expiration day of the loan. (II) Guarantees for holding subsidiaries By the end of the report period, the total guarantees that the Company had furnished holding subsidiaries amounted to RMB22 million, taking up 6.87% of the Company’s audited net assets of the year 2006. Details are as follows: On October 10, 2007, Shenzhen Shenbao Sanjing Food & Beverage Development Co., Ltd., the wholly-owned subsidiary of the Company, was granted the comprehensive credit of RMB22 million by China Everbright Bank Shenzhen Branch with term of one year. On October 15, 2007, a loan of RMB22 million was granted. In the report term, the total of guarantees provided by the Company was accounted for 9.55% of the net asset of the Company. There were no guarantees for the shareholders, the actual controllers and the related parties, and there were no direct or indirect liability guarantees for warrantees whose asset liabilities were over 70%. 49 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 III. Entrustment of financial management In the report period, the Company had made no entrustment of financial management. Section VIII Commitment Issues I. Commitments made by the original non-tradable shareholders in the process of Share Merger Reform: (I) Shenzhen Agricultural Products Co., Ltd. and Shenzhen Investment Holdings Corporation will obey the laws, statutes and regulations, and perform the statutory commitment obligations in the process of Share Merger Reform; (II) Carrying out an effective and long-term encouragement to the management level, after the completion of share relocation scheme, Shenzhen Agricultural Products Co., Ltd. and Shenzhen Investment Holdings Corporation, the non-negotiable shareholders of the Company, will sell their possessed shares in 3 year to the management level of the Company according to their share holding proportion after the share relocation scheme, which took up 6%-8% of the Company’s total capital shares after the implementation of pricing. The aforesaid encouragement specific measures and rules for implementation for the management level was studied and formulated by listed companies according to The Measures Governing Equity Incentive Plans of Listed Companies of CSRC and national relevant regulations, and were reported to the State-owned Assets Supervision and Administration Commission of Shenzhen Municipality Government for examination and approval and then implementation. The circulation condition of this part of shares will be implemented following relevant provisions. Both of Agriculture Products Co. and Investment Holdings Co. have been fulfilling their statutory responsibilities assumed from their commitments. According to “Trial Provisions for Implementing of Share Equity Incentive Program in State-controlled Listed Companies (Domestic)” dated December 6, 2006 issued jointly by State-owned Assets Supervisory & Administration Committee and the Ministry of Finance, the Company will further the details of the Company’s share equity incentive program. The non-negotiable share holders will push forward the implementation of share equity incentive program within the extent allowed by the laws and regulations and in appropriate market situation. II. On October 11, 2007, Agriculture Products Co., and Investment Holdings Co. send letters respectively to the Company, saying that they have already entered the “Share Equity Transferring Agreement” with Fusion System (HK) Co., Ltd. for the transferring of 76,407,697 shares in total (account for 42% of the total capital shares). In which, Agriculture Products Co. will transfer 38,589,008 shares to Fusion System (account for 21.21% of the total capital shares of the Company), while Investment Holdings will transfer 37,818,689 shares to Fusion System (account for 20.79% of the total capital shares of the Company). Upon completion of this share transferring, Fusion System will become the controlling shareholder of the Company. At present the share transferring is under proving process. Fusion System, Xinyi Technologies Group Co., Ltd.- the shareholder of Fusion System, and its substantial dominator Mr. Li Shengpo (known as “the purchaser” collectively) has made the commitment that “Upon completion of the takeover (namely when the target shares had been transferred to the possession of Fusion System), the purchaser will use its comprehensive resources to support the development of the Company, and practically ensure the Company to achieve the following goals: 1. For the first whole fiscal year upon completion of the share transferring, the Company will achieve a net profit of not less than RMB100 million; 50 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 2. At the 2nd and the 3rd complete fiscal year upon completion of the share transferring, the Company will achieve increase of net profit by at least 50%, i.e. at least RMB150 million at the 2nd year and RMB225 million at the 3rd year. If the Company failed to achieve the above target, the purchaser will compensate the shorted part by legal means (including but not limited to cash payment), to make the Company achieve the above targets. If the purchaser failed to fulfill the above commitments, the sellers or the Company are entitled to claim by legal means.” Section IX Engaging and Dismissing of Certified Public Accountants In the year 2007, the Company renewed the engagement of Shenzhen Dahua Tiancheng Certified Public Accountants as the domestic auditor of the Company 2006. The remunerations that the Company had paid the Certified Public Accountants within the two years were as follows: In RMB Yuan Financial auditing fee Other fees Name of the CPA Year Year Year Year Notes 2007 2006 2007 2006 Shenzhen Dahua Tiancheng Certified Public 238,000 220,000 — — — Accountants Shenzhen Dahua Tiancheng Certified Public Accountants had provided auditing services for the Company successively for seven years. Section X Other significant events I. In the report term, none of the directors, supervisors, executives, shareholders, substantial controller, buyer of the Company was investigated by relative departments, executed by legal & discipline departments, delivered to legal departments, appeared for crime, investigated or punished by China Securities Regulatory Commission, restricted to security market, criticized publicly, regarded as improper person, punished by other executive departments, or publicly condemned by the Stock Exchange. II. The Agriculture Products Co., and Investment Holdings Co., - the two top shareholders of the Company, were planning to dispose the Company’s shares up to 42% of the total capital shares. To the end of this report term, the share equity transferring promotion announcement and public invitation announcement have been published, subscriber offer period, communication period, and the decision-making procedures have been completed. On October 11, 2007, Agriculture Products Co., and Investment Holdings Co. send letters respectively to the Company, saying that they have already entered the “Share Equity 51 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 Transferring Agreement” with Fusion Co. for the transferring of 76,407,697 shares in total (account for 42% of the total capital shares). They have disclosed the simplified Statement of Change in Share Equity. While Fusion Co. has also disclosed the summary of Report on Purchase Offer. On October 29, 2007, the 2nd Shareholders’ Special Meeting 2007 examined and passed the proposal about strategic investment of Fusion System Co., Ltd. by way of share transferring agreement. For this will involve with transferring of state-owned shares, strategic investment of foreign company in A share listed Company, and formed offer trade, it can only be implemented after relative government approval procedures had been gone through. At present, this event is under relative approval procedures. The company will fulfill its duty in information disclosure duly and precisely. (For details please find the announcements released by Securities Times, Hong Kong Wen Wei Po, and www.cninfo.com.cn respectively on May 8, 2007, August 17, 2007, August 27, 2007, September 3, 2007, September 10, 2007, September 17, 2007, September 24, 2007, October 8, 2007, and October 12, 2007. III. With consideration of the resignations of Mr. Zhen Yuxi and Mr. Fang Jianhui from the positions of general manager and vice general manager respectively, the 12th meeting of the 6th term of Board held on February 22, 2008 have approved them to resign from the positions describe here above, and engaged Chairman Zeng Pai as the general manager of the Company. (For details please find the announcement released by Securities Times, China Securities Journal, Hong Kong Wen Wei Po, and www.cninfo.com.cn) IV. Accepting of investigations and visitings The Company accepted or conducted the following investigations, communications, or visiting events in the report term: Main content involved and Time/date Place Way Visitors material provided March 27th Meeting Onsite Huabao Xingye Talked about the Company’s 2007 room of the investigation Fund business operation and Company Management production. The Company Co., Ltd. revealed no significant Mar 28 Meeting Onsite Beijing Capital information that hasn’t been 2007 room of the investigation Group Ltd. disclosed to the public Company V. In the report period, there were no other significant events of the Company that haven’t been disclosed in provisional report. 52 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 Chapter X. Financial Report Section I Auditors’ Report 深华（2008）股审字 024 号 To the shareholders of Shenzhen Shenbao Industrial Co., Ltd. We have audited the accompanying financial statements of Shenzhen Shenbao Industrial Co., Ltd., which comprise the balance sheet as at December 31, 2007, and the income statement, statement of changes in equity and cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes. I. Management’s responsibility for the financial statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with Enterprise Accounting Standards. This responsibility includes: (1) designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; (2) selecting and applying appropriate accounting policies; and (3) making accounting estimates that are reasonable in the circumstances. II. Auditors’ responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Chinese Standards of CPA. 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 auditors’ 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 auditors consider internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 53 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 III. Auditors’ opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of Shenzhen Shenbao Industrial Co., Ltd. as of December 31, 2007, and of its financial performance and its cash flows for the year then ended in accordance with Enterprise Accounting Standard. Shenzhen Dahua Tiancheng CPAs CPA of PRC Zhang Guihong Shenzhen China CPA of PRC Wu Jianhui March 26, 2008 Section II The Financial Statements (Attached hereafter) I. The Balance Sheet II. The Income Statement III. The Cash Flow Statement IV. Statement of Change in Share Equity Section III Notes to the financial statements All figures hereinafter are described in RMB Yuan except for being stated otherwise Note 1. Company profile Shenzhen Shenbao Industrial Co., Ltd. (the “Company”), formerly a state-owned enterprise 54 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 incorporated in the People’s Republic of China (“PRC”) in 1975 (formerly named “Shenzhen Shenbao Canned Food Co.), obtained approval from the Shenzhen Municipal People’s Government to reorganize to a company limited by shares in 1991 (Document (1991)978). On the approval of the People’s Bank of China, Shenzhen Branch (Document (1991)126), the Company issued shares on the Shenzhen Stock Exchange and was granted the business license numbered Shen-Si-Zi N27358. The Company initially issued 107,312,935 shares in the stock exchange. In 1992, one bonus share was given to each 10 shares, totally increased 10,731,290 shares. In 1993, one bonus share and one allotted share were given to each 10 shares, totally increased 20,878,845 shares. In 1996, one bonus shares was given to each 10 shares upon the basis of total capital shares at the end of 1996, and capitalizing of capital reserves was carried out at one to ten basis, thus totally increased 27,784,614 shares. In 2001, upon the total capital shares at the end of 1999, 3 shares were allotted to each 10 shares, and totally increased 15,215,404 shares. The Company is now have registered capital of RMB181,923,088. Scope of main operations of the Company: production of food can, beverage and local products; domestic commerce and supply and marketing of materials (exclude government controlled or dominated merchandises); import and export business; development and operation of property on legally obtained land. The Company’s main products are: Seasoning series under “Sanjing” brand include oyster sauce, olive vegetable, and soy; beverages series under “Shenbao” brand include daisy tea, lemon tea, and wax gourd tea; tea series under “Jindiao” brand include instant tea powder and tea concentrate. Note 2. Basis of presentation of the financial statements and statement on compliance of Enterprise Accounting Standard The financial statements were prepared on the basis of constant operation, regarding to the trades and events practically happened, and recognition and measurement in accordance with the “Enterprise Accounting Standard – Basic Rules” and other criteria of the accounting standard. At preparation of the financial statements under Enterprise Accounting Standard of PRC, certain estimations and assumptions were needed. These estimations and assumptions may influence the presentation of assets, liabilities, and contingent liabilities at the financial report date, as well as the gains and expenses in the report term. The financial statements prepared by the Company were in compliance with the requirements of the Enterprise Accounting Standard and frankly and fully reflecting the Company’s financial situation, business performance and cash flow. 55 SHENZHEN SHENBAO INDUSTRIAL CO., LTD Note 3. Merger of enterprises and consolidated financial statements 1. Controlled subsidiaries (RMB0’000) Reg. Registered Actual investm Business property Name of the controlled subsidiaries Add. capital at the end o report term Subsidiaries formed not because of merger Shenzhen Shenbao Industrial Trading & Development Co., Ltd. (“SBGM”) Shenzhen Trading and wholesaling 550.00 55 Shenzhen Shenbao Properties Management Co., Ltd. (“SBWY”) Shenzhen Management of the Company’s properties 500.00 50 Shenzhen Shenbao Biological Products Co., Ltd. (“SWZP”) Shenzhen Production and sales of health food and food additive 200.00 20 Shenzhen Sanjing Food & Beverage Co., Ltd. (“SBSJ”) Shenzhen Manufacturing of beverage, food, and food additives 3,015.00 8,05 Shenzhen Shenbao Huacheng Foods Co., Ltd. (“SBHC”) Shenzhen Tea concentrates and instant brew 10,345.13 5,34 Huizhou Shenbao Industrial Investment Co., Ltd. (“HZSBTZ”) Huizhou Industrial investment, logistics information consulting 500.00 30 Huizhou Shenbao Technologies Co., Ltd. (“HZSBKJ”) Huizhou Property development and management 400.00 40 Shenzhen Shenbao Fruit Juice Co., Ltd.(“SBGZ”) Shenzhen Fruit juice series 1,650.00 1,65 Shenzhen Shenbao (Liaoyuan) Industrial Co., Ltd. (“SBLY”) Shenzhen Business not launched yet 237.80 Shenzhen Pearl River Refrigerated Foods Factory (“ZJLD”) Shenzhen Manufacturing of refrigerated foods 352.00 24 *1: Shenzhen Shenbao Fruit Juice Co., Ltd. – registered with capital of RMB16.50 million. The Company was supposed t fully invested by the Company. It was planned to manufacture fruit juice products. This company was not practically started juice production line under possess. The Company has provided accumulatively RMB14.85 million of long-term investmen between the recoverable value and book value of the asset. This company’s financial statements are not in the consolidation r *2: Shenzhen Shenbao (Liaoyuan) Industrial Co., Ltd. – This company has been founded for years, but hasn’t been norma long-term investment provision at the full amount of investment in this company. This company’s financial statements are no *3. Shenzhen Pearl River Refrigerated Foods Factory – has long been suspended for production. Deregistration procedures h The Company’s investment on this company has been neutralized to zero on equity basis. This company’s financial statemen *4: All of the above companies are direct or indirect shareholding subsidiaries with consolidated voting share of 100%. 56 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 Particulars about minor shareholders’ equity: Amount of minor Amount of minor Minor shareholders’ gain/loss Name of the shareholders’ equity used shareholders’ offset from the owners’ subsidiaries to offset minor equity equity of the parent shareholders’ gain/loss company SBSJ 10,956.20 10,956.20 (204,531.85) SBHC 46,944,803.65 46,944,803.65 (742,640.10) Total 46,955,759.85 46,955,759.85 (947,171.95) Note 4. Principal accounting policies, accounting estimations and preparation method of consolidated financial statements (1) The Company adopts the “Enterprise Accounting Standard”; (2) Fiscal year: The Company adopts Gregorian calendar year as the fiscal year, namely the fiscal year is the year started at January 1 and ended at December 31. (3) Standard currency The Company takes RMB as the standard currency for bookkeeping. (4) Accounting basis and pricing principles The Company adopts accrual basis in accounting. Except for provided otherwise in the note, normally actual cost is adopted in pricing. Assets are booked at actual costs when obtained. Asset impairment provisions are provided when impairment occurred. (5) Translation of foreign currencies Foreign currency transactions at initial confirmation shall be translated with the instant rate (or approximate exchange rate) on the exchange date. At the balance sheet day, foreign currency items are translated at the instant rate at the balance sheet day. Exchange differences between the amount recognized at instant rate of balance sheet date and the initially recognized, or the rate of previous balance sheet date, are accounted into current gain/loss account. Non-monetary foreign currency items measured at historic cost are still translated at the instant rate of the day when the transaction happened, its amount in standard currency shall not be changed. (6) Recognition of cash and cash equivalents Cash is referring to: cash, bank deposits, other monetary capital that can be drawn at any time; cash equivalents are those bonds, stocks, and foundation investments that can be cashed anytime within three months. (7) Transactional financial assets 57 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 Transactional financial assets are divided into transactional financial assets and those financial assets appointed to be measured at fair value with their changes are accounted into current gain/loss accounts. Transactional financial assets are recognized initially at the fair value when obtained. Relative transaction expenses are accounted into current gain/loss account when happened. At the balance sheet date, successive measurement of transactional financial assets are at fair value, and the transaction expenses which may possibly happen when the financial asset is disposed of, shall not be deducted. Changes of the fair value of transactional financial assets are accounted into current gain/loss accounts. (8) Accounting of receivables and bad debts Accounts receivable are classified into account receivable and other account receivable. Accounts receivable are initially recognized at the fair value when obtained. Successive measurements are at actual interest rate basis and according to the amortized costs. Allowance method is adopted in accounting of bad debt losses which may happen. Impairment tests are performed on single account with major amount and minor amount respectively. Impairment tests are performed separately on single account receivable with major amount. Impairment losses are recognized at the balance of current value of future cash flow lower than the book value, and bad debt provisions will be provided thereof. For individual account receivable with minor amount, and those with major amount but suggested no impairment when separate test was performed, bad debt provisions will be draw at the following schedule: Age Rate Within 1 year (include 1 year) 0% 1-2 years (include 2 years) 5% 2-3 years (include 3 years) 10% over 3 years 15% Bad debts are recognized when: (1) When the debtor is eliminated, bankrupted, or dead, and the account cannot be retrieved or significant short in cash flow after liquidation of the debtor’s assets or heritages. (2) The debtor hasn’t fulfilled its obligations to clear the overdue debt, and clear evidence suggesting that the account is impossible to be recovered. Bad debt loss is recognized when conclusive evidence suggests that the account is not receivable, and the bad debt provision will be neutralized thereafter. (9) Inventory Inventories are: Raw materials (include auxiliary materials), packing materials, consumables, product-in-process, product-in-development, finished goods, OEM goods, commission goods, goods sold by way of segment payments, etc. Inventories are measured initially at their costs. Inventories obtained from debtors in term of non-monetary assets to makeup debts are measured at fair value. Accounting method of inventories obtained in term of non-monetary transaction is available under the headline of “Monetary asset transaction”. Costs of inventories inputted by investors are recognized at the value setout by the investment contracts or agreements. Costs of finished products and in-process products are costs of raw materials, direct labors, other direct costs, and those indirect costs amortized at an appropriate proportion at normal productivity. It also includes relative interest expenses. Inventories are priced at costs when purchased or delivered to stock, and by weighted average method when delivered out from stock. Perpetual inventory system is adopted with inventories. 58 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 At the balance sheet day, inventories are measured at the lower of costs and cashable net values. At the end of year, inventories are measured at the lower of costs and cashable net values. If the cost of an inventory is higher than its cashable net value due to derogation, partially or fully out of date, or selling price is lower than the cost, the individual difference between the cashable net value and cost are provided as inventory impairment provision. Details are available in Note 6 and Note 7. Cashable net value is determined at the estimated value in normal operation less the estimated costs till it is finished and necessary sales expenses. For those inventories held for purpose of sales or service contracts, their cashable net value are accounted on the basis of contracted value. When the inventory amount is greater than the amount set by sales contract, the cashable value of exceeded part is accounted on the basis of common sales price. When the factor that caused reduction of inventory value has been eliminated, the inventory impairment provision provided previously shall be restored, within its amount, to the current gain/loss account. Cost of product-in-developing is accounted at the actual development cost, and transferred at individual development cost when sold. (10) Long-term equity investment For the long-term equity investment formed by corporate merger, if it is the long-term equity investment obtained from the corporate merger under the common control, the share of book value of owner's equity of the merged party on the merger date shall be taken as the initial investment cost. The direct expenses occurred in connection with the merger are accounted into current gain/loss account. For the long-term equity investments formed by merger of enterprises under different control, the merger cost is the asset given for obtaining of the controlling power, liabilities occurred or undertaken, and the fair value of equity securities issued. Expenses that are directly in connection with the merger are accounted into merger cost. Cost basis is adopted in accounting of those long-term equity investments by which the Company has substantial control over the invested enterprises, and those has no common control or major influence without quotation in an active market and the fair value cannot be reliably measured. Equity basis is adopted in accounting of those long-term equity investment by which the Company has joint control or major influence on the invested enterprise. Recognition of net loss incurred by the invested enterprise will be limited to when the book value of long-term equity investment and the substantial net investment as long-term equity has been reduced to zero, except for when the Company is responsible for extra losses. When the initial investment cost of a long-term equity investment is greater than the share of fair value of recognizable net asset of the invested enterprise, the initial investment cost will not be adjusted; when the initial investment cost of a long-term equity investment is lower than the share of fair value of recognizable net asset of the invested enterprise, the difference shall be accounted into current gain/loss account, and the cost of long-term equity investment shall be adjusted at the meantime. Recognition of the share of net gain/loss in the invested enterprise is on the basis of fair values of the recognizable assets of the invested enterprise when the investment is made, and adjusted by the net profit realized by the invested enterprise. Long-term investments are verified one after another at the end of year. If the retrievable value is lower than the book value due to falling of market price or fault of business operation, individual impairment provision will be provided at the balance of retrievable value lower than the book value. Retrievable value is determined at the higher one of fair value after deduction of disposal expenses and predicted future cash flow. Once the asset impairment loss is confirmed, it shall not be carried back in successive accounting periods. (11) Accumulative depreciation on fixed assets 59 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 a. Fixed assets is defined as the tangible assets which are held for the purpose of producing goods, providing services, lease or for operation & management, and have more than one fiscal year of service life. b. Initial measurement shall be conducted on fixed assets according to the actual cost. Abandon expenses will be estimated if the fixed asset is expected for a greater expense at when being abandoned, and will be accounted into fixed asset cost at its current value. If a price paid for purchasing of fixed asset is overdue beyond the normal credit conditions, and substantially forms financing characters, the cost of such fixed asset is determined at the current value of the price paid. The difference between the practical price paid and the current value of the price, except for those should be capitalized according to the regulations, shall be accounted into current gain/loss account. c. Depreciation of fixed assets is on age average basis. According to the categories of fixed assets, predicted service life, and predicted residue value (except for electronic facilities), the depreciation rates are decided upon the original value, the estimated service life, and the residue value (10% of original value). Depreciation age and annual rates are as the followings: Annual Fixed asset categories Useful life depreciation ratio Buildings: Consistency – production buildings 35 2.71% - non-production buildings 40 2.38% Temporary buildings 9 10.57% Equipment & machinery 12 7.92% Transportation tools 9 10.56% Other equipment 6 15.83% At end of year, the useful life and net residue rate are reviewed. Adjustments are done on any difference with original estimation. For those fixed assets whose retrievable amounts are lower than the book value due to technically out-of-date, damage, or idle for a long period of time, the retrievable value shall be estimated individually or on group, and impairment provision shall be drawn according to the differences with their book values. Once asset impairment losses are recognized, they shall not be carried back in successive terms. If impairment provision has been provided upon an fixed asset which is in status of disposal, and it may produce no financial benefit by use or disposal, depreciation and providing of impairment provision shall be suspended. And estimation of net residue value shall be adjusted at the meantime. (12) Construction in process The cost of construction in process is accounted according to the direct construction and installation costs, practical loan interest, and exchange gain/loss, which occurred in connection with the project. Construction in process is transferred to fixed asset as soon as the asset reaches its useful status as expected. Since the date when the construction in process reaches its useful status as expected, it is transferred to fixed asset at the value estimated according to the budget, planned cost, or actual costs, and depreciation will start at the second day. Adjustment will be done upon completion of project settlement process. At the end of year, full verification will be performed on construction in process. Impairment provision will be provided at the balance between the retrievable value and the book value, and accounted into current gain/loss account. Once asset impairment losses are recognized, they shall not be carried back in successive terms. (13) Loan and loan expenses Loans are initially booked at costs when obtained, and measured at amortized cost on actual interest rate basis in successive measurement. Loan expenses shall be capitalized only when they are satisfying 60 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 all of the conditions that: payment of asset already happened, loan expense already happened, and purchasing or construction activity for purpose of make the asset usable has started. Otherwise the loan expenses shall be recognized as current expenses. Loans borrowed particularly for purchasing or construction of assets which satisfies the conditions of capitalization, the expenses to be capitalized shall be decided by actual interest occurred for the particular loan, less interest obtained from saving of the unused fund saving in bank or temporary investment gains. If common loans have been used in purchasing or construction of assets satisfies the conditions of capitalization, the interest to be capitalized shall be calculated according to the weighted average of balance of accumulated capital expense over capital expense of the particular loan multiply the capitalization ratio of common loans used. Capitalization ratio is calculated at the weighted average interest of common loans. (14) Intangible assets and R&D costs Intangible assets are booked at the amount practically paid. When the payment for purchasing of intangible assets is delayed beyond the normal credit conditions, which has substantially formed financing activity, the cost of intangible assets shall be decided according to the current value of the price paid. The difference between the actual payment and the current value shall be accounted into current gain/loss account in the credit period, except for those shall be capitalized according regulations. Intangible assets with limited useful life are amortized at the amount of cost after deducting of predicted residue value upon their useful life on straight basis. Intangible assets without limited useful life are not amortized. a. Land using rights are amortized to 50 years; b. Patent technologies are amortized to 20 years; Expenditures of internal researching projects are divided into research expenditures and development expenditures. Expenditures occurred before scaled production or been used, using of the research fruit or other knowledge in particular project or design, to produce new products or materials, facilities, or products with substantial improvement, are regarded as development expenditures. When the following conditions are satisfied, the development period expenditures are recognized as intangible assets, or otherwise recognized as expenses. a. The intangible asset is completed and technically possible to be used or sold; b. With intention to complete the intangible asset for purpose of use or sale; c. Evidence showing that there are markets or the products produced with using of the intangible asset, or markets of the intangible asset itself, by which the intangible asset may produce financial benefits. Intangible assets used inside the Company must be approved for their usable characters. d. Developing of the intangible assets are supported by sufficient technical, financial, and other resources, and the intangible assets can be used or sold. e. Expenditures occurred in developing of the intangible asset may be reliably measured. Research expenditures are accounted into current expense account when occurred. At end of each year, intangible assets are inspected one after another. Those intangible assets which have been replaced by other new technologies and the financial benefit of the Company may be influenced negatively when they are used, or significant decline in market value and cannot restore in the retained amortizing period, they shall be estimated individually for their retrievable amount, and impairment provision shall be provided according to the balance of lower than their book value. Once an asset impairment loss is recognized, it shall not be restored in successive accounting period. No impairment provision was provided in the report term. 61 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 (15) Goodwill At merger of enterprises under different control, the balance of merger cost over the share of fair value of net asset taken over is recognized as goodwill. At the end of each year, goodwill are divided into relative asset group to perform impairment test. Impairment provisions provided thereof are accounted into current gain/loss account. Impairment provisions will not be restored thereafter once provided. (16) Recognition of income Incomes are those generated by sales of goods, providing of services, and giving of assets. Income from sales of goods Sales incomes are recognized when all of the following conditions are satisfied: a. Major risks and rewards attached to the goods have been transferred to the purchaser; b. The Company holds neither successive management power which is normally attached to ownership, nor effective control, over the goods which have been sold out; c. Amount of income may be reliably measured; d. Financial benefits may inflow to the company; e. The costs, occurred or will occur, may be measured reliably. Sales incomes are recognized at the payments received or receivable according to the sales contracts, except for if the payment received or receivable according to the contract is not fairly acceptable. When a sales income is collected by way of differed payments, and practically have financing characters, the sales income is recognized at the fair value of the contract price. The balance of contract price and fair value is amortized to the contract period on practical interest basis, and accounted into current gain/loss account. Income from providing of services At balance sheet day, those service trades which can be reliably estimated are recognized at the percentage of completion. Progress of completion of service is decided by the portion of costs occurred over the estimated total costs. Costs of service providing are decided by total of income multiply completion percentage less service providing cost recognized and accumulated in previous years. Meanwhile, the amount of estimated total service cost multiply completion percentage less service providing cost recognized and accumulated in previous year is carried over to service costs. When the result of service providing cannot be reliably estimated at the balance sheet day, provided that the service cost may be compensated, the service income may be recognized at the cost already occurred, and carried over to service cost at same amount. If the cost of a service was predicted not able to be compensated, the cost occurred is recorded into current gain/loss account rather than recognized as service income. Income from giving of assets Incomes from giving of assets are recognized against following situations: a. Amount of interest income is calculated according to the time and actual interest rate of the monetary capital is used by other party. b. Income of using fee is calculated upon the charge period and calculation provided by the related contract or agreement. 62 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 (17) Government subsidy Government subsidies are recognized only when all of the following conditions are satisfied: a. The enterprise satisfies the conditions attached to the government subsidy; b. The government subsidy can be obtained. When government subsidy is monetary capital, it is measured at the amount received or receivable. When government subsidy is no-monetary capital, it is measured at fair value; and if the fair value cannot be reliably obtained, it is measured at the nominal amount. Government subsidies are classified into asset-related subsidies and income-related subsidies. Asset-related subsidies are those granted to the enterprise for the purpose of purchasing, construction, or other forms of long-term assets. Asset-related subsidies are recognized as differed income and amortized to gain/loss account upon the useful life of the subsidies. Though government subsidies measured at nominal value are accounted directly into current gain/loss account. Income-related government subsidies are those other than asset-related government subsidies. Income-related government subsidies are treated separately under the following situations: a. The subsidies which are used to makeup relative expenses or losses of successive terms are recognized as differed income, and accounted to current gain/loss of the relative terms. b. Subsidies used to makeup relative expenses or losses already occurred, shall be accounted into current gain/loss account. If a recognized government subsidy needs to be returned, it shall be treated separately according to the following situations: a. When there is relative differed income, the book balance of relative differed income shall be deducted, the exceeding part shall be accounted into current gain/loss account. b. When there isn’t relative differed income, it shall be accounted into current gain/loss account directly. (18) Trade of non-monetary assets In case of the asset traded in is obviously different from the asset traded out in term of risks, time, and value, or with different current value of predicted cash flows, and the balance is relatively great comparing with the fair value of asset being traded, and the trade of non-monetary assets is substantially of commercial; When the trade of non-monetary assets is of commercial, and the asset traded out can be reliably measured for its fair value, then the initial value of the asset traded in will be decided by the fair value of the asset traded out. When the trade of non-monetary assets is of non-commercial, or none of the assets being traded can be reliably measured, the cost of asset traded in is recognized according to the book value of asset traded out and tax payable. (19) Employees’ remuneration Employees’ remunerations are the various terms of rewards and other relative expenses the Company paid to the employees for their services. The Company pays remunerations include: wages, bonus, allowances and subsidies; employee welfare; medical insurance, endowment insurance, unemployment insurance, labor injury insurance, and procreation insurance; housing reserves; trade union fee and education fee; non-monetary benefit; lay off compensation; and other expenses related to providing of services by the employees. In the accounting period when the employees are serving the Company, the remunerations payable are recognized as liabilities, and except for the lay off compensation, they shall be treated by one of the following means: 63 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 a. Employees’ remunerations attributable to producing of products or providing of services shall be accounted into product costs or service costs. b. Employees’ remunerations attributable to construction-in-process or intangible assets, shall be accounted into costs of construction-in-process or intangible assets. c. Remunerations other than those described by a. and b. herein shall be accounted into current gain/loss account. (20) Recognition of predicted liabilities Responsibilities connected to contingent issues and satisfied all of the following conditions are recognized as predictive liabilities: (1) The responsibility is a current responsibility undertaken by the Company; (2) Fulfilling of the responsibility may lead to financial benefit outflow; (3) The responsibility can be measured reliably for its value. When a contract to be executed becomes a contract cause losses, and the responsibilities of the contract satisfy the conditions described above, it shall be recognized as predicted liabilities. Other responsibilities assumed by the Company (e.g. undertaking of excess losses, reorganization liabilities, or abandon expenses) that satisfy the above conditions, are recognized as predicted liabilities. (21) Income tax: Income taxes payable in current term and previous terms are recognized as liabilities, while the part of income tax paid more than that should be paid is recognized as asset. Except for the differed income tax liabilities occurred in the following transactions, all of the differed income tax liabilities generated by taxable temporary differences are recognized. a. Initial recognition of goodwill. b. Initial recognition of assets or liabilities generated by trades with the following characters: a) The transaction is not a merger of businesses; b) Neither accounting profit nor taxable income (or deductible loss) is influenced by the transaction. To the extent of taxable income could be used to deduct deductible temporary difference, the differed income tax asset generated by the deductible temporary difference. Nevertheless, the differed income tax assets generated by initial recognition of assets or liabilities in the transactions satisfying the following conditions are not recognized: a. The transaction is not a merger of businesses; b. Neither accounting profit nor taxable income (or deductible loss) is influenced by the transaction. At the balance sheet day, when there is conclusive evidence showing that enough of taxable income could be obtained in future to be used in deducting of deductible temporary difference, the differed income tax asset which hasn’t been recognized in previous terms shall be recognized. At the balance sheet day, the current income tax liabilities (or assets) formed currently and previously are measured at the predicted payable (or refund) income tax amount calculated according to the taxation law. As for differed income tax asset and differed income tax liabilities, according to the regulations of the tax law, shall be calculated at the tax rate applicable to the predicted period of retrieving the assets or clearance of the liabilities. When the tax rate applicable is changed, the differed income tax assets and liabilities recognized shall be recalculated, though the differed income tax assets and liabilities generated by trades or events recognized directly in owners’ equity shall be accounted into current income tax expenses at its influence amount. Current income tax and differed income tax are accounted into current gain/loss account as income tax 64 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 expenses, though exclude income taxes generated under the following conditions: a. Merger of businesses b. Trade or event recognized directly in owners’ equity. Current income taxes and differed income taxes in connection with the trades or events directly accounted into owners’ equity shall be accounted into owners’ equity. (22) Consolidated financial statements: The Company takes all subsidiaries under the Company’s substantial control in the consolidation range. When the accounting policy adopted by a subsidiary is different with that of the parent company, it should be adjusted according to the parent company’s accounting policies before being consolidated. For subsidiaries acquired by merger of enterprise under common control, the consolidated income statement and cash flow statement are including the income, expenses, profit and cash flow generated from the beginning of the term in which the merger happened to the end of report term. For subsidiaries acquired in term of merger of enterprises under same control, the consolidated income statement and cash flow statement are including the income, expenses, profit and cash flow generated from the merger date to the end of report term. When the current loss undertaken by the minor shareholders of the subsidiary is exceeding the share of these minor shareholders in the owners’ equity, the balance shall be treated separately according to the following situations: a. If the minor shareholders were responsible to undertake according to the Articles of Association or agreement entered, and the minor shareholders are capable to makeup, the balance shall be deducted from minor shareholders’ equity; b. If the minor shareholders were not responsible to undertake according to the Articles of Association or agreement entered, the balance shall be deducted from the owners’ equity of the parent company. The profit produced by the subsidiary in successive terms shall be accounted into the owners’ equity of the parent company before being used to makeup the losses attributable to the minor shareholders but undertaken by the owners’ equity of the parent company. (23) Earnings per share Basic earnings per share Basic earnings per share is calculated as: net profit of the current term attributable to common shareholders, divided by weighted average of common shares issued to outside. While calculating of weighted average of common shares issued to outside is on the following formula: Weighted average of common shares issued to outside = common shares issued to outside at beginning of term + common shares newly issued in current term * period since issued ÷ period of report term – common shares repurchased in current term * period since repurchased ÷ period of report term Diluted earnings per share When there are dilution potential common shares in the Company, the current net profit attributable to common share holders and the weighted average of common shares issued to outside shall be adjusted respectively, and the diluted earnings per share is calculated according to this. Dilution potential common shares are those potential common shares which may reduce the earnings per share provided that they are converted to common shares in the current term. Calculating of dilution earnings per share shall adjust the current net profit attributable to the common share holders according to the following issues: a. The interests of dilution potential common shares which have been recognized as expenses; b. Gains or expenses expected to be generated by conversion of dilution potential shares. 65 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 At calculating of dilution earnings per share: weighted average of common shares issued to outside = weighted average of common shares at calculating of basic earnings per share + weighted average of common shares increased by conversion of expected dilution potential common shares into common shares issued. At calculating of weighted average of common shares increased by conversion of dilution potential common shares to common shares issued, dilution potential common shares issued in previous terms shall be assumed to be converted in the current term; while dilution potential common shares issued in current shares shall be assumed to be converted on the day of issuing. When the exercising prices of share option certificates and future share options are lower than the average market price of common shares in the current term, their dilution shall be considered. The Company commits that when the repurchasing price provided by the repurchasing contract is lower than the market price, their dilution shall be considered. Diluted potential common shares shall be accounted into diluted earnings per share at the descending order according to their scales of dilution, until the diluted earnings per share reaches its minimum value. Recalculating When the amount of common shares or potential common shares has decreased due to distributing of dividend, capitalizing of common reserves, share splitting, or share consolidation, though the amount of owners’ equity is not influenced, the earnings per share of each report term shall be recalculated upon the adjusted amount of shares. When an above change happened between the balance sheet date and the approval date of the financial statement, the earnings per share of each report term shall be recalculated according to the adjusted amount of shares. When retrospective adjustment or restatement was carried out on the income of previous years according to “Enterprise Accounting Standard No.28 – Change of accounting policies, accounting estimations, and correction of accounting errors”, earnings per share of each report year shall be recalculated. (24) Segment report Report segments are decided upon businesses or geographic areas. Business segments are those identifiable parts which can provide a particular product or service, or a group of products or services. A segment is undertaking risks and rewards different from those of other segments. Geographic segments are those identifiable parts which can provide products or services in a particular economic environment. A geographic segment is undertaking risks and rewards different from those segments provide products or services in other economic environment. When most of the income of a business segment or geographic segment is from external trade, and one of the following conditions is satisfied, it shall be recognized as a report segment: a. The income of this segment accounts for 10% or above of the total income of all segments. b. The absolute amount of this segment’s profit (or loss) accounts for 10% or above of the greater one of the total of all profit-making segments’ profit or the absolute amount of total of all loss-making segments’ losses. c. The asset of this segment accounts for 10% or above of the total asset of all segments. Segment information is disclosed in form of principal report formation and secondary report formation according to the differences in risks and rewards. (25) Change of accounting policies and accounting estimations The Company started to implement the new accounting standard since January 1, 2007, namely: accounting of income tax has been changed from tax payable basis to balance sheet liability basis; some of the long-term equity investment on cost basis were changed to be accounted in term of 66 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 financial instruments; compensation for employee laid off is complying with the recognition conditions of predicted liabilities. Their influence on each report term is as the followings: Influence amount on profit of each term Accumulated Change of Accounting Policies Beginning of 2006 Year 2006 influence amount 1. Differed income tax 2,527,441.36 1,905,452.27 4,432,893.63 2. Compensation for laying off of employee --- (6,890,000.00) (6,890,000.00) Sub-total 2,527,441.36 (4,984,547.73) (2,457,106.37) Note 5. Taxations The Company is subject to: VAT, operation tax, city maintaining & construction tax, education surcharge, corporation income tax, and property tax. The turnover tax rates are: VAT 17%, operation tax 5%, city maintaining & construction tax is at 1% or % of the turnover tax, and education surcharge is at 3% of the turnover tax. Corporation income tax is at 15%. Note 6. Notes to main items of financial statements (the following figures are consolidated figures except for otherwise stated) 1. Monetary fund Categories Currency Original currency Exchange rate At the end of term Beginning of term Cash RMB 69,635.71 --- 69,635.71 177,870.80 HKD 664.02 0.9364 621.79 667.14 USD 7,134.73 7.3046 52,116.35 55,712.97 Sub-total 122,373.85 234,250.91 Bank deposit RMB 19,396,302.86 --- 19,396,302.86 40,448,863.24 HKD 12,676.65 0.9364 11,870.42 12,712.42 USD 96,855.01 7.3046 707,487.10 320,798.73 Sub-total 20,115,660.38 40,782,374.39 Total 20,238,034.23 41,016,625.30 2. Trading financial assets End of term Beginning of term Basis of fair value Items recognition Transactional equity 262,500.00 99,000.00 Market value instrument investment Total 262,500.00 99,000.00 67 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 3. Notes receivable Category At the end of term Beginning of term Bank acceptance 760,820.00 87,382.57 Total 760,820.00 87,382.57 Issuer Date of issue Date of expire Amount Zhejiang Huafa Tea Co., Ltd. Dec. 3, 2007 June 3, 2008 410,820.00 Xinchang County Chengbao Industry Co., Ltd. Nov. 16, 2007 May 16, 2008 200,000.00 Xinchang County Chengbao Industry Co., Ltd. Nov. 16, 2007 May 16, 2008 150,000.00 4. Account receivable (1) Statement of account receivable balances at the end of year grouped according to their risks At the end of term Beginning of term Portion Bad debt Portion Bad debt Categories Amount Amount in total provision in total provision RMB % RMB RMB % RMB I. Single item with major 13,533,789.10 19.79 --- --- --- --- amount II. Single item with minor amount but with greater 18,073,056.16 26.42 18,073,056.16 17,642,171.85 47.28 17,642,171.85 risks when combined with other similar items III. Other minor 36,787,804.65 53.79 924,675.52 19,669,858.85 52.72 748,525.68 Total 68,394,649.91 100.00 18,997,731.68 37,312,030.70 100.00 18,390,697.53 Total of top 5 22,363,652.73 32.70 1,434,446.95 8,855,633.95 23.73 1,910,208.27 Amount of receivable due --- --- --- --- --- --- from related parties Details of single receivable account with major amount: Rate of bad debt Category Amount Causation provision Mali Huafa Import & Export Aged within one year, no bad debt 13,533,789.10 --- Co., Ltd. provision provided Single item of receivable with minor amount but with greater risks when combined with other similar items, recognition of this combination was upon accounts overdue for over 3 years and have been provide full bad debt provision. There is no balance of account receivable due from shareholders holding 5% or over of shares at the end of term. 68 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 (2) Statement of account receivable balances at the end of year grouped according to their ages: At the end of term Beginning of term Portion in Bad debt Portion in Bad debt Age Amount Amount total provision total provision RMB % RMB RMB % RMB Within 1 year 40,129,225.87 58.67 --- 13,553,302.82 36.32 --- Over 1 year but 5,634,171.13 281,708.56 8.24 599,628.07 1.61 29,981.40 within 2 years Over 2 years but 1,322,885.12 132,288.51 1.93 3,477,605.51 9.32 1,782,022.52 within 3 years over 3 years 21,308,367.79 31.16 18,583,734.61 19,681,494.30 52.75 16,578,693.61 Total 68,394,649.91 100.00 18,997,731.68 37,312,030.70 100.00 18,390,697.53 Details of account receivable: At the end of term Beginning of term Portion Bad debt Portion Bad debt Categories Amount Amount in total provision in total provision RMB % RMB RMB % RMB I. Single item with major 1,184,643.21 97.65 --- 147,303.45 83.81 --- amount II. Single item with minor amount but with greater 28,453.08 2.35 28,453.08 28,453.08 16.19 28,453.08 risks when combined with other similar items III. Other minor --- --- --- --- --- --- Total 1,213,096.29 100.00 28,453.08 175,756.53 100.00 28,453.08 Total of top 5 1,213,096.29 100.00 28,453.08 175,756.53 100.00 28,453.08 Amount of receivable due 1,184,643.21 97.65 --- --- --- --- from related parties Details of single account receivable with major amount: Category Amount Bad debt provision provided Causation SBHC 1,184,643.2 --- Internal transaction, no bad debt provision 1 provided 5. Account paid in advance At the end of term Beginning of term Age Amount Portion in total Amount Portion in total RMB % RMB % Within 1 year 10,155,876.05 97.53 1,405,127.48 59.81 Over 1 year but within 2 0.69 944,113.50 40.19 years 71,939.79 Over 2 years but within 3 1.78 --- --- years 185,125.49 over 3 years --- --- --- --- Total 10,412,941.33 100.00 2,349,240.98 100.00 69 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 Balance of account paid in advance has increased by RMB8,063,700.35 (343.33%) over that of the previous year. This was caused by merger of Wuyuan Shenbao Huafa Tea Co., Ltd. by SBHC. 6. Other receivables (1) Statement of other account receivable balances at the end of year grouped according to their risks At the end of term Beginning of term Portion Bad debt Portion Bad debt Categories Amount Amount in total provision in total provision RMB % RMB RMB % RMB I. Single item with major 13,081,405.6 24.31 --- 81,003,630.00 64.34 --- amount 4 II. Single item with minor amount but with greater 25,130,470.5 46.70 25,130,470.54 25,741,970.64 20.45 25,741,970.64 risks when combined with 4 other similar items 15,597,983.9 III. Other minor 29.89 381,072.35 19,155,823.92 15.21 1,111,688.71 0 53,809,860.0 Total 100.00 25,511,542.89 125,904,424.56 100.00 26,853,659.35 8 30,248,343.8 Total of top 5 56.21 8,135,608.25 99,529,033.31 79.05 6,028,499.16 4 Amount of receivable due 13,081,405.6 24.31 --- 7,970,700.00 6.33 --- from related parties 4 Details of single receivable account with major amount: Rate of bad debt Category Amount Causation provision Internal transaction, no bad debt Sanjing Oil 13,081,405.64 --- provision provided Single item of receivable with minor amount but with greater risks when combined with other similar items, recognition of this combination was upon accounts overdue for over 3 years and have been provide full bad debt provision. There is no balance of other account receivable due from shareholders holding 5% or over of shares at the end of term. 70 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 (2) Statement of other account receivable balances at the end of year grouped according to their ages: At the end of term Beginning of term Portion in Bad debt Portion in Bad debt Age Amount Amount total provision total provision RMB % RMB RMB % RMB Within 1 year 17,152,760.63 31.88 --- 56,696,901.76 45.03 --- Over 1 year but 3,375,900.45 6.27 31,158.95 6,927,626.95 5.50 54,578.63 within 2 years Over 2 years but 4,917,442.51 9.14 23,159.54 978,318.61 0.78 63,344.63 within 3 years over 3 years 28,363,756.49 52.71 25,457,224.40 61,301,577.24 48.69 26,735,736.09 Total 53,809,860.08 100.00 25,511,542.89 125,904,424.56 100.00 26,853,659.35 Details of other account receivable: At the end of term Beginning of term Portion Bad debt Portion Bad debt Categories Amount Amount in total provision in total provision RMB % RMB RMB % RMB I. Single item with major 162,738,528.10 81.47 --- 182,646,723.08 85.36 --- amount II. Single item with minor amount but with greater risks when 12,165,756.06 6.09 12,165,756.06 12,777,256.16 5.97 12,777,256.16 combined with other similar items III. Other minor 24,848,416.96 12.44 149,913.35 18,542,677.14 8.67 919,292.95 Total 199,752,701.12 100.00 12,315,669.41 213,966,656.38 100.00 13,696,549.11 Total of top 5 181,848,432.90 91.04 --- 190,617,423.08 89.10 --- Amount of receivable 181,607,576.81 90.92 --- 159,448,263.58 74.52 --- due from related parties Details of single receivable account with major amount: Categories Amount Rate of provision Causation SBSJ 64,800,000.00 --- Internal transaction, no bad debt provision provided SBHC 61,360,000.00 --- Internal transaction, no bad debt provision provided HZSBKJ 36,578,528.10 --- Internal transaction, no bad debt provision provided There is no balance of other account receivable due from shareholders holding 5% or over of shares at the end of term. 71 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 7. Inventory and inventory impairment provision (1) Details are as followings At the end of term Beginning of term Categories Book balance Book value Book balance Book value Raw materials 14,339,313.52 10,748,062.51 12,103,090.79 12,014,060.05 Packaging materials 3,583,927.74 3,575,418.19 3,321,905.36 2,407,807.35 Product in process 7,324,359.77 7,324,359.77 7,350,877.64 7,350,877.64 Product in developing --- --- 10,653,959.67 10,653,959.67 Stock products 13,429,351.56 12,964,214.51 10,909,807.33 10,444,670.28 Goods delivered at segment payment 1,234,656.83 1,234,656.83 385,472.49 385,472.49 OEM goods 5,392,518.12 98,015.80 6,574,250.71 1,279,748.39 Low price consumable 981,887.05 981,887.05 670,410.22 670,410.22 Total 46,286,014.59 36,926,614.66 51,969,774.21 45,207,006.09 (2) Details of products in developing Projects Beginning of term Increased this term Decreased this term At the end of term Shenbao Apartment * 10,653,959.67 7,411,904.96 18,065,864.63 —— Total 10,653,959.67 7,411,904.96 18,065,864.63 —— *: Is the sales of Shenbao Apartment, the real estate project developed by the Company, sold in this term. (3) Inventory impairment provision: Decreased this year Beginning Increased Carried back Carried out At the end Items of term this year for restoring of for other Total of term price reason Raw materials 973,131.82 2,700,000.00 --- 81,880.81 81,880.81 3,591,251.01 Packaging 29,996.93 --- --- 21,487.38 21,487.38 8,509.55 materials OEM goods 5,294,502.32 --- --- --- --- 5,294,502.32 Stock products 465,137.05 --- --- --- --- 465,137.05 Total 6,762,768.12 2,700,000.00 --- 103,368.19 103,368.19 9,359.399.93 Basis of recognizing the cashable net value of above inventories is: individual recognition. Namely on the average unit price of the product in recent months, minus direct expenses and taxes may occurred upon cashing. In which, partial of the OEM products has become impossible to be settled for years because the relative factories have released from the business relationship, and it is impossible to be recovered. Thus impairment provision was fully provided for these inventories. 72 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 8. Long-term equity investment （1） Details are as followings: At the end of term Beginning of term Items Impairment Impairment Book balance Book value Book balance Book value provision provision Long-term share 182,379,101.40 35,257,628.53 147,121,472.87 163,283,398.67 35,257,628.53 128,025,770.14 equity investment Incl. Investment 16,557,628.53 14,907,628.53 1,650,000.00 16,557,628.53 14,907,628.53 1,650,000.00 in subsidiaries Investment in --- --- --- --- --- --- joint businesses Investment in cooperation 148,283,972.87 2,870,000.00 145,413,972.87 129,188,270.14 2,870,000.00 126,318,270.14 businesses Other equity 17,537,500.00 17,480,000.00 57,500.00 17,537,500.00 17,480,000.00 57,500.00 investment Long-term credit --- --- --- --- --- --- investment Total 182,379,101.40 35,257,628.53 147,121,472.87 163,283,398.67 35,257,628.53 128,025,770.14 Particulars about joint businesses and cooperation businesses: Share Name of the Business Registered Total asset at Total of turnover Net profit of the Reg. Add. proportion Companies property capital end of term at current term current term % Affiliates companies 1. SZ Shenzhen Soft drink USD12.5 30％ 748,446,639.81 1,606,394,033.70 110,059,100.54 PEPSI mil. 2. Changzhou Vegetable RMB45 33％ 44,300,866.13 --- (6,167,577.93) Changzhou oil, animal mil. Sanjing feed 3. Shenbao Shenzhen Property RMB9 20％ 8,978,602.80 --- (21,397.20) Property development mil. a. Investment on equity basis I. Other equity investment on equity basis 73 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 Share in Name of the Additional Investment Equity changed this Cash dividend Accumulated Balance at the end registere Initial costs Companies investment retrieved term obtained change of term d capital Shenzhen Shenbao (Xinmin) 2,870,000.00 --- --- --- --- --- 2,870,000.00 49.14 Foods Co., Ltd. Shenzhen Pepsi Cola Beverage 60,148,557.1 30 96,286,508.90 --- 24,071,627.23 35,188,758.99 17,850,506.10 132,363,438.80 3 Co., Ltd. Changzhou Sanjing Oil Co., (2,245,186.4 33 11,500,000.00 2,000,000.00 --- (2,038,270.72) --- 11,254,813.51 9) Ltd. Shenzhen Shenbao Property Development Co., 20 1,800,000.00 --- --- (4,279.44) --- (4,279.44) 1,795,720.56 Ltd. Pearl River (2,425,801.6 Refrigeration * 2,425,801.61 --- --- --- --- --- 1) Total 114,882,310.5 55,473,289.5 2,000,000.00 24,071,627.23 33,146,208.83 17,850,506.10 148,283,972.87 1 9 *. This factory has been shut down long before and was canceled for business registration on October 30, 2007. Thus the Company still adopts equity basis in accounting of investment in this factory and its long-term investment balance was neutralized to zero. b. Investment on cost basis I. Stock investment (on cost basis) Portion in the Name of the Category of Amount Beginning Increased Decreased At the end registered Initial costs Companies shares of shares of term this term this term of term capital Beijing Tiantan Legal Holdings Co., person 33,333 --- 57,500.00 57,500.00 --- --- 57,500.00 Ltd. shares Sub-total 57,500.00 57,500.00 --- --- 57,500.00 *. These shares were legal person shares purchased through STAQ trading system. It was former Beijing Shuanghesheng Five Star Beer Sanhuan Co., Ltd. The Company was originally holding 55,000 shares, and was changed to 33,333 shares after implementation of the share exchange and renaming program. 74 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 II. Other equity investment on cost basis Share in Decrease Investme Beginning of Increased At the end of Name of the Companies registered Initial costs d thi t term term this term term capital term Shenzhen Sanjiu Weitai --- 0.95% 2,480,000.00 2,480,000.00 --- --- 2,480,000.00 Holdings Co., Ltd. Shenzhen Taiji 15,000,000.0 Optical-Electric --- 3.77% 15,000,000.00 --- --- 15,000,000.00 0 Technologies Co., Ltd. Shenzhen Shenbao 10 (Liaoyuan) Industrial Co., 53.50% 57,628.53 57,628.53 --- --- 57,628.53 years Ltd.* Shenzhen Shenbao Fruit 20 70% 16,500,000.00 16,500,000.00 --- --- 16,500,000.00 Juice Co., Ltd. years Sub-total 34,037,628.53 34,037,628.53 --- --- 34,037,628.53 c. Change of impairment provisions Decreased this term Beginning of Increased Carried back Carried out At the end of Name of the Companies term this term for restoring for other Total term of price reason Shenzhen Taiji Optical-Electric * 15,000,000.00 --- --- --- --- 15,000,000.00 Technologies Co., Ltd. Shenzhen Sanjiu Weitai 2,480,000.00 --- --- --- --- 2,480,000.00 Holdings Co., Ltd. Shenzhen Shenbao ** 2,870,000.00 --- --- --- --- 2,870,000.00 (Xinmin) Foods Co., Ltd. Shenzhen Shenbao (Liaoyuan) Industrial Co., ** 57,628.53 --- --- --- --- 57,628.53 Ltd. Shenzhen Shenbao Fruit *** 14,850,000.00 --- --- --- --- 14,850,000.00 Juice Co., Ltd. Total 35,257,628.53 --- --- --- --- 35,257,628.53 *: Since this company was established, it was improperly managed and in loss condition. Impairment provision has been provided at the balance between the predicted retrievable amount and the book value. **: These two companies have been established for years. At present they have been shut down. Though for they haven’t been liquidated yet, impairment provisions was provided in full upon them. ***: Please refer to Note 3. 75 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 Details of long-term investments: (1) Details are as followings At the end of term Beginning of term Items Impairment Impairment Book balance Book value Book balance Book value provision provision Long-term share equity 333,343,743.76 35,257,628.53 298,086,115.23 287,796,741.03 35,257,628.53 252,539,112.50 investment Incl. Investment 167,579,770.89 14,907,628.53 152,672.142.36 141,128,470.89 14,907,628.53 126,220,842.36 in subsidiaries Investment in joint --- --- --- --- --- --- businesses Investment in cooperation 148,283,972.87 2,870,000.00 145,413,972.87 129,188,270.14 2,870,000.00 126,318,270.14 businesses Other equity 17,480,000.00 17,480,000.00 --- 17,480,000.00 17,480,000.00 --- investment Long-term credit --- --- --- --- --- --- investment Total 333,343,743.76 35,257,628.53 298,086,115.23 287,796,741.03 35,257,628.53 252,539,112.50 Particulars about cooperation businesses are available at Note 6 –8(1). a. Investment on equity basis Share in Equity Name of the Additional Investment Cash dividend Accumulated Balance at the registered Initial costs changed this Companies investment retrieved obtained change end of term capital term Shenzhen Shenbao (Xinmin) Foods 2,870,000.00 --- --- --- --- --- 2,870,000.00 49.14 Co., Ltd. Shenzhen Pepsi Cola Beverage Co., 96,286,508.90 --- 24,071,627.23 35,188,758.99 17,850,506.10 60,148,557.13 132,363,438.80 30 Ltd. Changzhou Sanjing (2,038,270.72 Oil Co., Ltd. 33 11,500,000.00 2,000,000.00 --- --- (2,245,186.49) 11,254,813.51 ) Shenzhen Shenbao Property Development Co., 20 1,800,000.00 --- --- (4,279.44) --- (4,279.44) 1,795,720.56 Ltd. Pearl River Refrigeration * 2,425,801.61 --- --- --- --- (2,425,801.61) --- Total 114,882,310.51 2,000,000.00 24,071,627.23 33,146,208.83 17,850,506.10 55,473,289.59 148,283,972.87 *. This factory has been shut down long before and was canceled for business registration on October 76 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 30, 2007. Thus the Company still adopts equity basis in accounting of investment in this factory and its long-term investment balance was neutralized to zero. b. Investment on cost basis I. Other equity investment on cost basis Share in Investment Increased this Decreased Name of the Companies registered Initial costs Beginning of term At the end of term term term this term capital Shenzhen Sanjiu Weitai Holdings --- 0.95% 2,480,000.00 2,480,000.00 --- --- 2,480,000.00 Co., Ltd. Shenzhen Taiji Optical-Electric --- 3.77% 15,000,000.00 15,000,000.00 --- --- 15,000,000.00 Technologies Co., Ltd. SBSJ * 10 years 100% 80,520,842.36 80,520,842.36 --- --- 80,520,842.36 SBGM* 10 years 100% 5,500,000.00 5,500,000.00 --- --- 5,500,000.00 SWZP* 10 years 100% 2,000,000.00 2,000,000.00 --- --- 2,000,000.00 SBWY 10 years 51% 2,550,000.00 2,550,000.00 --- --- 2,550,000.00 SBHC 30 years 51.67% 31,000,000.00 31,000,000.00 22,451,300.00 --- 53,451,300.00 HZSBTZ 50 yrs 100% 3,000,000.00 3,000,000.00 --- --- 3,000,000.00 HZSBKJ 50 yrs 100% 4,000,000.00 --- 4,000,000.00 --- 4,000,000.00 SBLY 10 years 53.50% 57,628.53 57,628.53 --- --- 57,628.53 SBGZ 20 years 70% 16,500,000.00 16,500,000.00 --- --- 16,500,000.00 Sub-total 162,608,470.89 158,608,470.89 26,451,300.00 --- 185,059,770.89 *. Presented at consolidated voting rights. c. Change of impairment provitions Decreased this term Name of the Beginning of Increased Carried Carried At the end of Companies term this term back for out for term Total restoring other of price reason Shenzhen Taiji Optical-Electric 15,000,000.00 --- --- --- --- 15,000,000.00 Technologies Co., Ltd. Shenzhen Sanjiu Weitai Holdings Co., 2,480,000.00 --- --- --- --- 2,480,000.00 Ltd. Shenzhen Shenbao (Xinmin) Foods Co., 2,870,000.00 --- --- --- --- 2,870,000.00 Ltd. Shenzhen Shenbao (Liaoyuan) Industrial 57,628.53 --- --- --- --- 57,628.53 Co., Ltd. Shenzhen Shenbao 14,850,000.00 --- --- --- --- 14,850,000.00 Fruit Juice Co., Ltd. Total 35,257,628.53 --- --- --- --- 35,257,628.53 77 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 9. Fixed assets and accumulative depreciation Original value of fixed Balance at the beginning of Increased this Decreased this Balance at the end of assets year term term term Houses & buildings 48,389,882.41 1,844,129.55 50,234,011.96 Equipment & machinery 129,612,332.43 10,709,032.68 7,808,239.92 132,513,125.19 Transportation tools 8,114,111.90 1,102,391.12 1,354,457.33 7,862,045.69 Other equipment 5,167,145.97 360,960.73 316,291.62 5,211,815.08 Total 191,283,472.71 14,016,514.08 9,478,988.87 195,820,997.92 Accumulated Balance at the Balance at the end o Increased this term Decreased this term depreciation: beginning of year term Houses & buildings 3,304,184.72 1,140,328.95 4,444,513.67 Equipment & machinery 73,791,243.93 6,518,890.06 6,854,160.46 73,455,973.53 Transportation tools 5,779,670.47 594,758.58 1,207,773.27 5,166,655.78 Other equipment 3,488,652.82 470,101.14 255,494.36 3,703,259.60 Total 86,363,751.94 8,724,078.73 8,317,428.09 86,770,402.58 Carried back this term Impairment Balance at the Increased Carried back Balance at the provision beginning of year this term Carried out for end of term for restoring Total other reason of price Houses & 7,250,600.00 --- --- --- --- 7,250,600.00 buildings Equipment & 5,490,488.24 153,845.06 --- 656,077.08 656,077.08 4,988,256.22 machinery Transportation 3,875.00 --- --- --- --- 3,875.00 tools Other 60,438.83 --- --- 51,837.24 51,837.24 8,601.59 equipment Total 12,805,402.07 153,845.06 --- 707,914.32 707,914.32 12,251,332.81 Net value 92,114,318.70 96,799,262.53 The increased amount of fixed asset in the current term includes RMB12,599,153.34 of transferred from construction-in-process. 78 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 10. Construction in process Portion of Balance at the Amount Other Increased this Amount at the Fund project Project name Budget beginning of transferred into decrease in term end of term recourse input on term fixed asset this term budget Shenbao Plaza --- 3,842,333.64 --- --- --- 3,842,333.64 --- --- Preparation engineering of 75 mil. 2,303,206.72 435,000.00 --- --- 2,738,206.72 Independent 10.35% Shenbao Building Henggang Independent 45 mil. 2,502,485.84 625,979.31 621,979.31 2,506,485.84 --- --- Industry City and financing Transportation equipment --- 1,504,746.93 --- --- --- 1,504,746.93 --- --- project Juice production --- 217,890.79 --- --- --- 217,890.79 --- --- line Moving and reconstruction of --- 4,138,871.78 --- --- --- 4,138,871.78 Independent --- factories Huacheng --- 5,086,335.89 9,498,980.79 11,977,174.03 --- 2,608,142.65 Independent --- production line Tetra Pak machine reinstall --- --- --- --- --- --- Independent --- project Others --- 1,064,103.77 --- --- --- 1,064,103.77 --- --- Total 20,659,975.36 10,559,960.10 12,599,153.34 2,506,485.84 16,114,296.28 Construction-in-process impairment provisions are: Balance at the beginning of Increased this Carried back this Balance at the end of Project name year term term term Shenbao Plaza 3,842,333.64 --- --- 3,842,333.64 Transportation equipment project 1,504,746.93 --- --- 1,504,746.93 Juice production line 217,890.79 --- --- 217,890.79 Moving and reconstruction of 4,138,871.78 --- --- 4,138,871.78 factories Others 903,189.74 --- --- 903,189.74 Total 10,607,032.88 --- --- 10,607,032.88 Net value 10,052,942.48 5,507,263.40 Net value of construction-in-process has decreased by RMB4,545,679.08 (45.22%) from that of the previous year, which was caused by completion and transferring of Huacheng production line. 79 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 11. Intangible assets Balance at the Increased this Decreased this Balance at the end Items Note beginning of year term term of term I. Total of original value 39,000,733.80 48,877,881.84 14,769,215.23 73,109,400.41 1. Land using right 22,000,733.80 44,583,928.00 14,769,215.23 51,815,446.57 *1 2. Patent technologies 17,000,000.00 4,293,953.84 --- 21,293,953.84 *2 II. Accumulated amortization 9,585,885.18 1,932,662.27 4,711,096.43 6,807,451.02 1. Land using right 5,024,314.23 849,047.04 4,711,096.43 1,162,264.84 2. Patent technologies 4,561,570.95 1,083,615.23 --- 5,645,186.18 III. Total of accumulative amount of intangible asset impairment --- --- --- --- provisions 1. Land using right --- --- --- --- 2. Patent technologies --- --- --- --- IV. Total of intangible asset book 29,414,848.62 66,301,949.39 value 1. Land using right 16,976,419.57 50,653,181.73 2. Patent technologies 12,438,429.05 15,648,767.66 *1. Land using rights of the Company were undertaking income and inputted by minor shareholders. Land using rights were increased by RMB44,583,928.00, which were: (1) HZSBKJ undertook the 83,953.90 square meters of land in Ruhu Town Huizhou with cost of RMB36,578,528.10. (2) The minor shareholders of Wuyuan Shenbao Huafa Tea Co., Ltd. – the subsidiary of SBHC has inputted the land using right of 44,034.00 square meters in Wuyuan Industry Zone amounted RMB3,626,199.90; and the land using right of 4,176.00 square meters in Wuyuan Industry Zone undertaken with cost of RMB4,379,200.00. Decreasing of land using right was RMB14,769,215.23, including the land using right of 8,980.20 square meters transferred to Shenzhen Oumingda Investment Development Co., Ltd. with original value of RMB2,791,821.52 (amortized cost RMB1,936,095.09), and government retrieval of land using rights of 38,526.60 square meter amounted to RMB11,977,393.71. (amortized cost RMB8,122,023.71) *2. Increasing of patent technologies was because SBHC has developed three technologies including “manufacturing method of a green tea concentrate”, “manufacturing method of a coffee concentrate”, and “manufacturing method of natural plant concentrate used to process soft drinks”. All of the three technologies have been applied to National Patent Property Bureau and were accepted on April 28, 2007. 80 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 Including land using rights of: Area of land Original value of land Accumulated Retained Location 2007.12.31 (Squre using right amortizing amortizing period meter) Shenzhen Henggang 5,705.00 1,773,606.57 591,298.72 1,182,307.85 432 months Industry City Shenzhen Tianbei 2,776.80 5,457,912.00 135,600.30 5,322,311.70 471 months Huizhou Ruhu 83,953.90 36,578,528.10 367,085.49 36,211,442.61 591-593 months County Wuyaun County 44,034.00 3,626,199.90 30,575.04 3,595,624.86 588 months Industry Zone Wuyaun County 4,176.00 4,379,200.00 37,705.29 4,341,494.71 806 months Industry Zone Total 51,815,446.57 1,162,264.84 50,653,181.73 12. Long-term amortizable expenses Balance at the Retained Original Increased Amortized Accumulated Balance at the Categories beginning of amortizing Amount this term this term amortization end of term term period Decoration 3,101,299.15 594,034.75 --- 466,656.20 2,973,920.60 127,378.55 3 months fee Tianbei 143,597.56 114,878.08 --- 114,878.08 143,597.56 --- --- project Other 1 year, 3 2,457,712.90 1,996,730.31 15,331.49 498,676.61 944,327.71 1,513,385.19 projects years Total 5,702,609.61 2,705,643.14 15,331.49 1,080,210.89 4,061,845.87 1,640,763.74 13. Differed income tax asset Items End of term Beginning of term Bad debt provision 231,696.26 185,403.27 Long-term investment impairment provision 2,227,500.00 2,227,500.00 Fixed asset impairment provision 750,109.93 833,220.32 Construction-in-process impairment provision 1,197,180.81 1,197,180.81 Trading financial assets 1,468.27 29,818.27 Total 4,407,955.27 4,473,122.67 81 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 Items not recognized as differed income tax assets At the end of Beginning of Note term term Temporary difference may be neutralized 1. Bad debt provision 43,203,526.70 43,384,142.49 No original evidence provided 2. Inventory impairment provision 9,359,399.93 6,762,768.12 No original evidence provided 3. Fixed asset impairment provision 7,250,600.00 7,250,600.00 No original evidence provided 4. Construction-in-process impairment 2,625,827.46 2,625,827.46 No original evidence provision provided 5. Long-term equity investment impairment 20,407,628.53 20,407,628.53 No original evidence provision provided Total 82,846,982.62 80,430,966.60 14. Asset impairment provision Balance at the Provided Balance at the Items Decreased this term beginning this term end of term of year Written back Transferred 1. Bad debt provision 45,244,356.88 1,189,677.14 1,380,879.70 543,879.75 44,509,274.57 2. Inventory 6,762,768.12 2,700,000.00 --- 103,368.19 9,359,399.93 impairment provision 3. Long-term equity investment impairment 35,257,628.53 --- --- --- 35,257,628.53 provision 4. Fixed assets and 12,805,402.07 153,845.06 --- 707,914.32 12,251,332.81 impairment provision 5. Construction-in-process 10,607,032.88 --- --- --- 10,607,032.88 impairment provision Total 110,677,188.48 4,043,522.20 1,380,879.70 1,355,162.26 111,984,668.72 15. Short-term loans Typr of loan Balance at the beginning of year Balance at the end of term Original currency RMB Pledged loan 18,000,000.00 RMB --- Sub-total 18,000,000.00 --- Loan by pledge 5,000,000.00 RMB --- Sub-total 5,000,000.00 --- Guarantee loan 67,000,000.00 RMB 22,000,000.00 Sub-total 67,000,000.00 22,000,000.00 Total 90,000,000.00 22,000,000.00 No short-term loan is overdue. 82 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 16. Account payable End of term Beginning of term Age Amount Portion in total Amount Portion in total RMB % RMB % Within 1 year 27,893,822.21 91.24 13,656,981.39 84.33 Over 1 year but within 2 years 140,414.79 0.46 227,138.98 1.40 Over 2 years but within 3 years 227,138.98 0.74 --- --- Over 3 years 2,310,709.26 7.56 2,310,709.26 14.27 Total 30,572,085.24 100.00 16,194,829.63 100.00 No account payable to shareholders with 5% or above voting shares of the Company. 17. Account collected in advance Balance at the end of term: RMB2,183,994.02. No account collected in advance from shareholders with 5% or above voting shares of the Company. 18. Employees’ wages payable Balance at the Occurred current Paid in this Balance at the end Items beginning of year term term of term I. Wage, bonus, allowance and 3,119,502.77 20,171,335.89 19,331,269.31 3,959,569.35 subsidy II. Employees’ welfare 830,369.47 1,315,569.02 2,145,938.49 --- III. Social security (139,379.62) 2,748,675.59 2,956,320.18 (347,024.21) V. Trade union fee and education 748,802.17 642,574.06 629,099.92 762,276.31 fee VII. Compensation for releasing of 6,890,000.00 --- 4,743,284.00 2,146,716.00 labor service contract Total 11,449,294.79 24,878,154.56 29,805,911.90 6,521,537.45 *. Amount of Compensation for releasing of labor service contract at the beginning of term of RMB6,890,000.00 which was caused by retrospective adjustment on year 2006 according to the new accounting standard. The amount drawn in 2006 but not implemented in 2007 was because the payment procedures were not completed yet. 83 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 19. Tax payable Taxation At the end of term Beginning of term VAT (634,338.01) 55,907.54 Business tax 184,278.80 26,493.16 City construction tax 12,922.48 9,716.08 Enterprise income tax 1,033,099.55 181,989.82 Personal income tax 28,534.83 (32,445.70) Property tax (4,305.40) --- Stamp tax 667.23 841.60 Embankment fee 2,224.09 6,481.27 Education surtax 18,699.14 18,313.25 Land VAT 13,618.09 --- Total 655,400.80 267,297.02 20. Dividend payable Name of the investor Amount at the end of term Cause of debt Shares not consigned 218,212.60 Not paid Shenzhen Investment Holdings Co., Ltd. 2,690,970.14 Not paid Total 2,909,182.74 21. Other payables At the end of term Beginning of term Age Amount Portion in total Amount Portion in total RMB % RMB % Within 1 year 18,739,390.25 68.03 39,781,728.27 86.19 Over 1 year but within 2 years 1,779,377.82 6.46 217,969.80 0.47 Over 2 years but within 3 years 260,669.80 0.95 --- --- Over 3 years 6,765,349.29 24.56 6,157,029.56 13.34 Total 27,544,787.16 100.00 46,156,727.63 100.00 No other account payable to shareholders with 5% or above voting shares of the Company. 84 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 Details of other account payable account for 10% or over of the total account payable: Name of the company Amount Property Shenzhen Investment Holdings Co., Ltd. 3,510,297.20 Current account Total 3,510,297.20 Account of RMB27,598,863.99 trade payable to Sanjing under the parent company. 22. Expected liabilities Items At the end of term Beginning of term Reason to draw External guarantee 8,580,000.00 10,619,504.10 * Total 8,580,000.00 10,619,504.10 *. (1) In 1997, the Company provided guarantee to Guangdong Sunrise Holdings Co., Ltd. (former ShenZhen Lionda Holding Co.,Ltd., known as “Sunrise” hereinafter) for the loan of RMB8 million. On June 6, 2000, Shenzhen Futian People’s Court had judged the Company to undertake joint liabilities in repaying the debts. Through negotiation among the three parties, it was decided that the Company will pay RMB1.4 million of interest on behalf of Sunrise, and the principal of RMB8.58 million (including RMB0.58 million of interest converted into principal) will still be secured by the Company. The share equity of Shenzhen Shenbao Sanjing Food & Beverage Development Co., Ltd. was used as pledge for the guarantee. If Sunrise failed to repay the loan on due, the Company shall provide predicted loss provision fully on this issue and accounted into “predicted liabilities” at amount of RMB8,580,000.00. (2) In 1997, the Company provided guarantee to Guangdong Sunrise Holdings Co., Ltd. for the loan of HKD6 million. On July 26, 2000, Shenzhen Nanshan People’s Court had judged the Company to undertake joint liabilities in repaying the debts. Through negotiation among the three parties, it was decided that the Company will pay HKD2 million of principal and interest on behalf of Sunrise, and the retained principal of HKD4 million will still be secured by the Company as an loan of one year term. This guarantee has expired in January 2004. On June 30, 2004, the Company paid principal of RMB43,290.04 on behalf of Sunrise. In 2006, the Company repaid the principal of RMB2.55 million on behalf of Sunrise. On December 27, 2006, the Company entered a contract with Shenzhen Development Bank Nantou Branch and decided that the Company should pay the retained principal and interest amounted to HKD2,073,920.77 before February 28, 2007. On February 27, 2007, the Company repaid the retained principal and interest amounted to RMB2,055,920.0. Thus the predicted liability was neutralized to zero. 85 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 23. Capital shares Increased (decreased) in this term Items Beginning Share Bonus Others Sub-total At the end of term allotted shares of term I. Negotiable shares with selling restriction condition 1. Promoter’s shares 46,914,843 --- --- (9,096,154) (9,096,154) 37,818,689 Including: State-owned shares --- --- --- --- --- --- State-owned legal person shares 46,914,843 --- --- (9,096,154) (9,096,154) 37,818,689 Domestic legal person shares --- --- --- --- --- --- Overseas legal person shares --- --- --- --- --- --- Others --- --- --- --- --- --- 2. Non-promoters’ shares 53,753,945 --- --- (9,106,752) (9,106,752) 44,647,193 Including: State-owned shares State-owned legal person shares 53,743,347 (9,096,154) (9,096,154) 44,647,193 Domestic legal person shares --- --- --- --- --- --- Overseas legal person shares --- --- --- --- --- --- Employee shares 10,598 --- --- (10,598) (10,598) --- Converted or allotted shares --- --- --- --- --- --- Shares allotted to fund --- --- --- --- --- --- Shares allotted to strategic investors --- --- --- --- --- --- Shares allotted to common legal person --- --- --- --- --- --- Individual shares not listed --- --- --- --- --- --- Others --- --- --- --- --- --- 3. Optional shares --- --- --- --- --- --- Total of negotiable shares with selling restriction 100,668,788 --- --- (18,202,906) (18,202,906) 82,465,882 condition II. Unconditional negotiable shares 1. RMB common shares placed in the country 55,118,300 --- --- 18,202,906 18,202,906 73,321,206 2. Foreign shares placed in the country 26,136,000 --- --- --- --- 26,136,000 3. Foreign shares placed abroad --- --- --- --- --- --- 4. Others --- --- --- --- --- --- Total of unconditional negotiable shares 81,254,300 --- --- 18,202,906 18,202,906 99,457,206 III. Total of capital shares 181,923,088 --- --- --- --- 181,923,088 Share equity change has been verified by Shenzhen Zhongtianqin CPAs with Verification Report [2001] No. B-005. 24. Capital reserves Beginning of Increased this Decreased this At the end of Items term term term term Share capital premium 78,805,675.99 --- --- 78,805,675.99 Equity investment 465,005.37 --- --- 465,005.37 provision Other capital reserves 1,035,213.34 --- --- 1,035,213.34 Total 80,305,894.70 --- --- 80,305,894.70 86 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 25. Optional surplus reserves Items Beginning of term Increased this term Decreased this term At the end of term Statutory surplus reserves 26,382,931.72 4,907,308.65 --- 31,290,240.37 Total 26,382,931.72 4,907,308.65 --- 31,290,240.37 The statutory surplus reserves were provided at 10% of the net profit of the parent company according to the Company Law and relative regulations. Surplus reserves not audited of the previous year was RMB12,998,864.96. It has an difference of RMB13,384,066.76 with the surplus reserves of RMB26,382,931.72 at the beginning of this year, which was caused by retrospective adjustment upon the long-term equity investment at initializing of the new accounting standard, and the statutory common reserves of previous years were adjusted by RMB13,384,066.76. 26. Undistributed profit Beginning of term Increased this term Decreased this term At the end of term (12,190,091.18) 43,690,242.34* 4,907,308.65 26,592,842.51 The increase of undistributed profit of the year amounted to RMB43,690,242.34 was caused by realizing of net profit by the Company. While the decrease of undistributed profit amounted to RMB4,907,308.65 was caused by providing of statutory common reserves at 10% of the net profit of the parent company according to Company Law and relative regulations. Undistributed profit of RMB3,651,081.95 audited for last year, due to initializing of new accounting standard on January 1, 2007, retrospective adjustments were done on the undistributed profit at the beginning of year, and restated the comparable financial statements of 2006. Followings are the relative details: Amount of adjustment Summary of adjustment Remark 2006 2007 Undistributed profit (35,002,647.70) 3,651,081.95 audited of last year 1. Adjustment of differed Change of Adjustment: income tax 2,527,441.36 4,432,893.63 Accounting Policies 2. Adjustment of statutory Change of common reserves of (8,258,365.85) (13,384,066.76) Accounting previous years Policies 3. Adjustment of laying out Change of benefit --- (6,890,000.00) Accounting Policies Sub-total of adjustments (5,730,924.49) (15,841,173.13) Undistributed profit at beginning of year (40,733,572.19) (12,190,091.18) adjusted 87 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 27. Operational income (1) Operational incomes and costs: Current term Previous term Items Operational income Operational cost Operational income Operational cost 1. Major business income 187,940,225.97 152,959,785.73 102,098,339.14 88,596,396.46 2. Other business income 4,300,818.93 2,006,200.03 1,923,116.30 81,138.17 Total 192,241,044.90 154,965,985.76 104,021,455.44 88,677,534.63 (2) Portion of sales income from top five clients in the total sales income Current term Previous term Total of sales to top 5 clients 46,120,429.17 66,272,752.83 Portion in total sales income 23.99％ 64.67％ (3) Major business items Current term Previous term Items Operational income Operational cost Operational income Operational cost 1. Beverage 40,161.078.48 34,840,130.84 30,783,795.35 35,254,885.29 2. Seasonings 21,385,461.66 13,423,959.61 21,336,404.67 14,502,142.66 3. Tea products 101,838,851.83 86,514,256.27 49,978,139.12 38,839,368.51 4. Real Estate 24,554,834.00 18,181,439.01 --- --- Total 187,940,225.97 152,959,785.73 102,098,339.14 88,596,396.46 (4) Other business items: Current term Previous term Items Operational Operational cost Operational Operational cost income income 1. House rental 632,128.50 --- 384,767.50 --- 2. Disposal of land using 3,502,278.00 1,936,095.09 --- --- rights 3. Others 166,412.43 70,104.94 1,538,348.80 81,138.17 Total 4,300,818.93 2,006,200.03 1,923,116.30 81,138.17 88 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 Details of major business income (1) Operational incomes and costs: Current term Previous term Items Operational income Operational cost Operational income Operational cost 1. Major business income 25,441,449.10 19,042,199.34 1,423,803.03 1,380,647.84 2. Other business income 5,902,278.00 1,936,095.09 2,400,000.00 --- Total 31,343,727.10 20,978,294.43 3,823,803.03 1,380,647.84 (2) Portion of sales income from top five clients in the total sales income Current term Previous term Total of sales to top 5 clients 31,343,727.10 3,823,803.03 Portion in total sales income 100％ 100％ (3) Major business items Current term Previous term Items Operational income Operational cost Operational income Operational cost 1. Tea products 886,615.10 860,760.33 1,423,803.03 1,380,647.84 2. Real estate 24,554,834.00 18,181,439.01 --- --- Total 25,441,449.10 19,042,199.34 1,423,803.03 1,380,647.84 (4) Other business items: Current term Previous term Items Operational Operational Operational Operational income cost income cost 1. House rental 2,400,000.00 --- 2,400,000.00 --- 2. Disposal of land using rights 3,502,278.00 1,936,095.09 --- --- Total 5,902,278.00 1,936,095.09 2,400,000.00 --- 28. Operational tax and surcharges Previous Class of tax Current term Rate term 1,680,662.0 Income from general service, transportation Business tax 252,697.46 0 and others *5% City maintenance and construction 253,046.59 131,063.77 Operational tax and VAT paid *1% or 7% tax Education surtax 240,878.48 162,120.47 Operational tax and VAT paid *3% Embankment and enclosure 19,898.81 16,325.26 maintenance fee 2,194,485.8 Total 562,206.96 8 89 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 29. Financial expenses Categories Current term Previous term Interest expense 4,474,033.50 5,786,873.45 Less: Incoming interests 742,672.99 3,143,341.28 Exchange loss 674,813.65 34,131.61 Less: Exchange gain --- --- Others 66,013.17 198,873.12 Total 4,472,187.33 2,876,536.90 30. Asset impairment loss Items Current term Previous term I. Bad debt loss (191,202.56) 4,949,047.94 II. Inventory impairment loss 2,700,000.00 --- V. Impairment loss from long-term stock investment --- 16,555,000.00 VII. Fixed asset impairment loss 153,845.06 --- VIII. Construction in process impairment loss --- 4,138,871.78 Total 2,662,642.50 25,642,919.72 31. Gains from change of fair value Source of gains from change of fair value Current term Previous term Trading financial assets 189,000.00 7,500.00 Total 189,000.00 7,500.00 32. Investment gains Categories Current Previous term term Gains in the holding period Gains from disposal of long-term investment --- 73,351,770.64 Amortizing of difference in long-term investment --- (677,972.08) Net change of owners’ equity in invested companies adjusted at 33,146,208.83 50,738,091.01 end of year Total 33,146,208.83 123,411,889.57 90 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 Details of investment gains: Categories Current term Previous term Gains in the holding period Gains from disposal of long-term investment --- 73,351,770.64 Amortizing of difference in long-term investment --- (677,972.08) Net change of owners’ equity in invested companies adjusted at 33,146,208.83 50,738,091.01 end of year Total 33,146,208.83 123,411,889.57 33. Non-operational income/expense 1. Non-operational income Income items Current term Previous term Disposal of fixed assets 3,145.00 285,728.80 Government subsidy 34,161,577.32 * --- Others 200,396.47 170,955.40 Total 34,365,118.79 456,684.20 *. According to “Shenzhen Government Land Confiscation and Retrieving Rules” and “Decision on Retrieving of the Land Using Rights of Shenzhen Shenbao Industrial Co., Ltd.” (Shen-Guo-Fang [2007]443) issued by Shenzhen Land Resource and Property Administration, Shenzhen Land Resource and Property Administration has decided to retrieve the Company’s using right of the land located in He’ao Community, Hengang Street (Land No. G08511 -4(6)) with area of 38,526.6 square meter.Shenzhen Land Resource and Property Administration will compensate for the land using right with cash and no other compensation will be made. According to the appraisal report (Shen-Fang-Gu-Zi[2007]217) issued by Shenzhen Real Estate Appraisal Center, and also according to the meeting minute of Shenzhen Municipal Government 2007(585), the government will pay the Company RMB48,231,920 in total. The Company has received the compensation payment in December 2007. The balance of RMB34,161,577.32 calculated by the compensation of RMB48,231,920.00 received less the cost in obtaining of this land and the investment in construction of Henggang Industry City was carried as government subsidy income. 2. Non-operational expenditures Expenditures Current term Previous term Penalty and late fee paid 24,139.19 --- Net loss from fixed asset disposal 396,771.04 1,061,927.06 Guarantee loss --- 15,770,504.14 Commonweal donation --- 20,000.00 Others 317,663.43 70,540.03 Total 738,573.66 16,922,971.23 91 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 34. Income tax Items Current term Previous term Income tax expenditure of current term 2,233,645.96 2,131,932.27 Incl. Income tax occurred in current year 2,233,645.96 2,131,923.27 Adjustment on income tax of previous years --- --- Differed income tax expenditure 65,167.40 (1,905,452.27) Incl. Differed income tax occurred in current term 65,167.40 (1,905,452.27) Adjustment on differed income tax of previous years --- --- Influence of tax rate change --- --- Total 2,298,813.36 226,480.00 35. Other cash related to business operation Items Current term Previous term Other cash related to business operation received: Payment on behalf of Shenzhen Maoye (Group) Holdings Co., Ltd. for 30,003,630.00 3,000,000.00 cooperated construction Trade from Shenzhen Jiaoda Siyuan Education Development Co., Ltd. --- 1,000,000.00 Trade from Guangdong Huacheng Foods Co., Ltd. 500,000.00 2,500,000.00 Consigned advance payment for “Shenbao Apartment” --- 8,880,000.00 Deposit from Shenzhen Yuantai Real Estate Development Co., Ltd. --- 7,350,000.00 Compensation payment from Shenzhen Bureau of Finance for retrieving of land --- 1,200,000.00 using rights Shenzhen Minrun Agriculture Products Logistics Franchise Co., Ltd. 4,000,000.00 --- Trade from Shenbao Real Estate 1,669,670.00 --- Other trades 2,655,210.49 3,375,153.40 Sub-total 38,828,510.49 27,305,153.40 Other cash related to business operation paid: Repaying of land using right payment from Shenzhen Agriculture Products Co., --- 22,679,360.00 Ltd. Trade to Changzhou Sanjing Oil Co., Ltd. 4,103,990.24 3,120,700.00 Trade to Shenzhen Shenzhen Shenbao Sanjing Sales Co., Ltd. --- 3,000,000.00 Shenzhen Yuantai Real Estate Development Co., Ltd. 7,350,000.00 --- Henggang He’ao Community Council 716,205.00 --- Company management fees 17,059,588.64 12,395,556.63 Marketing and sales expenses 7,234,117.57 12,524,509.09 Others 2,300,000.00 --- Sub-total 38,763.901.45 53,720,125.72 92 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 36. Other cash related to investment Items Current term Previous term Other cash received related to investment Expiring of fixed term deposit pledge 5,000,000.00 25,000,000.00 Sub-total 5,000,000.00 25,000,000.00 Other cash paid related to investment Fixed term deposit pledge --- 20,000,000.00 Sub-total --- 20,000,000.00 37. Cash and cash equivalents Current term Previous term Items I. Cash 20,238,034.23 41,016,625.30 Incl. Cash in stock 122,373.85 234,250.91 Bank deposit on demand 20,115,660.38 35,782,374.39 Incl. Cash and cash equivalents of subsidiaries of the parent company with --- 5,000,000.00 restriction of use II. Cash equivalents --- --- Incl. Bond investment due in 3 months --- --- III. Balance of cash and cash equivalents at end of term 20,238,034.23 36,016,625.30 93 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 Note 7. Supplementary information of the Cash Flow Statement Supplementary Information Current term Previous term 1.Net profit adjusted to cash flow of operation: Net profit 44,637,414,29 32,859,598.62 Plus: Asset impairment reserves 2,660,642.50 25,642,919.72 Fixed asset depreciation, discount of oil and gas, depreciation of 8,724,078.73 9,069,333.79 production materials Amortizing of intangible assets 1,932,662.27 1,338,669.48 Amortizing of long-term expenses 1,080,210.89 938,225.47 Loss from disposal of fixed assets, intangible assets and other (35,251,279.50) 776,198.26 long-term assets Loss of disposing fixed assets 396,771.04 1,061,927.06 Loss from change of fair value (189,000.00) (7,500.00) Financial expenses (263,469.30) (2,910,336.55) Investment loss (33,146,208.83) (123,411,889.57) Decrease of differed income tax asset 65,167.40 (1,919,970.30) Increase of differed income tax liability --- --- Predicted guarantee loss --- 15,770,504.14 Decrease of inventory 5,580,391.43 (17,388,246.77) Decrease of operational receivable accounts 9,939,251.62 29,191,153.02 Increase of operational payable accounts (8,616,865.92) (1,012,234.54) Others --- --- 2. Material investment and financing not involved in cash flow Liabilities converted to capital --- --- Convertible bond expire in 1 year --- --- Fixed assets leased through financing --- --- 3. Net change of cash and cash equivalents Balance of cash at period end 20,238,034.23 36,016,625.30 Less: Initial balance of cash 36,016,625.30 17,669,146.78 Plus: Balance of cash equivalents at the period end --- --- Less: Initial balance of cash equivalents --- --- Net increasing of cash and cash equivalents (15,778,591.07) 18,347,478.52 Note 8. Related Parties and Transactions (1)Related parties without controlling relationship Name of the related parties Relation with the Company Shenzhen Investment Holdings Co., Ltd. Original controlling shareholders, the secondary shareholder at present Shenzhen Pepsi Cola Beverage Co., Ltd. Partnership company (2) Related parties with controlling relationship Legal Relation Name of the related Type of Registered Business Share or represent with the parties business capital range equity held ative Company Constructio Shenzhen Agriculture Shareholdi Chen 387,663,44 n and Controlling 29.54% Products Co., Ltd. ng Ltd. Shaoqun 2 operation shareholder of market (3) For details of the subsidiaries, joint businesses and cooperation businesses are available in Note 3. 94 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 (4) Related transactions Current term Previous term Name of companies Items Portion Portion Amount in this Amount in this item item Repaying of land Shenzhen Agriculture using right payment --- --- 22,679,360.00 100% Products Co., Ltd. collected in advance Shenzhen Agriculture Guarantee for the --- --- 20,000,000.00 100% Products Co., Ltd. Company’s loan Shenzhen Agriculture Disposal of the 20% --- --- 6,000,000.00 5.41% Products Co., Ltd. shares of Shenzhen China Agriculture Product Trade Online E-commerce Co., Ltd. (5) Trade with related parties Financial Beginning of Trade items Name of the related parties At the end of term property term Other account Changzhou Sanjing Oil Co., Current 13,081,405.64 7,970,700.00 receivable Ltd. account Other account Shenzhen Investment Current 3,510,297.20 3,510,297.20 payable Management Co., Ltd. account Other account Shenzhen Pepsi Cola Beverage Current 1,248,600.00 --- payable Co., Ltd. account Dividend Shenzhen Investment Dividend 2,690,970.14 2,690,970.14 payable Management Co., Ltd. Note 9. Contingent issues Influence on the financial situation, business Items Amount performance and cash flow of the current Property term and thereafter Guarantee provided to Guangdong Sunrise Group 8,580,000.00 * Guarantee Co., Ltd. Total 8,580,000.00 *. For details please go to Note 6-22. 95 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 Note 10. Commitment issues The Company has no material commitment issue need to be disclosed as of the end of report term. Note 11. Non-adjustment items in the post-balance sheet date issues The Company has no non-adjustment items in the post-balance sheet date issues need to be disclosed as of the end of report term. Note 12. Other major events On October 11, 2007, Agriculture Products Co. and Investment Holdings Co. entered the “Agreement on Share Equity Transferring” with Fusion System (HK) Co., Ltd (“Fusion System”), by which Agriculture Products Co., and Investment Holdings Co. were going to transfer 76,407,697 of the Company’s shares under their possession (account for 42% of the total shares of the Company). The proposal about this strategic investment has been approved by the Shareholders’ Special Meeting held on October 29, 2007. This issue is under relative approving process at present. The substantial controller of Fusion and Xinyi Technologies Group Co., Ltd. Mr. Li Shengpo committed: 1. For the first whole fiscal year upon completion of the share transferring, the Company will achieve an net profit of not less than RMB100 million; 2. At the 2nd and the 3rd complete fiscal year upon completion of the share transferring, the Company will achieve increase of net profit by at least 50%, i.e. at least RMB150 million at the 2nd year and RMB225 million at the 3rd year. If the Company failed to achieve the above target, the purchaser will compensate the shorted part by legal means (including but not limited to cash payment), to make the Company achieve the above targets. If the purchaser failed to fulfill the above commitments, the sellers or the Company are entitled to claim by legal means.” Note 13. Non-recurring gain/loss Amount before deducting of income Amount after deducting of income tax influence tax influence Sub-items Current Previous Current Previous term term term term 1. Gain/loss from disposal of non-current assets (1) Gains from disposal of long-term assets Incl. Gains from disposal of long-term 62,349,005.04 --- 73,351,770.64 --- equity investment Disposal of intangible assets 1,566,182.91 --- 1,331,255.47 --- Fixed asset disposal 3,145.00 285,728.80 2,673.25 242,869.48 Sub-total 1,569,327.91 73,637,499.44 1,333,928.72 62,591,874.52 (2) Expenses in disposal of long-term assets Incl. Net loss from disposal of fixed assets 396,771.04 1,061,927.06 337,255.38 902,638.00 Sub-total 396,771.04 1,061,927.06 337,255.38 902,638.00 Net gain/loss from disposal of non-current 1,172,556.87 72,575,572.38 996,673.34 61,689,236.52 assets 2. Refunding or exemption of tax without --- --- --- --- formal approval documents 3. Government subsidy accounted into 34,161,577.32 --- 29,037,340.72 --- current gain/loss 96 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 4. Gain/loss from predicted liabilities --- (15,770,504.14) --- (15,770,504.14) without connection with main business 5. Net amount of other non-operational gain/loss other than above (1) Non-operational income: Incl. Others 200,396.47 170,955.40 170,337.00 145,312.09 Sub-total 200,396.47 170,955.40 170,337.00 145,312.09 (2)Less: Non-operational expenses Incl. Penalties paid 24,139.19 --- 24,139.19 --- Others 317,663.43 90,540.03 270,013.92 79,959.03 Sub-total 341,802.62 90,540.03 294,153.11 79,959.03 None business income / expense, net (141,406.15) 80,415.37 (123,816.11) 63,353.06 6. Other non-recurring gain/loss items --- --- --- --- designated by CSRC Incl. Asset impairment loss carried back --- --- --- --- Total of non-recurring gain/loss before deducting of minor shareholders’ gain/loss 35,192,728.04 56,885,483.61 29,910,200.95 45,982,085.44 Less: influence amount of minor shareholders’ gain/loss 24,396.81 (1,398.59) 24,831.11 (1,398.59) Total of non-recurring gain/loss after deducting of minor shareholders’ gain/loss 35,168,331.23 56,886,882.20 29,885,369.84 45,983,484.03 Note 14. Net income on asset ratio Profit of the report period Net earnings / asset On full amortizing basis weighted average Current Previous Current Previous term term term term Net profit attributable to common shareholders of the 13.65％ 12.33％ 14.65％ 13.14％ Company Net profit attributable to holders of common shares after 4.31％ (4.31％) 4.63％ (4.59％) deducting of non-recurring gain/loss Note 15. Earnings per share Earnings per share Profit of the report period Basic gains per share Diluted gains per share Current Previous Current Previous term term term term Net profit attributable to common shareholders of the Company 0.24 0.19 0.24 0.19 Net profit attributable to holders of common shares after deducting of 0.08 (0.07) 0.08 (0.07) non-recurring gain/loss Items Year 2007 Year 2006 Calculating of basic earning per share and diluted earning per share (I) The numerator Net profit after tax 44,637,414.29 32,859,598.62 Adjustment: Influence of preferential share dividend and other instruments --- --- Gain/loss attributable to the holders of common shares of the parent company in calculating of 43,690,242.34 34,074,857.69 basic earnings per share Adjustment: Dividends and interests related to diluted potential common shares --- --- Change of gains or expenses due to conversion of dilute potential common shares --- --- Gain/loss attributable to the holders of common shares of the parent company in calculating 43,690,242.34 34,074,857.69 of diluted earnings per share (II) Denominator Weighted average of common shares placed outside in calculating of basic earnings per share 181,923,088.00 181,923,088.00 Plus: Weighted average of dilute potential common shares when converted to common shares --- --- Weighted average of common shares placed outside in current term in calculating of diluted 181,923,088.00 181,923,088.00 earnings per share (III) Earnings per share Basic gains per share 0.24 0.19 Net profit attributable to common shareholders of the Company 43,690,242.34 34,074,857.69 Net profit attributable to holders of common shares after deducting of non-recurring gain/loss 13,490,449.45 (11,908,626.34) Diluted gains per share 0.24 0.19 Net profit attributable to common shareholders of the Company 43,690,242.34 34,074,857.69 Net profit attributable to holders of common shares after deducting of non-recurring gain/loss 13,804,872.70 (11,908,626.34) 97 SHENZHEN SHENBAO INDUSTRIAL CO., LTD Note 16. Adjustment process and correction items of owners’ equity at initializing of the new accounting standard Items Share capital Capital Surplus Undistrib reserves reserves profi I. Balance at the end of last year 181,923,088.00 80,305,894.70 12,998,864.96 3,651,081.9 Plus: Correction of accounting errors in previous term --- --- --- --- Change of accounting estimation in previous term --- --- --- --- II. Balance before adjustment at the beginning of this year 181,923,088.00 80,305,894.70 12,998,864.96 3,651,081.9 Adjustment processes: 1. Adjustment of wage payable due to compensation for canceling of labor contracts --- --- --- (6,890,000.0 2. Temporary differences of income tax due to retrospective adjustment of book values of assets, --- --- --- 4,432,893.6 liabilities, and tax basis 3. Adjustment in common reserves due to adjustment of calculating method on long-term --- --- 13,384,066.76 (13,384,066 investment in subsidiaries III. Amount at the beginning of year after adjustment 26,382,931.72 (12,190,091 181,923,088.00 80,305,894.70 (Please refer to Enterprise Accounting Standard No.38) Note 17. Approval of financial statements The Financial Statements of the Company has been approved by the Board of Directors (or superior authorities) on March 26, 98 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 Supplementary information: Detailed Table of Asset Impairment Provisions Prepared by: Shenzhen Shenbao Industrial Co., Ltd. December 31 2007 RMB Yuan Decreased this term Balance of book Book balance at Provided this Items value at end of beginning of year term Written back Transferred term I. Bad debt provision 45,244,356.88 1,189,677.14 1,380,879.70 543,879.75 44,509,274.57 II. Inventory impairment provision 6,762,768.12 2,700,000.00 103,368.19 9,359,399.93 III. Disposable financial asset impairment provision IV. Investment equity hold till expiring impairment provision V. Long-term equity investment impairment 35,257,628.53 0.00 0.00 0.00 35,257,628.53 provision VI. Property investment impairment provision VII. Fixed asset impairment provision 12,805,402.07 153,845.06 707,914.32 12,251,332.81 VIII. Project material impairment provision IX. Construction in process impairment provision 10,607,032.88 0.00 0.00 0.00 10,607,032.88 X. Production biological material asset impairment provision Incl. Mature production biological material asset impairment provision XI. Gas & oil asset impairment provision XII. Intangible asset impairment provision XIII. Goodwill impairment provision XIV. Other Total 110,677,188.48 4,043,522.20 1,380,879.70 1,355,162.26 111,984,668.72 Comparison statement of shareholders’ equity difference adjustment form under old and new accounting standards In RMB Yuan Figures disclosed in Original figures in Projects Difference Statement on causations Annual Report 2007 Annual Report 2006 Shareholders’ equity at Dec 31st 2006 296,340,076.50 296,340,076.50 0.00 (under original accounting standard) Difference of long-term equity investment Incl. Differences in long-term equity investment caused by merger of companies under same holding Differences in credit of other long-term equity investment calculated on equity basis Investment properties measured by faire value Depreciations drawn for the previous years on the assets expected to be wasted Liabilities formed by recognition of employee Dismissal compensation recognizable as -6,890,000.00 -6,890,000.00 0.00 laying off compensation predicted debts according to the new accounting standard Payment for shares Reconstruction liabilities recognizable as predicted debts 99 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 Merger of companies Incl. Book value of consolidated goodwill under same holder Impairment provisions drawn upon goodwill according to the new accounting standard Financial assets booked as current gain/loss at fair value and disposable financial assets Financial liabilities booked as current gain/loss at fair value Equity increased by splitting with financial tools Derived financial instruments Differed income tax assets calculated at the difference between the asset book value of asset Income tax 4,432,893.63 4,432,893.63 0.00 impairment provisions and deductible losses and the taxable basis of assets according to the new accounting standard Equity increase attributable to minor shareholders among the differed income Minor shareholders’ equity 40,229.04 40,229.04 0.00 tax assets generated by providing of impairment provisions of the subsidiaries Special retrospective adjustment of companies with B shares or H shares listed Others Shareholders’ equity at January 1st 2007 293,923,199.17 293,923,199.17 0.00 (upon new accounting standard) Adjustment items of income statement (January 1 – December 31, 2006) RMB Yuan Items Not adjusted Adjusted Operational cost 88,677,534.63 88,677,534.63 Sales expense 13,496,558.81 13,496,558.81 Administrative expense 39,742,722.34 46,632,722.34 Income from change of fair value 7,500.00 7,500.00 Investment income 123,411,889.57 123,411,889.57 Income tax 2,131,932.27 226,480.00 Net profit 39,059,405.42 34,074,857.69 100 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 Statement of Adjustment in Net Profit Difference In RMB Yuan Items Amount 2006.1.1—12.31 Net profit (under original accounting standard) 39,059,405.42 Plus: Total of influence by retrospective adjustment -4,984,547.73 Incl. Business cost Sales expense Administrative expense -6,890,000.00 Income from change of fair value Investment income Income tax 1,905,452.27 Others Less: Influence on minority shareholders’ gain/loss by retrospective adjustment 2006.1.1—12.31 Net profit attributable to the owners of parent company 34,074,857.69 (under new accounting standard) Reference information with assumption of the new accounting standard is fully implemented I. Plus: Total of influences of other items Incl. R&D expenses Gain/loss from debt reorganization Gain/loss from non-monetary assets Investment income Income tax Others II. Influence of retrospective adjustment on minority shareholders’ gain/loss III. Plus: Minor shareholders’ gain/loss presented in the original financial statement 2006.1.1—12.31 Simulative net profit 34,074,857.69 101 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 Documents for Reference The following documents are ready at the secretariat of the Board for inquiry of CSRC, Shenzhen Stock Exchange and shareholders of the Company: 1. Financial Statements with the signatures and seals of the legal representative, CFO, and manager of the accounting department; 2. Original Auditor’s Report with seals and signatures of the CPAs; 3. Original and official copies of all documents which have been disclosed on Securities Times and Hong Kong Wen Wei Po in the report term; 4. The official copy of the Annual Report 2007 carrying personal signature and seal of the Chairman of the Board; SHENZHEN SHENBAO INDUSTRIAL CO., LTD. The Chairman: Zeng Pai March 26, 2008 102 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Consolidated Balance Sheet In RMB Assets Note 2007-12-31 2006-12-31 Current asset: Monetary fund 1 20,238,034.23 41,016,625.30 Trading financial assets 2 262,500.00 99,000.00 Notes receivable 3 760,820.00 87,382.57 Account receivable 4 49,396,918.23 18,921,333.17 Prepayment 5 10,412,941.33 2,349,240.98 Interest receivable - - Other account receivable 6 28,298,317.19 99,050,765.21 Inventories 7 36,926,614.66 45,207,006.09 Non-current asset due in 1 year - - Other current asset - - Total of current asset 146,296,145.64 206,731,353.32 Non-current assets Disposable financial asset - - Expired investment in possess - - Long-term receivable - - Long-term share equity investment 8 147,121,472.87 128,025,770.14 Property investment - - Fixed assets 9 96,799,262.53 92,114,318.70 Construction in process 10 5,507,263.40 10,052,942.48 Engineering material - - Fixed asset disposal - - Production physical assets - - Intangible assets 11 66,301,949.39 29,414,848.62 R&D expense - - Goodwill - - Long-term prepaid expenses 12 1,640,763.74 2,705,643.14 Differed income tax asset 13 4,407,955.27 4,473,122.67 Other non-current asset - - Total of non-current assets 321,778,667.20 266,786,645.75 Total of assets 468,074,812.84 473,517,999.07 Legal representative: Zeng Pai Financial Officer: Zeng Suyan Manager of Financial Dept.: Zeng Suyan (The notes attached herein are the constitution part of the financial statements) 103 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Consolidated Balance Sheet (Cont.) In RMB Liability and owners’ equity Note 2007-12-31 2006-12-31 Current liabilities Short-term loans 15 22,000,000.00 90,000,000.00 Trade off financial liabilities - - Notes payable - - Account payable 16 30,572,085.24 16,194,829.63 Prepayment received 17 2,183,994.02 1,997,963.99 Employees’ wage payable 18 6,521,537.45 11,449,294.79 Tax payable 19 655,400.80 267,297.02 Dividend payable 20 2,909,182.74 2,909,182.74 Other account payable 21 27,544,787.16 46,156,727.63 Non-current liability due in 1 year - - Other current liability - - Total of current liability 92,386,987.41 168,975,295.80 Non-current liabilities Long-term borrowings - - Bond payable - - Long-term payable - - Special payable - - Expected liabilities 22 8,580,000.00 10,619,504.10 Differed income tax liability - - Other non-recurring liabilities - - Total of non-current liabilities 8,580,000.00 10,619,504.10 Total of liability 100,966,987.41 179,594,799.90 Shareholders’ equity Share capital 23 181,923,088.00 181,923,088.00 Capital reserves 24 80,305,894.70 80,305,894.70 Less: Shares in stock - - Surplus reserves 25 31,290,240.37 26,382,931.72 Attributable profit 26 26,592,842.51 (12,190,091.18) Different of foreign currency - translation Shareholders’ equity attributable to 320,112,065.58 276,421,823.24 the parent company Minor shareholders’ equity Note 3 46,995,759.85 17,501,375.93 Total of shareholders’ equity 367,107,825.43 293,923,199.17 Total of owners’ equity and liabilities 468,074,812.84 473,517,999.07 Legal representative: Zeng Pai Financial Officer: Zeng Suyan Manager of Financial Dept.: Zeng Suyan (The notes attached herein are the constitution part of the financial statements) 104 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Consolidated Income Statement In RMB Items Note Year 2007 Year 2006 I. Total business income 192,241,044.90 104,021,455.44 Incl. Business income 27 192,241,044.90 104,021,455.44 II. Total business cost 212,266,571.21 177,888,479.36 Incl. Business cost 27 154,965,985.76 88,677,534.63 Business tax and surcharge 28 2,194,485.88 562,206.96 Sales expense 9,943,077.63 13,496,558.81 Administrative expense 38,028,192.11 46,632,722.34 Financial expenses 29 4,472,187.33 2,876,536.90 Asset impairment loss 30 2,662,642.50 25,642,919.72 Plus: Income from change of fair value 31 189,000.00 7,500.00 Investment income 32 33,146,208.83 123,411,889.57 Incl. Investment gains from affiliates 33,146,208.83 50,738,091.01 Exchange gains - - III. Business profit 13,309,682.52 49,552,365.65 Plus: Non business income 33 34,365,118.79 456,684.20 Less: Non-business expenses 33 738,573.66 16,922,971.23 Incl. Loss from disposal of non-current 396,771.04 1,061,927.06 assets IV. Gross profit 46,936,227.65 33,086,078.62 Less: Income tax expenses 34 2,298,813.36 226,480.00 V. Net profit 44,637,414.29 32,859,598.62 Net profit realized by the merged party under common control before the merger. Net profit attributable to the owners of 43,690,242.34 34,074,857.69 parent company Minor shareholders’ equity 947,171.95 (1,215,259.07) VI. Earnings per share: (I) Basic earnings per share 0.24 0.19 (II) Diluted earnings per share 0.24 0.19 Legal representative: Zeng Pai Financial Officer: Zeng Suyan Manager of Financial Dept.: Zeng Suyan (The notes attached herein are the constitution part of the financial statements) 105 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Annual Report 2007 SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Consolidated Cash Flow Statement In RMB Items Note Year 2007 Year 2006 I. Net cash flow from business operation Cash received from sales of products and providing of services 169,753,461.79 124,168,527.87 Tax returned - - Other cash received from business operation 35 38,828,510.49 27,305,153.40 Sub-total of cash inflow from business activities 208,581,972.28 151,473,681.27 Cash paid for purchasing of merchandise and services 131,614,229.55 94,414,236.98 Cash paid to staffs or paid for staffs 30,274,300.73 25,558,517.21 Taxes paid 10,379,773.93 7,782,449.53 Other cash paid for business activities 35 38,763,901.45 53,720,125.72 Sub-total of cash outflow from business activities 211,032,205.66 181,475,329.44 Cash flow generated by business operation, net (2,450,233.38) (30,001,648.17) II. Cash flow generated by investing Cash received from returning of investment 51,000,000.00 60,000,000.00 Cash received as investment gains 17,850,506.10 36,601,152.15 Net cash retrieved from disposal of fixed assets, intangible assets, and 45,644,015.00 1,611,680.00 other long-term assets Net cash received from disposal of subsidiaries or other operational - - units Other investment-related cash received 36 5,000,000.00 25,000,000.00 Sub-total of cash inflow due to investment activities 119,494,521.10 123,212,832.15 Cash paid for construction of fixed assets, intangible assets and other 75,589,736.98 14,883,496.82 long-term assets Cash paid as investment 3,800,000.00 11,500,000.00 Net increase of loan against pledge - - Net cash received from subsidiaries and other operational units - - Other cash paid for investment activities 36 - 20,000,000.00 Sub-total of cash outflow due to investment activities 79,389,736.98 46,383,496.82 Net cash flow generated by investment 40,104,784.12 76,829,335.33 III. Cash flow generated by financing Cash received as investment 21,700,000.00 - Incl. Cash received as investment from minor shareholders 21,700,000.00 - Cash received as loans 22,000,000.00 135,000,000.00 Cash received from bond placing - - Other financing-related cash received - - Subtotal of cash inflow from financing activities 43,700,000.00 135,000,000.00 Cash to repay debts 92,055,920.22 152,650,000.00 Cash paid as dividend, profit, or interests 5,077,221.59 5,881,958.64 Incl. Dividend and profit paid by subsidiaries to minor shareholders - - Other cash paid for financing activities - 4,948,250.00 Subtotal of cash outflow due to financing activities 97,133,141.81 163,480,208.64 Net cash flow generated by financing (53,433,141.81) (28,480,208.64) IV. Influence of exchange rate movement - - V. Net increase of cash and cash equivalents (15,778,591.07) 18,347,478.52 Plus: Balance of cash and cash equivalents at the beginning of year 36,016,625.30 17,669,146.78 Balance of cash and cash equivalents at the end of year 37 20,238,034.23 36,016,625.30 Legal representative: Zeng Pai Financial Officer: Zeng Suyan Manager of Financial Dept.: Zeng Suyan (The notes attached herein are the constitution part of the financial statements) 106 SHENZHEN SHENBAO INDUSTRIAL CO., LTD SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Statement on Change of Shareholders’ Equity Items Note year 2007 Shareholders’ equity attributable to the parent company Less: Capital Shares Surplus Share capital reserves in reserves stock I. Balance at the end of last year 181,923,088.00 80,305,894.70 - 1,299,8864.96 Plus: Change of accounting policy - - - 13,384,066.76 (1 Correcting of previous errors - - - - II. Balance at the beginning of current year 181,923,088.00 80,305,894.70 - 26,382,931.72 (1 III. Changed by this year - - - 4,907,308.65 (I) Net profit - - - - (II) Gains and losses accounted as shareholders’ equity directly - - - - 1. Change in fair value of sellable financial assets, net - - - - 2. Influence of change in other shareholders’ equity of the invested companies - - - - on equity basis 3. Income tax influence related to shareholders’ equity items - - - - 4. Others - - - - Total of (I) and (II) - - - - (III) Shareholders’ inputting and drawing of capital - - - - 1. Capital inputted by shareholder - - - - 2. Amount of shares paid and accounted into shareholders’ equity - - - - 3. Others - - - - (IV) Profit allotment - - - 4,907,308.65 ( 1. Providing of surplus reserves - - - 4,907,308.65 ( 2. Dividend to shareholders - - - - 3. Others - - - - (V) Internal transferring of shareholders’ equity - - - - 1. Capital reserves transferred to share capital - - - - 2. Surplus reserves transferred to share capital - - - - 3. Making up losses by surplus reserves - - - - 4. Others - - - - IV. Balance at end of year 181,923,088.00 80,305,894.70 - 31,290,240.37 Legal representative: Zeng Pai Financial Officer: Zeng Suyan Manager of Financial De (The notes attached herein are the constitution part of the financial statements) 107 SHENZHEN SHENBAO INDUSTRIAL CO., LTD SHENZHEN SHENBAO INDUSTRIAL CO., LTD. Statement on Change of Shareholders’ Equity Items Note Year 2006 Shareholders’ equity attributable to the parent company Less: Capital Shares Surplus Attribut Share capital reserves in reserves profi stock I. Balance at the end of last year 181,923,088.00 80,305,894.70 - 12,593,189.19 (35,002,64 Plus: Change of accounting policy - - - 8,258,365.85 (5,730,92 Correcting of previous errors - - - - II. Balance at the beginning of current year 181,923,088.00 80,305,894.70 - 20,851,555.04 (40,733,57 III. Changed by this year - - - 5,531,376.68 28,543,4 (I) Net profit - - - - 34,074,8 (II) Gains and losses accounted as shareholders’ equity directly - - - - 1. Change in fair value of sellable financial assets, net - - - - 2. Influence of change in other shareholders’ equity of the invested companies on equity basis - - - - 3. Income tax influence related to shareholders’ equity items - - - - 4. Others - - - - Total of (I) and (II) - - - - 34,074,8 (III) Shareholders’ inputting and drawing of capital - - - - 1. Capital inputted by shareholder - - - - 2. Amount of shares paid and accounted into shareholders’ equity - - - - 3. Others - - - - (IV) Profit allotment - - - 5,531,376.68 (5,531,37 1. Providing of surplus reserves - - - 5,531,376.68 (5,531,37 2. Dividend to shareholders - - - - 3. Others - - - - (V) Internal transferring of shareholders’ equity - - - - 1. Capital reserves transferred to share capital - - - - 2. Surplus reserves transferred to share capital - - - - 3. Making up losses by surplus reserves - - - - 4. Others - - - - IV. Balance at end of year 181,923,088.00 80,305,894.70 - 26,382,931.72 (12,190,09 Legal representative: Zeng Pai Financial Officer: Zeng Suyan Manager of Financial Dept.: Ze (The notes attached herein are the constitution part of the financial statements) 108