粤华包Ｂ(200986)2007年年度报告（英文版）

佛山华新包装股份有限公司 FOSHAN HUAXIN PACKAGING CO., LTD ANNUAL REPORT 2007 25 March 2008 1 I. Important notes and contents Important notes: The Board of Directors, the Supervisory Committee, directors, supervisors as well as Senior Executives of Foshan Huaxin Packaging Co., Ltd. (hereinafter referred to as the “the Company”) hereby confirm that there are no important omissions, fictitious statements or serious misleading information carried in this report, and shall take all responsibilities, individually and/or jointly, for the reality, accuracy and completeness of the whole contents. This Report is prepared in both English and Chinese language. Should there be difference in understanding the two versions, the Chinese version shall prevail. Mr. Wang Qi, Chairman of the Board, Mr. Tan Shanghui, General Manager and Mr. Ji Xiangdong, Chief Financial Officer hereby ensure that the financial report enclosed in this Annual Report 2007 is a true and complete report. Guangdong Hengxin Delu Certified Public Accountants produced unqualified auditors’ report for the Company. 2 Contents I. Important Notes and Contents-------------------------------------------------------------------2 II. Company Profile----------------------------------------------------------------------------------4 III. Financial Highlights and Business Highlights-----------------------------------------------5 IV. Changes in Share Capital and Particulars about Shareholders----------------------------7 V. Directors, Supervisors, Senior Executives and Staff---------------------------------------11 VI. Corporate Governance-------------------------------------------------------------------------17 VII. Shareholders’ General Meeting-------------------------------------------------------------23 VIII. Report of the Board of Directors-----------------------------------------------------------24 IX. Report of the Supervisory Committee-------------------------------------------------------40 X. Important Events--------------------------------------------------------------------------------43 XI. Financial Report--------------------------------------------------------------------------------49 XII. List of Documents Available for Inspection ----------------------------------------------49 3 II. Company Profile 1. Legal Name in Chinese: 佛山华新包装股份有限公司 Legal Name in English: Foshan Huaxin Packaging Co., Ltd. 2. Legal Representative: Wang Qi 3. Secretary of the Board: Zhou Qihong Address: the 18th Floor, Jinghua Bldg., Jihua Rd., Foshan Tel: 0757-83981729, 83992076 Fax: 0757-83992026 E-mail: hf_zhouqh@fshxp.com 4. Registered Address: No. 18, the 5th Jihua Road, Foshan Office Address: 18th Floor, Jinghua Building, the 5th Jihua Road, Foshan Post Code: 528000 The Company’s Internet Website: http://www.fshxp.com The Company’s E-mail: hejf@fshxp.com 5. Newspapers Designated for Disclosing the Information: Securities Times and Ta Kung Pao (HK) Internet Website Designated by China Securities Regulatory Commission: http://www.cninfo.com.cn Place Where the Annual Report is Prepared and Placed: Office of the Board 6. Stock Exchange Listed with: Shenzhen Stock Exchange Short Form of the Stock: Foshan Huaxin Packaging B Code of the Stock: 200986 7. Other Relevant Information (1) Date of first registration: Jun. 21, 1999 Registration with: Guangdong Municipal Administration for Industry and Commerce. (2) Business License No.: 19035257-5 (3) Taxation Registration No.: NTZi No. 440601707682279 (4) Certified public accountants engaged: Domestic certified public accountants: Guangdong Hengxin Delu Certified Public Accountants Address: No.16, 18, Kangning Road, Zhuhai, Guangdong Tel.: (0756) 83859808 Fax: (0756) 83800977 4 III. Financial Highlights and Business Highlights I. Financial and business Highlights as of the year 2007 Indexes Business Highlights ( Unit: RMB) Operating profit 114,354,059.21 Total profit 118,148,376.45 Total profit attributable to the listed companies’ shareholders 109,653,397.47 Total profit after deducting non-recurring gains and losses attributable to the listed companies’ shareholders 103,956,220.99 Net cash flow from operating activities 67,039,489.50 Items deducting non-recurring gains and losses and its amount Indexes Business Highlights ( Unit: RMB) Gains and losses on disposal of non-current assets 80,811.83 Government subsidy measured into gains and losses of current period 525,000.00 Fund possession cost measured into gains and losses of current period paid to non-financial enterprises 2,860,488.32 Net other non-operation income/expense 3,188,505.41 Subtotal 6,654,805.56 Deduct: Influence on enterprise income tax 8,813.42 Quotient of shares held by minority shareholders 948,815.66 Net amount of non-recurring gains and losses 5,697,176.48 II. Major accounting data and financial indices over the past three years 1. Major accounting data Unit: RMB Yuan Increase/decrease 2006 compared with last 2005 2007 year (%) Before Before After Adjustment After Adjustment After Adjustment Adjustment Adjustment Operating Income 1,269,510,406.95 670,134,266.81 673,543,663.61 88.48% 604,126,491.12 605,764,046.13 Total Profit 118,148,376.45 88,711,759.61 93,597,468.55 26.23% 73,366,607.28 74,074,349.97 Net profit attributable to the listed companies’ 109,653,397.47 86,049,103.07 90,981,019.39 20.52% 70,018,600.47 70,772,640.54 shareholders Net profit after deducting 103,956,220.99 83,098,211.72 88,623,452.10 17.30% 70,174,644.40 70,928,684.47 non-recurring gains and losses attributable to 5 the listed companies’ shareholders Net cash flow from 67,039,489.50 -133,179,152.28 -133,179,152.28 150.34% 37,524,206.66 37,524,206.66 operating activities Increase/decrease At the end of 2007 At the end of 2006 compared with last At the end of 2005 year (%) Before Before Adjustment After Adjustment After Adjustment After Adjustment Adjustment Total assets 3,021,741,905.13 2,772,661,095.22 2,767,792,787.20 9.18% 2,178,899,877.68 2,153,847,225.88 Owners’ equity 1,233,221,614.31 1,152,216,170.80 1,145,543,216.84 7.65% 1,066,167,067.73 1,054,562,197.45 (Shareholders’ equity) 2. Major financial index Unit: RMB Yuan Increase/ decrease 2006 compared with 2005 2007 last year Before After Before Adjustment After Adjustment After Adjustment Adjustment Adjustment Basic earnings per share 0.2170 0.20 0.18 20.56% 0.16 0.1610 Diluted earnings per share 0.2170 0.20 0.18 20.56% 0.16 0.1610 Basic earnings per share after deducting non-recurring gains 0.2057 0.19 0.1753 17.34% 0.16 0.1614 and losses Fully diluted return on equity 8.89% 7.47% 7.94% 0.95% 6.57% 6.71% Weighted average return on 9.05% 7.76% 8.27% 0.78% 6.79% 6.94% equity Fully diluted return on equity after deducting non-recurring 8.43% 7.21% 7.74% 0.69% 6.58% 6.73% gain and loss Weighted average return on equity after deducting 8.58% 7.49% 8.06% 0.52% 6.81% 6.96% non-recurring gain and losses Net cash flow per share from 0.13 -0.30 -0.30 37.67% 0.09 0.09 operating activities Increase/ decrease At the end of At the end of 2006 compared with At the end of 2005 2007 last year Before After Before Adjustment After Adjustment After Adjustment Adjustment Adjustment Net assets per share attributable to listed 2.44 2.62 2.61 -6.51% 2.43 2.37 companies’ shareholders 6 IV. Changes in Share Capital and Particulars about the Shareholders I. Changes in share capital (I) Statement of changes in share capital of the Company Unit: Share Prior to the change Increase/ decrease（+, -） Subsequent to the change Number of Proportion Issuance of Number of Proportion Bonus shares Other Subtotal shares (%) new shares shares (%) I. Unlisted circulation 290,000,000 65.98% 43,500,000 43,500,000 333,500,000 65.98% shares 1. Promoters’ shares 290,000,000 65.98% 43,500,000 43,500,000 333,500,000 65.98% Including: State-owned shares Domestic legal person 290,000,000 65.98% 43,500,000 43,500,000 333,500,000 65.98% shares Foreign legal person shares Others 2. Raised legal person shares 3. Employees’ shares 4. Preference shares or others Ⅱ. Listed circulation 149,500,000 34.02% 22,425,000 22,425,000 171,925,000 34.02% shares 1. RMB ordinary shares 2. Domestically listed 149,500,000 34.02% 22,425,000 22,425,000 171,925,000 34.02% foreign shares 3. Overseas listed foreign shares 4. Others Ⅲ. Total shares 439,500,000 100.00% 65,925,000 65,925,000 505,425,000 100.00% (II) Issuing and Listing of the share 1. The Company hadn’t issued or listed any new shares in past three years. 2. On May 10, 2007, the Shareholders’ General Meeting 2006 of the Company examined and approved the profit distribution project of 2006. The profit distribution project of 2006: based on the total share capital of 439,500,000 shares, the Company distributed the cash bonus RMB 0.50 (pre-tax) and 1.5 shares for every 10 shares to shareholders of domestically listed foreign shares (B shares) and domestic legal persons. On Jul. 9, 2007, this project has been implemented successfully so that the total share capital of the Company increased to 505,425,000 shares from 439,500,000 shares. 3. The Company has no employees’ shares 7 II. Introduction to Shareholders 1. Particulars about shares held by the top ten shareholders and the top ten shareholders holding tradable shares Unit: Share Total number of shareholders 19,527 Shares held by the top ten shareholders Proportion of Number of Number of Nature of Total number of Name of shareholders shares non-tradable pledged or frozen shareholder shares held held shares held shares Foshan Huaxin Development Co., Stated-owned legal 65.20% 329,512,030 329,512,030 0 Ltd person Foreign natural WU HAO YUAN 0.26% 1,334,919 Unknown person Foreign natural PANG, KWOK SHI 0.14% 730,605 Unknown person Domestic natural PIAO JOY GUANGSHI 0.13% 639,289 Unknown person Domestic natural LIN CHU BIN 0.12% 613,134 Unknown person Domestic natural LIN QIONG ZHI 0.12% 585,580 Unknown person Guangdong Technology Reform Stated-owned legal 0.11% 569,710 569,710 0 Investment Co., Ltd person China National Packaging Stated-owned legal 0.11% 569,710 569,710 0 Corporation person China Material Development and Stated-owned legal 0.11% 569,710 569,710 0 Investment General Corporation person Foshan Assets Management Stated-owned legal 0.11% 569,710 569,710 0 Center person Stated-owned legal Foshan Light Industry Company 0.11% 569,710 569,710 569,710 person Shares held by the top ten shareholders holding tradable shares Number of tradable Name of shareholders Variety of shares shares held WU HAO YUAN 1,334,919 Domestically listed foreign shares PANG, KWOK SHI 730,605 Domestically listed foreign shares PIAO JOY GUANGSHI 639,289 Domestically listed foreign shares LIN CHU BIN 613,134 Domestically listed foreign shares LIN QIONG ZHI 585,580 Domestically listed foreign shares TANG YI 552,200 Domestically listed foreign shares LIM CHINA MASTER FD SPC LTD-CHN INDEX 523,328 Domestically listed foreign shares SEGREGATED PORTFOLIO 8 ZHAN CHANG CHENG 522,905 Domestically listed foreign shares CAO SHENG CHUN 487,945 Domestically listed foreign shares CHEN PING HUA 449,000 Domestically listed foreign shares ① China Material Development and Investment General Corporation is the controlling shareholder of the principal shareholder of the Company, Foshan Huaxin Development Co., Ltd., therefore China Material Development and Investment General Corporation has Explanation on related related relationships with the Company and the controlling shareholders of the Company, relationship and action-in-concert Foshan Huaxin Development Co., Ltd. among above mentioned ② The Company is not aware of whether other shareholders exists related relationship or shareholders whether they belong to action-in-concert regulated in Measures for the Administration of Disclosure of Shareholder Equity Changes of Listed Companies. ③ In the report period, the shares held by shareholders of the Company holding over 5% (including 5%) were not pledged or frozen. 2. The introduction of the controlling shareholder of the Company: About the Company’s controlling shareholder: Foshan Huaxin Development Co., Ltd. (FHD) holds 329,512,030 of the Company’s state-owned legal person shares (non-tradable), taking 65.2% of the total share capital. FHD was incorporated on May 27, 1993; its legal representative is Tong Laiming; its registered capital is RMB 457.93 million; its business scope: production, manufacture and distribution of packing materials, papermaking, cable, wire, new materials; distribution of packing machinery and repairing services, amplifiers and fittings, decoration materials, and drinks; information consulting, etc. Foshan Huaxin Development Co., Ltd. has 7 legal person shareholders, of which China Material Development and Investment Corporation holds 62.11% of the registered capital in FHD; China Material Development and Investment Company registered through State Administrative Bureau in June, 1988 and now is wholly state-owned enterprise of China Chengtong Holding Group. China Chengtong Holding Group (hereinafter refer to as China Chengtong) was China Chengtong Group formerly and was set up in accordance with the admission ticket NMHE Zi (1998) Document No.189 issued by State Administration for Domestic Trade on Jan. 22, 1998 as a large scale logistic enterprise group approved by State Administration for Industry and Commerce Bureau and managed by SASAC. China Chengtong owned the largest chain logistic distribution and allotment network and metal distribution network in the mainland and transportation net combining seas, railways, highway and airlines. In accordance with the Circular on Establishing and Perfecting the Pilot Work of Board of Directors in State-owned Companies by Central Enterprises promulgated by SASAC in June 2004, China Chengtong is selected by the SASAC as the pilot standard Board of Directors in the first seven pilot enterprises for establishing and perfecting the Board of Directors. China Chengtong has been on a rapid developing way and move towards the goal of international modern enterprises. The registered capital of the Chengtong is RMB1, 546,950,000 and the legal person is Mr. Ma Zhengwu, the registered address is Northern Yuetan Street No. 25, Western District of Beijing. The registered number of business license is 1000001002867. The major business of the Company is storage logistic and metal trade, etc. 9 Relationship in Ownership and Shareholding between the Company and its actual controller: SASAC 100% China Chengtong Holding Group Co., Ltd. 100% China Materials Development Investment General Corporation 78.26% Jiacheng Enterprise Development Co., Ltd. 62.11% 6.62% Foshan Huaxin Development Co., Ltd. 0.11% 65.2% Foshan Huaxin Packaging Co., Ltd. 10 V. Directors, Supervisors, Senior Executives and Staff I. Directors, Supervisors, Senior Executives and Staff (I) Background Information Whether draw Drawing the the total payment remuneration Shares Shares held from the from the Name Position Sex Age Office term held at at Company in shareholding year-begin year-end the report companies or period (‘0000) other related units or not Chairman of Wang Qi Male 54 2005.06-2008.05 0 0 Yes the Board Vice Tong Laiming Chairman of Male 38 2005.10-2008.05 0 0 Yes the Board Tan Shanghui Director Male 57 2005.06-2008.05 0 0 No Yan Su Director Male 37 2007.05-2008.05 0 0 Yes He Jichang Director Male 51 2005.06-2008.05 0 0 Yes Huang Xin Director Male 45 2005.06-2008.05 0 0 No Independent Sun Sheng’ai Male 59 2005.06-2008.05 0 0 3.80 No Director Zhong Independent Male 54 2005.06-2008.05 0 0 3.80 No Liuhan Director Independent Ge Yun Female 45 2005.06-2008.05 0 0 3.80 No Director Secretary of Zhou Qihong Male 40 2006.09-2008.05 0 0 63.03 No the Board Chairman of Chen Zeqing Supervisory Female 56 2005.06-2008.05 0 0 Yes Committee Chen Ming Supervisor Male 44 2007.05-2008.05 0 0 Yes Mi Baogang Supervisor Male 47 2007.05-2008.05 0 0 Yes Huang Dabiao Supervisor Male 56 2005.06-2008.05 0 0 Yes Huang Weiji Supervisor Male 54 2005.06-2008.05 0 0 Yes General Tan Shanghui Male 57 2006.03-2008.06 0 0 81.31 No Manager Deputy Chen Haiyan General Male 42 2006.03-2008.06 0 0 69.13 No Manager Deputy Chen Jiali General Male 50 2006.03-2008.06 0 0 Yes Manager 11 Deputy Huang Xin General Male 44 2006.03-2008.06 0 0 63.41 No Manager Deputy Lu Liang General Male 35 2006.03-2008.06 0 0 62.65 No Manager Chief Ji Xiangdong Financial Male 33 2007.05-2008.06 0 0 45.54 No Officer Total - - - - 396.47 - Note: The Company hadn’t carried out Equity Incentive Plan till now. None of Directors, Supervisors, and Senior Executives held the Stock Option and shares subject to moratorium in the reporting period. Status of Directors, Supervisors and Senior Executives in employment in Shareholders’ Companies Employment Names Company Position duration From Jan. 1995 up Wang Qi Foshan Huaxin Development Co., Ltd General Manager to now Tong China Material Development and From Apr. 2005 up General Manager Laiming Investment General Corporation to now China Material Development and From 2006 up to Yan Su Chief Accountant Investment General Corporation now He Guangdong Guangye Assets Vice Chairman of the From 2006 up to Jichang Management Co., Ltd. Labor Union now Deputy Division Chief Chen From Sep. 2002 up China National Packaging Corporation of the Operation Ming to now Department Mi China Material Development and Deputy Manager of From Aug. 2007 up Baogang Investment General Corporation Financial Department to now Status of Directors, Supervisors and Senior Executives in employment in other units except the Shareholders’ Companies Employment Name Company Position duration Sun Guangdong International Business From 2002 up to Advisor Director Sheng’ai Law Firm now Zhong Chairman of the Board of From Jul. 2001 up Foshan Dongjian Group Co., Ltd Liuhan Directors to now Guangdong Institute of Certified From Sep. 2004 up Ge Yun Deputy Secretary-General Public Accountant to now 12 (II) The main work experience of current directors, supervisors and senior executives and the posts or concurrent posts held by them at the units other than corporate shareholders Chairman of the Board: Wang Qi was born in 1953, and he is a MBA and economic engineer. From Jan. 1995 to nowadays, he have hold posts in Foshan Huaxin Development Co., Ltd. as the Chairman of the Board, Vice-chairman of the Board and General Manager; from Jun. 1999 to nowadays, he has served in Foshan Huaxin Packaging Co., Ltd. as Chairman of the Board. He has been taking the posts of Deputy General Manager of China Material Development and Investment General Corporation from Nov. 2006. Vice-chairman of the Board: Tong Laiming was born in 1969 and he is the master of economics. From May 2000 to Sep. 2001, he held a post of Manager in Beijing Diweilepu Science-Trading Co., Ltd.; from Sep. 2001 to Apr. 2005, has hold posts in China Material Development and Investment General Corporation as the Assistant General Manager and concurrently Manager of Financial Management Department, Deputy General Manager and CFO. He has served as General Manager in China Material Development and Investment General Corporation from April 2005. Director and General Manager: Tan Shanghui, born in 1950, is an MBA and engineer. He once served as adjunct General Manager in Foshan Huafeng Paper Co., Ltd. from the year of 2004 to July 2006. He now serves as Director and General Manager of Foshan Huaxin Packaging Co., Ltd. from 1999. Director: Yan Su, born in 1970, is an MBA, CPA and CTA. From Aug. 2000 to Apr. 2006, has hold post in Huaxing Import & Export Co., Ltd as Manager of Financing Department, Chief Economist, Deputy General Manager; From Apr. 2006 to nowadays, he took post in China Material Development and Investment General Corporation as Assistant of General Manager, Chief Financial Officer, now also as Chief Accountant. He acts as the Secretary of Party Committee of Foshan Huaxin Development Co., Ltd from Jun. 2007 up to now. Director: He Jichang, born in 1956, has a bachelor degree, engineer. He once served as Division Chief of Planning & Development Dept. in Guangdong Guangye Assets Operation Co., Ltd. from June 2000 to Mar. 2002 and Director and Deputy General Manager of Guangdong Ipek Environmental Protection Industrial (Group) Co., Ltd. from Apr. 2002 to Sep. 2004. He also served as Director, General Manager and Party commissioner of Guangdong Guangye Education Development Co., Ltd.. Now, he is holding the post in Guangdong Guangye Asset Operation Co., Ltd. as Vice-chairman of labor union. Director and Deputy General Manager: Huang Xin, born in 1962, master degree. He served successively as Deputy General Manager, Manager of Operation Dept.Ⅱ, Manager of Industrial Dept, Deputy Manager of Stratagem Investment Dept. and 13 Manager of Asset Management Dept. in China Material Development Investment Corporation. He has held a post in Foshan Huaxin Packaging Co., Ltd. as a deputy general manager from Mar. 2006. Independent director: Sun Sheng’ai, born in 1949, is a university graduate and lawyer. He once served as director of Legal Affairs Dept. of Guangdong International Economic and Trading Law Office from the year of 2001 to 2002. He has served as partner and chief consultant of Guangdong Huanyu Jingmao Law Office from the year of 2002. Independent Director: Zhong Liuhan, born in 1953, is an economic engineer. He served as Chairman of the Board in Foshan Dongjian Group Company from Oct. 1994 to Jun. 2001. He has held a post in Foshan Dongjian Group Co., Ltd. as the Chairman of the Board and concurrently Secretary of the Party Committee from July 2001. Independent Director: Ge Yun, born in 1962, master majored in economic and CPA. She served as director of Operation Regulations Department and director of Training Department in Association of Public Accountants Guangdong Province from Feb. 1997 to Sep. 2004. She has held a post in Association of Public Accountants Guangdong Province as deputy secretary-general from Sep. 2004. Chairman of the Supervisory Committee: Chen Zeqing, born in 1951, is a junior college graduate, senior political engineer and assistant economic engineer. He has served as Director and Deputy General Manager in Foshan Huaxin Development Co., Ltd. since Sep. 1996. Meanwhile, he also holds a post in Foshan Huaxin Packaging Co., Ltd. as Chairman of Supervisory Committee from May 2003. Supervisor: Mi Baogang, born in 1960, is a junior college graduate and Accountant. From Sep. 1988 up to now he has been working in Financial Department of China Material Development and Investment General Corporation, from Aug. 2007 up to now, as Deputy Manager of Financial Department of China Material Development and Investment General Corporation. Supervisor: Chen Ming, born in 1963, is a Bachelor and Engineer. He held the post in China National Packaging Corporation as Deputy Division Chief of the Operation Department concurrently served as Deputy General Manager in China Packaging Certification Center Co. Ltd. Supervisor: Huang Dabiao, born in 1952, is a junior college graduate and assistant economic engineer. He once served as engineer of Foodstuff Factory, manager of Production Dept., Manager of Printing Dept. and Chairman of labor union in Tetra Huaxin (Foshan) Packing Co., Ltd. from Sep. 1990 to Jun. 2003. He now serves as Assistant General Manger and Deputy General Manager of Huaxin (Foshan) Color Printing Co., Ltd. 14 Supervisor: Huang Weiji, born in 1953, bachelor degree. He now serves as Chairman of Labor Union and concurrently Head of Administration Dept of Party in Foshan Huafeng Paper Co., Ltd. from the year 2000 to now. Secretary of the Board: Zhou Qihong, was born in 1967, master degree, engineer. He ever took the post of Deputy General Manager in Foshan Huaxin Packing Co., Ltd. from Jul. 1999 to Aug. 2004; He once concurrently served as General Manger in Foshan Huafeng Paper Co., Ltd. from Mar. 2001 to May 2004 and as Deputy General Manger in Foshan Huaxin Development Co., Ltd. from Aug. 2004 to Jul. 2006. He now serves as Secretary of the Board in Foshan Huaxin Packing Co., Ltd. from Sep. 2006 to now. Deputy General Manager: Chen Haiyan, born in1965, is a master, MBA and engineer. She once took the post of Secretary of the Board in Foshan Huaxin Packing Co., Ltd. from July 1999 to Sep. 2006. She has held post in Foshan Huaxin Packing Co., Ltd. as Deputy General Manger from July 2002 to now. She ever took the post of Chairman of the Board and concurrently General Manager in Huaxin (Foshan) Color Printing Co., Ltd. from Nov. 2003 to Jul. 2006. She concurrently took the Chairman of the Board and General Manger in Foshan Huafeng Paper Co., Ltd. Deputy General Manager: Chen Jiali, born in 1957, is a junior college graduate and engineer. He once served as Deputy General Manager in Huaxin Tetra (Foshan) Packaging Co., Ltd. from Feb. 1997 to now and as Deputy General Manager in Foshan Huaxin Packing Co., Ltd. since July 1999. He now serves as Chairman of the Board in Huaxin (Foshan) Color Printing Co., Ltd. Deputy General Manager: Lu Liang, born in 1972, MBA and economic engineer. He once served as Assistant General Manager and concurrently Head of Investment Development Dept. in Foshan Industrial Investment Co., Ltd. from Aug. 1998 to Dec. 2003. He now serves as Deputy General Manager in Foshan Huaxin Packing Co., Ltd. Since Jul. 2006, he concurrently took the Secretary of CPC in Foshan Huafeng Paper Co., Ltd. Chief Financial Officer: Ji Xiangdong, born in 1974, Bachelor degree and CPA. He has served as Deputy Manager of Auditing Dept. in Beijing Zhong Tian Hua Zheng Certified Public Accountants from Sep. 2002 to July 2004. He has successively held the posts in China Materials Development Investment Corporation as Deputy Manger and Manager of Financial Dept from Aug. 2004 to May 2007. From May 2007 up to now, he served as Chief Financial Officer in Foshan Huaxin Packing Co., Ltd. (III) Annual remuneration 1. Regarding the remuneration of directors, supervisors and senior executives of the Company, annual salary system was implemented according to the plan determined by shareholders’ general meeting and the board of directors. The limit of annual salary was determined according to the operating results of the Company. The total annual 15 remuneration of the current directors, supervisors and senior executives of the Company is RMB 3.96 million. 2. In the reporting period, the Company further improved independent director system. The annual allowance for an independent director was RMB 38,000. The expenses of performance of their duties were borne by the Company. 3. Wang Qi, the current Chairman of Board, Tong Laiming, Vice Chairman of Board and directors, namely Yan Su and He Jichang did not receive remuneration from the Company. Supervisors, namely Chen Zeqing, Chen Ming, Mi Baogang, Huang Dabiao and Huang Weiji did not receive remuneration from the Company. Chen Jiali, Deputy General Manager did not receive remuneration from the Company。The above personnel received remuneration from the units they served. (IV) Directors, supervisors and senior executives leaving their posts in the reporting period At the 2nd meeting of the 3rd Board of Directors for 2007 held by the Company on Apr. 18, 2007, Mr. Xu Xinmin was agreed to dismiss the post of Director of the 3rd Board of Directors and Mr. Yan Su was nominated as Director candidate. At the Annual Shareholders’ General Meeting of the Company held on May 10, 2007, Mr. Yan Su was elected as Director of the Company and the office term was up to May 2008. At the 1st meeting of the 3rd Supervisory Committee for 2007 held by the Company on Apr. 18, 2007, Both Mr. Gong Heping and Mr. Ji Xiangdong were agreed to dismiss the posts of Supervisor of the 3rd Supervisory Committee and Mr. Chen Ming and Mr. Mi Baogang was nominated as Supervisors candidate respectively. At the Annual Shareholders’ General Meeting of the Company held on May 10, 2007, Mr. Chen Ming and Mr. Mi Baogang were elected as the Supervisors and the office term was up to May 2008. At the 4th meeting of the 3rd Board of Directors for 2007 held by the Company on May 14, 2007, Mr. Ji Xiangdong was engaged as Chief Financial Officer agreed by the Board of Directors in accordance with the nomination of Mr. Tan Shanghui, General Manager of the Company. The office term was up to June 2008. II. Employees of the Company Employees of the Company and professional structure: The Company has 2000 in-service employees, including 987 production employees, 123 sales employees, 145 technical employees, 35 financial employees, 76 administrative employees and 634 other staff. 197 employees have the education of undergraduates and 275 employees have the education of technological academy and 1528 staff under the technological academy. There are 17 retired employees whom the Company will pay the expenses to. The staff above included staff of shareholding subsidiary company. 16 VI. Corporate Governance I. Corporate Governance According to the requirement of the Notice of Concerning Matters on Special Campaign to Strengthen the Corporate Governance of Listed Companies with ZJGSZi[2007] Document No.28 and the Notice of the Fulfillment of the Special Campaign to Strengthen the Corporate Governance of Listed Companies with ZJGSZi[2007] Document No.29 issued by CSRC, The Company set up the leader team and work team of special campaign to carry out the special campaign of corporate governance formally and completed the work in self-inspection phase, finished and disclosed the Self-inspection Report and Rectification Report on Special Campaign to Strengthen the Corporate Governance of Listed Companies. Subsequently, the Company collected and heard the advice and suggestion on corporate governance situation and rectification plan from investors and the public via the telephone, website and e-mail and passed the on-site inspection of Guangdong Bureau of CSRC. In accordance with the results of self-inspection, on-site inspection of Guangdong Bureau together with the comment from the public, the Company drafted the rectification measure, rectification time and person in charge, and implemented the rectification in compliance with relevant requirement to further perfect and regulated the operation of the Company. On Oct.13, 2007, the Company disclosed the Rectification Report on Special Campaign to Strengthen the Corporate Governance of Listed Companies. In the reporting period, the Company continuously perfected corporate legal person administering structure, built modern enterprise system, and regulated the operation of the Company strictly according to the requirements of Company Law, Securities Law and the relevant laws and regulations. The Board of Directors believe that the actual situation of the Company legal person administering structure is in line with the requirements of Administrative Rules for Listed Companies basically for details as follow: (I) About the shareholders and General Meeting of Shareholders: the Company further standardized the official rules of commencement of Shareholders’ General Meeting so as to protect the legal rights of shareholders; assure all shareholders, especially the middle and minority shareholders can enjoy the equal status and can execute their rights. (II) About the controlling shareholders and the listed companies: the controlling shareholders acted in standard and did not overstep to intervene the strategy and operation directly or indirectly; the Company and the controlling shareholders completed “five independence” in staff, assets, finance, organization and business; the Board of Directors, Supervisory Committee and internal organizations can operate independently; the transactions between the Company and other associated parties were equal, fair and just. (III) About the Directors and the Board of Directors: the Company would select the directors in accordance with the procedures of the Company Law and the Articles of Association of the Company. The number and composing of the Board of Directors were 17 abided by the requirement of laws and regulations. All directors of the Company would attend the Board of Directors in serious attitude according to Official Rules of Procedure for the Board of Directors. (IV) About Supervisors and Supervisory Committee: the number and composing of the Supervisory Committee were abided by the laws and regulations. All Supervisors of the Company could seriously stick to their responsibilities and supervised that whether the performance of finance, Directors, Managers and other Senior Management staff in conformity with laws and regulations. (V) About efficiency judgment and encouragement restriction system: the Company established just and transparent efficiency judgment and encouragement restriction system. (VI) About information disclosure and transparency: the Company designated the Secretary of the Board of Directors in charge of information disclosure, strictly abided by the requirement of relevant laws and regulations and Information Disclosure System, disclosed relevant information in trueness, accuracy, completeness and timeliness and ensured all shareholders acquire information equally. (VII) About stakeholders: the Company fully respected and protected the legal rights of relevant gainers and realized the concerted balance of interest of shareholders, staff and the society and accelerated continuous and healthy development. (VIII). about management of investors’ relationship: the Company designated special person for management of investors’ relationship and established the platform for mutual communication of investors; the relevant staff could answer incoming telegram, letters and visits of investors in details and in an earnestly way. 2. Particulars about duty performance of independent directors (I) Attendance of board meetings by independent directors According to the requirements of Guiding Opinions on the Establishment of Independent Director System in Listed Companies issued by CSRC, the Company now has three independent directors, i.e., Mr. Sun Sheng’ai, Mr. Zhong Liuhan and Ms. Ge Yun. The independent directors of the Company seriously performed their duties, actively participated in decision making of the board of directors of the Company in respect of major issues, expressed independent opinions on major issues including the change of senior executives of the Company and new project investment and really safeguarded the Company's overall interests and the interests of investors. Name of The supposed Attendance Attendance Absence remarks independent times of in person by (times) directors attendance this (in times) agent(times) year Sun Sheng’ai 9 9 0 0 Zhong Liuhan 9 9 0 0 Ge Yun 9 9 0 0 (II) Objection made by independent directors to relevant matters: In the reporting period, the independent directors of the Company did not make objection to the proposals of the board of directors or other important issues of the Company. 18 III. The relationship between the Company and its controlling shareholder The Company was strictly independent of its the largest shareholder, Foshan Huaxin Development Co., Ltd., in respect of business, personnel, assets, organs and finance and had independent and complete business and the ability of independent operation. (I) As for business, the Company was completely independent from its controlling shareholder and had completely independent business and the ability of independent operation. (II) As for personnel, the Company was independent of its controlling shareholder. Its general manger, deputy general managers, secretary to the board and finance personnel received remuneration from the Company, who did not hold any important position at corporate shareholders. (III) As for assets, the assets input by the controlling shareholder in the Company were independent, complete and had clear property right. The controlling shareholder did not occupy the Company's assets or dominate or interfere with the operation and management of the Company's assets. (IV) As for organization, the Company established an organizational structure that is completely independent of its controlling shareholder. The board of directors, the supervisory committee and internal organs of the Company operated independently according to the Company Law, the Securities Law and relevant laws and regulations. The largest shareholder acted according to relevant codes of conduct and did not directly or indirectly interfere with the Company's decision making and operating activities by overstepping the authority of the shareholders' general meeting. (V) As for finance, the Company established its owned accounts. Its controlling shareholder did not interfere with the Company's accounting activities. The Company independently operated, carried out accounting and paid taxes. IV. Appraisal of the senior executives of the Company and status of implementation of stimulation mechanism in the report period In the report period, the Company appraised its senior executives according to the principles on remuneration and equity incentive system adopted at 2004 annual shareholders’ general meeting and relevant detailed rules for implementation adopted by the remuneration committee of the board of directors and the board of directors of the Company and set the limit of incentive remuneration for senior executives based on such appraisal. V. Self-evaluation of Internal Control of the Company (I) Summary of Internal Control of the Company In the reporting period, according to the requirement of the Notice of Concerning Matters on Special Campaign to Strengthen the Corporate Governance of Listed Companies with ZJGSZi[2007] Document No.28, the Company done the self-inspection earnestly in view of the actual governance status, examined and approved the Rectification report on Special Campaign to Strengthen the Corporate Governance of Listed Companies. What’s more, the Company collected and heard the advice and suggestion on corporate 19 governance situation and rectification plan from the investors and the public via the special telephone and network platform and received the on-site inspection of Guangdong Bureau of CSRC. In the reporting period, in compliance with the Stock Listing Rules of Shenzhen Stock Exchange, Guidelines on Internal Control of Listed Companies of Shenzhen Stock Exchange and relevant regulations, the Company set down Management Rules for Shareholding Subsidiary Company, Management Rules on External Guarantee, Management Rules on Related Transaction, Internal Control Rules on External Investment, Rules on Significant Investment Decision-making, Rules on Internal Inspection and Disclosure, Internal Report Rules on Significant Information, Rules on Reception and Work-popularizing . At the meantime, the Company revised the Management Rules on Information Disclosure. All above mentioned rules have been examined and approved by the Board of Directors and have been implemented fully. (II) Key control activities 1. The control and management for shareholding subsidiary company: ① the Company appointed and accredited the directors, supervisors and important senior executives with clear responsibilities and power for shareholding subsidiaries.② the Company convened and held regular conference to analyze business operation，examined and approved monthly, quarter and annual financial report of shareholding subsidiaries. ③ the Company carried out performance measurement successfully by budget management. 2. The internal control on related transaction: The Company built and perfected the Management Rules on Related Transaction, which regulated in details in terms of the principle of related transaction, related person, related relationship, procedure of decision-making of associated transaction as well as procedure of disclosing. The Company submitted the “Proposal of Daily Related Transaction” in accordance with the need of operation development. The related transaction occurring in every year is operated strictly in line with the Management Rules on Related Transaction. 3. Internal Control on External Guarantee: The internal control on external guarantee is in line with the principle of legality, prudence, mutual benefit and safety. The independent directors performed their duty seriously and expressed dependent opinions on external guarantee of the Company. 4. Internal Control on the Use of Raised Capital: in the reporting period, the Company didn’t use the Raised Capital. The Company established sound Management Rules on Use of Raised Capital to further regulate the use and management of the Raised Capital. 5. Internal Control on the Significant Investment: the Company established sound Management Rules on External Investment，in which the specific rules were made on the basic principle of the external investment, the procedure of examination, approval and management on external investment. All investment of the Company implemented the 20 procedure of examination and approval in compliance with relevant laws, regulations, Articles of Association as well as relevant rules of the Company. 6. Internal Control on the Information Disclosure: the Company established sound the Management Rules on Information Disclosure which presented the procedure of disclosure at length, regulated the procedure of the important temporary report and information to further enhance the management and responsibilities for information disclosure, also regulated in details in terms of record management, confidentiality and punishment. The company will implement this rule strictly and perform its duty on information disclosure seriously. (III) The problems existing in the internal control of the Company and rectification plan In recent years, the Company encountered with the new challenge about how to enhance the comprehensive management arising from he major business of the Company has been in rapid development and expansion. So the Company must speed up the marketing development and follow up the management at the same time, provide the strong protection for its long term development healthily. According to the requirements of Guideline on Internal Control from Shenzhen Stock Exchange and CSRC, the Company will reinforce internal control continually, promote the trains for Directors, the Supervisors and Senior Management Staff of the Company in order to further perfect the corporate governance structure and improve the operating level. (IV) Overall self-evaluation about Internal Control from the Company The actual situation of internal control of the Company is basically in line with relevant regulations and the requirement of the securities supervisory organization also suitable for requirements for production and operation. The internal control of the Company played the important role to control and performed preventive effect in aspects of the whole process, all key parts and links of enterprise management, significant investment and significant risk. The Company enhanced the internal control continuously to improve the Company’s development steadily, healthily, rapidly and high-efficiently. However, facing with the competition is getting tough in packaging & papermaking industry; the changes from external environment influenced the internal control environment directly. Following with the Company’s enduring development, the expansion of the market, scale, business also influenced the internal control of the Company. The Company will deepen the all related work on internal control, further improve the efficiency and benefit in accordance with the requirements of the supervisory organization together with the actual need for the Company’s development through the innovation in system, management, methods, and concept. (V) Opinions on the self-evaluation of the internal control representing from the Supervisory Committee of the Company For details, please refer to the section VIIII Report of Supervisory Committee of this 21 Annual Report. (VI) Opinions on the self-evaluation of the internal control representing from the Independent Directors of the Company In 2007, the Company examined the Rules on Internal Control deeply in accordance with the Guidelines on Internal Control of Listed Companies issued by Shenzhen Stock Exchange. In aspect of corporate governance, the Company built and perfected the legal person administrative structure, boosted the governance strictly of the Board of Directors, Supervisory Committee, Shareholders’ General Meeting with clear aims in the limit of power, procedure of decision-making, related transaction, information disclosure, investors’ relationship, significant investment and risk control. In aspect of construction of the basic management system, combining to the actual rules of production and operation，the Company focused on the management in finance, guarantee, information disclosure, significant investment, so as to perfect the management rules and produce sound management rules relative systemically. In aspect of internal control, the Company set the definite control target to construct the favorable control environment, defined the clear control responsibilities and carried out efficient control activities. Based on independent judgment of our standpoint, the Company submitted the Self-evaluation Report of Foshan Huaxin Packaging Co., Ltd. And the Company checked and examined the internal control seriously and expressed the independent opinions as follow: 1. The rules of internal control of the Company were in line with the requirements of the securities supervisory organization and relevant regulations, also in line with the actual need for production and operation of the Company. 2. The internal control measures of the Company played the key part in the whole process and control of the every links. 3. The Self-evaluation Report of Internal Control reflected the internal control of the Company in deed. The summary of internal control was comprehensive. What’s more, the problem existing have been discovered deeply with best efforts to improve the internal control. 22 VII. Shareholders’ General Meeting I. Annual Shareholders’ General Meeting On May 10, 2007, the Annual Shareholders’ General Meeting 2006 was held at meeting room of the Company and its resolution published on Securities Times and Ta Kung Pao (HK) on May 12, 2007. II. Temporary Shareholders’ Meeting 1. On Jan.24, 2007, the 1st Temporary Shareholders’ General Meeting 2007 was held at the meeting room of the Company, the resolution published in Securities Times and Ta Kung Pao (HK) on Jan. 25, 2007. 2. On Jul.16, 2007, the 2nd Temporary Shareholders’ General Meeting 2007 was held at the meeting room of the Company, the resolution published in Securities Times and Ta Kung Pao (HK) on Jul.17, 2007. 23 VIII. Report of the Board of Directors I. Review of Operating Status in the reporting period (I) Main Operation Status of the Company in the Reporting Period In 2007, China’s macroeconomic situation maintained a good development; high economic environment has brought great market opportunities to enterprise development, the market demand of papermaking and packaging industries were keeping growth. When the demand is highly growing, it also accompanied by a larger supply of the market and the increasingly competitive market. Faced with complex and ever-changing, increasingly competitive market environment both at home and abroad, the Company positively dealing with all challenge, adapted the effective measures to maintain the stable operation of the production and the continuous improvement of economic efficiency through reform and strengthening management, of course all these is under the leading of the Board of Directors and operating management of the Company. Zhuhai project of the Company completed and put into production, the production and operating benefits also reflected increasingly. In the reporting period, the income of business was achieved RMB 126,951.04, an increase of 88.48% year-on-year. The operating profit amounted to RMB 114,354,100, up by 23.60% year-on-year. The net profit was RMB 109,653,400, up by 20.52% year-on-year. The net profit after deducting the non-recurring gains and losses reached RMB 103,956,200, up by 17.30% year-on-year. (II) Scope of main operation and its operating status 1. Scope of main operation: the Company is engaged in papermaking, printing and packaging industry and mainly produces and sells high-class and high-quality packaging materials and packaging products including high-class coated white board , soft packing boxes for liquid food (tetra pack), color printed packaging products and new-type aluminum and plastic compound paper cans. The main products of the Company are high-quality coated white board and color printed packaging products. 2. The income and cost of main business: Increase/decrease Increases/decrease Increases/decrease Profit Main Operating Main Operating of operating of main operating of profit of main Industry ratio income cost income over the cost over the last operating over the (%) last year (%) year (%) last year (%) White board 1,146,100,378.29 1,018,154,035.72 11.16 102.85 92.44 4.8 paper Printing 118,940,095.65 94,386,338.44 20.64 15.51 11.83 2.61 products (2) Main business income regarding regions: 24 Increase/decrease of main business income Regions Main business income over the same period of last year (%) Domestic 748,941,780.36 74.17% Foreign 520,568,626.59 113.76% (III) Main suppliers and clients In the reporting period, the sale volume of top-five clients reached RMB 161,650,200.71 in total, representing 12.73% of total amount. The purchase volume of the top-five suppliers amounted to RMB 214,363,018.48, representing the 19.31% of total amount. (IV) Status of the Company’ Assets of and its Changes (Unit: RMB) 2007 2006 Increase/decrease Item Proportion of Proportion of total over the last year Amount Amount total assets assets (%) Total Assets 3,021,741,905.13 100% 2,767,792,787.20 100% 9.18% Currency Capital 63,767,336.50 2.11% 112,899,721.31 4.08% -43.52% Account receivable 263,746,811.88 8.73% 99,288,379.31 3.59% 165.64% Inventory 186,800,021.23 6.18% 136,728,595.01 4.94% 36.62% Long-term investment 166,391,464.13 5.51% 222,855,306.21 8.05% -25.34% on stock Fixed assets 2,084,520,822.42 68.98% 659,095,806.52 23.81% 216.27% Construction in progress 39,423,119.78 1.30% 1,378,544,195.10 49.81% -97.14% Short-term Borrowings 481,839,691.89 15.95% 327,513,866.80 11.83% 47.12% Long-term Borrowings 179,334,850.00 5.93% 339,969,411.75 12.28% -47.25% Explanation on Changes: 1. The currency capital in this period decreased by 43.52% than last period, which mainly because the demand of daily capital turnover increased after the coated white board project with annual production capacity of up to 300,000 tons of Foshan Huafeng Paper Co., Ltd Zhuhai Branch, put into operation formally. 2. The account receivable in this period increased by 165.64% than last period, which mainly because the output and sale increased after the coated white board project with annual production capacity of up to 300,000 tons of Foshan Huafeng Paper Co., Ltd Zhuhai Branch put into operation formally. 3. The inventory in this period increased by 36.62% than last period, which mainly because the reserve of inventory increased after the coated white board project with annual production capacity of up to 300,000 tons of Foshan Huafeng Paper Co., Ltd Zhuhai Branch, put into operation formally. 4. The long-term investment on stock decreased by 25.34% than last year, which mainly because Tetra Pak (Foshan) Packaging Co., Ltd. returned the bonus stock of the 2007 first half year 5. The fixed assets in this period increased by 216.27% than last period, which mainly because the major fixed assets have been delivered after the coated white board project with annual production capacity of up to 300,000 tons of Foshan Huafeng Paper Co., Ltd 25 Zhuhai Branch which have been invested 1.6 billion to, put into operation formally. 6. The construction in progress in this period decreased by 97.14% than last period, which mainly because the construction in progress turned to the fixed assets after the coated white board project with annual production capacity of up to 300,000 tons of Foshan Huafeng Co., Ltd Zhuhai Branch which have been invested 1.6 billion to, put into operation formally. 7. The short-term borrowings in this period increased by 47.12% than last period, which mainly because the raised capital and working capital increased after production arising from the coated white board project with annual production capacity of up to 300,000 tons of Foshan Huafeng Paper Co., Ltd Zhuhai Branch, put into operation formally. 8. The long-term borrowings in this period decreased by 47.25% than last period, which mainly because most of raised capital will be due in 2008 for the coated white board project with annual production capacity of up to 300,000 tons of Foshan Huafeng Paper Co., Ltd Zhuhai Branch, so that most of raised capital will turn to un-current liability within one year. (V) Explanation on Significant Changes of Major Financial date in the reporting period Unit: (RMB) Yuan Items Y2007 Y2006 Rate of Change Selling Expenses 31,760,154.78 15,940,438.43 99.24% Administrative Expenses 54,659,328.20 40,001,475.63 36.64% Financial Expenses 47,324,512.88 1,313,928.67 3,501.76% Income Tax 759,434.35 173,702.96 337.20% Explanation on changes: 1. The selling expenses of this year 99.24 % up compared with that of last year. It resulted from formal operation of 300,000 tons ecdemic extension project of high-class coated white board from Foshan Huafeng Paper Co., Ltd. in Zhuhai and the increment of sales volume. 2. The administrative expenses of this year 36.64 % up compared with that of the last year. It resulted from formal operation of 300,000 tons ecdemic extension project of high-class coated white board from Foshan Huafeng Paper Co., Ltd. in Zhuhai and the increment of managers. 3. The financial expenses of this year 3501.76 % up compared with that of the last year. It resulted from formal operation of 300,000 tons ecdemic extension project of high-class coated white board from Foshan Huafeng Paper Co., Ltd. in Zhuhai and the interest expenses were accounted into profit and loss of this year. 4. Income Tax of this year 337.20 % up compared with that of the last year. It resulted from profit of Tetra Foshan Huafeng Paper Co., Ltd. increased much compared with last year. 26 (Ⅵ). Cash flow structure of the Company in the report period Unit: (RMB) Yuan Items Y2007 Y2006 Rate of Change Cash flow caused by operation activity 67,039,489.50 -133,179,152.28 150.34% Cash flow caused by investment activities -197,504,757.64 -302,406,589.15 34.69% Cash flow caused by fund-raising activities 81,332,883.33 390,652,101.96 -79.18% Net increase in cash and cash equivalents -49,132,384.81 -44,933,639.47 -9.34% Explanation on changes: 1. Cash flow caused by operation activity of this year 150.34 % up compared with that of last year. It resulted from formal operation of 300,000 tons ecdemic extension project of high-class coated white board from Foshan Huafeng Paper Co., Ltd. in Zhuhai and the increment of sales volume. 2. Cash flow caused by investment activities 34.69 % up compared with that of last year. It resulted from cash dividends received of Tetra Huaxin (Foshan) Packaging Co., Ltd. increased and payment for purchase and construction of fixed assets decreased in this year. 3. Cash flow caused by fund-raising activities 79.18% down compared with that of last year, which resulted from pay for the loan of Foshan Huaxin Development Co., Ltd. increased in report period. (Ⅶ) Operation and performance analysis of main controlling subsidiary companies and shareholding companies of the Company 1. Foshan Huafeng Paper Co., Ltd.: its registration capital was USD121.39 million, and the Company holds 75% shareholding of this company. Main product of this company is coated white board. At the end of report period, total assets of this company was RMB 2,557,504,500, and it realized profit from operation RMB 22.9158 million and net profit RMB 21.9247 million in this year 2. Huaxin (Foshan) Color Printing Co., Ltd.: its registration capital was USD 6.6 million, and the Company holds 75% shareholding of this company. Main product of this company is presswork. At the end of report period, total assets of this company was RMB233.4945 million, and it realized operation revenue RMB 121.7050 million and net profit RMB 8.8893 million in this year. 3. Tetra Huaxin (Foshan) Packaging Co., Ltd.: its registration capital was USD 67 million, and the Company holds 25% shareholding of this company. Main product of this company is Tetra packaging material. At the end of report period, total assets of this company was RMB 12,340,565, and it realized operation revenue RMB 14,140,796 and net profit RMB 376.9559 million in this year. 27 (Ⅷ) Challenge and countermeasure met in the operation 1. The main challenge faced by the Company was the rapid increment of market need for coating white board and packaging & printing industries, the concentration of papermaking and packaging & printing enterprise enhanced more and competition of large enterprises will still be austere. The Company adopt the concept of harmonious competition when face the fierce market competition, strive for establishing the competition in internal management, quality of product and service, economize resource, improve the technology and odditional value and avoid vicious competition of cutting price. The high-class coating white board product of the Company, with strong market competition and great market potential, belongs to the high-level products in papermaking industry which is environment protection product encouraged and supported by the country. 2. Heavy press of capital cost and liquidity The Company belongs to capital intensive industry and resource-restricted industry. The central government decides to tighten further monetary policy in 2008, which cause capital liquidity of the Company under press, especially the short-term financing bonds matured in June 2008 and loan for Zhuhai project matured in succession, which make demands of the capital financing and attempter. As for the heavy press of capital cost and liquidity, the Company will broaden financing channel to ensure the normal operation of the Company efficiently. Ⅸ Analysis on the continuity and stability of the operation and earning capacity The operation and earning capacity are favorable. The operation efficiency of fixed assets, total assets and stock turnover are favorable. Profit rate on cost, profit rate on fund, profit rate on total assts and profit rate on sales are in shape, and the continuity and stability of the operation and earning capacity are favorable. ⅡDevelopment and out of the Company (Ⅰ) Development trend of this industry & market structure faced by the Company 1. Development trend of this industry: (1) Domestic papermaking industry & consumption market is flourishing and prosperous, and the development speed goes up continuously and steadily; (2) Paper based packaging materials stood for green environment protection packageing developed rapidly, which supply a great market potential for cardboard packaging and packaging & printing industry; (3) Need for paper-box packaging is large and develops rapidly — Cardboard consumption for paper-box packaging keep rapid increase about 15% to 18%, which demand for importing high-grade packaging paperboard; (4) High-grade color paper based packaging developed rapidly — consumption for high-grade color paper based packaging keep rapid increase about 10% to 18% and high-grade part depends on import; (5) The development trend of packaging industry is development of green 28 environment protection packaging; (6) There are good out look in color paper-box industry of our country. 2. Market structure faced by the Company Industry of the Company belongs to light manufacture industry, and its operation inferred to coated white board industry, packaging printing industry and liquid food soft package industry (benefit package). With the continuous and stable development of our country, need for papermaking industry increases continuously. Industry policy of the papermaking industry brought by the country is “assisting larger industries; limiting small ones”, and actively support large papermaking enterprise. The industrial policy adopted by the country is support of large enterprise and restriction of small enterprise, that is, adopt affirmative support to the lager-sized papermaking enterprise. Policies for the Development of Paper Industry released by National Development and Reform Commission quoted the distribution of papermaking industrial should adjust from north to south to form a new reasonable industrial distribution. Including south of the Changjiang River is the main area for development of papermaking industry, which should be mainly in integrated project construction of forest and paper, speed up the development of paper pulp and papermaking industry. The integration of forest and paper will be the development direction for papermaking enterprise in future. Nowadays, Guangdong coated white board market formed a monopolization by some larger plants including our company. Zhuhai 300,000 tons coated white board project has been completed and put into operation in 2007, the economic benefits reflected gradually and the competition competence improved, which supply strong power to sustainable development of the Company. In aspect of packaging and printing industry, owing to the continuous development of economic of our country and improvement of people’s standard of living, the packaging and printing industry developed rapidly. Owing to little pollution and large need for labor force and so on, the development outlook of packaging and printing industry is good. In later years, production competence of papermaking industry in our country will get into a concentrated release period, as well as an age with fierce changes of competence structure. The Company located on the Angle Area of the Pearl River printing industry belt, which center on Guangdong Province. The color printing company belongs to our company have advanced equipment and technology and possess strong competition advantage of packaging and printing business and good market prospect. In aspect of liquid food soft package (benefit package), shareholding enterprise of the Company, Tetra Huaxin Company, has particular competition advantages, and the products benefit package is in the state of outstanding in the globe. The benefit package with high technology and odditional value, which have large market potential and development space, was used widely in drinks produced by many international famous enterprises export to Hongkong and Southeast Area. Nowadays, the production capacity reached above 6.5 million and in front of the third over the country. Prosperous of milk consumption market will push the Tetra package production to the peak of Chinese market. It is estimated that the market status will be steady in a long period, which has brought considerable investment profit. 29 (Ⅱ) Developing opportunity and tactic of the Company in the future 1. Developing opportunity: (1) There is a large gap in high-grade paper board market. With the rapid development of economic of the country, packaging white board consumption is over supply in former years; (2) Making great efforts to improve the packaging level of the exported merchandise and developing new type packaging material; The development trend of papermaking & packing industry in the future is to develop green environment protection packaging. (3) Along with the competition is fiercer and shuffle is sooner, it is a rare opportunity for integration of papermaking industry; (4) Owing the appreciation of RMB, the purchase cost of the raw material in domestic papermaking enterprise will lower down, as well as the cost of production will lower down. 2. Developing tactic (1) Forming particular competition advantages by conformity the upper resources, saving cost and getting through the whole industry chain of Planting-Pulp-Papermaking-Printing-Packaging and seeking the outstanding or even the leading position of the Company in forest-pulp-paper field and printing & packaging field; (2) Implementing industry upgrade stratagem, entering into the food packaging paper field, which was still blank in domestic with particular resources, meanwhile occupying the domestic market of food packaging paper and seeking financing in capitalistic market which lay resource foundation of the implementation of the next stratagem; (3) Struggling for developing the financing function of capitalistic market effectively, speeding up the resource distribution of the food packaging in developed cities in China, forming a net supplies integrative packaging service over the country, offering complex and integrative service for customers, further strengthening the core competition competence and profit competence of the Company by helping the customer be successful, developing with them together and establishing strategic partnership with customers. (Ⅲ) 2008 work plan of the Company 1. According to the change of the market, implementing scientific and effective operation mode and keeping good production and operation mode and striving for actualization of profit increment; 2. Accelerating the fulfillment of stratagem of paper packaging industry; 3. Executing and implementing the overall budget manager system; 4. Expanding financing channel and ensuring the fulfillment of the investment project of the Company as scheduled; 5. Consolidating functional department establishment of headquarters; 6. Push information construction with overall consideration and implementing panel of capital centralized management; 30 7. Concentrating energy to push the operation management of Huafeng Paper Co., Ltd. in Zhuhai into a new step. 8. Increasing devotion of color printing business and accelerating development of the Company; 9. Further strengthening construction of safety system and establishing OHSAS safety system; 10. Gathering elites of senior manager and technology and accelerating the continuous & stable development of the Company. (Ⅳ) Need for funds and usage plan of the Company in the future Owing to Huafeng Zhuhai 300,000 tons coated white board project has been completed and put into operation, Operation size and production competence of the Company are increased continuously, and the need for funds is also increased. Meanwhile, the Company belongs to capital intensive industry and resource-restricted industry, and the development of the Company is related to the project and need for capital. According to capital need for the development stratagem in the future, the Company will adopt effective measures to ensure fund accommodating: 1. Making use of funds reasonable; broadening sales channel active; expediting funds collecting; improving fluidity of asset in Company; 2. Setting up favorable communication and cooperation relationship with local financial institute activity to get a loan from commercial bank; 3. Increasing track and investigation of capitalistic market and monetary policy, and realizing the refinancing in the capital market through issuance of corporate bond, short-term financing bonds and additional issuance of shares. (Ⅴ) Main risks and countermeasures 1. Policy changes risk: The policy brought by Compendium on the Eleventh Five-year Plan of National Economic and Society Development is “Adjusting raw material structure of papermaking industry, reducing consumption of water and pollution, washing out the laggard pulp production line, actualizing integrated project construction of forest and paper allowed in the area”. National Development and Reform Commission released Policies for the Development of Paper Industry according with the above demands; “Scale and environment protection” will be the important development index of papermaking industry, which will influence the operation and development of the Company. Aim at the above policy, as for one of large-sized papermaking enterprise in south area of China, the Company will make full use of current support policy; increase the investment of new projects in coming years, developing to the direction of integration of forest-pulp-paper; keep the competition advantage of enterprise scale; Aim at the increased risk of demands from environment protection, the Company constituted the enterprise target of combination of saving resources and purgation production , reduced pollutant discharge, improved the standard of pollutant discharge, improve the circular utilization of water and ensure the discharge up to the standard by technical improvement of the original equipment and constructed new environment protection projects. 31 2. Price changes risk: price of the main raw materials of pulp and waste paper trends to rise in recent years, which influence the cost of main operation products much, but affected by improvement of production competence in recent years, the market competition is fierce and price of various kinds of paper does not rise synchronously with the price of raw materials and the fluctuation will influent the outstanding achievement of the Company. In coming period of time, accompanying with the global increment supply of pulp, slowing of expanding of paper products in domestics and accelerating of integration, we forecast that the raise of price of the main raw materials like pulp and so on will slow down and the price of paper products will rise gradually. Therefore, on one hand, with guide of market, through enlarging raw material stocking channel, adjust public welfare fund by domestic raw material adopting. On the other hand, the Company will continuously control the cost and develop the scale advantage and enforce the storage management; optimize product structure, develop new product with high odditional value, improve the market competition. At the same time, with strategic development guide of integration of forest-pulp-paper, accelerate the development of relevant projects, strive for hold the active control right of resources especially the forest, decrease the dependence on raw materials, thereby decrease the unfavorable influence on the Company operation caused by changing price. 3. Market changes risks: Owing to new built Huafeng Zhuhai 300,000 tons coated white board has been completed and put into operation, production competence of high-class coated white board in the Company will increase to about 450,000 tons from 150,000 tons, provided production line achieved planned production competence. Meanwhile, construction and devotion of new plant belonged to Huaxin Color Print greatly promotes production competence. Owing to enlarging of production competence, market competition increased fierce. If the market sales can not increase along with increased production, production of the Company will meet risks from market changes. Aim at the risk of market sales change, on one hand, the Company will further enhance the team construction of marketing; adjust marketing tactics proper; increase market exploiting; adapt need of market changes; try the best to resolve risks of market changes. On the other hand, to ensure the smooth sale of new investment project, the Company consolidates and enlarges northern China market, also, enlarge sales areas and prefects overseas marketing system by added setting up sales agency and transferring storage based on existing sales net. At the same time, the Company will strengthen marketing tactic; further perfect client information management system; realize the effective combination of direct marketing and indirect marketing and enlarge market quotient. Ⅲ. Investment in the report period (Ⅰ) Utilization of raised proceeds In the report period, the Company did not have raised proceeds. And raised proceeds had run out before this report period in accordance with the usage pf raised proceeds. 32 (Ⅱ) Other important investment project utilizing non-raised funds In the report period, Huafeng Zhuhai 300,000 tons high-class coated white board project has been completed and put into operation. Owing to the adjustment and perfecting of manufacture, technology and production process, accommodation of staff, machine, technics and other factors, the production system got into relative stable step, complicate efficiency of production have been improved steadily, the production cost have been controlled and quality of the products have been improved continuously. The quality of the product in Zhuhai, which is at an advanced level in domestic, is the key product established a leading position of Huafen Paper Co., Ltd. in white board field. In the year 2007, Huafeng (Zhuhai) Paper Co., Ltd. realized output for 232,000 tons, 103.88% of the forecast; realized annual sales volume for 235,000 tons, 102.70% of the forecast; realized profit from operation for RMB 20.3227 million IV. Changes on accounting policy and accounting estimated of the Company and its influence (I) Change in accounting policies Since Jan. 1, 2007, the Company performed Accounting Standard for Business Enterprises and its Application Guide (hereinafter referred to as “Accounting Standard for Business Enterprise”) promulgated by the Ministry of Finance in February 2006. In accordance with relevant provisions of Accounting Standard for Business Enterprise No. 38 --- First Time Adoption of Accounting Standards for Business Enterprises and the Circular on the No.7 Questions and Responses of Information Disclosure Standards by Companies Publicly Issuing Securities ------ Compilation and Disclosure of the Comparative Financial Accounting Information during the Transition Period between the New and Old Accounting Standards (ZJKJ Zi [2007] No. 10) issued by China Securities Regulatory Commission, the financial statement for 2006 was made retroactive adjustment. Namely, in line with the principle regulated in ZJF [2006] No. 136 promulgated by China Securities Regulatory Commission, the amount at the period-begin in balance sheet as at Jan. 1, 2007 was recognized, and based on the above, the comparative balance sheet and comparative income statement shall be prepared according to Article 5 and Article 19 in Accounting Standard for Business Enterprise No. 38 --- First Time Adoption of Accounting Standards for Business Enterprises and the principle of retroactive adjustment, income statement and statement of change in owner’s equity after adjustment and comparative balance sheet with period begin has been prepared. The line of amount in last year in income statement and statement of change in owner’s equity has been listed in the light of amount after the adjustment. (II) Influence on consolidated accounting statement due to change of accounting policies (1) In accordance with Article 5 in the Accounting Standard for Business Enterprise No. 38 --- First Time Adoption of Accounting Standards for Business Enterprises: for the long-term equity investment is generated from a business combination under common control, the unamortized equity investment difference on the debit side amounting to RMB 40,682,689.96 (is balance between the fair value of the Company’s investment amount in Foshan Huafeng Paper Co., Ltd. in June 1999 and quotient in net asset of Foshan Huafeng Paper Co., Ltd.) was entirely sterilized, the retained earnings of RMB 40,682,689.96 was modulated decrease. For any other long-term equity investment calculated by equity method, the difference on the credit side amounting to RMB 33 11,841,082.59 (is balance between the fair value of the Company’s investment amount in Tetra Huaxin (Foshan) Packing Co., Ltd. in June 1999 and quotient in net asset of Tetra Huaxin (Foshan) Packing Co., Ltd.) was modulated increase by RMB 11,841,082.59 as the retained earnings. (2) In accordance with Article 13 in the Accounting Standard for Business Enterprise No. 38 --- First Time Adoption of Accounting Standards for Business Enterprises: as to the business combination under common control, the amortized value of the originally recognized as goodwill amounting to RMB -555,568.25 was entirely sterilized and modulated increase by RMB 555,568.25 as the retained earnings by the subsidiary company of the Company. (3) In accordance with Article 12 in the Accounting Standard for Business Enterprise No. 38 --- First Time Adoption of Accounting Standards for Business Enterprises: on the date of initial implementation, the Company made a retroactive modulation to the effect of the temporary difference between the carrying amount of an asset or liability and its tax base on income tax, and modulated increase by RMB 2,816,865.45 (of which, Foshan Huafeng Paper Co., Ltd.: RMB 2,422,587.02; Huaxin (Foshan) Color Printing Co., Ltd.: 394,278.43) as the retained earnings based on the affected amount. (4) In accordance with the Accounting Standard for Business Enterprise No. 38 --- First Time Adoption of Accounting Standards for Business Enterprises: influence on the retained earnings of the associated company of the Company and influence on quotient of net assets shared by the Company based on equity proportion due to retroactive modulation made by the associated company of the Company totaling RMB 19,476,721.09 (Tetra Huaxin (Foshan) Packing Co., Ltd.) was modulated increase by RMB 19,476,721.09 as the retained earnings. Owing to change in the above accounting policies, the Company totally modulated increase by RMB 4,931,916.32 as net profit for 2006, modulated decrease by RMB 6,672,953.96 as the retained earnings at the beginning of 2007, of which, retained profit was modulated decrease by RMB 5,920,189.03, surplus reserve was modulated decrease by RMB 752,764.93. In the statement of change in owner’s equity, in the line of “amount in last year”, surplus reserve was changed into RMB -1,105,179.88, retained profit was changed into RMB -10,499,690.40. For details, please refer to the Note XV to the Financial Statement. (III) Influence on accounting statement of parent company due to change of accounting policies (1) In accordance with the provision of Accounting Standard for Business Enterprise No. 38 --- First Time Adoption of Accounting Standards for Business Enterprises and Explanation on Accounting Standard for Business Enterprise No. 1 promulgated by Ministry of Finance on Nov. 16, 2007: as to long-term equity investment of subsidiary company held by an enterprise before the date of initial implementation, it shall be made a retroactive modulation on the date of initial implementation, regarding as the said subsidiary company was measured by employing cost method at first. Thus, the Company made a retroactive modulation to long-term equity investment of subsidiary company existed on the date of initial implementation. For the long-term equity investment is generated from a business combination under common control, the unamortized equity investment difference on the debit side amounting to RMB 40,682,689.96 (is balance between the fair value of the Company’s investment amount in Foshan Huafeng Paper Co., Ltd. in June 1999 and quotient in net asset of Foshan Huafeng Paper Co., Ltd.) was 34 entirely sterilized, the retained earnings of RMB 40,682,689.96 was modulated decrease. For any other long-term equity investment calculated by equity method, the difference on the credit side amounting to RMB 11,841,082.59 (is balance between the fair value of the Company’s investment amount in Tetra Huaxin (Foshan) Packing Co., Ltd. in June 1999 and quotient in net asset of Tetra Huaxin (Foshan) Packing Co., Ltd.) was modulated increase by RMB 11,841,082.59 as the retained earnings. The Company made a retroactive modulation to long-term equity investment of subsidiary company existed on the date of initial implementation based on cost method, which investment income in the statement of parent company for 2006 decreased by RMB 1,546,748.99, while retained profit at the year-begin in the statement of parent company for 2006 increased by RMB 3,383,985.98, and capital reserve at the year-begin in the statement of parent company for 2006 decreased by RMB 3,232,500.00. (2) In accordance with the Accounting Standard for Business Enterprise No. 38 --- First Time Adoption of Accounting Standards for Business Enterprises: influence on the retained earnings of the associated company of the Company and influence on quotient of net assets shared by the Company based on equity proportion due to retroactive modulation made by the associated company of the Company totaling RMB 19,476,721.09 (Tetra Huaxin (Foshan) Packing Co., Ltd.) was modulated increase by RMB 19,476,721.09 as the retained earnings. Owing to change in the above accounting policies, the Company totally modulated increase by RMB 3,524,149.17 as net profit for 2006 in the statement of parent company, modulated decrease by RMB 3,252,500.00 as capital reserve at the year-begin in the statement of parent company for 2007, modulated decrease by RMB 7,527,649.29 as the retained earnings at the beginning of 2007, of which, retained profit was modulated decrease by RMB 6,774,884.36, surplus reserve was modulated decrease by RMB 752,764.93. In the statement of change in owner’s equity of parent company as of 2007, in the line of “amount in last year”, capital reserve was changed into RMB -3,232,500.00, surplus reserve was changed into RMB -1,105,179.88, retained profit was changed into RMB -9,946,618.88. (IV) In the report period, no correction occurred on the accounting estimated changes and significant accounting error. V. Routine work of the Board of Directors (I) Board meetings and resolutions in the report period In the report period, the Company held 9 Board meetings: 1. The 1st meeting of the 3rd Board of Directors was held by voting in correspondence on Jan. 5, 2007, and the announcement of the resolutions of this meeting was published on Securities Times and Hong Kong Commercial Daily on Jan. 9, 2007. 2. The 2nd meeting of the 3rd Board of Directors was held by voting on the spot on Apr. 18, 2007, and the announcement of the resolutions of this meeting was published on Securities Times and Ta Kung Pao on Apr. 19, 2007. 3. The 3rd meeting of the 3rd Board of Directors was held by voting in correspondence on 35 Apr. 19, 2007, on which considered and approved the 1st Quarter Report 2007. 4. The 4th meeting of the 3rd Board of Directors was held by voting in correspondence on May 14, 2007, and the announcement of the resolutions of this meeting was published on Securities Times and Ta Kung Pao on May 16, 2007. 5. The 5th meeting of the 3rd Board of Directors was held by voting in correspondence on May 24, 2007, and the announcement of the resolutions of this meeting was published on Securities Times and Ta Kung Pao on May 25, 2007. 6. The 6th meeting of the 3rd Board of Directors was held by voting on the spot on Jun. 28, 2007, and the announcement of the resolutions of this meeting was published on Securities Times and Ta Kung Pao on Jun. 30, 2007. 7. The 7th meeting of the 3rd Board of Directors was held by voting in correspondence on Aug. 10, 2007, on which considered and approved the Interim Report 2007 and Summary. 8. The 8th meeting of the 3rd Board of Directors was held by voting on the spot on Oct. 12, 2007, and the announcement of the resolutions of this meeting was published on Securities Times and Ta Kung Pao on Oct. 13, 2007. 9. The 9th meeting of the 3rd Board of Directors was held by voting in correspondence on Oct. 22, 2007, and the announcement of the resolutions of this meeting was published on Securities Times and Ta Kung Pao on Oct. 23, 2007. (II) Implementation by the board of directors of the resolutions of the Shareholders' General Meeting In 2007, the Board of Directors of the Company was able to implement the resolutions of the Shareholders' General Meeting strictly according to the duties mentioned in the Article of Association as well as modify the Article of Association and confirm the audit fees of accountants based on the authority given to the Board of Directors in the Shareholders’ General Meeting. VI. Summary report on the performance of the Remuneration Committee subject to the Board of Directors Opinions on the remuneration of the directors and the senior management staff of the Company by the Remuneration Committee in the report period: The annual remuneration of the directors and the senior management staff of the Company for 2007 which was reviewed by the Remuneration and Appraisal Committees was strictly in line with the remuneration rule for the directors and the senior management staff made before and the relevant rule on appraisal incentive execution. The processes of system-making, rule on examining incentive and the payment administration complied with the regulations of related laws, rules and the Article of 36 Association. VII. Performance of the Audit Committee subject to the Board of Directors The Audit Committee did a lot of work at auditing in 2007, drawing out Implementation by Audit Committee on Annual Summary Report for Audit Work 2007 of Guangdong Hengxin Delu Certified Public Accountants Co., Ltd According to Circular on Properly Handling the 2007 Annual Reports of Listed Companies and the Related Work and Notice on Promulgating the Standards Concerning the Contents and Formats of Information Disclosure by Companies Offering Securities to the Public No.2 — Contents and Formats of Annual Reports (Revised in 2007) issued by China Securities Regulatory Commission, the annual audit work of the Company in 2007 of Guangdong Hengxin Delu Certified Public Accountants Co., Ltd was concluded as follows: (1) Confirm the general audit plan Before the certified public accountants worked out the audit work, the Audit Committee and the certified public accountants drew out the plan for audit work of the Company in 2007 by consulting, and put in the relevant information about the plan for audit work of the Company in 2007 to independent directors of the Company through financial controllers. (2) Review the Financial Statements made by the Company On Jan. 1, 2008, the 1st meeting of the Audit Committee of the Company 2008 was held in boardroom of the Company by the Audit Committee, at which examined and approved the Financial Statements of the Company in 2007; considered that the related data in the financial statements made by the Company had reflected the assets and liabilities by Dec. 31, 2007 and the result of production and operation in 2007, with relatively increase operation result compared to that in 2006, which was compared to financial data in the reports of the Company in 2006, including total assets, major sales, net profit, sales expense, administrative expense and financial expense; consented to carry out the Annual Financial Audit Work of the Company in 2007 based on the financial statements made by the Company and issued the relevant written review opinion. (3) The certified public accountants began the audit work formally, the Audit Committee supervised the word by written correspondence On Jan. 9, 2008, the certified public accountants began the audit word formally. During the auditing period, the Audit Committee issued Supervisory Letter on Audit on Feb. 18, 2008, which required the certified public accountants should finish the audit work according to the general plan for audit work to ensure the disclosure on annual report of the Company and the establishment of related documents. (4) The certified public accountants issued the primary auditors’ opinion, the Audit Committee review the Financial Statements and presented written opinion On Feb. 28, 2008, the certified public accountants issued primary auditors’ opinion on the Financial Statements on time according to the general audit plan. The 2nd meeting of the Audit Committee was held on Mar. 3, 2008 by the Audit Committee, at which again reviewed the Financial Statements after issuing the primary auditors’ opinion; considered 37 the relevant data in the Annual Financial Statement of the Company reflected the assets and liabilities of the Company by Dec. 31, 2007 and the annual result of production and operation in 2007; and consented to draw out the Annual Report of the Company in 2007 and Its Summary based on the Financial Statements after issuing the primary auditors’ opinion. Meanwhile, the Audit Committee required the certified public accountants should finish the audit work as soon as possible in order to disclose the annual report for 2007 on schedule. (5) The manuscript of the Auditors’ Report of the Annual Financial Statements of the Company 2007 was finalized, the other related documents on the annual audit for 2007 were issued by certified public accountants, leading the consummation of the annual audit work of the Company in 2007. On Mar. 13, 2008, the certified public accountants completed the manuscript of the auditors’ report on schedule according to the general audit plan, also issued the Special Statement on Fund Appropriation and Fund Flow by the Related Parties of Foshan Huaxin Packing Co, Ltd based on Notice on Promulgating the Standards Concerning the Contents and Formats of Information Disclosure by Companies Offering Securities to the Public No.2 — Contents and Formats of Annual Reports (Revised in 2007) issued by China Securities Regulatory Commission and relevant request of the Company. (6) Conclusion on particulars about annual audit work of the certified public accountants In the opinion of the Audit Committee, the audit work for the Company offered by Guangdong Hengxin Delu Certified Public Accountants Co., Lt which was engaged by the Company followed the independent, objective and fair Practices Standard with responsibility and the audit work about annual report in 2007 was accomplished quite favorably. (7) Examination and approval on the related proposals about the Proposal on Renewed Employment of Certified Public Accountants by the Audit Committee The 3rd meeting of the Audit Committee 2008 was held on Mar.18, 2008, at which the following proposals were examined and approved with 4 votes in favor, 0 against and 0 abstention: ①. Final Financial Report of the Company 2007 ②. Proposal on Engagement of Certified Public Accountants for 2008-3-22 Given the relatively favorable operation and the service lever of Guangdong Hengxin Delu Certified Public Accountants Co., Lt, the Company continued to engaged Guangdong Hengxin Delu Certified Public Accountants Co., Lt as audit body, offering the audit for the Financial Statements of the Company and other related consulting service for one year. ③. Implementation by Audit Committee on Annual Summary Report for Audit Work 2007 of Guangdong Hengxin Delu Certified Public Accountants Co., Ltd. VIII. Profit distribution preplan for 2007 As audited by Guangdong Hengxin Delu Certified Public Accountants Co., Ltd, the 38 Company achieved the net profit for 2007 of RMB 109,653,397.47 and the profit available for distribution to the whole shareholders was RMB 354,802,914.55. Whereas the shareholding subsidiaries under the Company planed to expand production of the project, needing more capital, which was financing for the project through loan and other ways, the Company had planned not to distribute any profit for the year 2007, so as to strive for stable, healthy and fast development of the Company. The retained profit of the Company would be used to complement the working capital. IX. Other matters The domestic newspaper for information disclosure of the Company was Securities Times, the overseas newspaper for information disclosure of the Company was changed to Ta Kung Pao from April 2007, which was Hong Kong Commercial Daily before. 39 Section IX Report of the Supervisory Committee I. Work of the Supervisory Committee in the report period In the report period，the Supervisory Committee of the Company performed its duties and seriously conducted supervising work according to the Company Law, the Articles of Association of the Company and relevant provisions of other laws and regulations. The members of the Supervisory Committee attended all Board Meetings and Shareholders' General Meetings held by the Company as non-voting delegates, effectively supervised the holding procedure of meetings, decision-making procedure, resolutions, information disclosure and the status of implementation of the resolutions of the Shareholders' General Meeting by the board of directors as well as the lawfulness and legal compliance of the duty performance of the Company's directors, managers and other senior executives and played its due role of supervision and protected legal rights of the Company and the shareholders. The Supervisory Committee of the Company held 4 meetings in total in 2007. The basic information about these meetings is as follows: (I) The 1st meeting of the 3rd Supervisory Committee of the Company for 2007 was held on Apr. 18, 2007, at which 5 supervisors were present, meeting the requirement. The relevant resolutions were published in Securities Times and Ta Kung Pao on Apr. 19, 2007. (II) The 2nd meeting of the 3rd Supervisory Committee of the Company for 2007 was held on Apr. 19, 2007, at which 5 supervisors were present, meeting the requirement. The 1st Quarter Report of the Company for 2007 was considered and approved in the meeting. (III) The 3rd meeting of the 3rd Supervisory Committee of the Company for 2007 was held by voting in correspondence on Aug. 10, 2007, at which 5 supervisors were present, meeting the requirement. The Interim Report 2007 and Summary were considered and approved in the meeting. (IV) The 4th meeting of the 3rd Supervisory Committee of the Company for 2007 was held by voting in correspondence on Oct. 22, 2007, at which 5 supervisors were present, meeting the requirement. The 3rd Quarter Report of the Company for 2007 was considered and approved in the meeting. II. Opinions of the Supervisory Committee According to the Company Law and the Article of Association of the Company, the Supervisory Committee expressed the following opinions on the related particulars of the Company in the report period: (I) Opinions of the Supervisory Committee on the operation of the Company according to 40 law In 2007, the Supervisory Committee of the Company supervised the whole course of the Company's operation according to law. In its opinion, the Company's decision-making procedure complied with the provisions of the Company Law, the Securities Law and the Articles of Association of the Company. The Company has established a set of relatively perfect internal control system. The directors, independent directors, managers and other senior executives of the Company diligently performed their duties, were incorruptible and self-disciplined and made unremitting efforts to promote the development of the Company in the report period. No such personnel were found to violate laws, regulations and the Articles of Association of the Company or harm the interests of the Company and shareholders when they performed duties. (II) Opinions of the Supervisory Committee on the inspection of the financial affairs of the Company In the opinion of the Supervisory Committee, the Company had sound financial system and standardized financial management. The standard unqualified auditor's reports on the Company's financial affairs for 2007 and the statements on relevant matters respectively issued by Guangdong Hengxin Delu Certified Public Accountants Co., Ltd. retained by the Company as domestic auditing bodies objectively, fairly and truly reflected the Company's financial position and operating results. (III) Opinions of the Supervisory Committee on the investment projects of the Company utilizing raised proceeds The Supervisory Committee had checked the utilization of raised proceeds. In the report period, the Company had no raised proceeds. The investment for the projects financed by the funds from non-financial activities complied with the interest of the shareholders of the Company and the long-term development of the Company. (IV) Opinions of the Supervisory Committee on the related transaction In the report period, the related transactions existing between the Company and the related parties were equal with fair value, which did not harm the interest of the Company and its shareholders. (V) Opinions of the Supervisory Committee on purchase and sales of assets In the report period, no purchase and sales of assets by the Company occurred, neither did the guarantee with any form for the shareholders and the related parties, nor guarantee for natural person. (VI) Opinion of the Supervisory Committee on self-evaluation for internal control 1. The Company established the sound internal control system for all departments in the Company in according to the related regulations from CSRC and Shenzhen Stock Exchange, the basic principle of the internal control and its condition, assuring the normal operation of the business and the safety and integrity of the Company’s assets. 41 2. The integrity of the organization structure of the internal control, the internal audit department and the staffing of the Company assured the implementation and supervision of the key campaign for the internal control of the Company fully efficient. 3. In 2007, the affairs that disobeyed Guidelines of Shenzhen Stock Exchange for the Internal Control and the internal control system of the Company did not occurred. To sum up the above, the Supervisory Committee thought that the self-evaluation on internal control of the Company reflected the actual situation of the Company’s internal control roundly, truly and exactly. 42 Section X. Important Events I. Significant lawsuit and arbitration case The dispute case of transfer agreement was entertained by Guangdong Zhuhai Intermediate People’s Court (hereinafter refer to as Zhuhai Intermediate Court) on Aug. 20, 2007, which was appealed Stora Enso Packing Boards Asia Oy (hereinafter refer to as Stora Enso) to Intermediate Court by the holding subsidiaries of the Company Foshan Huafeng Paper Co., Ltd (hereinafter refer to as Huafeng Paper). The detail of the case was stated as the following: On Oct. 28, 2007, Stora Enso and Huaxin Packing signed Joint Venture Contract, in which two sides promised to set up Stora Enso Huaxin (Zhuhai) Paking Board Company Limited (hereinafter refer to as Joint Venture Corporation) through joint venture. Meanwhile, the representatives of Stora Enso and Huaxin Packing together drew out the Acquisition of Assets Agreement and the appended documents signed by Joint Venture Corporation and Huafeng Paper, in which Joint Venture Corporation would purchase the asset for Coated Grey Manila Board Project of Huafeng Paper.located in Zhuhai On Dec. 29, 2005, Stora Enso decided to withdraw the joint venture project, stop implementing Joint Venture Contract and refuse to collect the related procedures for Business License for an Enterprise as a Legal Person of Joint Venture Corporation, which caused the Acquisition of Assets Agreement could not be continuously implemented. Therefore, it brought considerable economic loss to Huafeng Paper. According to the statistics presented by Huafeng Paper, the economic loss to Huafeng Paper caused by the Stora Enso’s decision amounted RMB 58 million in total, including reconstruction expense, supplier counterclaim, engineering management fees during reconstruction period, wage for employees and the engineering interest during delay period. Huafeng Paper appealed Stora Enso to court for recoupment in order to safeguard the legitimate rights and interests of Huafeng Paper. Stora Enso Packing Boards Asia Oy raised an objection to the jurisdiction of the case and applied the case not to file in Zhuhai Intermediate Court but carry out the arbitration in Singapore. On Nov. 20, 2007, according to the judgment of Civil Ruling (2007) (ZZFMS Zi No. 52) issued by Zhuhai Intermediate People’s Court, the objection to jurisdiction of the case raised by Stora Enso Packing Boards Asia Oy was dismissed. However, Stora Enso Packing Boards Asia Oy has appealed the case to Guangdong Supreme People’s Court as it objected the judgment of Zhuhai Intermediate Court. It was quite uncertain to tell whether the money for recoupment would be taken back through the verdict and execution for the case mentioned above, so the Company could not make sure how much the above case would affect the profit of the Company in the report period. If there was any news about the case, the Company would announce duly. The production of the Company has been operated normally so far. 43 II. Other investments of the Company (1) Investment in securities of the Company In the report period, the Company did not conduct investment in securities. (2) Particulars about equity of other listed companies held by the Company In the report period, the Company did not hold the equity of other listed companies. (3) Particulars about equity of financial enterprises and companies not yet listed held by the Company Unit: RMB Yuan Change in Profit Equity the Initial Number and loss Subject for proportion in Book value at owners’ Source of Name investment of shares in the accounting that of this the period-end equity in shares amount held report calculation company the report period period Xinjiang Long-term Sub-branch, Investment by 100,000.00 0 0.08% 0 0.00 0.00 equity Commercial Bank establishment investment of Foshan Long-term Commercial Bank Investment by 3,000,000.00 0 2.50% 0 0.00 0.00 equity of Foshan establishment investment Guangdong Long-term Investment by Development 113,558.00 0 0.32% 113,558.00 0.00 0.00 equity establishment Bank investment Total 3,213,558.00 0 - 113,558.00 0.00 0.00 - - III. Significant events on asset purchase and sales and the reorganization of assets In the report period, no such significant events as asset purchase and sales and enterprises combination occurred to the Company, neither did those occurred before but lasted to the report period. IV. The implementation of the plan for share incentive in the report period In the report period, no implementation of the plan for share incentive occurred to the Company. V. In the report period, events on significant related transaction of the Company Related transaction correlated to daily business In the report period, the Company and the related party Qingdao Chengtong Fuel Co., Ltd (hereinafter refer to as Chengtong Fuel) conducted daily related transaction, of which the details were mentioned in the Financial Statements Appended Note. 44 1. Particulars about related transaction The major business of Qingdao Chengtong Fuel Co., Ltd was storage services, technical service in transportation and wholesale of coal, of which the registered capital was RMB 10 million. The Company and Chengtong Fuel were controlled by Chinese Material Exploitation and Investment Parent Company as Chengtong Fuel was the holding subsidiary of Chinese Material Exploitation and Investment Parent Company and 62.11% equity of the Foshan Huaxin Development Co., Ltd was held by Chinese Material Exploitation and Investment Parent Company. Chengtong Fuel was the related legal party for the Company based on Share Listing Rules Article 10.1.3 Item Two. 2. The content and amount of transaction By Dec. 31, 2007, Huafeng Paper purchased blended soft coal, quality mix soft coal and white coal from Chengtong Fuel, amounting 76,800 tons totally. The amount of the related transaction was RMB 418,505,000, which took up 45.97% of the amount in the same kind transaction. 3. Pricing policy and method for setting accounts The price for related transaction was based on the market price and in line with the fair and reasonable pricing principle. The two sides made the transaction price by consulting as the method for setting accounts was by bank note and cerement. 4. Explanation on the necessity and persistence for related transaction The Company could capitalize on the resources and the competitive edge of the related party to strengthen the advantage of concentrative purchase and enhance the efficiency of concentrative purchase, which could decrease the purchase cost, realize the resource optimization distribution and achieve the maximum of economic. So the transaction was necessary. As to ensure the persistence and timeliness of coal supply to Huafeng Paper and reduce the purchase cost, the related transaction of purchasing coal from Chengtong Fuel by Huafeng Paper belonged to continuous business in the daily operation, which was expected to exist in a certain period. 5. Influence on the independence of the listed company by the related transaction The transaction met the demand for normally developing the business of the holding subsidiary Huafeng Paper. The transaction was fair and favorable to each other, which did not harm the benefit of the Company or affect the in independence of the listed company, neither did the Company rely greatly on the related party because of the transaction with the related party. VI. Significant contract and its execution (I) In the report period, the Company did not enter into important project contracts for providing significant guarantee to other companies, for entrusting other companies with money management or for holding in trust, contracting for or leasing the assets of other companies nor did other companies enter into important project contracts for holding in 45 trust, contracting for or leasing the assets of the Company. (II) In the report period, significant guarantee of the Company By Dec. 31, 2007, the external guarantee balance that the Company did not free from the guarantee responsibility was RMB 798,656,400, which was used for guarantee to all the holding subsidiaries, RMB 758,656,400 for Foshan Huafeng Paper Co., Ltd, RMB 40 million for Huaxin (foshan) Color Printing Co., Ltd. The guarantee belonged to joint guarantee. The Company did not have overdue external guarantee. Unit: RMB’0000 External guarantee from the Company（not including the guarantee for subsidiaries） Amount The period Type of Executed For the related party Guarantee party Date of signing for of guarantee or not or not guarantee guarantee No Total guarantee amount in the report 0.00 period Total guarantee balance at the end of 0.00 the report period Guarantee for the subsidiaries from the Company Total guarantee amount for the 70,865.64 subsidiaries in the report period Total guarantee balance for the subsidiaries at the end of the report 79,865.64 period Total guarantee amount from the Company（including the guarantee for the subsidiaries） Total guarantee amount 79,865.64 The proportion of the total guarantee amount in the net asset of the 56.11% Company Including: Guarantee amount offered to shareholders, actual controllers and 0.00 related parties Guarantee amount for debt offered to the guarantee party whose 4,000.00 asset-liability ratio was over 70% directly or indirectly Part of the amount of the total 8,693.36 guarantee over 50% Total guarantee for the above 12,693.36 VII. Events of commitment In the report period, the events of commitment that influenced the business result and the financial status of the Company greatly previous or during the report period didn’t 46 happen to the Company or the shareholders that held 5% of the shares. VIII. The engagement or dismissal of certified public accountants' firm and payment of remuneration In the report period, as resolved by the 2nd Extraordinary Shareholders' General Meeting of the Company 2007, the Company engaged Guangdong Hengxin Delu Certified Public Accountants Co., Ltd. as its accounting audit body for 2007, which has serviced for the Company for 2 years. The decision-making procedure concerning the remuneration for certified public accountants' firms: The Shareholders' General Meeting authorizes the Board of Directors in relevant aspect and the board of directors shall determine the limit of audit remuneration according to relevant charging standards and amount of work. The Company paid RMB 500,000 to Guangdong Hengxin Delu Certified Public Accountants Co., Ltd. as audit fee. IX. In the report period, public decry-for from CSRC and stock exchange During the report period, the Company, Directors, the Supervisors, Senior Management Staff as well as shareholders and actual controllers received respectively no inspection from vested organs, no enforcement measure from judicial discipline inspection departments, no transfer to judicial organs, no prosecution for criminal liability, no inspection from CSRC, or administrative punishment and circulate a notice of criticism from CSRC and be banned from securities market, or cognizance of unsuitable persons, punishment from other administration, and public decry-for from stock exchange. X. Other significant events On Jun. 7, 2007, the Company published short-term financing bills of RMB 420 million by discount and actually obtained capital of RMB 404.12 million which was used to complement the working capital, improve asset structure and reduce cost of funds. XI. Investigation and visit acceptance of the Company in the report period. In the report period, according to the requirement of Guidelines on Fair Information Disclosure of Listed Companies, the Company and the persons charged with the information disclosure strictly followed the principle of fair information disclosure, didn’t conduct treatment difference policy, neither did they disclose important information of the Company which didn’t publish to any particular object privately by choice. The two main forms to accept the visit were: phone reception and face-to- face with the shareholders. During the report period, the Company patiently and detailedly answered the questions that the shareholders concerned and offered relevant information disclosed publicly by the Company. Investigation and visit acceptance of the Company in the report period. Topics discussed and information Date Venue Manner Visitors provided May. 10, 2007 The Company Field study Zhang Yuanhang Major business and operation of the 47 from Shanghai Company Securities News Duan Zhu from Major business and operation of the May. 10, 2007 The Company Field study Securities Daily Company Dou Qinhong from Business Major business and operation of the Dec. 17, 2007 The Company Field study Department in Company, operation of Zhuhai Guangzhou of Branch, Huafeng Bohai Securities 48 Section XI financial report The financial report is attached hereinafter Section XII List of Documents Available for Inspection Investors and relevant departments may consult the following documents at the office of the board of directors of the Company: 1. The financial statements bearing the seal and signature of the Company's legal representative, financial controller and the person in charge of the accounting organ. 2. The auditor's report bearing the seal of the certified public accountants and the signature of C.P.A. 3. The original of all the Company's documents and the original manuscripts of announcements publicly disclosed on the newspapers designated by China Securities Regulatory Commission in the report period. 4. The original of 2007 annual report bearing the signature of the chairman of the board of directors of the Company. By order of Board of Directors of Foshan Huaxin Packaging Co., Ltd. 25 March 2008 49 Financial Report (2008) HEZS No. 71 To the Shareholders of Foshan Huaxin Packaging Co., Ltd: We have audited the financial statement, accompanying which balance sheet and consolidated balance sheet of Foshan Huaxin Packaging Co., Ltd (the Company) as of 31 December 2007 and the statements of income and the consolidated statements of incomes 2007, cash flows and consolidated cash flows 2007, statement on changes of owners’ equity and consolidated statement on changes of owners’ equity 2007 and notes of the financial statements. I. The management level’s responsibility to financial statement It’s the Company’s responsibility to prepare the financial report in accordance with Accounting Standard of Enterprises and Accounting System of Enterprises. The responsibilities included: 1) design, perform and protect internal control related to financial statement to prevent material misstatement owing to fraud and error.2) choose and execute suitable accounting policies; 3) make reasonable accounting estimates. II Certified Public Accountants’ responsibilities Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards required that we abide by the Professional Ethical Standards, plan and perform the auditing so as to gain rational assurance that financial report exist no material misstatement. Audit refers to performing auditing procedure to gain audit evidence related to financial statement carrying amounts and disclosure. The audit procedures are decided by the judge of Certified Public Accountants, including the evaluation of material misstatement owing to fraud and error. In the process of risk evaluation, we take internal control related to preparation of financial statement into consideration and design suitable audit procedure. However, our purpose is not to produce opinion to efficiency of internal control. Audit also includes assessing the accounting principles used and significant estimates made by management and rationality of accounting estimates as well as evaluating the overall financial statement presentation. We believe that our audit is sufficient and proper and provides a reasonable basis for our opinion. III Audit opinion In our opinion, the accompanying consolidated financial statements give a true and fair view of the financial position of the Group as of 31 December 2007, and of the results of its operations and cash flows for the year then ended in accordance with International Financial Reporting Standards. Guangdong Heng Xin De Lu Certified Public Accountants CPA: Du Xiaoqiang Zhuhai ·China CPA:Yu Donghong Mar. 2008 50 Foshan Huaxin Packing Co., Ltd Balance Sheet Dce.31, 2007 In RMB Item Number at period-end Number at period-begin Note Consolidation Parent company Consolidation Parent company Current Assets: Monetary funds VI.(I) 63,767,336.50 24,921,687.13 112,899,721.31 43,871,864.93 Transaction financial asset Notes receivable VI.(II) 59,669,620.10 42,524,885.68 Account receivable VI.(III) 263,746,811.88 99,288,379.31 Account paid in advance VI.(IV) 3,637,855.82 53,957,937.56 61,216.22 Interest receivable Dividend receivable VI.(V) 34,140,000.00 124,931,529.10 89,842,010.66 Other account receivable VI.( VI) VII.(I) 21,060,306.72 910,387,437.97 6,425,304.42 697,068,001.63 Inventories VI.(VI) 186,800,021.23 136,728,595.01 Non-current assets due within 1 year Other current assets Total current assets 632,821,952.25 1,060,240,654.20 451,824,823.29 830,843,093.44 Non-current assets: Available for sale financial assets Held to maturity investments Long-term account receivable VI.(VIII) Long-term equity investment 166,391,464.13 953,404,856.77 222,855,306.21 1,006,768,698.85 VII.(II) Investing property VI.(IX) 11,478,231.26 11,931,146.06 Fixed asset VI.(X) 2,084,520,822.42 1,100,792.04 659,095,806.52 474,108.14 Project in construction VI.(XI) 39,423,119.78 1,378,544,195.10 Engineering material VI.(XII) 13,629,040.02 Fixed asset disposal Bearer biological asset Oil assets Intangible assets VI.(XIII) 64,221,719.36 37,594,771.73 Development expense Goodwill Long-term expense to be apportioned VI.(XIV) 5,087,221.02 2,190,917.70 Deferred tax assets VI.(XV) 4,168,334.89 3,755,820.59 Other non-current assets Total of non-current assets 2,388,919,952.88 954,505,648.81 2,315,967,963.91 1,007,242,806.99 Total assets 3,021,741,905.13 2,014,746,303.01 2,767,792,787.20 1,838,085,900.43 Footnote is part of the accounting statements. Foshan Huaxin Packing Co., Ltd Balance Sheet (con.) 51 Dce.31, 2007 In RMB Number at period-end Number at period-begin Item Note Consolidation Parent company Consolidation Parent company Current liabilities: Short-term borrowings VI.(XVII) 481,839,691.89 150,000,000.00 327,513,866.80 150,000,000.00 Transaction financial liabilities Notes payable VI.(XVIII) 9,155,830.91 18,959,350.81 Account payable VI.(XIX) 195,690,685.23 204,490,086.85 Account received in advance VI.(XX) 20,204,812.16 5,024,554.95 4,680.40 Employee’s compensation payable VI.(XXI) 4,027,568.82 501,779.75 Tax payable VI.(XXII) -2,482,848.18 180,429.31 -14,115,152.80 18,582.27 Interest payable VI.(XXIII) 1,391,185.09 259,949.10 Dividend payable VI.(XXIV) 133,758.00 133,758.00 108,988.00 108,988.00 Other account payable VI.(XXV) 36,286,574.75 24,024,575.77 441,088,546.22 426,497,628.25 Non-current liabilities due within 1 VI.(XXVI) 258,481,674.99 110,000,000.00 115,000,000.00 year Other current liabilities VI.(XXVII) 412,912,500.00 412,912,500.00 Total current liabilities 1,417,641,433.66 697,753,042.83 1,098,330,189.93 576,629,878.92 Non-current liabilities: Long-term borrowings VI.(XXVIII) 179,334,850.00 110,000,000.00 339,969,411.75 120,000,000.00 Debentures payable Long-term payables Specific purpose account payables VI.(XXIX) 1,145,000.00 Provisions for contingent liabilities Deferred tax liabilities Other non-current liabilities VI.(XXX) 1,320,000.00 Total non-current liabilities 180,654,850.00 110,000,000.00 341,114,411.75 120,000,000.00 Total liabilities 1,598,296,283.66 807,753,042.83 1,439,444,601.68 696,629,878.92 Owner’s equity Share capital VI.(XXXI) 505,425,000.00 505,425,000.00 439,500,000.00 439,500,000.00 Capital surplus VI.(XXXII) 253,763,982.00 250,531,482.00 253,763,982.00 250,531,482.00 Less: Treasury Stock Reserved fund VI.(XXXIII) 119,229,717.76 119,229,717.76 110,478,493.89 110,478,493.89 Retained earnings VI.(XXXIV) 354,802,914.55 331,807,060.42 341,800,740.95 340,946,045.62 Foreign exchange difference Total owners' equity attributable to 1,233,221,614.31 1,145,543,216.84 holding company Minority interest 190,224,007.16 182,804,968.68 Total owner’s equity 1,423,445,621.47 1,206,993,260.18 1,328,348,185.52 1,141,456,021.51 Total liabilities and owner’s equity 3,021,741,905.13 2,014,746,303.01 2,767,792,787.20 1,838,085,900.43 Footnote is part of the accounting statements. 52 Foshan Huaxin Packing Co., Ltd Income Statement 2007 In RMB Item Number at period-end Number at period-begin Note Consolidation Parent company Consolidation Parent company I. sales VI.(XXXV） 1,269,510,406.95 242,154.18 673,543,663.61 6,603,855.75 Less: cost of sales VI.(XXXV） 1,109,026,954.79 234,829.23 615,783,395.93 5,675,060.71 Taxes and associate charges VI.(XXXVI） 184,977.83 243,344.30 64,620.24 Selling and distribution expenses VI.(XXXVII） 31,760,154.87 15,940,438.43 218,802.78 Administrative expenses VI.(XXXVIII） 54,659,328.20 8,535,868.05 40,001,475.63 8,274,240.99 Financial expense VI.(XXXIX） 47,324,512.88 -993,115.25 1,313,928.67 -271,018.28 Impairment loss VI.(XXXX） 6,439,391.28 139,878.63 -1,338,167.24 Add: gain/(loss) from change in fair value (“-” means loss) VI.(XXXXI) gain/(loss) from investment (“-” means loss) 94,238,972.11 95,188,490.55 90,916,675.03 96,837,146.81 VII.(III) Including: income form investment on affiliated 94,238,972.11 94,238,972.11 90,916,675.03 90,916,675.03 enterprise and jointly enterprise III. Business profit (“-” means loss) 114,354,059.21 87,513,184.07 92,515,922.92 89,479,296.12 Add: non-business income VI.(XXXXII） 4,200,863.52 1,081,545.63 93,956.42 Less: non-business expense VI.(XXXXIII） 406,546.28 945.40 Including: loss from non-current asset disposal 305,600.88 IV. Total profit (“-” means loss) 118,148,376.45 87,512,238.67 93,597,468.55 89,573,252.54 Less: Tax expense VI.(XXXXIV） 759,434.35 173,702.96 V. Net profit (“-” means loss) 117,388,942.10 87,512,238.67 93,423,765.59 89,573,252.54 Including: attributable to holding company 109,653,397.47 90,981,019.39 Minority interest 7,735,544.63 2,442,746.20 VI. Earnings per share (I) basic earnings per share 0.22 0.18 (II) diluted earnings per share 0.22 0.18 53 Foshan Huaxin Packing Co., Ltd Cash Flow Statement 2007 In RMB Consolidation Parent company Number of last Item Note Number of this year Number of this year Number of last year year I. Cash flows for operating activities: Cash received from sales of goods or rending of services 876,517,170.07 551,715,663.80 9,734,952.93 Refund of tax and fare received VI.(XXXXV) 115,326.09 Other cash received relating to operating activities 8,147,648.96 38,885,259.39 19,144,805.91 9,405,100.36 Sub-total of cash inflows 884,780,145.12 590,600,923.19 19,144,805.91 19,140,053.29 Cash paid for goods and services 685,992,336.50 572,936,007.36 6,840,090.90 Cash paid to and on behalf of employees 67,493,605.65 82,602,429.09 9,654,158.68 7,494,968.28 Tax and fare paid VI.(XXXXV) 19,274,397.67 19,425,003.49 49,863.74 346,287.92 Other cash paid relating to operating activities 44,980,315.80 48,816,635.53 214,363,155.26 248,467,577.59 Sub-total of cash outflows 817,740,655.62 723,780,075.47 224,067,177.68 263,148,924.69 Net cash flow from operating activities 67,039,489.50 -133,179,152.28 -204,922,371.77 -244,008,871.40 II. Cash Flows from Investment Activities: Cash received from return of investments Cash received from investment income 113,462,814.19 70,074,370.78 113,462,814.19 70,074,370.78 Net cash received from disposal of fixed assets, intangible assets and 38,000.00 1,778,893.68 1,146,590.00 other long-term assets Proceeds from sale of subsidiaries and other operating units Other cash received relating to investment activities Sub-total of cash inflows 113,500,814.19 71,853,264.46 113,462,814.19 71,220,960.78 Cash paid for acquiring fixed assets, intangible assets and other 311,005,571.83 374,259,853.61 724,008.00 330,518.00 long-term assets Cash paid for acquiring investments 242,833,387.82 Net cash used in acquiring subsidiaries and other operating units Other cash paid relating to investment activities Sub-total of cash outflows 311,005,571.83 374,259,853.61 724,008.00 243,163,905.82 Net cash flow from investing activities -197,504,757.64 -302,406,589.15 112,738,806.19 -171,942,945.04 III. Cash Flows from Financing Activities: Cash received from absorbing investment Including: Cash received from increase in minority interest Cash received from borrowings 1,115,959,191.72 774,710,248.32 652,990,000.00 501,000,000.00 Other proceeds relating to financing activities Sub-total of cash inflows 1,115,959,191.72 774,710,248.32 652,990,000.00 501,000,000.00 Cash paid for settling debt 983,561,253.39 382,273,219.70 557,765,000.00 110,000,000.00 Cash paid for distribution of dividends or profit or reimbursing interest 51,065,055.00 1,784,926.66 21,991,612.22 Including: dividends or profit paid to minority interest Other cash payments relating to financing activities Sub-total of cash outflows 1,034,626,308.39 384,058,146.36 579,756,612.22 110,000,000.00 54 Net cash flow from financing activities 81,332,883.33 390,652,101.96 391,000,000.00 IV. Effect of foreign exchange rate changes on cash and cash equivalents V. Increase in cash and cash equivalents -49,132,384.81 -44,933,639.47 -18,950,177.80 -24,951,816.44 Add : Cash and cash equivalents at year-begin 112,899,721.31 157,833,360.78 43,871,864.93 68,823,681.37 VI. Cash and cash equivalents at the end of the year 63,767,336.50 112,899,721.31 24,921,687.13 43,871,864.93 Foshan Huaxin Packing Co., Ltd Consolidated Statement of Change in Owners’ Equity Dec.31, 2007 In RMB Amount in this period Owners’ equity belonged to parent company Items Lessen: Total of owners’ Surplus Minority equity share capital Capital reserve treasury Retained profits Others equity public reserve stock I. balance at the end of 439,500,000.00 253,763,982.00 111,231,258.82 347,720,929.98 181,000,322.74 1,333,216,493.54 last year Add: change of -752,764.93 -5,920,189.03 1,804,645.94 -4,868,308.02 accounting policy Correction of errors in previous period II. balance at the 439,500,000.00 253,763,982.00 110,478,493.89 341,800,740.95 182,804,968.68 1,328,348,185.52 beginning of this year III. Increase/ decrease of amount in this year 65,925,000.00 8,751,223.87 13,002,173.60 - 7,419,038.48 95,097,435.95 (“-” means decrease) (I) Net profit 109,653,397.47 7,735,544.63 117,388,942.10 (II)Gain/loss listed to owners’ equity directly 1. Net amount on changes in book value of financial assets available for sale 55 2.Effect on changes in other owners’ equity of invested units under equity method 3. Effect on income tax related to items listed to owners’ equity 4. Others Subtotal of (I)and (II) 109,653,397.47 7,735,544.63 117,388,942.10 (III) Input an reduced capital of owners 1. Input capital of owners 2.Amount of Shares included in the owners’ equity 3. Others (IV) Profit distribution 8,751,223.87 -30,726,223.87 -316,506.15 -22,291,506.15 1. Withdrawing 8,751,223.87 -8,751,223.87 surplus public reserve 2. Distribution to all -21,975,000.00 -316,506.15 -22,291,506.15 owners (shareholders) 3. Others (V)Internal carrying forward of owners’ 65,925,000.00 -65,925,000.00 equity 1. New increase of capital (share capital) from capital reserves 2. Convert surplus reserves to capital(share capital) 3. Surplus reserves make up losses 4. Others 65,925,000.00 -65,925,000.00 IV. Balance at the end 505,425,000.00 253,763,982.00 119,229,717.76 354,802,914.55 190,224,007.16 1,423,445,621.47 of this period Foshan Huaxin Packing Co., Ltd Consolidated Statement of Change in Owners’ Equity (con.) Dec.31, 2007 In RMB Items Amount in last period Owners’ equity belonged to parent company Minority equity Total of owners’ 56 Lessen: equity Surplus public share capital Capital reserve treasury Retained profits Others reserve stock I. balance at the end 439,500,000.00 253,763,982.00 102,626,348.51 270,276,737.22 180,484,739.75 1,246,651,807.48 of last year Add: change of -1,105,179.88 -10,499,690.40 1850973.32 -9753896.96 accounting policy Correction of errors in previous period II. balance at the 439,500,000.00 253,763,982.00 101521168.63 259,777,046.82 182,335,713.07 1,236,897,910.52 beginning of this year III. Increase/ decrease of amount in this year 8,957,325.26 82,023,694.13 469,255.61 91,450,275.00 (“-” means decrease) (I) Net profit 90,981,019.39 2,442,746.2 93,423,765.59 (II)Gain/loss listed to owners’ equity directly 1. Net amount on changes in book value of financial assets available for sale 2.Effect on changes in other owners’ equity of invested units under equity method 3. Effect on income tax related to items listed to owners’ equity 4. Others Subtotal of (I)and (II) 90,981,019.39 2,442,746.20 93,423,765.59 (III) Input an reduced capital of owners 1. Input capital of owners 2.Amount of Shares included in the owners’ equity 3. Others (IV) Profit 8,957,325.26 -8,957,325.26 -1,973,490.59 -1,973,490.59 distribution 57 1. Withdrawing 8,957,325.26 -8,957,325.26 surplus public reserve 2. Distribution to all -1,973,490.59 -1,973,490.59 owners (shareholders) 3. Others (V)Internal carrying forward of owners’ equity 1. New increase of capital (share capital) from capital reserves 2. Convert surplus reserves to capital(share capital) 3. Surplus reserves make up losses 4. Others IV. Balance at the 439,500,000.00 253,763,982.00 110,478,493.89 341,800,740.95 182,804,968.68 1,328,348,185.52 end of this period 58 FOSHAN HUAXIN PACKAGING CO., LTD. NOTE TO FINANCIAL STATEMENT As of the year 2007 (The following amount is expressed in RMB unless otherwise special explanation) I. Profiles of the Company Foshan Huaxin Packing Co., Ltd. (hereinafter referred to as the Company) was promoted by Foshan Huaxin Development Co., Ltd., as a main sponsor, under approving of People’s Government of Guangdong Province with YBH (1999) document No. 297 and Economic System Reform Committee of Guangdong Province with YTG (1999) document No. 032, and jointly invested by seven shareholders such as Foshan Municipal Investment General Corporation, Foshan Xinhui Industrial Development Co., Ltd., China Packaging General Corporation, China Material Development & Investment General Corporation, Guangdong Technical Reforming & Investment Co., Ltd., China Chemistry & Light Industry General Corporation, and Foshan Light Industry Company by promotion with total share capital of RMB 290,000,000 at par value of RMB 1 per share. The Company is joint-stock company who was registered in Administration Bureau for Commerce & Industry of Guangdong Province on June 21, 1999. (Business License No. 40000000005147). In the year of 2000, the Company successfully placed foreign shares domestically listed (B shares) amounting to 149,500,000 by mean of private placing, which was listed in Shenzhen Stock Exchange for trade. After offering, the Company’s total share capital was increased to RMB 439,500,000.00. In June 2007, the Company distributed dividends of 65,925,000 shares, thus, the total share capital was changed into RMB 505,425,000.00. The Company is engaged in paper making, paper package and printing industry and mainly manufactures (operated by subsidiary companies under the Company) and sells packaging materials, and packaging products, materials for decoration and aluminum and plastic compound materials; sells and maintains package machinery; invests in industry in terms of package and printing. The Company is located in No. 18, Jihua 5th Road, Foshan, Guangdong. Foshan Huafeng Paper Co., Ltd and Huaxin (Foshan) Color Printing Co., Ltd. are two shareholding subsidiaries of the Company, of which main products include high-class coated white board and color printed packaging products. II. Preparation basis for the financial statement The former financial statement was prepared by the Company in accordance with the Accounting Standard for Business Enterprise promulgated on Feb. 15, 2006 as well as Accounting System for Business Enterprise promulgated on Dec. 29, 2000 (both hereinafter referred to as “former accounting standard and system”). Since Jan. 1, 2007, the Company performed Accounting Standard for Business Enterprises and its Application Guide (hereinafter referred to as “Accounting Standard for Business Enterprise”) promulgated by the Ministry of Finance on February 15, 2006. The Financial Statement as of the Year 2007 is the first annual financial statement of the Company prepared on the basis of the Accounting Standard for Business Enterprise. 59 As the Company prepared the financial statement for 2007, in accordance with relevant provisions of the Circular on the No.7 Questions and Responses of Information Disclosure Standards by Companies Publicly Issuing Securities ------ Compilation and Disclosure of the Comparative Financial Accounting Information during the Transition Period between the New and Old Accounting Standards (ZJKJ Zi [2007] No. 10) issued by China Securities Regulatory Commission, the amount at the period-begin in balance sheet as at Jan. 1, 2007 was recognized based on principle regulated in the Circular on Doing Well the Financial Information Disclosure Related to the New Accounting Standard (ZJF [2006] No. 136) from China Securities Regulatory Commission, and based on the above, the comparative balance sheet and comparative income statement shall be prepared according to Article 5 and Article 19 in “ Accounting Standard for Business Enterprise No. 38 --- First Time Adoption of Accounting Standards for Business Enterprises and the principle of retroactive adjustment, and restated in the light of the Accounting Standard for Business Enterprise. Reconciliation processing that owner’s equity at the beginning and end of 2006 stated under the former accounting standard and system and net profit as of the year 2006 were adjusted as owner’s equity and net profit stated under new accounting standard for business enterprise is listed in Note XV of the financial statement. III. Main accounting policies and accounting estimates adopted by the Company (I) Statement of complying with Accounting Standard for Business Enterprise The financial statements prepared by the Company comply with the requirement of the New Accounting Standard for Business Enterprises, and had truly and completely reflected the Company’s financial status, operation results and cash flow. (II) Preparation basis for the financial statements With sustaining operation as a premise, the Company prepares the financial statement. (III) Fiscal year The fiscal year of the Company is the solar calendar year, which is from January 1 to December 31. (IV) Standard currency of accounts The Company adopts Renminbi as a standard currency of accounts. (V) Accounting measurement attribute Items in financial statements shall be accorded based on historical cost. Financial assets and financial liabilities which are measured at their fair values, of which the variation is recorded into the profits and losses of the current period, financial assets available for sale, derivative financial instruments shall be measured in the light of fair value; inventories which are delayed in payment over the normal credit condition when purchased and fixed assets shall be accorded with present value of purchase price; inventories which impairment loss occurred shall be measured by net realizable value; 60 other assets depreciation shall be measured by recoverable amount (which higher between fair value and present value); inventory surplus assets shall be measured by replacement cost. The accounting measurement attribute remained unchanged. (VI) Recognition standard for cash equivalents Cash equivalents of the Company refer to short-term (usually due within 3 months since the day of purchase) and high circulating investments, which are easily convertible into known amount of cash and whose risks in change of value are minimal. (VII) Foreign current translation For a foreign currency occurred, the amount in the foreign currency shall be translated into the amount in the functional currency at an approximate exchange rate with the spot exchange rate of the transaction date. For the balance of foreign currency at the period-end in various foreign currency accounts, the foreign currency monetary items shall be translated at the spot exchange rate on the balance sheet date, the balance of exchange shall be recorded into the profits and losses at the current period; except that the balance of exchange arising from foreign currency borrowings for the purchase and construction or production of assets eligible for capitalization shall be measured in the light of capitalization principle. The foreign currency non-monetary items measured at the historical cost shall still be translated at the spot exchange rate on the transaction date; the foreign currency non-monetary items measured at the fair value shall be translated at the spot exchange rate on the fair value confirming date, the difference is taken as the changes in the profit and loss of fair value. (VIII) Recognition and measurement of financial instruments 1. Classification of financial assets and financial liabilities Financial assets shall be classified into the following four categories when they are initially recognized: (1) the financial assets which are measured at their fair values and the variation of which is recorded into the profits and losses of the current period, including transactional financial assets and the financial assets which are measured at their fair values and of which the variation is included in the current profits and losses; (2) the investments which will be held to their maturity; (3) loans and the account receivables; and (4) financial assets available for sale. Financial liabilities shall be classified into the following two categories when they are initially recognized: (1) the financial liabilities which are measured at their fair values and of which the variation is included in the current profits and losses, including transactional financial liabilities and the designated financial liabilities which are measured at their fair values and of which the variation is included in the current profits and losses; and (2) other financial liabilities. 2. Recognition basis and measurement method When the Company becomes a party to a financial instrument, it shall recognize a 61 financial asset or financial liability. The financial assets and financial liabilities initially recognized by the Company shall be measured at their fair values. For the financial assets and liabilities measured at their fair values and of which the variation is recorded into the profits and losses of the current period, the transaction expenses thereof shall be directly recorded into the profits and losses of the current period; for other categories of financial assets and financial liabilities, the transaction expenses thereof shall be included into the initially recognized amount. The Company shall make subsequent measurement on its financial assets according to their fair value; the Company shall make subsequent measurement on its financial assets according to their fair values, and may not deduct the transaction expenses that may occur when it disposes of the said financial asset in the future. However, those under the following circumstances shall be excluded: (1) The investments held until their maturity, loans and accounts receivable shall be measured on the basis of the post-amortization costs by adopting the actual interest rate method; (2) The equity instrument investments for which there is no quotation in the active market and whose fair value cannot be measured reliably, and the derivative financial assets which are connected with the said equity instrument and must be settled by delivering the said equity instrument shall be measured on the basis of their costs. The Company shall make subsequent measurement on its financial liabilities on the basis of the post-amortization costs by adopting the actual interest rate method, with the exception of those under the following circumstances: (1) For the financial liabilities measured at their fair values and of which the variation is recorded into the profits and losses of the current period, they shall be measured at their fair values, and none of the transaction expenses may be deducted, which may occur when the financial liabilities are settled in the future; (2) For the derivative financial liabilities, which are connected to the equity instrument for which there is no quotation in the active market and whose fair value cannot be reliably measured, and which must be settled by delivering the equity instrument, they shall be measured on the basis of their costs. (3) For the financial guarantee contracts which are not designated as a financial liability measured at its fair value and the variation thereof is recorded into the profits and losses of the current period, and for the commitments to grant loans which are not designated to be measured at the fair value and of which the variation is recorded into the profits and losses of the current period and which will enjoy an interest rate lower than that of the market, a subsequent measurement shall be made after they are initially recognized according to the higher one of the following: i. the best estimated amount as outgone due to performing the relevant current obligation; or ii. the surplus after accumulative amortization as determined according to the effective interest method is subtracted from the initially recognized amount. 3. Recognition and measurement of transfer of financial assets Where the Company has transferred nearly all of the risks and rewards related to the ownership of the financial asset to the transferee, it shall stop recognizing the financial asset. If it retained nearly all of the risks and rewards related to the ownership of the 62 financial asset, it shall continue to recognize the entire financial asset to be transferred and shall recognize the consideration it receives as a financial liability. Where the Company does not transfer or retain nearly all of the risks and rewards related to the ownership of a financial asset, it shall deal with it according to the circumstances as follows, respectively: (1) If it gives up its control over the financial asset, it shall stop recognizing the financial asset; (2) If it does not give up its control over the financial asset, it shall, according to the extent of its continuous involvement in the transferred financial asset, recognize the related financial asset and recognize the relevant liability accordingly. If the transfer of an entire financial asset satisfies the conditions for stopping recognition, the difference between the amounts of the following 2 items shall be recorded in the profits and losses of the current period: (1) The book value of the transferred financial asset; (2) The sum of consideration received from the transfer, and the accumulative amount of the changes of the fair value originally recorded in the owner's equities. If the transfer of partial financial asset satisfies the conditions to stop the recognition, the entire book value of the transferred financial asset shall, between the portion whose recognition has been stopped and the portion whose recognition has not been stopped, be apportioned according to their respective relative fair value, and the difference between the amounts of the following 2 items shall be included into the profits and losses of the current period: (1) The book value of the portion whose recognition has been stopped; (2) The sum of consideration of the portion whose recognition has been stopped, and the portion of the accumulative amount of the changes in the fair value originally recorded in the owner's equities which is corresponding to the portion whose recognition has been stopped. 4. Determination of the fair value of financial assets and financial liabilities As for the financial assets or financial liabilities for which there is an active market, the quoted prices in the active market shall be used to determine the fair values thereof. Where there is no active market for a financial instrument, the enterprise concerned shall adopt value appraisal techniques (the value appraisal techniques mainly include the prices adopted by the parties, who are familiar with the condition, in the latest market transaction upon their own free will, the current fair value obtained by referring to other financial instruments of the same essential nature, the cash flow capitalization method and the option pricing model, etc.) to determine its fair value. As for the financial assets initially obtained or produced at source and the financial liabilities assumed, the fair value thereof shall be determined on the basis of the transaction price of the market. 5. Impairment inspection and withdrawal method of impairment provision for financial assets and financial liabilities The Company shall carry out an inspection, on the balance sheet day, on the carrying amount of the financial assets other than those measured at their fair values and of which the variation is recorded into the profits and losses of the current period. An impairment test shall be made on the financial assets with significant single amounts. With regard to the financial assets with insignificant single amounts, it shall be included in a combination of financial assets with similar risk features so as to conduct another 63 impairment test. Where, upon independent test, the financial asset (including those financial assets with significant single amounts and those with insignificant amounts) has not been impaired, it shall be included in a combination of financial assets with similar risk features so as to conduct another impairment test. Where a financial asset which is measured on the basis of post-amortization costs and for which there is any objective evidence proving that the impairment occurred, the impairment losses shall be recognized in accordance with the balance between book value and the current value of the predicted future cash flow. Where there is a very small gap between the predicted future cash flow of a short-term account receivable item and the current value thereof, the predicted future cash flow is not required to be capitalized when determining the relevant impairment-related losses. Where an equity instrument investment for which there is no quoted price in the active market and whose fair value cannot be reliably measured, or a derivative financial asset which is connected with the equity instrument and which must be settled by delivering the equity instrument, suffers from any impairment, the gap between the carrying amount of the equity instrument investment or the derivative financial asset and the current value of the future cash flow of similar financial assets capitalized according to the returns ratio of the market at the same time shall be recognized as impairment-related losses. Where a fair value of financial assets available for sale drops by a big margin or not contemporarily in anticipation, its impairment losses shall be recognized, the accumulative losses arising from the decrease of the fair value of the owner’s equity which was directly included shall be transferred out and recorded into impairment losses. (IX) Withdrawal method for reserve for bad debts of accounts receivable Accounts receivable (including accounts receivable and other receivables) with significant single amounts and there is objective evidence proving it has impaired, its reserve for bad debts shall be withdrawn according to the balance of its current value of future cash flow’s lowering than its book value; for accounts receivable (including accounts receivable and other receivables) with insignificant single amounts and those with significant single amounts and there has not been impaired after independent test, its withdrawal proportion for bad debts reserve shall be confirmed based on the actual loss rate of accounts receivable combination with same aging and combining the present situation. Withdrawal proportions of bad debts reserve are as follows: Aging Withdrawal proportion 1-3 months - 4-12 months 5% 1-2 years 10% 2-3 years 20% Over 3 years 50% (X) Recognition and measurement of inventories 64 1. The term "inventories" refers to finished products or merchandise possessed by an enterprise for sale in the daily of business, or work in progress in the process of production, or materials and supplies to be consumed in the process of production or offering labor service. 2. The sending out inventories shall be measured by planned cost. 3. On the date of balance sheet, the inventories shall be measured whichever is lower in accordance with the cost and the net realizable value. The Company shall make provision for loss on decline in value of inventories on the ground of the balance of the cost of inventories is higher than the net realized value. Such merchandise inventory for sale directly as finished goods inventories, merchandise and materials for sale, their net realizable value shall be the amount after deducting estimated sale expense and relevant taxes from the estimated sale price of the inventories in course of normal production and operation; the net realizable value of materials inventories for processing shall be the amount after deducting the estimated cost of completion, estimated sale expense and the relevant taxes from the estimated sale price of finished products in course of normal production and operation; on the balance sheet date, for inventories with the contract price and inventories without the contract price in the same inventories, their net realizable value shall be measured separately, and comparing with their corresponding costs, their amounts of provision for loss on decline in value of inventories withdrawn or carried forward shall be confirmed respectively. 4. Inventory system for inventories: Perpetual inventory system shall be adopted. 5. The Company shall amortize the easily consumed products of low value and packing articles and supplies by employing the one-off write-off method. (XI) Recognition and measurement of long-term equity investment 1. Recognition of initial investment cost of long-term equity investment (1) For the merger of enterprises under the same control, if the consideration of the merging enterprise is that it makes payment in cash, transfers non-cash assets or bear its debts or issue equity securities, it shall, on the date of merger, regard the share of the book value of the owner's equity of the merged enterprise as the initial cost of the long-term equity investment. The difference between the initial cost of the long-term equity investment and the book value of merger consideration paid or the total amount of the par value of share issued shall offset against the capital reserve. If the capital reserve is insufficient to dilute, the retained earnings shall be adjusted. (2) For the merger under different control, the Company, on the date of merger, regards the fair value of the merger consideration paid and various direct costs as the initial cost of the long-term equity investment. (3) Besides the long-term equity investments formed by the merger of enterprises, the initial cost of a long-term equity investment obtained by making payment in cash shall be the purchase cost which is actually paid; the initial cost of a long-term equity investment obtained on the basis of issuing equity securities shall be the fair value of the equity 65 securities issued; the initial cost of a long-term equity investment of an investor shall be the value stipulated in the investment contract or agreement except the unfair value stipulated in the contract or agreement. 2. A long-term equity investment that is controlled by the Company shall be accounted by employing the cost method, and shall be made an adjustment by employing the equity method when it works out consolidated financial statements. A long-term equity investment that does not do joint control or does not have significant influence on the Company, and entity, and has no offer in the active market and its fair value cannot be reliably measured, shall be measured by employing the cost method. A long-term equity investment that does joint control or significant influences over the Company shall be accounted by employing the equity method. 3. Recognition measurement for income from long-term equity investment The price of a long-term equity investment measured by employing the cost method shall be included at its initial investment cost. If there are additional investments or disinvestments, the cost of the long-term equity investment shall be adjusted. The dividends or profits declared to distribute by the invested entity shall be recognized as the current investment income. The investment income recognized by the investing enterprise shall be limited to the amount received from the accumulative net profits that arise after the invested entity has accepted the investment. Where the amount of profits or cash dividends obtained by the investing entity exceeds the aforesaid amount, it shall be regarded as recovery of initial investment cost. The price of a long-term equity investment measured by employing the equity method shall, in accordance with the attributable share of the net profits or losses of the invested entity, recognize the investment profits or losses and adjust the book value of the long-term equity investment. The investing enterprise shall, in the light of the profits or cash dividends declared to distribute by the invested entity, calculate the proportion it shall obtain, and shall reduce the book value of the long-term equity investment correspondingly. Where any change is made to the owner's equity other than the net profits and losses of the invested entity, the book value of the long-term equity investment shall be adjusted and be included in the owner's equity. When disposing of a long-term equity investment, the difference between its book value and the actual purchase price shall be included in the current profits and losses. If any change other than the net profits and losses of the invested entity occurs and is included in the owner's equity, the portion previously included in the owner's equity shall, when disposing of a long-term equity investment measured by employing the equity method, be transferred to the current profits and losses according to a certain proportion. 4. On the balance sheet date, where an long-term equity investment for which it is measured by employing the cost method, there is no quoted price in the active market and whose fair value cannot be reliably measured, there is any objective evidence proving that such long-term equity investment has been impaired, shall be withdrawn provision for impairment of long-term equity investment in the light of the gap between the book value of long-term equity investment and current value of the future cash flow of similar 66 investment according to the return ratio of the market at the same time,. Where other investment for which there exist impairment signs, shall be withdrawn provision for impairment of long-term equity investment in the light of the method mentioned in III (XVI) in the Notes to the Financial Statement. 5. Recognition basis of joint control and significant influences over the investing enterprises: the joint control shall be recognized in the light of the control over an economic activity in accordance with the contracts and agreements, which does not exist unless the investing parties of the economic activity with one an assent on sharing the control power over the relevant important financial and operating decisions. Significant influences shall be recognized in the light of the power to participate in making decisions on the financial and operating policies of an enterprise, but not to control or do joint control together with other parties over the formulation of these policies. Where an investing enterprise is able to have significant influences on an invested entity, the invested entity shall be its associated entity. (XII) Recognition and measurement of investment real estates 1. Investment real estates include: the right to use any land which has already been rented; the right to use any land which is held and prepared for transfer after appreciation; and the right to use any building which has already been rented. 2. The initial measurement of the investment real estate shall be made at its cost. The Company shall make a subsequent measurement to the investment real estate through the cost pattern 3. An investment real estates measured through the cost pattern shall be withdrawn a depreciation and made an amortization by employing the same method with fixed assets and intangible assets. 4. Where an investment real estates measured through the cost pattern for which there exist impairment signs on the balance sheet, shall be withdrawn provision for impairment of investment real estates in the light of the method mentioned in III (XVI) in the Notes to the Financial Statement. (XIII) Recognition and measurement of fixed assets 1. Fixed assets refers to the tangible assets that simultaneously possess the features as follows: (1) they are held for the sake of producing commodities, rendering labor service, renting or business management; and (2) their useful life is in excess of one fiscal year. 2. No fixed assets may be recognized unless it simultaneously meets the conditions as follows: (1) the economic benefits pertinent to the fixed assets are likely to flow into the enterprise; and (2) the cost of the fixed assets can be measured reliably. Where the subsequent expenditure related with fixed assets, meeting the aforesaid recognition condition, shall be measured into the cost of the fixed assets, while not meeting the aforesaid recognition condition, it shall be measured into the profits and losses of the current period. 67 3. The initial measurement of fixed assets shall be made at its cost. 4. The Company shall account the depreciation of the fixed assets by employing the straight-line method. Category of fixed asset Useful life Expected net salvage value Annual depreciation rate(%) House and building 40 years 10% 2.25% Machinery equipment 20 years 10% 4.50% Transport equipment 8 years 10% 11.25% Other 5 years 10% 18% 5. A fixed assets, for which it is stopped to use for six months in succession due to running under its production capacity or natural disasters, shall be recognized idle fixed assets. The Company shall withdraw depreciation of idle fixed assets by employing the method with other fixed assets. 6. On the balance sheet date, where a fixed assets for which there exist impairment signs, shall be withdrawn provision for impairment of fixed assets in the light of the method mentioned in III (XVI) in the Notes to the Financial Statement. (XIV) Recognition and measurement of construction in progress 1. No construction in progress may be recognized unless it simultaneously meets the conditions as follows: a. the economic benefits are likely to flow into the Company, and b. the cost of the construction in progress can be measured reliably. The construction in progress shall be measured in the light of the actual cost when the assets complete and achieve estimated usable status. 2. Constructions in progress are carried down to fixed assets according to their actual costs when completing and achieving estimated usable status. The fixed assets that have been completed and reached estimated usable status but have not yet been through completion and settlement procedures are charged to an account according to their estimate values; adjustment will be conducted upon confirmation of their actual values. 3. On the balance sheet date, where a construction in progress for which there exist impairment signs, shall be withdrawn provision for impairment of the construction in progress in the light of the method mentioned in III (XVI) in the Notes to the Financial Statement. (XV) Recognition and measurement of intangible assets 1. The intangible assets shall be initially measured according to its cost. 2. In accordance with such integrative factors as intangible asset’s contractual right or other statutory rights, same industry situation, historical experience as well as expert discussion, if it is able to forecast the period when the intangible assets can bring economic benefit to the Company, it shall be regarded as an intangible asset with certain service life; if it is unable to forecast the period when the intangible assets can bring economic benefit to the Company, it shall be regarded as an intangible asset with uncertain service life. 68 3. With regard to intangible assets with limited useful life, the following factors shall be considered when the useful life is estimated: (1) general life cycle of products manufactured with the said assets, information of useful life of similar assets obtained; (2) estimation over the present phase and future development tendency in the respect of technology and technics; (3) market demand of products manufactured with the said assets and of labor service provided by the said assets; (4) action taken by present or potential competitor; (5) expected maintain expenditure for which it keeps economic benefit capacity brought by the said assets, and expenditure capacity paid in advance by the Company; (6) such laws, regulations or the similar restriction related with control period of the said assets, i.e. concession period and tenancy duration; and (7) relevance of useful life of other assets held by the Company. 4. With regard to intangible assets with limited service life shall be amortized reasonably in accordance with the expected realization pattern of the economic benefits which relevant to the intangible assets within the service life, if it is unable to determine the expected realization pattern reliably, intangible assets shall be amortized by the straight-line method. Intangible assets with uncertain service life may not be amortized, but the Company shall check the service life of the said intangible assets for every year, and make impairment testing. 5. On the balance sheet date, the Company shall check future economic benefit capacity is expected to be brought by the intangible asset to it. And the said intangible assets shall be withdrawn provision for impairment in the light of the method mentioned in III (XVI) in the Notes to the Financial Statement. 6. The research expenditures for its internal research and development projects of the Company shall be recorded into the profit or loss for the current period. The development expenditures for its internal research and development projects of the Company may be confirmed as intangible assets when they satisfy the following conditions simultaneously:(1)It is feasible technically to finish intangible assets for use or sale;(2)It is intended to finish and use or sell the intangible assets;(3)The usefulness of methods for intangible assets to generate economic benefits shall be proved, including being able to prove that there is a potential market for the products manufactured by applying the intangible assets or there is a potential market for the intangible assets itself or the intangible assets will be used internally;(4)It is able to finish the development of the intangible assets, and able to use or sell the intangible assets, with the support of sufficient technologies, financial resources and other resources; and (5)The development expenditures of the intangible assets can be reliably measured. (XVI) Impairment of assets 1. The Company shall, on the balance sheet date, make a judgment of assets (excluding inventories, equity instrument investment without quoted price in the active market and whose fair value cannot be reliably measured, investment real estates measured by fair value pattern, consumptive biological assets, assets formed by construction contracts, deferred income tax assets, unsecured residual value of the lessor in a financial leasing 69 and assets out of financial assets) on whether there is any sign of possible assets impairment. With there is any evidence indicating a possible impairment of assets, the Company shall, on the basis of single item assets, estimate the recoverable amount. Where it is difficult to do so, it shall determine the recoverable amount of the group assets on the basis of the asset group to which the asset belongs. 2. The recoverable amount shall be determined in light of the higher one of the net amount of the fair value of the single item assets, assets group, or combination of group assets minus the disposal expenses and the current value of the expected future cash flow of the single item assets, assets group, or combination of group assets. 3. Where the recoverable amount of the single assets is lower than its book value, its corresponding provision for impairment of assets shall be recognized shall be withdrawn in according to the balance of the book value of the single assets and the recoverable amount. Where the recoverable amount of an asset group or a combination of asset groups is lower than its book value, it shall be recognized as the corresponding impairment loss. The amount of the impairment loss shall first charge against the book value of the headquarter' assets and goodwill which are apportioned to the asset group or combination of asset groups, then charge it against the book value of other assets in proportion to the weight of other assets in the asset group or combination of asset groups with the goodwill excluded. The charges against the book value of the assets above shall be treated as the impairment loss of the assets (including the goodwill) and shall be withdrawn the provision for impairment of single assets. 4. Once any loss of asset impairment is recognized, it shall not be switched back in the future accounting period. (XVII) Recognition and measurement of borrowing costs 1. Recognition principle for capitalization of borrowing costs Where the borrowing costs incurred to the Company can be directly attributable to the acquisition and construction or production of assets eligible for capitalization, it shall be capitalized and recorded into the costs of relevant assets. Other borrowing costs shall be recognized as expenses on the basis of the actual amount incurred, and shall be recorded into the current profits and losses. The term "assets eligible for capitalization" shall refer to the fixed assets, investment real estate, inventories and other assets, of which the acquisition and construction or production may take quite a long time to get ready for its intended use or for sale. 2. Period of capitalization of borrowing costs (1) The borrowing costs shall not be capitalized unless they simultaneously meet the following requirements:(1)The asset disbursements have already incurred; (2) The borrowing costs has already incurred; and (3)The acquisition and construction or production activities which are necessary to prepare the asset for its intended use or sale have already started. (2) Suspension of capitalization: Where the acquisition and construction or production of 70 a qualified asset is interrupted abnormally and the interruption period lasts for more than 3 months, the capitalization of the borrowing costs shall be suspended. The borrowing costs incurred during such period shall be recognized as expenses, till the acquisition and construction or production of the asset restarts. (3) Ceaseing of capitalization: When the qualified asset under acquisition and construction or production is ready for the intended use or sale, the capitalization of the borrowing costs shall be ceased. 3. Capitalized amount of borrowing costs As for specifically borrowed loans for the acquisition and construction or production of assets eligible for capitalization, the to-be-capitalized amount of interests shall be determined in light of the actual cost (including amortization of depreciation or premium recognized by the actual rate method) incurred of the specially borrowed loan at the present period minus the income of interests earned on the unused borrowing loans as a deposit in the bank or as a temporary investment; Where a general borrowing is used for the acquisition and construction or production of assets eligible for capitalization, the Company shall calculate and determine the to-be-capitalized amount of interests on the general borrowing by multiplying the weighted average asset disbursement of the part of the accumulative asset disbursements minus the general borrowing by the capitalization rate (weighted average rate) of the general borrowing used. During the period of capitalization, the amount of interest capitalized during each accounting period shall not exceed the amount of interest actually incurred to the relevant borrowings in the current period. During the period of capitalization, the exchange balance on foreign currency borrowings shall be capitalized, and shall be recorded into the cost of assets eligible for capitalization. For the ancillary expense incurred to a specifically borrowed loan, those incurred before a qualified asset under acquisition, construction or production is ready for the intended use or sale shall be capitalized at the incurred amount when they are incurred; those incurred after a qualified asset under acquisition and construction or production is ready for the intended use or sale shall be recorded into the profits and losses of the current period. The ancillary expenses arising from a general borrowing shall be recognized as expenses at their incurred amount when they are incurred, and shall be recorded into the profits and losses of the current period. (XVIII) Recognition principle of revenue 1. Selling goods No revenue from selling goods may be recognized unless the following conditions are met simultaneously: a. The significant risks and rewards of ownership of the goods have been transferred to the buyer by the enterprise; b. The enterprise retains neither continuous management right that usually keeps relation with the ownership nor effective control over the sold goods; c. The relevant amount of revenue can be measured in a reliable way; d. The relevant economic benefits may flow into the enterprise; and e. The relevant costs incurred or to be incurred can be measured in a reliable way. 2. Providing labor services 71 If the Company can, on the date of the balance sheet, reliably estimate the outcome of a transaction concerning the labor services it provides (The outcome of a transaction concerning the providing of labor services can be measured in a reliable way, means that the following conditions shall be met simultaneously: a. The amount of revenue can be measured in a reliable way; b. The relevant economic benefits are likely to flow into the enterprise; c. The schedule of completion under the transaction can be confirmed in a reliable way; and d. The costs incurred or to be incurred in the transaction can be measured in a reliable way), it shall recognize the revenue from providing services employing the percentage-of-completion method. And the Company shall ascertain the schedule of completion under the transaction concerning the providing of labor services in accordance with the measurement of the work completed. If an enterprise can not, on the date of the balance sheet, measure the result of a transaction concerning the providing of labor services in a reliable way, it shall be conducted in accordance with the following circumstances, respectively: a. If the cost of labor services incurred is expected to be compensated, the revenue from the providing of labor services shall be recognized in accordance with the amount of the cost of labor services incurred, and the cost of labor services shall be carried forward at the same amount; or b. If the cost of labor services incurred is not expected to compensate, the cost incurred should be included in the current profits and losses, and no revenue from the providing of labor services may be recognized. 3. Abalienating the right to use assets No revenue from abalienating of right to use assets may be recognized unless the following conditions are met simultaneously: a. the relevant economic benefits are likely to flow into the enterprise; and b. the amount of revenues can be measured in a reliable way. The amount of interest revenue should be measured and confirmed in accordance with the length of time for which the enterprise's cash is used by others and the actual interest rate; or the amount of royalty revenue should be measured and confirmed in accordance with the period and method of charging as stipulated in the relevant contract or agreement. (XIX) Recognition and measurement of income taxes 1. Where there is difference between the book value of the assets or liabilities and its tax base (As for an item that has not been recognized as an asset or liability, if its tax base can be determined in light of the tax law, the difference between the tax base and its book value), the deferred income tax assets or the deferred income tax liabilities shall be determined according to the applicable tax rate in the course of prospective recovering assets or discharging liabilities. 2. The Company shall recognize the deferred income tax assets in accordance with the extent of the amount of the taxable income which it is most likely to obtain and which can be deducted from the deductible temporary difference. On the balance sheet date, where there is any exact evidence showing that it is likely to acquire sufficient amount of taxable income tax in a future period to offset against the deductible temporary difference, the deferred income tax assets unrecognized in prior periods shall be recognized. 72 3. The carrying amount of deferred income tax assets shall be reexamined on balance sheet day. If it is unlikely to obtain sufficient taxable income taxes to offset the benefit of the deferred income tax assets, the carrying amount of the deferred income tax assets shall be written down. When it is probable to obtain sufficient taxable income taxes, such write-down amount shall be subsequently reversed. 4. On the basis of measuring and recognizing income taxes of the current period (income taxes payable of the current period) and deferred income tax (or income), the summation of both the income taxes of the current period and deferred income tax of an enterprise shall be recognized as income tax expenses or incomes in the income statement, but excluding influence on income tax due to the transactions or events directly recognized as the owner's rights and interests. (XX) Preparation method of the consolidated financial statement Parent company shall bring all subsidiaries under its control into the consolidation scope of consolidated financial statement. In line with the Accounting Standard for Business Enterprise No. 33 – Consolidated Financial Statement, the consolidated financial statement shall be prepared by parent company on the basis of the both financial statement of parent company and its subsidiaries after adjusting long-term equity investment over its subsidiaries based on equity method in accordance with other relevant information. (XXI) Notes to Change in accounting policies and accounting estimates 1. Change in accounting policies Since Jan. 1, 2007, the Company performed Accounting Standard for Business Enterprises and its Application Guide (hereinafter referred to as “Accounting Standard for Business Enterprise”) promulgated by the Ministry of Finance in February 2006. In accordance with relevant provisions of Accounting Standard for Business Enterprise No. 38 --- First Time Adoption of Accounting Standards for Business Enterprises and the Circular on the No.7 Questions and Responses of Information Disclosure Standards by Companies Publicly Issuing Securities ------ Compilation and Disclosure of the Comparative Financial Accounting Information during the Transition Period between the New and Old Accounting Standards (ZJKJ Zi [2007] No. 10) issued by China Securities Regulatory Commission, the financial statement for 2006 was made retroactive adjustment. Namely, in line with the principle regulated in ZJF [2006] No. 136 promulgated by China Securities Regulatory Commission, the amount at the period-begin in balance sheet as at Jan. 1, 2007 was recognized, and based on the above, the comparative balance sheet and comparative income statement shall be prepared according to Article 5 and Article 19 in Accounting Standard for Business Enterprise No. 38 --- First Time Adoption of Accounting Standards for Business Enterprises and the principle of retroactive adjustment, income statement and statement of change in owner’s equity after adjustment and comparative balance sheet with period begin has been prepared. The line of amount in last year in income statement and statement of change in owner’s equity has been listed in the light of amount after the adjustment. 2. Influence on consolidated accounting statement due to change of accounting policies (1) In accordance with Article 5 in the Accounting Standard for Business Enterprise No. 73 38 --- First Time Adoption of Accounting Standards for Business Enterprises: for the long-term equity investment is generated from a business combination under common control, the unamortized equity investment difference on the debit side amounting to RMB 40,682,689.96 (is balance between the fair value of the Company’s investment amount in Foshan Huafeng Paper Co., Ltd. in June 1999 and quotient in net asset of Foshan Huafeng Paper Co., Ltd.) was entirely sterilized, the retained earnings of RMB 40,682,689.96 was modulated decrease. For any other long-term equity investment calculated by equity method, the difference on the credit side amounting to RMB 11,841,082.59 (is balance between the fair value of the Company’s investment amount in Tetra Huaxin (Foshan) Packing Co., Ltd. in June 1999 and quotient in net asset of Tetra Huaxin (Foshan) Packing Co., Ltd.) was modulated increase by RMB 11,841,082.59 as the retained earnings. (2) In accordance with Article 13 in the Accounting Standard for Business Enterprise No. 38 --- First Time Adoption of Accounting Standards for Business Enterprises: as to the business combination under common control, the amortized value of the originally recognized as goodwill amounting to RMB -555,568.25 was entirely sterilized and modulated increase by RMB 555,568.25 as the retained earnings by the subsidiary company of the Company. (3) In accordance with Article 12 in the Accounting Standard for Business Enterprise No. 38 --- First Time Adoption of Accounting Standards for Business Enterprises: on the date of initial implementation, the Company made a retroactive modulation to the effect of the temporary difference between the carrying amount of an asset or liability and its tax base on income tax, and modulated increase by RMB 2,816,865.45 (of which, Foshan Huafeng Paper Co., Ltd.: RMB 2,422,587.02; Huaxin (Foshan) Color Printing Co., Ltd.: 394,278.43) as the retained earnings based on the affected amount. (4) In accordance with the Accounting Standard for Business Enterprise No. 38 --- First Time Adoption of Accounting Standards for Business Enterprises: influence on the retained earnings of the associated company of the Company and influence on quotient of net assets shared by the Company based on equity proportion due to retroactive modulation made by the associated company of the Company totaling RMB 19,476,721.09 (Tetra Huaxin (Foshan) Packing Co., Ltd.) was modulated increase by RMB 19,476,721.09 as the retained earnings. Owing to change in the above accounting policies, the Company totally modulated increase by RMB 4,931,916.32 as net profit for 2006, modulated decrease by RMB 6,672,953.96 as the retained earnings at the beginning of 2007, of which, retained profit was modulated decrease by RMB 5,920,189.03, surplus reserve was modulated decrease by RMB 752,764.93. In the statement of change in owner’s equity, in the line of “amount in last year”, surplus reserve was changed into RMB -1,105,179.88, retained profit was changed into RMB -10,499,690.40. For details, please refer to the Note XV to the Financial Statement. 3. Influence on accounting statement of parent company due to change of accounting policies (1) In accordance with the provision of Accounting Standard for Business Enterprise No. 38 --- First Time Adoption of Accounting Standards for Business Enterprises and Explanation on Accounting Standard for Business Enterprise No. 1 promulgated by Ministry of Finance on Nov. 16, 2007: as to long-term equity investment of subsidiary company held by an enterprise before the date of initial implementation, it shall be made 74 a retroactive modulation on the date of initial implementation, regarding as the said subsidiary company was measured by employing cost method at first. Thus, the Company made a retroactive modulation to long-term equity investment of subsidiary company existed on the date of initial implementation. For the long-term equity investment is generated from a business combination under common control, the unamortized equity investment difference on the debit side amounting to RMB 40,682,689.96 (is balance between the fair value of the Company’s investment amount in Foshan Huafeng Paper Co., Ltd. in June 1999 and quotient in net asset of Foshan Huafeng Paper Co., Ltd.) was entirely sterilized, the retained earnings of RMB 40,682,689.96 was modulated decrease. For any other long-term equity investment calculated by equity method, the difference on the credit side amounting to RMB 11,841,082.59 (is balance between the fair value of the Company’s investment amount in Tetra Huaxin (Foshan) Packing Co., Ltd. in June 1999 and quotient in net asset of Tetra Huaxin (Foshan) Packing Co., Ltd.) was modulated increase by RMB 11,841,082.59 as the retained earnings. The Company made a retroactive modulation to long-term equity investment of subsidiary company existed on the date of initial implementation based on cost method, which investment income in the statement of parent company for 2006 decreased by RMB 1,546,748.99, while retained profit at the year-begin in the statement of parent company for 2006 increased by RMB 3,383,985.98, and capital reserve at the year-begin in the statement of parent company for 2006 decreased by RMB 3,232,500.00. (2) In accordance with the Accounting Standard for Business Enterprise No. 38 --- First Time Adoption of Accounting Standards for Business Enterprises: influence on the retained earnings of the associated company of the Company and influence on quotient of net assets shared by the Company based on equity proportion due to retroactive modulation made by the associated company of the Company totaling RMB 19,476,721.09 (Tetra Huaxin (Foshan) Packing Co., Ltd.) was modulated increase by RMB 19,476,721.09 as the retained earnings. Owing to change in the above accounting policies, the Company totally modulated increase by RMB 3,524,149.17 as net profit for 2006 in the statement of parent company, modulated decrease by RMB 3,252,500.00 as capital reserve at the year-begin in the statement of parent company for 2007, modulated decrease by RMB 7,527,649.29 as the retained earnings at the beginning of 2007, of which, retained profit was modulated decrease by RMB 6,774,884.36, surplus reserve was modulated decrease by RMB 752,764.93. In the statement of change in owner’s equity of parent company as of 2007, in the line of “amount in last year”, capital reserve was changed into RMB -3,232,500.00, surplus reserve was changed into RMB -1,105,179.88, retained profit was changed into RMB -9,946,618.88. IV. Taxes Main taxes types and tax rate are applicable to the Company as follows: 1. Value-added tax (VAT) VAT was paid based on tax rate of 17%. 2. Business tax Business tax was paid based on tax rate of 5% of taxable income payable. 75 3. City maintenance and construction tax City maintenance and construction tax was based on tax rate of 7% of turnover tax payable. 4. Educational surtax Education surtax was based on tax rate of 3% of turnover tax payable. 5. Embankment protection cost Embankment protection cost was based on tax rate of 3% of turnover tax payable. 6. Income tax The Company and its subsidiary companies except for the following companies shall paid income tax based on 33% of taxable income. The applicable tax rate of Foshan Huafeng Paper Co., Ltd., a shareholding subsidiary of the Company, is 27%. In 2003, the said company established a branch company in Zhuhai, in accordance with the relevant provisions of tax law, the said company belonged to investment by stage and enjoyed preferential tax policies of “exemption of income tax”. At present, the said company is handling procedure related with exemption of tax to Tax Authority. Foshan Huafeng Paper Co., Ltd. Zhuhai Branch Company put into production in 2007 and entered into the first preferential year, thus, income tax was exempted for the moment. Finally, the said income tax shall take the approval of Tax Authority as standard. The applicable tax rate of Huaxin (Foshan) Color Printing Co., Ltd., a shareholding subsidiary of the Company, is 27%. As approved by the State Tax Bureau of Foshan Chancheng District, the said company enjoyed preferential tax polices of “two years’ exemption and three years’ half” since 2006, thus, income tax was exempted in 2007. Tetra Huaxin (Foshan) Packaging Co. Ltd. — the affiliate company of the Company — was recognized a high- tech enterprise with foreign investment within State-level High-tech Industrial Development Parks. According to relevant provisions of clause 3 of article 7 in the “Detailed Rules of Income Tax for Foreign Enterprises or Foreign Invested Enterprises” and approval from the State Tax Bureau of Foshan Chancheng District, Shiwan Branch with SWGSJ [2007] document No. 24, the said company temporarily enjoys 15% of income tax rate for year 2007. Meanwhile, the local income tax was exempted according to the State Tax Bureau of Guangdong Province with YGSJ [2007] document No. 7. V. Enterprise combination and consolidated financial statement (I) Subsidiary company 1. Subsidiaries obtained through enterprise combinations under the same control Full name of Registration Registered Natural of Actual Organization Net Proportion of subsidiaries place capital business and investment code business scope amount up investment shares held by the to the balance over Company year-end subsidiaries --------- 76 in fact directly indirectly ========== ===== ========= =========== ============ ======== ========= ==== ==== Manufacturing Foshan Huafeng Foshan 61762142-1 USD121390000 and selling of 746190500 --- 75% --- high-class paper Paper Co., Ltd. and paper board Process and Huaxin (Foshan) Foshan 72111733-X USD6600000 printing of 40936500 --- 75% --- packaging or Color Printing decorating printing products Co., Ltd. sold in both domestic and overseas market. ========== ===== ========= =========== ============ ======== ========= ==== ==== 2. Subsidiaries obtained through enterprise combinations not under the same control Actual Net Proportion of Natural of investment investment shares held by the Full name of Registration Organizatio Registered business and amount up balance over Company subsidiaries place n code capital business scope to the subsidiaries --------- year-end in fact directly indirectly ========== ======= ========= ========= ============ ======== ========= ==== ==== Foshan 77620148-3 CNY5000000 Purchasing and 5000000 --- --- 100% Foshan Huazhi Wasted Paper selling wasted Recycling Co., paper, wasted Ltd. newspaper Foshan Foshan 70817367-9 CNY1500000 Other printing, 1500000 --- --- 100% Chancheng advertisement Zhujiang Color Printing designing and Co., Ltd. releasing ========== ====== ========= ========= ============ ======== ========= ==== ==== (II) Explanation on change in scope of the consolidated financial statement during the reporting period During the reporting period, the scope of the consolidated financial statement remained unchanged. (III) Minority interests Full name of subsidiaries Minority interests Amount of minority Balance of losses as of this shareholder’s gains period borne by minority and losses offset shareholder of subsidiaries from minority exceeding share enjoyed by shareholders’ equity minority shareholders in owner’s equity at the period-begin offset from owner’s equity of parent 77 company Foshan Huafeng Paper Co., Ltd. 175,339,555.01 --- --- Huaxin (Foshan) Color Printing Co., Ltd. 14,884,452.15 --- --- VI. Notes to the consolidated financial statement Unless otherwise noted in the following items, amount at the year-end refers to date as at Dec. 31, 2007, amount at the year-begin refers to date as at Jan. 1, 2007, amount in this year refers to data from Jan. 1, 2007 to Dec. 31, 2007, amount in last year refers to data from Jan. 1, 2006 to Dec. 31, 2006. (I) Monetary fund Amount at the year-end Amount at the year-begin Items ------------------------------ --------------------------------- Amount Amount Original Rate of Rate of converted into Original currency converted into currency exchange exchange RMB RMB ================== =========== ======== =========== ============= ========= ============ Cash — CNY --- --- 60,788.71 --- --- 34,462.47 Bank deposit—HKD 3,893,171.64 0.93638 3,602,221.99 3,537,160.14 1.00467 3,602,184.76 Bank deposit—USD 356,991.94 7.3046 2,602,498.08 998,732.39 7.8087 7,780,294.10 Bank deposit—EUR --- --- --- 0.03 --- 0.31 Bank deposit—CNY --- --- 51,829,566.17 --- --- 96,407,167.94 Other monetary fund —CNY --- --- 5,672,261.55 --- --- 5,075,611.73 ----------- ------------ Total 63,767,336.50 112,899,721.31 =========== ============ 1. Monetary fund as at the year-end decreased by RMB 49,132,384.81 than the year-begin, down by 43.52%, which was mainly because that Foshan Huafeng Paper Co., Ltd. Zhuhai Branch Company’s project on annual output of 300,000-ton high-class coated white board has been put into production formally, resulting in increase of the demand of daily turnover capital. 2. Other monetary fund as at the year-end was RMB 5,672,261.55, which was margin deposited with the bank when Foshan Huafeng Paper Co., Ltd. treated bank acceptance bill and credit letter payable. 3. Except for statement mentioned in above “2”, no mortgaged and blocked payment restricted realization, deposited in overseas and with potential risk. (II) Notes receivable Amount at the Amount at the Type year-end year-begin ================================ ============= ============= 78 Bank Acceptance Bill 59,669,620.10 20,052,440.76 Other --- 22,472,444.92 ------------- ------------- Total 59,669,620.10 42,524,885.68 ============= ============= (III) Accounts receivable 1. Composing of accounts receivable Amount at the year-end Amount at the year-begin ---------------------------------- ---------------------------------- Items Reserve for Reserve for bad Book balance proportion Book balance proportion bad debts debts ================ =========== ====== ========= ========== ===== =========== Accounts receivable --- --- --- --- --- --- with significant single amounts Accounts receivable 16,005,413.21 5.73% 13,795,939.14 15,365,127.24 13.79% 11,017,077.56 with insignificant single amounts but with significant credit risk Other insignificant 263,337,107.66 94.27% 1,799,769.85 96,061,340.58 86.21% 1,121,010.95 -------------- ------ ------------- -------------- ----- ------------- 279,342,520.87 100% 111,426,467.8 100% 12,138,088.51 Total 15,595,708.99 2 =========== ====== ========== ========== ===== =========== 2. Aging analysis Amount at the year-end Amount at the year-begin Aging ---------------------------------- ---------------------------------- Reserve for bad Reserve for bad Book balance proportion debts Book balance proportion debts ============= ============ ====== =========== ============ ===== ============ 1-3 months 236,686,069.49 84.73% --- 77,187,621.20 69.27% --- 4-12 months 19,535,695.48 6.99% 976,784.78 16,902,705.51 15.17% 845,135.28 1-2 years 6,000,834.64 2.15% 600,083.46 1,183,271.12 1.06% 118,327.12 2-3 years 1,114,508.05 0.40% 222,901.61 787,742.75 0.71% 157,548.55 Over 3 years 16,005,413.21 5.73% 13,795,939.14 15,365,127.24 13.79% 11,017,077.56 -------------- ------ ------------- -------------- ------ ------------- Total 279,342,520.87 100% 15,595,708.99 111,426,467.82 100% 12,138,088.51 ============ ====== ============ ============ ====== ============ 79 3. In accounts receivable at the year-end, no arrearage due to shareholders which holding over 5% (including 5%) of shares with voting right 4. The top 5 arrearage in accounts receivable at the year-end Proportion in Term limit of Name of debtor Arrearage total accounts arrearage receivable =============================== ============ ========= ========== = Shenzhen Wangying Color Box Paper 6,634,650.61 Within 1 year 2.38% Products Plant Dongguan the 2nd Light Industry Materials 5,354,152.10 Within 1 year 1.92% Supply Company Wrigley Confectionery (China) Co., Ltd. 4,359,929.65 Within 1 year 1.56% Ronggui Yongfa Trade Co., Ltd. 4,076,131.78 Within 1 year 1.46% Shenzhen Gaoli Paper Products Plant 3,904,137.08 Within 1 year 1.40% =============================== ============ ========= ========== = 5. Accounts receivable – foreign currency balance Amount at the year-end Amount at the year-begin ---------------------------------- ----------------------------------- Type Amount Amount Rate of Rate of Original currency converted into Original currency converted into exchange exchange RMB RMB ===== ============ ======= ============= ============= ======= ============= USD 2,861,351.57 7.3046 20,859,252.94 755,029.77 7.8087 5,881,681.92 HKD 18,744,016.04 0.93638 17,431,934.96 18,989,129.17 1.00467 19,179,020.88 ------------- ------------- Total 38,291,187.90 25,060,702.80 ============= ============= Accounts receivable as at the year-end increased by RMB 164,458,432.57 than the year-begin, up by 165.64%, which was mainly because that Foshan Huafeng Paper Co., Ltd. Zhuhai Branch Company’s project on annual output of 300,000-ton high-class coated white board has been put into production formally, resulting in increase of output and sales volume. (IV) Prepayments 1. Aging analysis Amount at the year-end Amount at the year-begin Aging ------------------------- ------------------------- Book balance Proportion Book balance Proportion 80 ============== ============= ======= ============= ======= = Within 1 year 2,886,461.82 79.35% 53,957,937.56 100% 1-2 years 751,394.00 20.65% --- --- ---------------- ------- ---------------- ------- Total 3,637,855.82 100% 53,957,937.56 100% ============= ======= ============= ======= 2. Important prepayments with aging over one year Reason without settlement Name of debtor Amount timely ============================ ============= ======================= NILPETER China Ltd. 559,342.00 Uncompleted ============================= ============= ======================= 3. In prepayments at the year-end, no arrearage due to shareholders which holding over 5% (including 5%) of shares with voting right. (V) Dividends receivable Items Amount at the Amount at the year-end year-begin ================================ ============= ============= Dividends receivable with aging within one 34,140,000.00 --- year ------------- ------------- Total 34,140,000.00 --- ============= ============= (VI) Other receivables 1. Composing of other receivables Amount at the year-end Amount at the year-begin --------------------------------- ---------------------------------- Items Reserve for Reserve for bad Book balance Proportion Book balance Proportion bad debts debts ================ =========== ====== ========== =========== ====== =========== Other receivables with --- --- --- --- --- --- significant single amounts Other receivables with 875,040.08 3.93% 437,520.05 2,537,974.97 31.07% 1,268,987.49 insignificant single amounts but with significant credit risk Other insignificant 21,363,856.95 96.07% 741,070.26 5,629,658.13 68.93% 473,341.19 ------------- ------ ------------ ------------- ------ ------------- 81 Total 22,238,897.03 100% 1,178,590.31 8,167,633.10 100% 1,742,328.68 =========== ====== ========== =========== ====== =========== 2. Aging analysis Amount at the year-end Amount at the year-begin Items -------------------------------- -------------------------------- Reserve for bad Reserve for bad Book balance Proportion Book balance Proportion debts debts ============= =========== ====== ============ =========== ====== ============ 1-3 months 8,015,736.04 36.05% --- 787,675.54 9.64% --- 4-12 months 8,633,045.39 38.82% 421,136.17 2,315,616.91 28.35% 115,780.85 1-2 years 847,101.87 3.81% 83,210.19 1,477,127.96 18.09% 147,712.80 2-3 years 1,183,619.54 5.32% 236,723.91 1,049,237.72 12.85% 209,847.54 Over 3 years 3,559,394.19 16.00% 437,520.05 2,537,974.97 31.07% 1,268,987.49 ------------- ------ ------------ ------------- ------ ------------ Total 22,238,897.03 100% 1,178,590.31 8,167,633.10 100% 1,742,328.68 =========== ====== ============ =========== ====== ============ 3. In other receivables at the year-end, arrearage of RMB 135,100.00 due to shareholders which holding over 5% (including 5%) of shares with voting right. For details, please refer to Note VIII (IV) 5. 4. The top 5 arrearage in other receivables at the year-end Term limit Proportion in Name of debtor Arrearage Kind or contents of total other arrearage receivables ======================= ============ ============== ======== =========== Hangfun Technology (Hong 3,770,175.91 Payment for goods 4-12 16.95% Kong) Co., Ltd. months Dragon State International 3,031,784.12 Amortization of 1-3 13.63% Limited capital occupied months Intermediary organs 2,684,354.11 Intermediary fee Over 3 12.07% used for additional years issuance Doumen Custom of the 1,524,000.00 Margin deposit 1-3 6.85% People’s Republic of months Chinese Zhuhai International Container 1,511,160.38 Payment for goods 4-12 6.80% Terminals (Gaolan) Ltd months ======================= ============ ============== ======== =========== (VII) Inventory 82 1. Composing of inventory Amount at the year-end Amount at the year-begin ------------------------- ------------------------- Items Reserve for Reserve for Book balance Book balance falling price falling price =================== ============== ========== =============== ========== Raw materials 104,451,088.47 276,234.72 102,125,430.06 276,234.72 Goods in production 5,052,462.79 135,151.79 2,252,844.65 135,151.79 Finished product 77,520,733.43 568,925.70 32,885,123.34 123,416.53 Packing and Low-value 756,048.75 --- --- --- consumption goods -------------- ---------- --------------- ---------- Total 187,780,333.44 980,312.21 137,263,398.05 534,803.04 ============== ========== =============== ========== 2. Reserve for falling price of inventory Decrease in this year Book balance Book balance Withdrawal in ----------------------- Items at the at the this year Switching year-begin Writing off year-end back ======== ========== ========== ========== ========== ========== Raw 276,234.72 --- --- --- 276,234.72 materials Goods in 135,151.79 --- --- --- 135,151.79 production Finished 123,416.53 445,509.17 --- --- 568,925.70 product ----------- ----------- ----------- ----------- ----------- Total 534,803.04 445,509.17 --- --- 980,312.21 ========== ========== ========== ========= ========== Note: As at the year-end, if the cost of inventories is higher than the net realizable value, the reserve for falling price of inventories shall be made. The net realizable value is recognized that in the daily business activity the amount after deducting the estimated cost of completion, estimated sale expense and relevant taxes from the estimated sale price of inventories. 3. Inventories as at the year-end increased by RMB 50,071,426.22 than the year-begin, up by 36.62%, which was mainly because that Foshan Huafeng Paper Co., Ltd. Zhuhai Branch Company’s project on annual output of 300,000-ton high-class coated white board has been put into production formally, resulting in increase of normal storage quantity of inventories. (VIII) Long-term equity investment Items Amount at the year-end Amount at the year-begin 83 -------------------------- ------------------------ Reserve for Reserve for Book balance Book balance impairment impairment ================== ============== ============ ============== ========== Investing in affiliated 166,277,906.13 --- 219,641,748.21 --- enterprises Other equity investment 3,213,558.00 3,100,000.00 3,213,558.00 --- -------------- ------------ -------------- ---------- Total 169,491,464.13 3,100,000.00 222,855,306.21 --- ============== ============ ============== ========== 1. Long-term equity investment measured based on cost method Increase Decrease Name of investing Proportion of Initial investment Balance at the Balance at the in this in this enterprise shares held amount year-begin year-end year year ============= ====== ============ =========== ===== ===== =========== Foshan Urban 2.583% 3,100,000.00 3,100,000.00 --- --- 3,100,000.00 Cooperative Bank Co., Ltd. Guangdong 0.32% 113,558.00 113,558.00 --- --- 113,558.00 Development Bank ------------ ------------ ----- ----- ------------ Total 3,213,558.00 3,213,558.00 --- --- 3,213,558.00 ============ =========== ===== ===== =========== 2. Long-term equity investment measured based on equity method Increase/decrease in this year ----------------------------- Name of Initial Additional Balance at the Net gains and Balance at the investing investment losses Other investment year-begin Cash dividends year-end enterprise amount adjusted equity distributed based on change equity method =========== ========== ==== ========== ========= ========== ===== ========== Affiliated enterprise Tetra Huaxin 145,945,947.55 --- 219,641,748.21 94,238,972.11 147,602,814.19 --- 166,277,906.13 (Foshan) Packaging Co., Ltd. ----------- ---- ----------- ----------- ----------- ------ ----------- 84 Total 145,945,947.55 --- 219,641,748.21 94,238,972.11 147,602,814.19 --- 166,277,906.13 ========== ==== ========== ========= ========== ===== ========== Voting Proportion right of shares Name of investing Registration Business proportions Total net assets at Total operating Net profit in this held by enterprise place nature in the year-end income in this year year the investing Company enterprise =============== ====== ======== ====== ======== ============== ================ ============== Affiliated enterprise Tetra Huaxin Foshan Joint 25% 25% 665,111,624.52 1,414,079,592.87 376,955,888.42 (Foshan) Packaging venture Co., Ltd. enterprise =============== ====== ======== ====== ======== ============== ================ ============== 3. Reserve for impairment of long-term equity investment Amount at Name of investing Increase in this Decrease in Amount at the Reason for the enterprise year this year year-end withdrawal year-begin =============== ========= ============ ========= ============ ========= Foshan Urban --- 3,100,000.00 --- 3,100,000.00 Insolvency Cooperative Bank Co., Ltd. --------- ------------ --------- ------------ Total --- 3,100,000.00 --- 3,100,000.00 ========= ============ ========= ============ (IX) Investment real estate balance at the Increase in this Decrease in balance at the Items year-begin year this year year-end =================== =========== =========== =========== =========== Original price House and building 18,670,864.52 --- --- 18,670,864.52 ------------- ------------ ------------ ------------ Total 18,670,864.52 --- --- 18,670,864.52 ------------- ------------ ------------ ------------ Accumulative depreciation House and building 6,739,718.46 452,914.80 --- 7,192,633.26 ------------- ------------ ------------ ------------ 85 Total 6,739,718.46 452,914.80 --- 7,192,633.26 ------------- ------------ ------------ ------------ Accumulative amount of reserve for impairment House and building --- --- --- --- ------------- ------------ ------------ ------------ Total --- --- --- --- ------------- ------------ ------------ ------------ Book value House and building 11,931,146.06 --- --- 11,478,231.26 ------------- ------------ ------------ ------------ Total 11,931,146.06 --- --- 11,478,231.26 =========== =========== =========== =========== (X) Fixed assets 1. Original price of fixed assets Amount at the Decrease in Amount at the Type Increase in this year year-begin this year year-end ========== ============== ============== ========== ============== = House and building 204,890,766.42 351,631,431.06 420,563.32 556,101,634.16 Machinery equipment 782,041,190.94 1,119,544,581.34 4,575,468.03 1,897,010,304.25 Transportation equipment 14,956,952.78 7,809,783.93 748,325.00 22,018,411.71 Other 14,786,941.34 15,608,411.03 --- 30,395,352.37 ---------------- ---------------- ------------ ---------------- Total 1,016,675,851.48 1,494,594,207.36 5,744,356.35 2,505,525,702.49 ============== ============== ========== ============== = Of which, original price of project in construction transferring fixed assets was RMB 1,479,247,822.66 in 2007. 2. Accumulative depreciation Amount at the Increase in this Decrease in this Amount at the Type year-begin year year year-end ============ ================ ============== ============== ============== House and 8,440,809.97 50,472.19 47,749,541.59 building 39,359,203.81 86 Machinery 54,157,946.00 3,861,792.25 351,109,061.35 equipment 300,812,907.60 Transportation 2,004,772.64 635,411.00 11,484,892.12 equipment 10,115,530.48 Other 7,091,069.70 3,368,981.94 --- 10,460,051.64 ---------------- -------------- -------------- -------------- Total 357,378,711.59 67,972,510.55 4,547,675.44 420,803,546.70 ================ ============== ============== ============== 3. Reserve for impairment of fixed assets Amount at the Increase in this Decrease in this Amount at the Type year-begin year year year-end ============ ================ ============== ============== ============== Machinery 201,333.37 --- --- 201,333.37 equipment ---------------- -------------- -------------- -------------- Total 201,333.37 --- --- 201,333.37 ================ ============== ============== ============== Note: Reserve for impairment of fixed assets was withdrawn by Huaxin (Foshan) Color Printing Co., Ltd. in accordance with expected recoverable amount of single fixed assets as at the end of 2005 lower than its book value. 4. Book value of fixed assets Amount at the Type Amount at the year- end year-begin =================================== ============== ================ House and building 165,531,562.61 508,352,092.57 Machinery equipment 481,026,949.97 1,545,699,909.53 Transportation equipment 4,841,422.30 10,533,519.59 Other 7,695,871.64 19,935,300.73 -------------- ---------------- Total 659,095,806.52 2,084,520,822.42 ============== ================ Note: The workshop of Foshan Huafeng Paper Co., Ltd. totaling to 38,124.91 sq.m., which was located in No. 17, Hebin Road, Foshan, has been used as a guaranty for loan of RMB 105,785,800.00, and relevant certificate has been handled. The righter is China Construction Bank Corporation. Foshan Branch. The date of exercise debt was up to Dec. 31, 2009. By the end of this year, original value was RMB 101,356,526.68 as well as net value of RMB 91,220,874.00. 5. By the end of this year, as to new workshop of Huaxin (Foshan) Color Printing Co., Ltd., which located in No. 3, Keyang Road, LGW Park, South Manor, Economic 87 Development Zone of Chancheng District, its original value was RMB 52,974,355.69, as well as net value of RMB 51,418,866.58. Property right certificate for workshop of Foshan Huafeng Paper Co., Ltd. Zhuhai Branch Company is under handle. 6. Fixed assets as at the year-end increased by RMB 1,425,425,015.90 than the year-begin, up by 216.27%, which was mainly because that Foshan Huafeng Paper Co., Ltd. Zhuhai Branch Company’s project on annual output of 300,000-ton high-class coated white board has been put into production formally, resulting in use of main fixed assets. (XI) Construction in progress 1. Classification of projects Decrease in this year Budget Amount at the Increase in this ----------------------- Amount at the Resource of Name of projects (RMB’000) year-begin year Transferring into Other year-end funds fixed assets decrease ================ ====== ============ =========== ============ ========= ========== ========= Expansion of 147,300 1,333,836,149.37 138,176,491.96 1,441,344,150.14 9,413,332.84 21,255,158.35 Borrowing 300,000-ton project from financial institution and self-financing Five-color UV printer 1,083 10,830,000.00 --- 10,830,000.00 --- --- Self-financing machine Renovation project of 190 594,271.05 1,133,045.22 --- --- 1,727,316.27 Self-financing production line Desulfurization project 3,819,680.08 799,554.41 --- --- 4,619,234.49 Self-financing Workshop and 6,000 28,450,410.09 3,842,962.15 26,312,672.52 5,980,699.72 --- Self-financing production line of color printing Kingdee K3 soft and its 76.10 761,000.00 --- 761,000.00 --- --- Self-financing implementation project Construction of new 510 77,078.00 4,058,004.30 --- --- 4,135,082.30 Borrowing warehouse from financial institution and self-financing Production line of 930 --- 5,485,725.36 --- --- 5,485,725.36 Borrowing eight-color soft printing from financial institution and self-financing Renovation project of --- 2,024,996.50 --- --- 2,024,996.50 Borrowing 88 post working procedure from financial of printing institution and self-financing Bobbin testing rewinder 175,606.51 --- --- --- 175,606.51 Self-financing machine 330 model ------------- ----------- ------------- ---------- ----------- Total 1,378,544,195.10 155,520,779.90 1,479,247,822.66 15,394,032.56 39,423,119.78 ============ =========== ============ ========= ========== Note: Construction in progress – other decreased by RMB 15,394,032.56 in 2007, which was mainly because land use right was transferred into intangible assets for measurement. 2. Capitalization of borrowing cost measured into project cost Transferring Capitalization Amount at the Increase in this Other Amount at the Name of projects into fixed assets rate year-begin year decrease year-begin in this year ============= ============= ============ =========== ======= ========== ========= = = Expansion of --- --- 81,201,621.81 30,493,804.39 111,695,426.00 300,000-ton project Construction of --- --- --- 7.47% 75,973.02 75,973.02 new warehouse Renovation project --- 81,275.21 --- --- 81,725.21 7.47% of post working procedure of printing Production line of --- 33,020.36 --- --- 33,020.36 7.47% eight-color soft printing ------------- ------------- -------------- ----- ---------- Total 81,201,621.81 30,684,072.98 111,695,426.00 --- 190,718.59 ============= ============ =========== ======= ========== = = (XII) Project material Amount at the Amount at the Type year-end year-begin =================================== ============== ============== Wool cloth and netting 4,925,829.50 --- Machinery component 3,917,324.97 --- Electric materials 1,249,640.99 --- 89 Water-heating 1,135,611.80 --- Bearing 959,698.40 --- Steels 758,174.09 --- Other 682,760.27 --- -------------- -------------- Total 13,629,040.02 --- ============== ============== (XIII) Intangible assets 1. Original value of intangible assets Original value at Increase in this Decrease in this Original value at Items the year-begin year year the year-end =============== ============= ============= ============= ============= Land use right of 32,978,923.04 9,413,332.84 --- 42,392,255.88 Huafeng Co. Land use right of 11,118,000.00 18,249,297.44 --- 29,367,297.44 Huaxin Color Printing Other --- 477,810.10 --- 477,810.10 ------------- ------------- ------------- ------------- Total 44,096,923.04 28,140,440.38 --- 72,237,363.42 ============= ============= ============= ============= 2. Accumulative amortization Amount at the Amortization in Decrease in this Amount at the Items year-begin this year year year-end =============== ============= ============= ============= ============= Land use right of 5,130,931.31 753,711.77 --- 5,884,643.08 Huafeng Co. Land use right of 1,371,220.00 709,008.00 --- 2,080,228.00 Huaxin Color Printing Other --- 50,772.98 --- 50,772.98 ------------- ------------- ------------- ------------- Total 6,502,151.31 1,513,492.75 --- 8,015,644.06 ============= ============= ============= ============= 3. Book value of intangible assets Amount at the Amortization in Decrease in this Amount at the Items year-begin this year year year-end =============== ============= ============= ============= ============= Land use right of 27,847,991.73 8,659,621.07 --- 36,507,612.80 Huafeng Co. 90 Land use right of 9,746,780.00 17,540,289.44 --- 27,287,069.44 Huaxin Color Printing Other 427,037.12 --- 427,037.12 ------------- ------------- ------------- ------------- Total 37,594,771.73 26,626,947.63 --- 64,221,719.36 ============= ============= ============= ============= Note: (1) The use right of Foshan Huafeng Paper Co., Ltd.’s land located in No. 17, Hebin Road, Foshan, was taken as mortgage for loan. For details, please refer to Note VI (X). Up to the year-end, the original value was RMB 32,978,923.04, as well as net value of RMB 27,188,413.29. (2) The certificate of land use right of Foshan Huafeng Paper Co., Ltd. Zhuhai Branch Company was under transaction. Up to the year-end, the original value was RMB 9,413,332.84, as well as net value of RMB 9,319,199.51. (XIV) Long-term deferred expense Amount at the Amortization in this Decrease in this Amount at the Items year-begin year year year-end ============ ============= ============= ============= ============= Facility maintain expense 293,083.05 --- 293,083.05 --- Repair and improvement of 1,897,834.65 3,739,255.50 549,869.13 5,087,221.02 the rented fixed assets ------------- ------------- ------------- ------------- Total 2,190,917.70 3,739,255.50 842,952.18 5,087,221.02 ============= ============= ============= ============= (XV) Deferred income tax assets Amount at the year-end Amount at the year-begin ----------------------------------- ---------------------------------- Items Deductible Deferred income tax Deferred income tax Deductible temporary assets assets temporary difference difference =================== =============== ============= ============= ============== Reserve for impairment of 4,168,334.89 19,709,298.21 3,755,820.59 13,910,446.65 asset ------------ ------------ ------------ ------------ Total 4,168,334.89 19,709,298.21 3,755,820.59 13,910,446.65 ============ ============ ============ ============ (XVI) Reserve for impairment of assets 91 Decrease in this year Book balance at the Withdrawal in this Book balance at Items --------- year-begin year the year-end Switching Writing back off ==================== ============= ============ ===== ===== ============= Reserve for bad debt 13,880,417.19 2,893,882.11 --- --- 16,774,299.30 Reserve for falling price of 534,803.04 445,509.17 --- --- 980,312.21 inventory Reserve for impairment of --- 3,100,000.00 --- --- 3,100,000.00 long-term equity investment Reserve for impairment of 201,333.37 --- --- --- 201,333.37 fixed assets ------------- ------------ ----- ----- ------------- Total 14,616,553.60 6,439,391.28 --- --- 21,055,944.88 ============= ============ ===== ===== ============= (XVII) Short-term loan Amount at the Amount at the Type year-end year-begin ==================================== =============== ================ Loan on security 481,839,691.89 318,213,866.80 Mortgage and security loan --- 9,300,000.00 --------------- ---------------- Total 481,839,691.89 327,513,866.80 =============== ================ Of which: (1) In foreign currency loans as at the end of the year included USD 1,360,043.87 with rate of exchange of 7.3046, converting into RMB 9,914,719.81; HKD 3,365,152.00 with rate of exchange of 0.93638, converting into RMB 3,205,964.46. (2) In security loans included borrowing of import letter of credit of HKD 547,760.00 as well as UDS 1,360,043.87, and loan of trust receipt of HKD 2,817,392.00, converting into RMB 13,120,684.27. (3) No overdue short-term loan. China Materials Development Investment General Corporation and Foshan Huaxin Development Co., Ltd. provided the joint responsibility guarantee for the Company’s security loan of RMB 150 million; China Chengtong Holding Group Co., Ltd., China Materials Development Investment General Corporation, Foshan Huaxin Development Co., Ltd. and the Company provided the joint responsibility guarantee for the security loan of Foshan Huafeng Paper Co., Ltd (subsidiary company) amounting to RMB 291,839,691.89; Foshan Huaxin Development Co., Ltd. and the Company provided the joint responsibility guarantee for the security loan of Huaxin 92 (Foshan) Color Printing Co., Ltd. (subsidiary company) amounting to RMB 40,000,000.00. For details, please refer to Note VIII (IV) 6 (3). (4) Short-term borrowing as at the year-end increased by RMB 1,425,425,015.90 than the year-begin, up by 47.12%, which was mainly because of increase of capital financed outward and current fund loan after Foshan Huafeng Paper Co., Ltd. Zhuhai Branch Company’s project on annual output of 300,000-ton high-class coated white board has been put into production formally. (XVIII) Notes payable Amount at the Amount at the Type year-end year-begin =================================== ============= ============= Bank acceptance bill 9,155,830.91 18,959,350.81 ------------- ------------- Total 9,155,830.91 18,959,350.81 ============= ============= Note: Bank acceptance bill as at the year-end was that China CITIC Bank Foshan Branch drew to Foshan Huafeng Paper Co., Ltd., the said company deposited into 30% of margin deposit, for which the Company and China Chengtong Holding Group Co., Ltd. provided the joint responsibility guarantee. (XIX) Accounts payable 1. In balance of accounts payable at the year-end, no arrearage due to shareholders which holding over 5% (including 5%) of shares with voting right. 2. No account payable with aging over one year at the year-end. 3. Accounts payable included the following foreign currency balance Amount at the year-end Amount at the year-begin ---------------------------------------- ----------------------------------------- Type Rate of Converting into Rate of Converting into Original currency Original currency exchange RMB exchange RMB ===== ============= ======= ============= ============= ======= ============= USD 1,125,652.87 7.3046 8,206,009.34 892,704.02 7.8087 6,970,857.88 HKD 41,430,050.97 0.93638 38,529,947.38 19,266,112.90 1.00467 19,356,085.14 EUR -20,235.00 10.6669 -215,705.10 -8,532.83 10.2667 -87,604.84 ------------- ------------- Total 46,520,251.62 26,239,338.18 ============= ============= (XX) Item received in advance 1. In balance at the year-end, no arrearage due to shareholders which holding over 5% 93 (including 5%) of shares with voting right. 2. No item received in advance with aging over one year at the year-end. (XXI) Employees pay payable Amount at Increase in this Payable in this Amount at the Items the year year year-end year-begin ========================= ======= ============= ============= ============ Wage, premium, allowance and --- 52,253,821.14 48,443,788.48 3,810,032.66 subsidy Employee benefits/welfare --- 699,807.46 699,807.46 --- Social insurance --- 6,336,565.80 6,164,278.08 172,287.72 Housing provident fund --- 672,749.10 687,062.90 -14,313.80 Labor union expenditure and --- 977,121.13 917,558.89 59,562.24 employee education expenses ------- ------------- ------------- ------------ Total --- 60,940,064.63 56,912,495.81 4,027,568.82 ======= ============= ============= ============ (XXII) Taxes payable Amount at the Amount at the Type of taxation year-end year-begin =================================== ============== =============== VAT -1,400,902.03 -14,279,770.63 City maintenance and construction tax 10,611.24 122.62 Business tax 170,788.42 8,865.97 Enterprise income tax -1,343,547.25 39,451.77 Personnel income tax 42,179.44 68,840.95 Stamp tax 2,832.21 30,550.00 Embankment protection expense 30,642.11 16,786.52 Educational surtax 4,547.68 --- -------------- --------------- Total -2,482,848.18 -14,115,152.80 ============== =============== (XXIII) Interests payable Amount at the Amount at the Items year-end year-begin =================================== ============== ============== Interests payable with aging within one year 1,391,185.09 259,949.10 94 -------------- -------------- Total 1,391,185.09 259,949.10 ============== ============== (XXIV) Dividend payable Amount at the Amount at the Name of investors year-end year-begin =================================== ============== ============== Foshan Xinhui Industrial Development Co., Ltd. 54,494.00 54,494.00 Foshan Light Industry Company 79,264.00 54,494.00 -------------- -------------- Total 133,758.00 108,988.00 ============== ============== (XXV) Other payables Amount at the Amount at the Items year-end year-begin =================================== ============== ============== Loan of Foshan Huaxin Development Co., Ltd. 23,235,000.00 425,866,555.60 Margin and guarantee deposit 1,003,135.90 1,780,000.00 Temporary accounts payable 7,963,668.49 7,667,609.51 Other 4,084,770.36 5,774,381.11 -------------- -------------- Total 36,286,574.75 441,088,546.22 ============== ============== 1. In balance at the year-end, arrearage was RMB 23,250,647.13 that the Company owed shareholders which holding over 5% (including 5%) of shares with voting right. The creditor is Foshan Huaxin Development Co., Ltd.. For details, please refer to Note VIII (IV) No. 5. 2. Other payables with the greater amount as at the year-end Name of creditors Amount Contents ========================= ============= =============== Foshan Huaxin Development Co., 23,250,647.13 Current capital Ltd. Housing subsidies 2,778,536.73 Housing subsidies Foshan Gongrong Renewable 1,562,916.86 Margin Resources Co., Ltd. Zhuhai Xinhe Logistical Co., Ltd. 918,330.58 Transportation charges Zhuhai Xinchangyun 637,000.00 Transportation charges Transportation Company ========================= ============= =============== 95 (XXVI) Non-current liabilities due within one year Amount at the Amount at the Items year-end year-begin =================================== ============== ============== Long-term loan due within one year 258,481,674.99 115,000,000.00 -------------- -------------- Total 258,481,674.99 115,000,000.00 ============== ============== Long-term due within one year Type of Terms of Original Amount at the Amount at the Bank currency loans currency year-end year-begin ======================== ====== ========== ============ ============== ============== Agricultural Bank Of China, CNY Guarantee 110,000,000.00 --- Foshan Huada Sub-Branch China Construction Bank EUR Guarantee 5,482,537.10 58,481,674.99 --- Corporation, Foshan Branch and mortgage Industrial Bank, Guangzhou Branch CNY Guarantee 90,000,000.00 90,000,000.00 Bank Of China Limited, Foshan CNY Guarantee --- 25,000,000.00 Branch -------------- -------------- Total 258,481,674.99 115,000,000.00 ============== ============== Note: Foshan Huaxin Development Co., Ltd. provided the joint responsibility guarantee for the Company’s guarantee loan of RMB 110 million; the Company provided the joint responsibility guarantee for guarantee loan of RMB 148,481,674.99 of Foshan Huafeng Paper Co., Ltd., of which the said company’s appraisal value amounting to RMB 105,785,800 and net value of workshop and land use right as at the year-end amounting to RMB 91,220,000 was used as mortgage for the loan in EUR. (XXVII) Other current liabilities Amount at the Amount at the Items and contents year-end year-begin =================================== ============== ============== Principal of short-term financing bills for 2007 420,000,000.00 --- Less: discount amount 17,010,000.00 --- Real financing amount 402,990,000.00 --- Add: discount amortization 9,922,500.00 --- -------------- -------------- Total 412,912,500.00 --- ============== ============== 96 Note: In accordance with the Notice on Issuing Short-term Financing Bills by Foshan Huaxin Packing Co., Ltd. from People’s Bank of China with YF [2007] No. 153, the Company issued short-term financing bills of RMB 420 million by discount in 2007 at the issuance price of par value of RMB 95.95 for every RMB 100, and interest period was from June 11, 2007 to June 9, 2008. The Company financed RMB 402,990,000.00 in fact, as well as discount amortization of RMB 9,922,500.00 by the end of year. (XXVIII) Long-term Loan Type of Terms of Amount at the Amount at the Units Remark currency loans year-end year-begin =================== ====== ==== =========== =========== ========================= = ====== Agricultural Bank Of CNY Guarantee 10,000,000.00 120,000,000.00 RMB 110 million due within one China, Foshan Huada Sub-Branch year was transferred out Foshan Huaxin CNY Credit 100,000,000.00 --- Development Co., Ltd. China Construction Bank EUR Guarantee 69,334,850.00 129,969,411.75 Total borrowing was RMB Corporation, Foshan and EUR12,659,563.80, of which Branch mortgage EUR677,026.70 was refunded and EUR5,482,537.10 due within one year was transferred out Industrial Bank, CNY Guarantee --- 90,000,000.00 RMB 90 million due within one Guangzhou Branch year was transferred out ----------- ----------- Total 179,334,850.00 339,969,411.75 =========== =========== Note: 1. In foreign currency loan was EUR 6,500,000.00 with rate of exchange of 10.6669, converting into RMB 69,334,850.00. 2. As to guarantee loan, guarantee and mortgage loan of the Company, please refer to Note VIII (IV) 6 (3). 3. Long-term loan at the year-end decreased by RMB 160,634,561.75, down by 47.25%, which was mainly because a majority of capital financed outward for Foshan Huafeng Paper Co., Ltd. Zhuhai Branch Company’s project on annual output of 300,000-ton high-class coated white board will mature in 2008, which will be transferred into non-current liabilities due within one year. （XXIX）Special payables Amount at the Increase in this Switching back in Amount at the Type year-begin year this year year-end ================== ============= ============= ============= ============= Appropriate funds for 210,000.00 --- 210,000.00 --- clean production technology research 97 project of Recycling Paper Mill Appropriate funds for 410,000.00 --- 410,000.00 --- technology renovation of desulfurization project by sulfuration soda process Appropriate funds for 350,000.00 --- 350,000.00 --- technology renovation of color packaging printing equipment Appropriate funds for 175,000.00 --- 175,000.00 --- technology renovation of intelligentization and digital of flexographic plate production ------------- ------------- ------------- ------------- Total 1,145,000.00 --- 1,145,000.00 --- ============= ============= ============= ============= Note: In 2007, special payables were carried forward RMB 1,145,000.00, which was mainly because of income from government subsidies of RMB 525,000.00 and deferred income of RMB 620,000.00 in accordance with the provision of the Accounting Standard for Business Enterprise No. 16 – Government Subsidies. (XXX) Other non-current liabilities Amount at the Amount at the Items year-end year-begin =================================== ============== ============== Deferred income 1,320,000.00 --- -------------- -------------- Total 1,320,000.00 --- ============== ============== (XXXI) Share capital Number at the Change in this year (+,-) Number at the year-end year-begin --------------- ----------------------------------- --------------- Items Issuance Capitalization Bonus Number Proportion of new of share Other Subtotal Number Proportion shares share capital ================== ======== ===== ==== ======== ====== ==== ======== ======== ===== 98 I. Unlisted shares 1. Sponsor’s shares 290,000,000 65.98% --- 43,500,000 --- --- 43,500,000 333,500,000 65.98% Including: Shares held by the State --- --- --- --- --- --- --- --- --- Shares held by domestic 290,000,000 65.98% --- 43,500,000 --- --- 43,500,000 333,500,000 65.98% legal person Shares held by foreign --- --- --- --- --- --- --- --- --- legal person Other --- --- --- --- --- --- --- --- --- 2. Raised legal person’s --- --- --- --- --- --- --- --- --- shares 3. Inner employee shares --- --- --- --- --- --- --- --- --- 4、Preferred shares or other --- --- --- --- --- --- --- --- --- Including: transferred --- --- --- --- --- --- --- --- --- allotted shares --------- ----- ---- -------- ------ ---- -------- --------- ----- Total unlisted shares 290,000,000 65.98% --- 43,500,000 --- --- 43,500,000 333,500,000 65.98% --------- ----- ---- -------- ------ ---- -------- --------- ----- II. Listed shares 1. RMB ordinary shares ---- --- --- --- --- --- --- ---- --- 2. Domestically listed 149,500,000 34.01% --- 22,425,000 --- --- 22,425,000 171,925,000 34.01% foreign shares 3. Overseas listed foreign --- --- --- --- --- --- --- --- --- shares 4. Other --- --- --- --- --- --- --- --- --- --------- ----- ---- -------- ------ ---- -------- --------- ----- Total listed shares 149,500,000 34.01% --- 22,425,000 --- --- 22,425,000 171,925,000 34.01% --------- ----- ---- -------- ------ ---- -------- --------- ----- III. Total shares 439,500,000 100% --- 65,925,000 --- --- 65,925,000 505,425,000 100% ======== ======== ===== ==== ======== ===== ==== ======== ===== = = (XXXII) Capital reserve Amount at the Increase in this Decrease in this Amount at the Items year-begin year year year-end =============== ============== ============= ============= ============= Share premium 250,531,482.00 --- --- 250,531,482.00 Other capital reserve 3,232,500.00 --- --- 3,232,500.00 -------------- ------------- ------------- -------------- 99 Total 253,763,982.00 --- --- 253,763,982.00 ============== ============= ============= ============= (XXXIII) Surplus reserve Amount at the Increase in this Decrease in Amount at the Items year-begin year this year year-end =============== ============== ============= =========== ============== Statutory surplus 110,478,493.89 8,751,223.87 --- 119,229,717.76 public reserve -------------- ------------- ----------- -------------- Total 110,478,493.89 8,751,223.87 --- 119,229,717.76 ============== ============= =========== ============== (XXXIV) Retained profit Items Amount ========================================== =============== Retained profit at the year-begin before the adjustment 347,720,929.98 Modulation (+,-) -5,920,189.03 Retained profit at the year-end 341,800,740.95 Add: net profit as of this year 109,653,397.47 Less: withdrawing statutory surplus public reserve 8,751,223.87 Withdrawing arbitrary surplus public reserve --- Distributing dividend of common shares 87,900,000.00 Transferring into capital --- Retained profit at the year-end 354,802,914.55 ========================================== =============== Note: In accordance with the Articles of Association of the Company and relevant provisions, the Company withdrew 10% of net profit as statutory surplus public reserve. Modulation amount of retained profit at the year-end was retroactive modulation amount after performing new accounting standard for business enterprise. (XXXV) Operating income and operating cost 1. Operating income Amount in last Items Amount in this year year =================================== ================ ============== Income from main operation 1,258,781,957.97 670,134,266.81 Other operating income 10,728,448.98 3,409,396.80 ---------------- -------------- Total 1,269,510,406.95 673,543,663.61 100 ================ ============== Sales revenue from the top five customers Amount in this Amount in last Items year year =================================== ============== ============== Total sales revenue from the five customers 161,650,200.71 87,148,583.07 Proportion in total operating income (%) 12.73% 12.94% =================================== ============== ============== 2. Operating cost Amount in last Items Amount in this year year =================================== ================ ============== Cost of main operation 1,106,281,858.19 615,216,075.28 Other business expenditure 2,745,096.60 567,320.65 ---------------- -------------- Total 1,109,026,954.79 615,783,395.93 ================ ============== 3. Classification of main operation income and cost Amount in this year Amount in last year ------------------------------- --------------------------- Items Income from main Cost of main Income from Cost of main operation operation main operation operation ========= ============== ============== ============ ============= = White board paper 1,146,100,378.29 1,018,154,035.72 564,996,889.99 529,063,282.40 Printing 118,940,095.65 94,386,338.44 102,968,023.77 84,402,762.85 Paper and other --- --- 3,827,422.40 3,696,104.42 Aluminum and --- --- plastic compound paper cans 1,743,706.98 1,455,701.94 Offsetting each other -6,258,515.97 -6,258,515.97 -3,401,776.33 -3,401,776.33 among industries within the Company ---------------- ---------------- -------------- -------------- Total 1,258,781,957.97 1,106,281,858.19 670,134,266.81 615,216,075.28 ============== ============== ============ ============= = 4. Income from operating income as of this year increased by RMB 595,966,743.34 than last year, an increase of 88.48%, operating cost as of this year increased by RMB 101 493,243,558.86 than last year, up by 80.10%, which were mainly because that Foshan Huafeng Paper Co., Ltd. Zhuhai Branch Company’s project on annual output of 300,000-ton high-class coated white board has been put into production formally, resulting in increase of production capacity and sales volume, and from which fixed cost of the Company was reduced, resulting in rise of gross profit ratio, (XXXVI) Business tax and extra Amount in this Amount in last Items year year =================================== ============== ============== City maintenance and construction tax --- 21,333.98 Educational surtax --- 9,143.13 Embankment protection cost 184,977.83 181,697.26 Business tax --- 31,169.93 -------------- -------------- Total 184,977.83 243,344.30 ============== ============== (XXXVII) Sales expense Sales expense as of this year increased by RMB 15,819,716.44 than last year, up by 99.24%, which was mainly because that Foshan Huafeng Paper Co., Ltd. Zhuhai Branch Company’s project on annual output of 300,000-ton high-class coated white board has been put into production formally, resulting in increase of relevant sales expense. (XXXVIII) Administrative expense Administrative expense as of this year increased by RMB 14,657,852.57 than last year, an increase of 36.64%, which was mainly because that Foshan Huafeng Paper Co., Ltd. Zhuhai Branch Company’s project on annual output of 300,000-ton high-class coated white board has been put into production formally, resulting in increase of relevant administrative expense. (XXXIX) Financial expense Amount in this Amount in last Type year year =================================== ============== ============== Interest expense 42,624,773.87 1,784,926.66 Less: interest revenue 4,145,108.33 946,139.28 Exchange loss 6,898,508.47 312,129.27 Less: exchange revenue 46,419.12 511,632.45 Other 1,992,757.99 674,644.47 -------------- -------------- Total 47,324,512.88 1,313,928.67 102 ============== ============== Financial expense as of this year increased by RMB 46,010,584.21, up by 3,501.76%, which was mainly because that Foshan Huafeng Paper Co., Ltd. Zhuhai Branch Company’s project on annual output of 300,000-ton high-class coated white board has been put into production formally, resulting in interest expense recording into gains and losses of this year. (XL) Impairment loss of assets Amount in this Amount in last Items year year =================================== ============== ============== Loss from bad debt 2,893,882.11 163,866.52 Loss from falling price of inventories 445,509.17 -1,502,033.76 Loss from impairment of long-term investment 3,100,000.00 --- -------------- -------------- Total 6,439,391.28 -1,338,167.24 ============== ============== (XLI) Investment income Amount in this Amount in last Items year year =================================== ============== ============== Attributable share of the net profits and 94,238,972.11 90,916,675.03 losses recognized under equity method of the invested entity -------------- -------------- Total 94,238,972.11 90,916,675.03 ============== ============== There was no significant restriction to investment income transfer in the Company. (XLII) Non-operating income Amount in this Amount in last Items year year =================================== ============== ============== Income from disposal of fixed assets 386,412.71 1,063,345.63 Payment be failed to pay 3,261,280.81 --- Capital for technology renovation from 525,000.00 --- government subsidies Other 28,170.00 18,200.00 -------------- -------------- Total 4,200,863.52 1,081,545.63 103 ============== ============== (XLIII) Non-operating expense Amount in this Amount in last Items year year =================================== ============== ============== Loss from disposal of fixed assets 305,600.88 --- Penalties 100,000.00 --- Other 945.40 --- -------------- -------------- Total 406,546.28 --- ============== ============== (XLIV) Income tax expense Amount in this Amount in last Items year year =================================== ============== ============== Income tax expense of the current period 1,171,948.65 173,582.96 Deferred income tax expense -412,514.30 120.00 -------------- -------------- Total 759,434.35 173,702.96 ============== ============== (XLV) Notes to cash flow statement 1. Other cash received related with operating activities Amount in this Amount in last Items year year =================================== ============== ============== Total 8,147,648.96 38,885,259.39 ============== ============== Including: Interest revenue 1,175,933.00 946,139.28 Margin received 1,400,000.00 --- Compensation received for employee --- 26,373,073.74 ============== ============== Note: In 2007, the Company received borrowing of RMB 341,000,000.00 from Foshan Huaxin Development Co., Ltd., which was used for construction of Foshan Huafeng Paper Co., Ltd. Zhuhai Branch Company’s project on annual output of 300,000-ton high-class coated white board, thus, comparative amount in last year was restated by reclassification from “Other cash received related with operating activities” to “Cash 104 received from obtaining borrowings”. 2. Other cash paid related with operating activities Amount in this Amount in last Items year year ============================================ ============== ============== Total 44,980,315.80 48,816,635.53 ============== ============== Including: Operating expense 18,344,187.43 19,680,620.65 Guarantee deposit paid for wasted paper 1,965,559.02 --- ============== ============== 3. Supplemental information of cash flow statement Supplemental information Amount in this year Amount in last year ====================================================== =============== ============== 1. Transferring net profit into cash flows of operating activities: Net profit 117,388,942.10 93,423,765.59 Add: Reserve for impairment of assets 6,439,391.28 -824,462.58 Depreciation of fixed assets, oil and gas assets and productive biological assets 68,425,425.35 37,736,137.64 Amortization of intangible assets 1,513,492.75 881,938.44 Amortization of long-term deferred expenses 842,952.18 870,086.08 Loss for disposal of fixed assets, intangible assets and other long-term assets -80,811.83 -1,063,345.63 (income is listed as “-”) Losses on scrapping of fixed assets (income is listed as “-”) --- --- Losses on change in fair value (income is listed as “-”) --- --- Financial expense (income is listed as “-”) 40,127,178.77 1,784,926.66 Losses arising from investment (income is listed as “-”) -94,238,972.11 -90,916,675.03 Decrease of deferred income tax assets (increase is listed as “-”) -412,514.30 120.00 Increase of deferred income tax liabilities (decrease is listed as “-”) --- --- Decrease of inventories (increase is listed as “-”) -50,516,935.39 -47,214,898.46 Decrease in operating receivables (increase is listed as “-”) -148,811,969.66 -47,801,778.40 Increase in operating payables (decrease is listed as “-”) 126,363,310.36 -80,054,966.59 Other --- --- Net cash flows arising from operating activities 67,039,489.50 -133,179,152.28 (2) Investing and financing activities that do not involving significant cash receipts and payments Conversion of debt into capital --- --- Reclassify convertible bonds to be expired within one year as current --- --- liabilities 105 Fixed assets financed by financing leases --- --- (3) Change in cash and cash equivalents Balance of cash at the end of the period 63,767,336.50 112,899,721.31 Less: Balance of cash at the beginning of the period 112,899,721.31 157,833,360.78 Add: Balance of cash equivalents at the end of the period --- --- Less: Balance of cash equivalents at the beginning of the period --- --- Net increase in cash and cash equivalents -49,132,384.81 -44,933,639.47 ====================================================== =============== =============== 4. Cash and cash equivalent Items Amount in this year Amount in last year ========================================== ============== ============== I. Cash 63,767,336.50 112,899,721.31 Including: Cash on hand 60,788.71 34,462.47 Bank deposit used for payment at any moment 58,034,286.24 107,789,647.11 Other monetary funds used for payment at any moment 5,672,261.55 5,075,611.73 (2) Cash equivalents --- --- Of which: Bonds investment to be expired within three months --- --- (3) Balance of cash and cash equivalents at the end of the period 63,767,336.50 112,899,721.31 Of which: Cash and cash equivalents restricted when parent --- --- company and the Group ================================================ ================ =============== (XLVI) Segment reporting 1. Main report --- business segment (1) Segment information as of this year Items White board paper Printing Other offset Total ==================== ============= =========== ============= ============= ============= I. Operating income 1,153,821,732.18 121,705,036.56 242,154.18 -6,258,515.97 1,269,510,406.95 Of which: income from foreign trading 1,147,563,216.21 121,705,036.56 242,154.18 --- 1,269,510,406.95 Income from among segments 6,258,515.97 --- --- -6,258,515.97 --- II. Sales expense 27,676,129.10 4,084,025.77 --- --- 31,760,154.87 III. Operating profit/(loss) 22,915,838.70 4,874,554.88 87,513,184.07 -949,518.44 114,354,059.21 IV. Total assets 2,557,504,473.15 233,622,654.03 2,014,746,303.01 -1,784,131,525.06 3,021,741,905.13 V. Total liabilities 1,612,820,230.20 174,077,585.05 807,753,042.83 -996,354,574.42 1,598,296,283.66 VI. Supplemental information 1. Expense of depreciation and 61,885,356.67 8,799,189.51 97,324.10 --- 70,781,870.28 amortization 2. Capital expenditure 155,684,279.74 30,944,540.18 724,008.00 --- 187,352,827.92 106 ==================== ============= =========== ============= ============= ============= (2) Segment information in last year White board Items Printing Other offset Total paper ==================== ============= =========== ============= ============= ============= I. Operating income 566,298,246.12 104,043,338.07 6,603,855.75 -3,401,776.33 673,543,663.61 Of which: income from foreign trading 563,770,018.82 103,873,208.72 5,900,436.07 --- 673,543,663.61 Income from among segments 2,528,227.30 170,129.35 703,419.68 -3,401,776.33 --- II. Sales expense 12,579,151.73 3,142,483.92 218,802.78 --- 15,940,438.43 III. Operating profit/(loss) 283,656.77 8,672,738.57 89,479,296.12 -5,919,768.54 92,515,922.92 IV. Total assets 2,286,906,451.71 214,481,737.11 1,838,085,900.43 -1,571,681,302.05 2,767,792,787.20 V. Total liabilities 1,362,880,978.59 163,838,155.58 696,629,878.92 -783,904,351.41 1,439,444,661.68 VI. Supplemental information 1. Expense of depreciation and 32,719,553.74 6,656,357.32 112,251.10 --- 39,488,162.16 amortization 2. Capital expenditure 528,178,424.90 39,644,338.62 330,518.00 --- 568,153,281.52 ==================== ============= =========== ============= ============= ============= 2. Secondary report --- region segment Income from foreign trading Items Amount in this year Amount in last year =================================== ================ ================ Domestic 748,941,780.36 430,016,920.39 Overseas 520,568,626.59 243,526,743.22 ---------------- ---------------- Total 1,269,510,406.95 673,543,663.61 ================ ================ VII. Notes to the financial statement of parent company (I) Other receivables 1. Composing of other receivable Amount at the year-end Amount at the year-begin --------------------------------- ------------------------------ Items Reserve Reserve for Book balance Proportion Book balance Proportion for bad bad debts debts =============== =========== ====== ======== =========== ===== ======== Other receivables 904,350,280.37 99.32% --- 694,047,043.99 99.57% --- with significant 107 single amounts Other receivables 278,983.25 0.03% 139,491.63 --- --- --- with insignificant single amounts but with significant credit risk Other insignificant 5,898,052.98 0.65% 387.00 3,020,957.64 0.43% --- -------------- ------ ---------- -------------- ----- --------- Total 910,527,316.60 100% 139,878.63 697,068,001.63 100% --- =========== ====== ======== =========== ===== ======== 2. Aging analysis Amount at the year-end Amount at the year-begin ------------------------------- ---------------------------- Items Reserve Reserve for Book balance Proportion Book balance Proportion for bad bad debts debts ========= =========== ====== ======== =========== ====== ====== 1-3 months 114,771,132.38 12.61% --- 130,281,720.91 18.69% --- 4-12 months 344,088,760.76 37.79% 237.00 114,259,215.05 16.39% --- 1-2 years 244,458,498.08 26.85% 150.00 301,426,016.33 43.24% --- 2-3 years 126,323,425.90 13.87% --- 29,983,319.72 4.30% --- Over 3 years 80,885,499.48 8.88% 139,491.63 121,117,729.62 17.38% --- -------------- ------ ---------- -------------- ------ -------- Total 910,527,316.60 100% 139,878.63 697,068,001.63 100% --- =========== ====== ======= =========== ====== ====== 3. Other receivables with significant single amounts Name of debtor Arrearage Proportion Reason withdrawn ========================== ============== ======== ========================= Zhuhai Huafeng Paper Co., Ltd. 783,511,157.99 --- Subsidiary companies that can be controlled, and with normal production and operation, a little probability for loss of bad debts Huaxin (Foshan) Color Printing Co., 120,839,122.38 --- Subsidiary companies that can be Ltd. controlled, and with normal production and operation, a little probability for loss of bad debts 4. In other receivables at the year-end, arrearage of RMB 135,100.00 due to shareholders which holding over 5% (including 5%) of shares with voting right. For details, please refer to Note VIII (IV) 5. 5. The top 5 arrearage in other receivables at the year-end 108 Term limit Proportion in Name of debtor Arrearage Kind or contents of total other arrearage receivables ========================= ============== ============= ======== =========== Zhuhai Huafeng Paper Co., Ltd. 783,511,157.79 Fund Rolling for 86.05% appropriation many years Huaxin (Foshan) Color Printing 120,839,122.38 Fund Rolling for 13.27% Co., Ltd. appropriation many years Dragon State International Limited 3,031,784.12 Amortization of 1-3 months 0.33% capital occupied Intermediary organs 2,684,354.11 Intermediary fee Over 3 0.29% used for years additional issuance Chen Jiali 190,346.89 Payment paid in Over 3 0.02% advance years ========================= ============== ============= ======== =========== 6. Other receivables of related parties as at the year-end took up 99.63% of total other receivables (II) Long-term equity investment Amount at the year-end Amount at the year-begin Items Reserve for Reserve for Book balance Book balance impairment impairment ================== ============== ========== ================ ========== Investing in subsidiary 787,126,950.64 787,126,950.64 companies --- --- Investing in affiliated 166,277,906.13 219,641,748.21 enterprises --- --- -------------- ---------- ---------------- ---------- Total 953,404,856.77 --- 1,006,768,698.85 --- ============== ========== ================ ========== 1. Long-term equity investment measured based on cost method (1) Investment measured based on cost method in subsidiary companies Proportion Initial Balance at the Increase in Decrease in Balance at the Name of investing enterprise of shares investment year-begin this year this year year-end held amount ================= ===== ========== ========= ========= ========= ========= 109 800,295,306.8 Foshan Huafeng Paper Co., Ltd. 75% 746,190,450.61 949,518.44 949,518.44 746,190,450.61 6 Huaxin (Foshan) Color Printing 75% 40,936,500.03 40,936,500.03 --- --- 40,936,500.03 Co., Ltd. ------------ ----------- ----------- ----------- ----------- 841,231,806.8 Total 787,126,950.64 949,518.44 949,518.44 787,126,950.64 9 ========== ========= ========= ========= ========= (2) Other equity investment measured based on cost method: naught 2. Long-term equity investment measured based on equity method Increase/decrease in this year ------------------------ Additi Initial Name of investing onal Balance at the Net gains and Balance at the investment losses Other enterprise invest year-begin Cash dividends year-end amount adjusted equity ment distributed based on change equity method ============= ========== ==== ========== ========= ========== ==== ========== Affiliated enterprise: Tetra Huaxin 145,945,947.55 --- 219,641,748.21 94,238,972.11 147,602,814.19 --- 166,277,906.13 (Foshan) Packaging Co., Ltd. ---------- ---- ---------- --------- ---------- ---- ---------- Total 145,945,947.55 --- 219,641,748.21 94,238,972.11 147,602,814.19 --- 166,277,906.13 ========== ==== ========== ========= ========== ==== ========== Voting Proportion right of shares Total operating Name of investing Registration Business proportions Total net assets Net profit in held by income in this enterprise place nature in at the year-end this year the year investing Company enterprise =============== ====== ======== ====== ======== ========= =========== ========= Affiliated enterprise Tetra Huaxin Foshan Joint 25% 25% 665,111,624.52 1,414,079,592.87 376,955,888.42 (Foshan) Packaging venture Co., Ltd. enterprise =============== ====== ======== ====== ======== ========= =========== ========= 110 (III) Investment income Items Amount in this year Amount in last year ========================================== ============== ============== Attributable share of the net profits and losses recognized 94,238,972.11 90,916,675.03 under equity method of the invested entity Dividend distribution measured in the light of cost method 949,518.44 5,920,471.78 declared by the invested company -------------- -------------- Total 95,188,490.55 96,837,146.81 ============== ============== There was no significant restriction to investment income transfer in the Company. VIII. Relationship and related transaction (I) Recognition standard of related parties In accordance with the Accounting Standard for Business Enterprise No. 36 - Related party disclosure, when a party controls, jointly controls or exercises significant influence over another party, or when two or more parties are under the control, joint control or significant influence of the same party, the affiliated party relationships are constituted. In the light of the Administrative Measures for the Disclosure of Information of Listed Companies (CSRC No. 40), the special related legal person and related natural person are recognized as related parties. (II) Related parties with control relationship 1. Related parties with control relationship (1) Related parties controlling the Company Relationshi Legal Name of Registratio Natural of Organization Main business p with the representativ enterprise n place business code Company e ========== ===== ========================== ===== ===== ====== ========= Manufacturing and trading of: Foshan Parent Limited Tong 19353992-5 packaging materials, paper, cable, wire, new materials; trading of; company company Laiming Foshan packaging machinery and Huaxin maintenance, amplifier and parts, Development decoration materials, beverages; Co., Ltd. Information and consulting service. (Manufacturing items are operated by the subsidiaries) Main businesses: Investment and China Beijing Actual ownershi Tong 10000890-7 development of important industrial Material materials; sales of metal materials controller p by the Laiming Development (rare metal excluded), construction & Investment whole materials, cement, wood, chemical General materials, garment, paper, rubber, people Corporation * tire, electro-mechanic products, wire 111 & cable, industrial boilers, crops, automobile (including sales of cars to final users), (items particularly stated by national government excluded). Import & export business in the above range of products (as approved by the merchandise list, import and export business administrated collectively by the national government excluded). Technical consultant and service related to material development. China Beijng Operation and management of Actual Limited Ma Zhengwu 71092254-4 Chengtong capital; entrustment management; controller company Holding merger and acquisition, investment (state- Group Co., management and consultation, Owned Ltd. * logistical service, import & export corporate business and sales of steels ) ======= ===== ========================== ==== ===== ====== ========= * On June 28, 2005, Foshan Gongying Investment Holdings Co., Ltd. transferred its 62.1142% equity of Foshan Huaxin Development Co., Ltd. (investment amount of RMB 284.44 million) to China Materials Development Investment General Corporation. Owing to that Foshan Huaxin Development Co., Ltd. is the parent company of the Company and held 65.2% equity of the Company, furthermore, China Materials Development Investment General Corporation formerly held 0.11% equity of the Company, thus, China Materials Development Investment General Corporation held 65.31% equity of the Company directly and indirectly, who became the actual controller of the Company. China Chengtong Holding Group Co., Ltd. held 100% equity of China Materials Development Investment General Corporation, thus, it also was the actual controller of the Company. (2) Related parties controlled by the Company For details, please refer to Note V (I). 2. Registered capital of related parties with controlling relationship and its change Amount at the Increase in Decrease Amount at the Name of companies year-begin this year in this year year-end ================================ ============== ======== ======== ============== Foshan Huaxin Development Co., Ltd. CNY457,930,000 --- --- CNY457,930,000 China Chengtong Holding Group Co., Ltd. CNY2,560,160,000 --- --- CNY2,560,160,000 China Materials Development Investment CNY1,317,290,000 CNY1,317,290,000 --- --- General Corporation Foshan Huafeng Paper Co., Ltd. USD121,390,000 --- --- USD121,390,000 Huaxin (Foshan) Color Printing Co., Ltd. USD6,600,000 --- --- USD6,600,000 Foshan Huazhi Wasted Paper Recovery Co., CNY5,000,000 CNY5,000,000 --- --- Ltd. Foshan Chancheng Distric Pearl River Color CNY1,500,000 --- --- CNY1,500,000 112 Printing Co., Ltd. ================================ ============== ======== ======== ============== 3. Shares held by the related parties with controlling relationship and its change Amount at the Decrease in Increase in this year Amount at the year-end year-begin this year Name of companies ------------------ --------------- --------- ----------------- Amount Ratio Amount Ratio Amount Ratio Amount Ratio ===================== ========== ===== ========= ==== ==== === ========== ===== Foshan Huaxin Development 286,532,200.00 65.20 42,979,830.00 --- --- --- 329,512,030.00 65.20% Co., Ltd % Chian Materials 495,400.00 0.11% 74,310.00 --- --- --- 569,710.00 0.11% Development Investment General Corporation Foshan Huafeng Paper Co., 746,192,321.86 75% --- --- --- --- 746,192,321.86 75% Ltd. Huaxin (Foshan) Color 40,936,500.03 75% --- --- --- --- 40,936,500.03 75% Printing Co., Ltd. Foshan Huazhi Wasted Paper 5,000,000.00 100% --- --- --- --- 5,000,000.00 100% Recovery Co., Ltd. Foshan Chancheng Distric 1,500,000.00 100% --- --- --- --- 1,500,000.00 100% Pearl River Color Printing Co., Ltd. ===================== ========== ===== ========= ==== ==== === ========== ===== (III) Related parties without controlling relationship Relationship with the Name of companies Organization code Company ================================== ================ ================= Tetra Huaxin (Foshan) Packaging Co., Ltd. 61762144-8 Affiliated company 19354411-8 Under the same parent Foshan Huaxin Import & Export Co., Ltd. Company 73728500-4 Under the same actual Qingdao Chengtong Fuel Co., Ltd. controller ================================== ================ ================= (IV) Related transaction 1. The subsidiary companies with controlling relationship and brought into the consolidation scope of accounting statement of the Company, whose transactions each other and trading with parent company has been offset. 2. Pricing principle of related transaction 113 Market price 3. Goods purchased from related parties This year Last year ---------------------- ---------------------- Name of company Proportion in Proportion in Amount same Amount same (RMB’000) transaction (RMB’000) transaction (%) (%) ======================= ======== ======== ======== ======== Qingdao Chengtong Fuel Co., Ltd. 41,850.5 45.97 --- --- ----------- -------- ----------- -------- Total 41,850.5 45.97 --- --- ======== ======== ======== ======== 4. Goods sold to related parties This year Last year ---------------------- ---------------------- Name of company Proportion in Proportion in Amount same Amount same (RMB’000) transaction (RMB’000) transaction (%) (%) ======================== ======== ======= ========= ======= Foshan Huaxin Import & Export 512.4 0.43 238 0.23 Co., Ltd. ----------- -------- ----------- -------- Total 512.4 0.43 238 0.23 ======== ======= ========= ======= 5. Unsettled amount due to associated parties Amount at the year-end Amount at the year-begin ---------------------- ----------------------- Items Reserve Reserve Balance for bad Balance for bad debt debt ============================ ============== ======== ============== ======== Accounts receivable Foshan Huaxin Import & Export Co., 77,915.85 --- 1,153.37 --- Ltd. Prepayment: Tetra Huaxin (Foshan) Packaging Co., --- --- 61,216.22 --- Ltd 114 Other receivables Foshan Huaxin Development Co., Ltd. --- --- 4,186.40 --- Foshan Huaxin Import & Export Co., --- --- 22,096.90 --- Ltd. Tetra Huaxin (Foshan) Packaging Co., --- --- 120,000.00 --- Ltd Account payable Qingdao Chengtong Fuel Co., Ltd. 1,046,484.17 --- --- --- Other payables Foshan Huaxin Development Co., Ltd. 23,250,647.13 --- 425,866,555.60 --- Long-term loans Foshan Huaxin Development Co., Ltd. 100,000,000.00 --- --- --- ============================ ============== ======== ============== ======== 6. Other related transactions (1) Leasing of office building The Company entered the agreement with Foshan Huaxin Development Co., Ltd. to rent the 907 square meters of office located at the 18/F Jinghua Building, Jihua 5th Road, Foshan. The Company committed to pay management fee of RMB326,520 and parking fee of RMB25,200 per year during the period from January 1st 2006 until December 31st 2007. (2) Loan due to related parties In accordance with the Contract on Loan signed between the Company and Foshan Huaxin Development Co., Ltd, the loan balance that the Company borrowed from Foshan Huaxin Development Co., Ltd was RMB 123,235,000.00 up to 31 December 2007, including short-term loan of RMB 23,235,000.00 as well as long-term loan RMB 100,000,000.00 (The term of loan was from 1 July 2007 to 30 June 2009). The borrowing rate was determined at the interest rate of loan which borrowed from Tetra Huaxin (Foshan) Packaging Co., Ltd, which is lower than that of bank loan of the same period. The Company paid the interests of RMB 14,108,740.15 in current year and paid the interests of RMB 11,877,191.98 in last year. (3) Guarantee of related parties ① China Material Development & Investment General Corporation signed Contract on Guarantee of Maximum Amount (Contract No. GBZ476630120072096) with Bank of China Limited Foshan Branch. According to the contract and Credit Single Agreement signed and to be signed between the said bank and the following companies, China Material Development & Investment General Corporation shall provide a joint responsibility guarantee for all debts that maximum amount limitations shall not exceed RMB 235 million to the Company, Foshan Huafeng Paper Co., Ltd, Foshan Huaxin Import & Export Co., Ltd and Huaxin (Foshan) Color Printing Co., Ltd from 20 October 2005 to 31 December 2009. 115 Foshan Huaxin Development Co., Ltd. signed the Contract on Guarantee of Maximum Amount (Contract No. GBZ476630120072070) with Bank of China Limited Foshan Branch. According to the contract and Credit Single Agreement signed and to be signed between the said bank and the following companies, Foshan Huaxin Development Co., Ltd. provided a joint responsibility guarantee for all debts that maximum amount limitations that was equally as RMB 235 million to the Company, Foshan Huaxin Import & Export Co., Ltd., Foshan Huafeng Paper Co., Ltd, and Huaxin (Foshan) Color Printing Co., Ltd from 1 March 2006 to 31 December 2009 (including RMB 50,000,000 of the Company, RMB 60,000,000 of Foshan Huaxin Import & Export Co., Ltd, RMB 100,000,000 of Foshan Huafeng Paper Co., Ltd and RMB 25,000,000 of Huaxin (Foshan) Color Printing Co., Ltd.) The Company signed the Contract on Guarantee of Maximum Amount (Contract No. GBZ476630120072071) with Bank of China Limited Foshan Branch. According to the contract and Credit Single Agreement signed and to be signed between the said bank and the following companies, the Company provided a joint responsibility guarantee for all debts that maximum amount limitations that was equally as RMB 125 million to Foshan Huafeng Paper Co., Ltd. and Huaxin (Foshan) Color Printing Co., Ltd. from 1 March 2007 to 31 December 2009 (including RMB 100 million of Foshan Huafeng Paper Co., Ltd, and RMB 25 million of Huaxin (Foshan) Color Printing Co., Ltd.) Up to the end of year, balance of short-term loan of the Company was RMB 50,000,000, which was guaranteed by Guarantee of Maximum Amount with Contract No. GBZ476630120072096 and GBZ476630120072070; Balance of short-term loan of Foshan Huafeng Paper Co., Ltd was RMB 25,000,000, which was guaranteed by Guarantee of Maximum Amount with Contract No. GBZ476630120072096, GBZ476630120072070 and GBZ476630120072071, amount of opening of import credit letter was USD 5,275,781.41 and balance of documentary loan of import credit letter was RMB 1,264,982.96 (which equaled to USD 173,523.04), which was guaranteed by Guarantee of Maximum Amount with Contract No. GBZ476630120072096 and GBZ476630120072071; balance of short-term loan of Huaxin (Foshan) Color Printing Co., Ltd was RMB 25,000,000, which was guaranteed by Guarantee of Maximum Amount with Contract No. GBZ476630120072070 and GBZ476630120072071. ② Foshan Huaxin Development Co., Ltd signed Contract on Guarantee with Agricultural Bank of China Foshan Huada Sub-Branch with contract No. 44901200700001239 and 44901200700001479, for which Foshan Huaxin Development Co., Ltd provided the joint responsibility guarantee for short-term loan of RMB 60,000,000 to the Company. ③ Foshan Huaxin Development Co., Ltd. signed Contract on Guarantee of Maximum Amount (Contract No. SFFFYEBZD 20070930001) with Shenzhen Development Bank Foshan Branch, for which Foshan Huaxin Development Co., Ltd. provided the joint responsibility guarantee for short-term loan of RMB 40,000,000 to the Company. ④ Foshan Huaxin Development Co., Ltd signed Contract on Guarantee with Agricultural Bank of China Foshan Huada Sub-Branch respectively [Contract No. FNYBZ (2005) No. 4, FNYBZ (2005) No. 6, FNYBZ (2005) No. 11, FNYBZ (2005) No. 18 and No. 44901200600000576], for which Foshan Huaxin Development Co., Ltd provided the joint responsibility guarantee for long-term loan totaling RMB 120 million to the Company. Up to the end of year, long-term loan due to within one year of RMB 110 116 million has been transferred into non-current liabilities due to within one year. ⑤ The Company and China Materials Development Investment General Corporation respectively signed Contract on Guarantee of Maximum Amount with (2006) NYZSGB Zi No. 0020-1 and (2006) NYZSGB Zi No. 0020-2 with China Minsheng Banking Corp., Ltd. Guangzhou Branch, for which they provided the joint responsibility guarantee for the debts of the maximum amount of credit line amounting to RMB 50 million (or equivalence foreign currency as RMB 50 million) to Foshan Huafeng Paper Co., Ltd. Up to the end of year, the balance of short-term loan was RMB 50 million. ⑥ The Company signed Contract on Guarantee of Maximum Amount with XYYJB Zi (Foshan) No. 200402020141 with Industrial Bank Guangzhou Branch, for which the Company provided the joint responsibility guarantee for the loan of limit of the maximum principal amounting to RMB 250 million from 2 February 2004 to 1 February 2009 to Foshan Huafeng Paper Co., Ltd. Up to the end of year, the balance of long-term loan was RMB 90 million., which was transferred into non-current liabilities due to within one year. The Company signed Contract on Guarantee of Maximum Amount with XYYSB Zi (Tuo-Zhan) No. 200705110222 with Industrial Bank Co., Ltd. Foshan Branch, for which the Company provided the joint responsibility guarantee for the credit line loan amounting to RMB 154,120,000.00 from 11 May 2007 to 11 May 2008 to Foshan Huafeng Paper Co., Ltd. Up to the end of year, the amount of opening import credit letter was USD 13,169,310.00 as well as HKD 37,706,600.00, the balance of documentary import credit letter was RMB 25,719,007.62, USD 1,186,520.83 and HKD 547,760.00, which equaled to RMB 34,878,161.27. ⑦ China Chengtong Holding Group Co., Ltd. and the Company respectively signed Contract on Guarantee of Maximum Amount with (2007) YZB Zi No. 270247-1 and 2 with China CITIC Bank Foshan Branch, for which they provided the joint responsibility guarantee for debt of the maximum amount of RMB 0.2 billion from 22 March 2007 to 21 March 2008 to Foshan Huafeng Paper Co., Ltd.. Up to the end of year, the balance of short-term loan was RMB 148,000,000.00 as well as notes payable (bank acceptance bill) of RMB 9,155,830.91. ⑧ The Company signed Contract on Guarantee of Maximum Amount with (2004) ZGB Zi No. 15 with China Construction Bank Corporation Foshan Branch, for which the Company provided the joint responsibility guarantee for debt of the maximum amount of RMB 0.3 billion (including Renminbi amount converted from foreign currency) from 1 February 2004 to 31 January 2007 to Foshan Huafeng Paper Co., Ltd.. In 2007, the Company newly signed Contract on Guarantee of Maximum Amount (Contract No. 2007 ZGB Zi No. 6), for which the Company provided the joint responsibility guarantee for a series of creditor’s right (formed because the said bank provided credit business and trading financing business such as loan, bank acceptance bill, credit letter, overseas agency payments, trust receipt loan, export negotiation, forfaiting, letter of guarantee and capital trading) of the maximum amount of RMB 0.3 billion (including Renminbi amount converted from foreign currency) from 1 February 2007 to 31 January 2012 to Foshan 117 Huafeng Paper Co., Ltd.. Real long-term loan borrowed by Foshan Hufeng Paper Co., Ltd was RMB 12,659,563.80, loan term are as follows: From 25 March 2005 to 30 June 2008 (EUR 982,537.10) From 25 March 2005 to 30 September 2008 (EUR 2,000,000.00) From 25 March 2005 to 31 December 2008 (EUR 2,000,000.00) From 25 March 2005 to 31 March 2009 (EUR 2,000,000.00) From 25 March 2005 to 30 June 2009 (EUR 2,000,000.00) From 25 March 2005 to 31 December 2009 (EUR 2,000,000.00) From 25 March 2005 to 5 November 2009 (EUR 1,677,026.70) The aforesaid borrowings were guaranteed with the Guarantee Contract of Maximum Amount (2004 ZGB Zi No. 15) as well as the workshop and land use right with appraisal value of RMB 105,785,800 and net value as at the year-end of RMB 91,220,000 as mortgage. In 2007, the Company has refunded EUR 677,026.70. Up to the end of year, the balance of long-term loan was EUR 11,982,537.10, of which long-term loan due to within one year amounting to EUR 5,482,537.10 has been transferred into non-current liabilities due to within one year. By the end of year, the balance of short-term loan of Foshan Huafeng Paper Co., Ltd. amounting to RMB 2,696,547.66 (converting into HKD 2,817,392.00) was trust receipt loan, the amount of opening import credit letter was USD 9,364,134.92 and HKD 14,586,400.00, which were guaranteed with the Guarantee Contract of Maximum Amount (2007 ZGB Zi. No. 6) ⑨ The Company signed the Guarantee Contract of Maximum Amount (Contract No. 8210200728001401) with Shanghai Pudong Development Bank Guangzhou Branch Dongfeng Sub-branch, for which the Company provided the joint responsibility guarantee for debt of the maximum balance of Guild Credit Line no more than RMB 30 million to Foshan Huafeng Paper Co., Ltd.. Up to the end of year, the balance of short-term loan was RMB 30 million. ⑩ The Company signed the Guarantee Contract of Maximum Amount (Contract No. 2007 YZB Zi. No. 271006) with China CITIC Bank Foshan Branch, for which the Company provided the joint responsibility guarantee for debt of the maximum amount of RMB 15 million from 10 October 2007 to October 10 2008 to Huaxin (Foshan) Color Printing Co., Ltd.. Up to the end of year, the balance of short-term loan was RMB 15 million IX. Contingent events (I) Contingent liabilities due to lawsuit and arbitration pending There was no contingent liability due to lawsuit and arbitration pending. 118 (II) Contingent liabilities formed due to external guarantee up to Dec. 31, 2007 Ended Dec. 31, 2007, no external guarantee existed in the Company. As to guarantee provided by the Company for its subsidiaries, please refer to Note VIII (IV) 6. X. Commitment events In accordance with the Guarantee Contract with (2005) ZGWD Zi. No 5 and (2006) ZGWD Zi No. 6 signed between the subsidiary company of the Company --- Foshan Huafeng Paper Co., Ltd. and China Construction Bank Corporation Foshan Branch on 7 June 2006, the loan of maximum amount of RMB 62,741,600.00 and RMB 43,044,200.00 (including equivalence foreign currency) provided by the said bank to the said company from 1 March 2004 to 31 December 2009 were guaranteed with house and building located in No. 17, Hebin Road, Foshan with appraisal value amounting to RMB 62,741,600.00 (numbers of property right certificate: YFDZ Zi No. C0674149, C0674127, C0674150, C0674146, C0674129, C0674131, C0674141, C0674147, C0674130, C0674142, C0674132, C0674126, C0674152, C0674128, C0674135, C0674125, C0674138, C0674148, C0674144 ) and land as well as house and building with appraisal value of RMB 43,044,200.00 (numbers of property right certificate: YFDZ Zi No. 1002142, FFGY (1998) Zi No. 06000603051 as mortgages. Up to the end of year, the balance of long-term loan was RMB 127,816,524.99 (EUR 11,982,537.10, including long-term loan due to within one year of EUR 5,482,537.10), as well as the balance of short-term loan amounting to RMB 2,696,547.66 (HKD 2,817,392.00). Meanwhile, the Company provided the joint responsibility guarantee for the loans mentioned above. XI. Events after balance sheet date In accordance with the resolutions of the 2nd meeting of the 3rd Board of Directors for 2008 held on 25 March 2008, the profit distribution preplan for 2007 is as follows: profit available for distribution to investors was RMB 354,802,914.55 after withdrawing 10% of net profit for 2007 audited by Guangdong Hengxin Delu Certificate Public Accountants Co., Ltd.. Neither distribution nor capitalization of share capital was implemented. The aforesaid proposal would be implemented after submitting to the Shareholders’ General Meeting for approval. XII. Other events (I) Leasing Operating lease Various assets leased by the Company as follows: Book value at the Book value at the type year-end year-begin ============================== ================ ================ House and building 11,478,231.26 11,931,146.06 ---------------- ---------------- 119 Total 11,478,231.26 11,931,146.06 ================ ================ (II) Government subsidies 1. The support fund for technology innovation to the medium and small-sized enterprise from Municipal and District-class Finance of Foshan was RMB 525,000.00, which was appropriated into the Company in 2005 and 2006 in batches. In 2007, relevant technology renovation has been completed. Thus the government subsidies were measured into non-operating income. 2. In May 2007, Foshan Huafeng Paper Co., Ltd. received appropriated funds of RMB 700,000 from Bureau of Environmental Protection of Foshan Municipal Chancheng District, which was used for control project on desulfurization. The said funds has been measured into deferred income. (III) Other significant events 1. The Company entered into the Joint Venture Agreement with STORAENSO PACKAGING BOARDS ASIAOY on 28 October 2005, in which the both purchased the assets of Foshan Huafeng Paper Co., Ltd. Zhuhai Branch Company, the subsidiary company of the Company, at the price of RMB 710,265,723.03, and together set up a joint venture company, namely STORAENSO HUAXIN (ZHUHAI) PACKAGING PAPER LTD., through assets merger. The said joint venture company’s total investment amount was USD 98 million with registered capital of USD 49 million as well as operating duration of 50 years. Of which, the Company invested in RMB 9.8 million, STORAENSO PACKAGING BOARDS ASIAOY invested in USD 39.2 million.. As approved by Department of Foreign Trade and Economic Cooperation of Guangdong Province with YWJMZ Zi [2005] No. 673, the joint venture company has obtained certificate of approval for foreign-funded enterprise with SWZYHZZ Zi [2005] No. 0043. Owing to the said purchase, Foshan Huafeng Paper Co., Ltd. Zhuhai Branch Company’s project on production expansion of 300,000-ton high-class coated white board at place out of Zhuhai under construction was changed into project on production of liquid package paper board with production scale of 300,000 tons. However, the company had a notice from STORAENSO PACKAGING BOARDS ASIAOY on 29 November 2005, in which STORAENSO PACKAGING BOARDS ASIAOY decided to give up the said investment because rate of return on profit from project on liquid package paper board was no all idealization. Due to unilateral termination of the cooperation from STORAENSO PACKAGING BOARDS ASIAOY, in accordance with the Clause 22.1 and 22.2 in the Agreement, “if any part in the Joint Venture Agreement fails to implement any obligation under the Agreement…, the said party shall be regard that it violate this agreement”, STORAENSO PACKAGING BOARDS ASIAOY “shall undertake duties for direct and real loss (excluding indirect) for abiding party due to its breach of contract. The Company considered that STORAENSO Huaxin (Zhuhai) Packaging Paper Ltd. failed to be established due to unilateral termination of the cooperation from STORAENSO PACKAGING BOARDS ASIAOY, resulting in a great of cost put into the project of coated white board in Zhuhai by the Company, for which the Company took 120 sue to require STORAENSO PACKAGING BOARDS ASIAOY to compensate for loss to the Company. But STORAENSO PACKAGING BOARDS ASIAOY proposed an objection to right of jurisdiction in this case. On 20 November 2007, as judged by Zhuhai Intermediate People's Court with Civil Judgment (2007) ZZFMSC Zi No. 52, the Court rejected the said objection on right of jurisdiction in this case. STORAENSO PACKAGING BOARDS ASIAOY has appeal from the judgment of Zhuhai Intermediate People's Court to Guangdong Higher People Court. 2. Enterprise Income Tax Law of People’s Republic of China has been approved by the 5th Session of the 10th National People’s Congress on 16 March 2007, which was perfected since 1 January 2008. Thus, the enterprise income tax of the Company will pay on the basis of 25% since 2008. XIII. Non-recurring gains and losses Items 2007 2006 ========================================= ============= ============= Gains/losses from disposal of non-current assets 80,811.83 1,546,984.30 Government subsidies recorded into profit and loss of the 525,000.00 --- current period Occupancy fees accepted by non-financing enterprise 2,860,488.32 --- recorded into profit and loss of the current period Other non-operating income and expense 3,188,505.41 18,200.00 Other non-recurring gains and losses --- 1,502,033.76 ------------- ------------- Subtotal 6,654,805.56 3,067,218.06 ------------- ------------- Less: Influence on income tax 8,813.42 116,326.71 Quotient shared by minority shareholders 948,815.66 593,324.07 Net non-recurring gains and losses 5,697,176.48 2,357,567.28 ============= ============= Note: Date mentioned above table, “+” shows profit or income, “-” shows loss or expense XIV. Return on equity and earnings per share Profit as of the report period Return on equity（%） Earnings per share（RMB/share） ------------------------------- ------------------------------- 121 Fully diluted Weighted average Fully diluted Weighted average --------------- --------------- --------------- --------------- 2007 2006 2007 2006 2007 2006 2007 2006 ================ ====== ====== ====== ====== ====== ====== ====== ====== Net profit attributable to 8.89 7.94 9.05 8.27 0.22 0.18 0.22 0.18 common shareholder of the Company Net profit after deducting 8.43 7.74 8.58 8.06 0.21 0.18 0.21 0.18 non-recurring gains and losses attributable to common shareholder of the Company ================== ====== ====== ====== ====== ====== ====== ====== ====== Note: Return on equity and earnings per share as of last year has been recalculated based on the data after retroactive modulation due to that the Company performed the accounting standards. Owing to share dividends of RMB 65,925,000.00 distributed by the Company in 2007, thus, the Company has recalculated earnings per shares as of last year based on the number of shares after modulation. Calculation formula on return on equity and earnings per share 1. Fully diluted return on equity Fully diluted return on equity =P÷E Of which: P refers to Net profit attributable to common shareholder of the Company or net profit after deducting non-recurring gains and losses attributable to common shareholder of the Company; E refers to net assets at the period-end attributable to common shareholders of the Company. “Net profit attributable to common shareholder of the Company” excluded minority interest, “net profit after deducting non-recurring gains and losses attributable to common shareholder of the Company” would be calculated based on consolidated net profit after deducting minority interests; deducting non-recurring gain and loss of parent company (the Company should consider influence of income tax) and non-recurring gain and loss of each subsidiary (the Company should consider influence of income tax) ; “net assets at the period-end attributable to common shareholders of the Company” excluded minority interests. 2. Weighted average return on equity Weighted average return on equity =P/ （ E0 ＋ NP÷2 ＋ Ei×Mi÷M0 － Ej×Mj÷M0±Ek×Mk÷M0） Of which: P refers to Net profit attributable to common shareholder of the Company or net profit after deducting non-recurring gains and losses attributable to common shareholder of the Company; NP refers to net profit attributable to common shareholders of the Company; E0 refers to net assets at the period-begin attributable to common shareholders of the Company; Ei refers to net assets increased due to issuance of new share or debts for equity swap or attributable to common shareholders of the Company; 122 Ej refers to net assets decreased due to repurchased or dividends in cash or attributable to common shareholders of the Company; M0 refers to the number of months during the report period; Mi refers to the number of months from the next month when net assets increased to the end of the report period; Mj refers to the number of months from the next month when net assets decreased to the end of the report period; Ek refers to change of increase/decrease of net assets due to other transaction events; Mk refers to the number of months from the next month when other net assets changed the end of the report period 3. Earnings per share-basis Earnings per share-basis =P÷S S=S0＋S1＋Si×Mi÷M0－Sj×Mj÷M0－Sk Of which: P refers to net profit attributable to shareholders holding ordinary shares or net profit attributable to shareholders holding ordinary shares after deducting non-recurring gains and losses; S weighted average number of ordinary shares issued out; S0 refers to total number of shares at the period-begin; S1 refers to the number of shares increased due to transferring capital reserve into share capital or dividend distribution of shares during the report period; Si refers to the number of shares increased due to issuance of new shares or debt for equity swap during the report period; Sj refers to the number of shares decreased due to stock repurchase during the report period; Sk refers to the number of split-share during the report period; M0 refers to the number of months during the report period; Mi refers to the number of months from the next month to the end of the report period for increase of shares; Mj refers to the number of months from the next month to the end of the report period for decrease of shares 4. Earnings per share-diluted Earnings per share-diluted =[P+（potential diluted interests of ordinary shares recognized as expense － transfer fee ） × （ 1- income tax rate ） ]/ （ S0 ＋ S1 ＋ Si×Mi÷M0 － Sj×Mj÷M0—Sk+ weighted average amount of ordinary shares increased due to warrant, share options、convertible bond)） Of which, P refers to net profit attributable to shareholders holding ordinary shares or net profit attributable to shareholders holding ordinary shares after deducting non-recurring gains and losses. The Company shall consider all influence on potential diluted interests of ordinary shares when the Company calculated diluted earnings per share, till to minimum diluted EPS. XV. Supplemental information The Financial Statement as of the Year 2007 is the first annual financial statement of the Company prepared on the basis of the Accounting Standard for Business Enterprise. In accordance with relevant provisions of the Circular on the No.7 Questions and Responses of Information Disclosure Standards by Companies Publicly Issuing Securities --- Compilation and Disclosure of the Comparative Financial Accounting Information during the Transition Period between the New and Old Accounting Standards (ZJKJ Zi [2007] No. 10) issued by China Securities Regulatory Commission, relevant comparative data as of 2006 has been made the retroactive modulation in line with the requirement of Accounting Standard for Business Enterprise No. 38---First Time Adoption of 123 Accounting Standards for Business Enterprise, and restated in the light of the Accounting Standard for Business Enterprise. Reconciliation items that shareholders’ equity as at the begin of year 2006 and as at the end of year 2006, net profit as of year 2006 stated under the original accounting standards for business enterprise and accounting system for business enterprise was modulated into shareholder’s equity and net profit and loss stated under the Accounting Standards for Business Enterprise are listed as follows: (I) Reconciliation of difference in shareholders’ equity between the New and the Old Accounting Standard for Business Enterprise Amount disclosed Items Jan. 1, 2006 Dec. 31, 2006 in Annual Report Difference 2006 =========================== =========== ============ ============= ========== Shareholder’s Equity stated under the 1,066,167,067.73 1,152,216,170.80 1,152,216,170.80 --- old accounting standards Balance of long-term equity investment -29,734,539.58 -28,841,607.37 -28,841,607.37 --- Of which: balance of long-term equity -41,879,239.67 -40,682,689.96 -40,682,689.97 --- investment formed in the merger of an enterprise under the same control Credit balance for long-term equity 12,144,700.09 11,841,082.59 11,841,082.59 --- investment calculated based on equity method Investment real estate measured based --- --- --- --- on fair value model Depreciation over the past years --- --- --- --- supplemental withdrew due to dismantling cost of assets Employee termination indemnity --- --- --- --- according with projected liability Share based payments --- --- --- --- Reorganization obligation according --- --- --- --- with projected liability Business Combinations 694,460.39 555,568.25 555,568.25 --- Of which: Book value of goodwill 694,460.39 555,568.25 555,568.25 --- formed in the merger of an enterprise under the same control Reserve for impairment of goodwill --- --- --- --- withdrawn based on new accounting standards Financial assets measured in line with --- --- --- --- fair value and its change amounts was recognized in profit or loss of current period and available-for sale financial assets 124 Financial liability measured in line --- --- --- --- with fair value and its change amounts was recognized in profit or loss of current period Equity increased due to division of --- --- --- --- financial instruments Derivative financial instruments --- --- --- --- Income Tax 2,816,955.45 2,816,865.45 2,816,865.45 --- Minority interests 182,335,713.07 182,804,968.68 182,124,467.30 680,501.38 Other 14,618,253.46 18,796,219.71 --- 18,796,219.71 Shareholder Equity stated under the 1,236,897,910.52 1,328,348,185.52 1,308,871,464.43 19,476,721.09 new accounting standard ============================ ============ ============ ============= ========== Note: The difference between shareholder’s equity as at Dec. 31, 2006 and shareholder’s equity in reconciliation statement disclosed in Annual Report 2006 was RMB 19,476,721.09, which was mainly because that Tetra Huaxin (Foshan) Packaging Co., Ltd., an affiliated company of the Company, made the retroactive modulation in accordance with Article 5 and Article 19 in “Accounting Standard for Business Enterprise No. 38 --- First Time Adoption of Accounting Standards for Business Enterprises, resulting in the influence on retained earnings of the said company and quotient of net assets enjoyed by the Company based on equity proportion in the said company totaled to RMB 19,476,721.09, and shareholder’s equity in reconciliation statement disclosed in Annual Report 2006 amounting to RMB 680,501.38, which failed to record into the statement, was made the modulation. (II) Reconciliation to net profit as of 2006 between the New and the Old Accounting Standard for Business Enterprise Items Amount =========================================== ================ Net profit as of 2006 (the old accounting standards) 86,049,103.07 Total amount influenced by retroactive adjustment items 4,931,916.32 Including: investment income 5,070,898.46 Management expense -138,892.14 Income tax -90.00 Add: Minority shareholder’s gains and losses 2,442,746.20 Net profit as of 2006 (the new accounting standard) 93,423,765.59 Net profit attributable to owner of parent company 90,981,019.39 125 Minority shareholder’s gains and losses 2,442,746.20 Reference information of supposing implement the New Accounting Standard for Business Enterprise Total amount influenced by other items --- Including: development expense --- Income from debt restructuring --- Investment income --- Simulated net profit as of 2006 93,423,765.59 Net profit attributable to owner of parent company 90,981,019.39 Minority shareholder’s gains and losses 2,442,746.20 =========================================== ================ XVI. Approval of financial statement The said financial statement has been approved by all directors (the Board of Directors) of the Company on 25 March 2008. 126