张裕Ｂ(200869)2007年年度报告（英文版）

YANTAI CHANGYU PIONEER WINE COMPANY LIMITED 2007 Annual Report 2008.03.25 Content I. Important 4 II. KEY COMPANY DATA OF RECORD …………………..……………………..…. .. 5 III. SUMMARY OF ACCOUNTING AND FINANCIAL INFORMATION…….…… 6 1. Summary of Financial Information for the Report Period……………………........ ……………. 6 Differences and Explanation in Net Profit under the PRC Accounting Standards and 2. 6 International Accounting Standards…………………………………………………………….… Principal Accounting and Financial Information for the Preceding Three Years of the Report 3. 6 Period…………………………………………………………….……..…….. …………………. IV. CHANGES IN SHARE CAPITAL AND SHAREHOLDERS ………………...... . 7 1. Changes in Share Capital………………………………………………………………………… 7 2 Changes in Limited Shares………………………………………………………………………… 7 3. Information about Issuance and Listing of Stocks………………………………………. ……… 8 4. Shareholders Introduction………………. ……………………………………………………… 8 V. DIRECTORS, SUPERVISORS, SENIOR MANAGEMENT AND STAFF….. … 11 1. The Basic Information of Directors, Supervisors and Senior Management……………………… 11 Principal Working Experiences of Incumbent Directors, Supervisors and Senior 2. 12 Managers………………………………………………………………………………………… 3. Change of Directors, Supervisors and Senior Management …………………………………… 13 4. Staff of the Company………………………………………………….........................……. …. 14 VI. CORPORATE GOVERNANCE STRUCTURE…………………..…….……..…. …. 14 1. Current Corporate Governance Situation of the Company …….……….......... …….………....... 14 2. The Duty Performance of the Independent Directors……………………..……….. ……..……… 15 Information for Personnel, Assets, Finance, Department and Business Associated with Holding 3. 15 Shareholders……………………………………………..……..….. ………………..……..…. ... 4 Formulation and Improvement of Internal Control Rules..……..….. ………………..……..…. . 15 5. Performance Evaluation and Incentives to Senior Management…………………. ……………… 16 VII. BRIEF SUMMARY OF THE SHAREHOLDERS’ MEETING………….….….. … 16 VIII BOARD OF DIRECTIORS’ REPORT……………….…………………………….. .. 16 1. Discussion and Analysis of Management Team……………………………………………. …… 16 2. Investment of the Company……………………………………………………………………… 21 3. Audits and Changes of Accounting Policie ……………………………………………………… 21 4. Information of the Routine Work of Board of Directors………………………………. ………… 22 5. Preliminary Plan for Profit Distribution…………………………………………………………… 23 6. Other Disclosed Information……………………………………………………………………… 23 IX. BOARD OF SUPERVISORS’ REPORT……………………..………….………….. 24 2 1. Meetings of the Board of Supervisors………………………….………………………………. … 24 2. Independent Comments of the Board of Supervisors for Relative Issues in 2007………………. 24 X. MATERIAL EVENTS…………………………………………………………..……….. 25 1. Major Lawsuit and Arbitration…………… 25 2. Relative Issues about Bankruptcy and Reform 25 3. Information about Holding Share Equity of Other Listed Company or Financial Enterprise 25 4. Important Merger and Acquisition, Sales of Assets…………………....….…………. ….………. 25 5. The Performance on Share Equity Incentive Scheme………………....….…………. ….………. 25 6. Significant Interrelated Deals………………….……...…………………….………………….. … 25 7. Major and Important Contracts and Execution Results………………………………. ………… 25 8. Issues Promised by the Company……….………...……………………….................. …............. 25 9. Appointing and Dismissing Certified Public Accountants Firm…………….................. ….......... 26 Records of Punishments, Criticism in the Form of Circular or Open Reprimands Made by the 10. 26 Competent Authorities…………………. ……...…………………….………………….. …….. .. 11. The Company’s Receptions, Studies and Visits……………………………………………. ……. 26 12. Other Major Issues……...…………………….………………….. ………………………….…… 27 XI. FINANCIAL REPORT………………..………………………..…………………….. .. 28 XII. REFERENCE DOCUMENTS……………………………….. ..…………………….. .. 132 3 I. Important The Board of Directors，the Board of Supervisors and directors, supervisors & senior management of the Company collectively and individually accept full responsibility for the truthfulness; accuracy and completeness of the information contained in this report and confirm that to the best of their knowledge and belief there are no unfaithful facts, significant omissions or misleading statements. Board chairman Mr. Sun Li qiang entrusted vice Board chairman Mr. Zhou Hong Jiang to preside the meeting and to make the vote on his behalf because he can not attend the board meeting for the official affairs. The independent director Mr. Wang Zhuquan entrusted the independent director Mr. Wang Shigang on his behalf to vote for the proposals because he was then studying abroad. Director Mr. Augusto Reina entrusted Mr. Aldino Marzorati on his behalf to vote for the proposals because he can not attend the board meeting for his personal reasons. Ernst & Young Hua Ming provides the audit report with standard and unreserved audit advice. Mr. Sun Liqiang (Chairman of the Company), Mr. Leng Bin (Chief Accountant) and Mr. Jiang Jianxun (Chief of Account Department) assure the truthfulness and completeness of the financial report in the annual report. The reader is advised that this report has been prepared originally in Chinese. In the event of a conflict between this report and the original Chinese version or difference in interpretation between the versions of the report, the Chinese language report shall prevail. 4 II. KEY COMPANY DATA OF RECORD 1. Legal Name in Chinese: 烟台张裕葡萄酿酒股份有限公司 Legal Name in English: Yantai Changyu Pioneer Wine Company Limited 2. Legal Representative: Sun Liqiang 3. Secretary to the Board of Directors: Qu Weimin Contact Address: 56 Dama Road, Yantai City, Shandong Province, the PRC Telephone: 0086-535-6633658 Facsimile: 0086-535-6633639 E-Mail: quwm@changyu.com.cn Authorized Representative of the Securities Affairs: Li Tingguo Contact Address: 56 Dama Road, Yantai City, Shandong Province, the PRC Telephone: 0086-535-6633656 Facsimile: 0086-535-6633639 E-Mail: stock@changyu.com.cn 4. Registered Address: 56 Dama Road, Yantai City, Shandong Province, the PRC Office Address: 56 Dama Road, Yantai City, Shandong Province, the PRC Postal Code: 264000 Web Site: http://www.changyu.com.cn 5. Publications: The newspapers in which the Company’s information is disclosed: “China Securities Newspaper” and “Securities Times” in the PRC “Hong Kong Commercial Daily” outside the PRC Web Site for carrying the report: http://www.cninfo.com.cn Annual Report kept at: BOD Office of the Company 6. Place of listing of the Shares: Shenzhen Stock Exchange Abbreviation of the Shares: Changyu A, Changyu B Code Number of the Shares: 000869, 200869 7. Other information of the Company: • The first registration date: September 18th, 1997 • The original place of registration: the Business Administration Bureau of Shandong Province • The registration amendment date: June 23rd , 2006 • The registration amendment place: the Business Administration Bureau of Shandong Province • The business license number: 3700001806012 • The registration number of revenue: 37060216500338-1 in State Taxation Bureau 370601267100035 in Local Taxation Bureau • The International accountant appointed by the Company: Ernst & Young Hua Ming The office address of the International accountant appointed by the Company: Level 17, Ernst & Young Tower, Oriental Plaza, Beijing • The Chinese accountant appointed by the Company: Ernst & Young Hua Ming Certified Public Accounts Co. Ltd. The office address of the Chinese accountant appointed by the Company: Level 17, Ernst & Young Tower, Oriental Plaza, Beijing 5 III. SUMMARY OF ACCOUNTING AND FINANCIAL INFORMATION 1. Summary of Financial Information for the Report Period Unit：CNY Item Amount Business profit 948,281,314 Total profit Net profit attributed to the shareholders of the listed company 949,443,426 Net profit attributed to the shareholders of the listed company after deducting 635,627,764 the irregular profit and loss Net cash flows from the operating activities 635,038,241 Note: The item and involved amount after deducting the irregular profit and loss Item Unit:CNY Net profit attributed to common shareholders of the Company 635,627,764 Add (less): item of irregular profit and loss Profit and loss on disposal of non-liquid assets 1,993,241 investment income (209,856) Net income from other non-business activities (3,155,353) Effect index for the income tax of irregular profit and loss 404,297 Net profit after deducting the irregular profit and loss 634,787,595 Subtract : effect index for irregular profit and loss attributed to minority shareholders 468,048 Net profit attributed to common shareholders of the Company after deducting irregular profit and loss 634,319,547 2.Differences in Net Profit under the PRC Accounting Standards and International Accounting Standards The net profit of the Company in 2007 was CNY638,894,578 according to the PRC Accounting Standards by Ernst & Young Hua Ming., and CNY 641,043,264 according to the International Accounting Standards by the Company. Major differences were as follows: Unit:CNY Item 2007 Net profit as stated under the PRC Accounting Standards 638,894,578 Adjustment according to the International Accounting Standards: ― Depreciation on fixed assets at fair value ― Deferred tax of above depreciation on fixed assets at fair value (626,314) Amount after the adjustment according to the International Accounting Standards 641,043,264 3.Principal Accounting and Financial Information for the Preceding Three Years of the Report Period Unit ：CNY 2006 More or less than Item 2007 2005 After adjustment Before adjustment last year (%) Business revenue 2,730,166,091 2,167,274,933 2,162,755,218 25.97 1,804,375,891 Total profit 949,443,426 565,023,227 634,201,810 68.04 443,427,134 Net profit attributed to the shareholders of the 635,627,764 394,517,034 443,863,305 61.12 312,369,566 listed company Net profit attributed to the shareholders of the 635,038,241 394,773,012 444,119,283 60.86 313,269,379 listed company after deducting the irregular profit and loss Basic earnings per share 1.21 0.75 0.84 61.33 0.77 Diluted earnings per share 1.21 0.75 0.84 61.33 0.77 Basic earnings per share after deducting the 1.20 0.75 0.84 60.00 0.77 irregular profit and loss Overall sharing for the return rate of net assets 28.52 19.58 22.09 8.94 16.89 6 (%) Weighted average for the return rate of net 30.98 20.97 22.13 10.01 17.57 assets (%) Overall sharing for the return rate of net assets 28.46 19.59 22.10 8.87 16.90 (%) after deducting the irregular profit and loss Weighted average for the return rate of net 30.92 20.98 22.14 9.94 16.49 assets (%) after deducting the irregular profit and loss Net cash flows from the operating activities 816,161,158 398,074,447 398,074,447 105.03 325,539,508 Net cash flows per Share from the operating 1.55 0.75 0.75 106.67 0.80 activities End End of 2006 End Before adjustment More or less than After adjustment last year (%) of 2007 of 2005 Total assets 3,251,224,474 2,811,556,581 2,729,228,871 15.64 2,347,684,371 Total shareholders’ equity (minor 2,229,020,376 2,015,216,612 2,009,713,129 10.61 1,849,769,824 shareholders’ equity excluded) Net assets per share attributed to the 4.23 3.82 3.81 10.73 4.56 shareholders of the listed company IV. CHANGES IN SHARE CAPITAL AND SUBSTANTIAL SHAREHOLDERS 1. Changes in Share Capital Unit: share’0000 Amount before this change Change Amount after this (+ -) change Allot Distribute Transfer other Percentage Sub Percentage Amount new bonus capital to share others Amount % total % share share capital 1. Limited shares 26,575 50.40 26,575 50.40 (1)State Shares (2) State legal person share (3)Other domestic corporate 26,575 50.40 26,575 50.40 share --- domestic legal 26,575 50.40 26,575 50.40 person share ---domestic natural person share (4) foreign held share ---overseas legal person share --- overseas natural person share 2. Unlimited shares 26,153 49.60 26,153 49.60 (1)CNY common share 8,307 15.75 8,307 15.75 (2)Foreign share listed in 17,846 33.85 17,846 33.85 PRC (3) Foreign share listed overseas (4) Others Total shares 52,728 100 52,728 100 2. Changes in Limited Shares Unit: share’0000 Shareholder’s Name Numbers for the Numbers of Numbers of Numbers for the Reasons for Releasing date for limited shares on releasing the increasing the limited shares on limiting the the limited shares Jan.1st, 2007 limited shares in limited shares in shares on 2007 2007 Dec.31st,2007 Yantai Changyu Group 26,575 0 0 26,575 Share structure March 21st, 2009 Co Ltd. reform Total 26,575 0 0 26,575 - 7 3. Information about the Issuance and Listing of Stocks (1) The Company did not issue new stocks within preceding three years by the end of report period. (2) During the report period, the Company’s total shares, the structure of shares and the structure of assets and liabilities were not changed because of distribution of dividends in the form of shares, increase of capital stock, allocation, re-issuance of stocks, disclosed issuance of stocks, enforcement of title warrants, implementation of stock equity incentive plan, business merger, transfer of company’s transferable debentures to stocks, decrease of registered capital, listing of internal shares, issuance of bonds or other causes. (3) The Company didn’t issue any internal stocks. 4. Shareholders’ Introduction (1) The total number and top 10 shareholders at the end of report period Total amount of Shareholders 12,749 Shareholders including 7,603 shareholders with A shares, 5,146 shareholders with B shares The top 10 shareholders Name of Shareholders The character Percentage Number of Number of limited Lien or frozen of the (%) shares hold listing shares shares shareholders YANTAI CHANGYU GROUP CO.LTD. Other 50.40 265,749,120 265,749,120 0 HTHK/CMG FSGUFP-CMG FIRST STATE CHINA Foreign 0 0 GROWTH FD 2.75 14,523,852 shareholder GSI S/A GOLDEN CHINA MASTER FUND Foreign 0 0 1.30 6,847,927 shareholder JP MORGAN FUNDS Foreign 0 0 1.26 6,632,624 shareholder HUITIANFU GROWTH FOCUS 0 0 SECURITIES-ORIENTED Other 1.24 6,543,344 CAPITAL FUND BBH BOS S/A FIDELITY FD-CHINA FOCUS FD Foreign 0 0 1.09 5,737,978 shareholder JF ASIA DOMESTIC OPPORTUNITIES FUND Foreign 0 0 1.08 5,699,983 shareholder DRAGON BILLION GREATER CHINA MASTER Foreign 0 0 FUND 0.97 5,128,200 shareholder HUITIANFU VALUE-ADDED 0 0 SECURITIES-ORIENTED Other 0.87 4,588,117 CAPITAL FUND FIDELITY KOREA-CHINA EQUITY INVETMENT Foreign 0 0 TRUST-MOTHER 0.82 4,349,799 shareholder The top 10 Shareholders of unlimited shares Name of Shareholders Number of unlimited shares held Type of Shares HTHK/CMG FSGUFP-CMG FIRST STATE CHINA GROWTH B Shares 14,523,852 FD GSI S/A GOLDEN CHINA MASTER FUND 6,847,927 B Shares JP MORGAN FUNDS 6,632,624 B Shares HUITIANFU GROWTH FOCUS SECURITIES-ORIENTED A Shares 6,543,344 CAPITAL FUND BBH BOS S/A FIDELITY FD-CHINA FOCUS FD 5,737,978 B Shares JF ASIA DOMESTIC OPPORTUNITIES FUND 5,699,983 B Shares DRAGON BILLION GREATER CHINA MASTER FUND 5,128,200 B Shares HUITIANFU VALUE-ADDED SECURITIES-ORIENTED 4,588,117 A Shares CAPITAL FUND FIDELITY KOREA-CHINA EQUITY INVETMENT B Shares 4,349,799 TRUST-MOTHER 8 GUOTAI JUNAN SECURITIES HONG KONG LIMITED B Shares 4,329,159 The explanation for the relationship and accordant In the top 10 shareholders, Yantai Changyu Group Company action of the top 10 shareholders Limited has no associated relationship with the other 9 listed shareholders, and the relationship between the other shareholders is unknown. (2) Introduction for the holding shareholders and the actual controllers 1) Legal holding shareholder Name of the legal holding shareholder: Yantai Changyu Group Company Limited Legal representative: Mr. Sun Liqiang Registered capital: CNY 50 million Establishment date: April 27th, 1997 Business scope: wine, healthy liquor, distillating liquor, drinks, production, distribution, the plant of primary products and the import & export business under permission. 2) Legal actual controllers The company is actually controlled by four parties: Yantai Yuhua Investment & Development Co., Ltd, ILLVA Saronno Investment Italy, International Finance Corporation and SASAC Yantai. The situation of the four parties is as following: ① Name of the legal holding shareholder: Yantai Yuhua Investment & Development Co. Ltd Legal representative: Mr. Jiang Yongsheng Registered capital: CNY 387,995,100 Establishment date: October 28th, 2004 Business scope: Under state permission, property investment, tenancy of machine and facility, wholesale and retail of construction material, chemical products (chemical hazard products excluded), hardware, and electronical products , grape plant. The holding shareholder of Yantai Yuhua Investment & Development Co. Ltd. is Yantai Yusheng Investment & Development Co. Ltd., which was established on October 27th 2004 with legal representative Mr. Li Jianjun, registered capital CNY 67.333 million and business scope of property investment under the state permission. ② Name of the legal holding shareholder: ILLVA Saronno Investment Italy Legal representative: Mr. Augusto Reina Registered capital: EUR 5,160,000 Establishment date: January 24th, 2005 (its name is changed from ARCHIMEDE SRL) Business scope: The company’s operating scope includes receiving the investments and dividends that Italian or overseas businesses provide or distributed to other companies; controlling the use of and dealing with and buying or selling and disposing the corporate stocks, public stocks and individual stocks; providing capital and technical coordination to the company’s joint ventures and performing the duties of a controlling party; engaging in the activities in terms of providing financial assistance, technical and R&D and occupational training, shareholding affairs, organizing the storage of raw materials and warehousing of final products upon the precondition that it is helpful for the joint ventures and in order to realize the final operation goals; production and sales of food products, alcoholic and nonalcoholic products as well as any other related industrial, commercial, financial and tertiary activities via subsidiary companies and joint ventures or directly by itself; conducting business activities in the fields of acid food and agriculture. ③ Name of the legal holding shareholder: International Finance Corporation Registered address: 2121 Pennsyvania Avenue, N.W. Washington DC 20433, USA Registered capital: USD 2.36 billion Registered date: 1956 Business scope: International Finance Corporation is one of the members of World Bank, mainly dedicated to investing in private sectors of developing countries while providing technical support and consultation service. The corporation is a multilateral financial institution that ranks first in the world in terms of providing capital stock and loans to developing countries. Its purpose is to promote sustainable investments of private sectors of developing countries in order to alleviate poverty and improve people’s life. 9 ④ SASAC Yantai 3) The change for the holding shareholders and the actual controllers During the report period, there is no any change for the holding shareholders and the actual controllers. 4) Introduction for property right and control relations between the Company and its actual controllers top management of Changyu Group 14 persons middle management of Changyu Group 12 persons 64% 36% Zhongcheng Trust Investment Co., Ltd. Yantai Yusheng Investment & Development Co., Ltd. staff of Changyu Group 46 persons 148 人 7.73% 54.47% 37.78% IFC Yantai Yuhua Investment & Development Co., LTD. SASAC Yantai Illva Saronno Investment Co., LTD. 10% 45% 12% 33% current shareholders for A share Changyu Group current shareholders for B share 15.75% 50.40% 33.85% the Company （3） The other legal shareholders holding over 10% of the Company’s share Except Yantai Changyu Group Company Limited, there are no any other legal shareholders holding 10% or over of the Company’s share. （4） Share holding of top 10 limited stockholders and limitation conditions Unit: share No. Limited Limited shares Date of Newly added Limitation conditions shareholder’s held by them listing tradable name p shares 1 Yantai Changyu 265,749,120 March 21st 26,363,800 1. From the day of being granted the right of circulation on stock market as Group Co., Ltd 2009 March 21st,2006, Changyu Group will not transact or transfer its March 26,363,800 shareholding in the Company within 36 months 21st,2010 March 213,021,520 21st,2011 2. Within 12 months as from the day of the expiry of the afore-said promising period, the amount of the former non-circulating stock that Changyu Group may list for transaction at Stock Exchange can’t be over 5% of its total and within 24 months after that, can’t be over 10% of its total. 3. Changyu Group also promised to propose over the shareholders’ meetings 2005, 2006 and 2007 to distribute the Company’s profit in cash no less than 65% of the distributable profit realized in the same year and ensure to vote for aye for this proposal. 10 V. DIRECTORS, SUPERVISORS, SENIOR MANAGEMENT AND STAFF 1. The basic information of directors, supervisors and senior management (1)Information for the change of share holding and salary of directors, supervisors and senior management The salary for the independent directors is paid according to the resolution of Shareholder’s meeting. The salary for the Chairman, directors with administration duty, supervisors, managers and other senior management should be paid on basis of the evaluation result according to the Evaluation and Incentives Scheme for Senior Managemen of the Company which is passed during the Board of Director’s meeting. Shares hold Shares hold Reason Total Salary drew Whether or not NAME POST SEX AGE Term at the at the ends for from the company draw the salary for Post beginning of the year change during the report from shareholder’s of the year period company and other related company Sun Liqiang Chairman to the M 60 2006.12.07— 0 0 --- 77.7 NO Board of Directors 2009.12.06 Zhou Vice-chairman to M 43 2006.12.07— 0 0 --- NO Hongjiang the Board of 2009.12.06 Directors and 75.2 general manager Leng Bin Director and M 45 2006.12.07— 0 0 --- NO vice-general 2009.12.06 46.1 manager Qu Weimin Director, M 50 2006.12.07— 0 0 --- NO Vice-general 2009.12.06 manager and 47.0 Secretary to the Board of Directors Jiang Jinqiang Director M 35 2006.12.07— 0 0 --- 0 NO 2009.12.06 Augusto Reina Director M 67 2006.12.07— 0 0 --- 0 NO 2009.12.06 Aldino Director M 55 2006.12.07— 0 0 --- 0 NO Marzorati 2009.12.06 Antonio Director M 69 2006.12.07— 0 0 --- 0 NO Appignani 2009.12.06 Jean Paul Pinari Director M 56 2006.12.07— 0 0 --- 0 NO 2009.12.06 Geng Zhaolin Independent M 65 2006.12.07— 0 0 --- 5 NO Director 2009.12.06 Ju Guoyu Independent M 61 2006.12.07— 0 0 ----- 5 NO Director 2009.12.06 Wang Shigang Independent M 42 2006.12.07— 0 0 --- NO 5 Director 2009.12.06 Wang Zhuquan Independent M 43 2007.09.07— 0 0 -- 5 Director 2009.12.06 Fu Mingzhi Chairman for the M 54 2006.04.27— 0 0 --- NO Board of 2009.04.28 52.1 supervisors Zhang Hongxia supervisor F 51 2006.04.27— 0 0 --- 38.4 NO 2009.04.28 Lian Zhendian Supervisor M 39 2006.04.27— 0 0 --- 0 NO 2009.04.28 Yang Ming Vice-general M 49 --- 0 0 --- 45.3 NO manager Li Jiming General Engineer M 41 --- 0 0 --- 45.2 NO Jiang Hua Vice-general M 44 --- 0 0 --- 60.30 NO manager Sun Jian Vice-general M 41 --- 0 0 --- 45.70 NO manager Jiang Jianxun Treasurer M 41 --- 0 0 --- 36.20 NO Wang Counselor M 68 --- 0 0 --- 3.5 NO Gongtang Total 0 0 --- 592.7 --- 11 (2) Information of directors, supervisors who hold posts in shareholder’ s Company Name Name of shareholder Post in shareholder’s company Term for the post Paid by shareholder’s company or not Sun Liqiang Yantai Changyu Group Chairman of the Board of 2005.10.26—2009.10.27 No Company LTD Directors and general manager Zhong Hongjiang Yantai Changyu Group Vice chairman of the Board of 2005.10.26—2009.10.27 No Company LTD Directors Fu Mingzhi Yantai Changyu Group Director and vice general 2005.10.26—2009.10.27 No Company LTD manager Leng Bin Yantai Changyu Group Director 2005.10.26—2009.10.27 No Company LTD Zhang Hongxia Yantai Changyu Group Chief of audit department - No Company LTD 2. Principal Working Experiences of Incumbent Directors, Supervisors and Senior Managers (1) Members of the Board of Directors Mr. Sun Liqiang, Chairman, is a college graduate and senior economist. Now he is the representative of Eleventh National People’s Congress, Chairman and General manager of Changyu Group. He began serving as chairman of the Company on September 18, 1997 and has held the position ever since. Mr. Zhou Hongjiang, is a mastership graduate and senior engineer. He began serving as general manager of the Company on December 28, 2001 and as Director, Vice Chairman and General Manager of the Company on May 20, 2002. Mr. Leng Bin, Director, is a postgraduate and senior accountant and now is the Director of Changyu Group. He began serving as a director of the Company on June 15, 2000. Mr. Qu Weimin, holds a bachelor of engineering and is a senior economist. He began serving as Director, Deputy General Manager and concurrently as Secretary of the board of directors of the Company on September 18, 1997. Mr. Jiang Jinqiang, is a university graduate, holds the qualifications of registered accountant and valuator, now is the full-time supervisor of SASAC Yantai. He began serving as a director of the Company on April 27, 2006. Mr. Augusto Reina is serving as chief executive officer of several companies including Illva Saronno Holding SpA and Illva Saronno Investment SRL, member of the board of directors of Barberini Spa, director of Federvini (Italian Alcohols Production and Export Association), director of Istituto Del Liquore (Wine Research Institute) and director of Assovini (Sicily Viniculture and Wine Production Association). He has been director of this company since April 27th , 2006. Mr. Aldino Marzorati, a university graduate, is general manager of Illva Saronno Holding SpA and director of the board of directors of some branches under the group company. He has been director of this company since April 27th , 2006. Mr. Antonio Appignani, a university graduate, is vice chairman of Italian Business Consultation Committee, chief of Professional Ethics Committee, teacher of vocational training course of Industrial and Commercial Consultation Committee, member of Economic and Commercial Committee of the public university “G. D Annunzio” and concurrently serving as member of the board of directors of different companies and member of the board of directors of several companies under Illva Group. He has been director of this company since April 27th, 2006. Mr. Jean-Paul Pinard, a doctor in economics and finance, began to serve as director of the Bureau of Agriculture of International Finance Corporation under World Bank from 2001, and retired in 12 2007. He has been director of this company since December 7th, 2006. Mr. Geng Zhaolin, is a postgraduate and senior engineer. He previously served as Vice Director of the China Foods Standardization Technology Committee, executive director of China Foods Technology Institute, counselor of China Association of Wine Industry. He began serving as an independent director of the Company on May 20, 2002. Mr. Ju Guoyu, is a professor and doctorate tutor. He previously served as President of Economic Institute of Peking University and Vice President of the Economic Society of Beijing Municipality, independent director of Tibet Jin Zhu Co., Ltd and Guangdong Guanhao Scientific Technology Co., Ltd. He began serving as independent director of the Company on September 24, 2003. Mr. Wang Shigang, holds an MBA and is a Senior Accountant. He previously served as Vice Chairman and Vice General Manager of Shandong Hengyuan Certified Public Accountants Firm, director of Jinan Branch of said firm, independent director of Shandong Dongyuen Chemical Industry Co.,Ltd. He began serving as independent director of the Company on May 20, 2002. Mr. Wang Zhuquan, is the doctor for administration (accountancy), holds the qualifications of registered accountant and valuator, now is the professor, master and Phd Supervisor, vice dean of Administration Institute, dean of Accountancy Department under Ocean University of China (2) Members of the Board of Supervisors Mr. Fu Mingzhi, is a university graduate and senior economist. Currently he is the Director and Deputy General Manager of Changyu Group. He began serving as a Chairman to Board of Supervisors of the Company on April 27th, 2006. Ms. Zhang Hongxia, is a college graduate and senior accountant. She is presently Director of the Auditing Office of Changyu Group. She began serving as supervisor of the Company on September 18, 1997. Mr. Lian Zhendian, a postgraduate and senior accountant, is section chief of the Planning Commission of Yantai City, supervisor of the board of supervisors of Yantai Non-ferrous Metal Group Co., Ltd., Yantai Administrative and Institutional Affairs Company and Yantai Commercial Materials Holding Co., Ltd.. He has been supervisor of this company since April 27th , 2006. (3) Other senior managers Mr. Yang Ming, is a university graduate and applied researcher. He began serving as Deputy General Manager of the Company on August 12, 1998. Mr. Li Jiming, is a doctoratoral graduate and applied researcher. He began serving as Chief Engineer of the Company on September 14, 2001. Mr. Jiang Hua, is a postgraduate and engineer. He began serving as Deputy General Manager of the Company on September 14, 2001. Mr. Sun Jian, is university graduate, MBA, assistant engineer. He began serving as Deputy General Manager of the Company on March 22, 2006. Mr. Jiang Jianxun, holds an MBA and is an accredited accountant. He began serving as Financial Supervisor of the Company on May 20, 2002. Mr. Wang Gongtang, is a postgraduate and senior engineer. He began serving as consultant of the Company on September 18, 1997. 3.Change of Directors, Supervisors and Senior Management During the report period, for fear of losing the independence as the independent director of the Company due to the change of working position, the independent director Mr. Wang Yancai put forward to resign his position in the Company. Approved by the Company’s 2007 first temporary shareholders’ meeting, Mr. Wang Yancai was not the independent director of the Company’s fourth session Board of Directors, and Mr. Wang Zhuquan was elected to be the independent director of the Company’s fourth session board of directors. During the report period, there is no any change for the other directors, supervisors and senior management. 13 4. Staff of the Company As to December 31st , 2007, the total registered staff number of the Company (including the headquarter and main controlling subsidiary company) was2,722, including 978 production workers, 1,431 sales persons, 96 technicians, 72financial members, 145 administrative persons. Among the staff members, 1017 persons were university graduates, which is 37.36% of the total employees, 685persons were college graduates, which is 25.16% of the total employees, 355 persons were Senior middle school graduates, which is 13.04% of the total employees, and 665 persons were graduated below senior middle school, which is 24.44% of the total employees. All the retired staff’s expenses were paid by social security system, not by the Company. VI. CORPORATE GOVERNANCE STRUCTURE 1. Current Corporate Governance Situation of the Company (1) Establishment and improvement of legal entity structure The Company has, according to relevant national laws and rules including the “Company Law of the People’s Republic of China”, “Securities Law of the People’s Republic of China” and “Guidelines on Listed Companies Internal Control”, established and improved its legal entity structure and legally conducted its activities within the scope of that structure. In future, the Company will further step up and perfect the functions of the Board of Supervisors and the Auditing Committee and Emolument Committee under the Board of Directors, and strengthen its internal supervision and restriction mechanism to meet the needs of the Company’s development. (2) The Company’s special activities in its internal control in 2007 1) The performance of Company’s special activities in its internal control According to the “Notice on Launching Special Activities to Strengthen Listed Companies’ Internal Controls” promulgated by China Securities Regulatory Commission and relevant requirements of Shandong Securities Regulatory Bureau, the Company set up an internal control improvement leadership group (hereinafter referred to as “leadership group” and a working group on April 20th , 2007, drew up special rules in this regard, organized concerned functional departments and persons to study relevant laws, rules and documents conscientiously and to search for problems and weak points in terms of its internal control. The leadership group called a meeting on July 18th, 2007 and during the meeting the first draft of “Company’s Self-examination Activities Report” was discussed and adopted. Moreover, the leadership group asked all departments concerned to submit operable improvement plans in the light of the first draft. And then, the leadership group held a meeting on July 25, discussing and adopting the improvement plans forwarded by different departments, making supplementation and amendment of some corresponding measures and requesting the office of the board of directors to start the process of investors’ appraisal in an effective and practical way. The Company’s fourth session Board of Directors’ 5th meeting deliberated and passed the “Company’s Internal Self-Examination Report and Improvement Plan” on August 15th and made it public in “China Securities”, “Securities Times” and the website CNINF. The Company also called a brief meeting with investors on September 22nd,2007 to hear institutional investors’ comments and suggestions to the Company’s efforts in its internal control. Shandong Securities Regulatory Bureau made a spot examination of the Company’s efforts in its internal control on October 11th and 12th ,2007 and aired concrete opinions. The Company, thereafter, made further improvement both on the problems it had found during the self examination and those pointed out by Shandong Securities Bureau. The Company’s “Internal Control Improvement Report” was deliberated and approved by its fourth session Board of Directors’ 8th meeting held on November 10th, 2007. (Please read the detailed information as The Company’s Internal Control Improvement Report in “China Securities”, “Securities Times” and the website CNINF on Nov.11th ,2007) 2) Achievements made during the Company’s special activities in its internal control Through the special activities, the Company has completed its internal control rules, further raised the sense of the Company’s directors, supervisors and senior officers in performing their duties according to rules, and as a result, the Company’s internal control system functions better than before and its ability for internal control is further strengthened. 14 2. The Duty Performance of the Independent Directors During the report period, all independent directors of the Company performed their duties conscientiously and in accordance with the law, attended all the Board of Directors’ meetings or came to the meetings as non-voting attendees in person, regularly inquired into the Company’s operations and listened to relevant reports, checked and directed the operation of the Company, in the light of independent, external and fair policy, expressed their professional opinions on the major decisions, participated in examination of and declared themselves on the significant issues such as interrelated dealings, engaging and dismissal of top management, compensation assessment and re-appointment of certified public accountants, played appropriate roles in terms of improving internal supervisory mechanisms and safeguarding the legal rights and interests of the Company and all its shareholders’. During the report period, none of the independent directors raised any objection to the Company’s activities. 3. Information for Personnel, Assets, Finance, Institution and Business Associated with Holding Shareholders (1) Personnel arrangement: the Company’s general manager, deputy general managers and other senior officers, all of whom were paid by the Company did not hold any post in the controlling parties. The Company was entirely independent in personnel arrangement, conclusion and adjustment of labor contracts thanks to its sound system in this regard. (2) Assets: intangible assets including trademark, industrial property right and non-patent technologies were all clearly divided between the Company and the controlling shareholder. Most assets belonging to the Company have been transferred and finished the relative procedures. The Company being a legal independent entity consistently conducted business activities legally and provided no guarantee in any form with its assets for its shareholders or individuals’ liabilities or any other legal persons or natural persons. However, due to some issues from the past, transfer of the Company assets are as yet incomplete. The intangible assets such as trademark ownership and land title still held by the controlling shareholders, will be actively negotiated with the controlling shareholder to rectify those long-standing problems step by step upon the precondition of no infringement on the Company and shareholders’ interests. (3) Finance: the Company has independent finance department, chief account and financial staff, and also standardized accounting system. The Company has also established own bank accounts, duly and legally paying taxes, workers insurance fund. No one of the financial department staff holds concurrent posts in associated companies. (4) Offices: the Company has set up a sound organizational framework, in which the Board of Directors and Board of Supervisors operate independently. No superior and subordinate relationship exists between the Company and the functional departments of the controlling shareholder. (5) Operations : the operations of the Company are independent of the controlling shareholder, the Company itself owns completely independent systems covering research and development, accounting, workforce and labor, quality control, raw materials purchase, production and sales, and is possessed of self-run capabilities, and has neither relationship with the controlling shareholder in terms of supply and sales by proxy nor competition with the other. 4. Formulation and Improvement of Internal Control Rules During the report period, the Company drew up and revised various internal control rules in the light of management demand. After repeated revision and amendment, the Company worked out numerous workable internal control rules in terms of production and sales, financial management and information disclosure and so on, and effectively implementing the new rules in its routine operations. so as to ensure strong supports to the Company’s sustainable and repid development, efficaciously preventing misconducts and lowering the Company’s operation risks. Please read the detailed information in Self Evaluation Report on Internal Control. 15 5. Performance Evaluation and Incentive to Senior Management The Company has already established a system for evaluation of achievement of senior management and the related incentive system, which linked the reward with the Company’s benefit, and personal achievement. The Emolument Committee under Board of Directors assumed the responsibility of stipulating the policy and appraising the scheme for salaries and rewards. Based on the production and business goals, this committee examined senior personnel according to their management achievement and index, and took these as basis for awards or penalties. The Company will orient to the market and complete the implementation of evaluation and incentive systems gradually. VII. BRIEF INTRODUCTION TO THE SHAREHOLDERS’ MEETING Totally two shareholders’ meetings were convened by the Company during the report period. 1. The 2006 Shareholder s’ Meeting The 2006 shareholder s’ meeting was held on April 12th, 2007 in the meeting room of the Company’s Wine Culture Museum. The meeting notice was published in “China Securities Newspaper”, “Securities Times” in the PRC and “Hong Kong Commercial Daily” on 13th April, 2007. 2. The 2007 First Temporary Shareholders’ Meeting The 2007 first temporary shareholder s’ meeting was held on September 7th, 2007 in the meeting room of the Company’s Wine Culture Museum. The meeting notice was published in “China Securities Newspaper”, “Securities Times” in the PRC and “Hong Kong Commercial Daily” on September 8th, 2007. VIII. BOARD OF DIRECTOR’S REPORT 1. Discussion and Analysis of Management Team (1) The review of operations during the report period ① General information of operations during the report period During the report period, the Chinese wine sector maintained rapid growth momentum., the Company grasped each and every opportunity, to work hard and effectively at the central task of tapping market potential as best it could, to steadily cope with increasingly acute competition, thus made remarkable achievements, and confirmed the leading position of the Company in Chinese wine industry. Following are the change and relative reasons concerning principal sales, principal profit and net profit of the Company during the report period: Unit: CNY Item 2007 2006 More or less than last year(%) Principal sales 2,730,166,091 2,167,274,933 25.97 Principal profit 948,281,314 565,350,395 67.73 Net profit attributed to shareholders of 635,627,764 394,517,034 61.12 listing company Remark to the main factors causing major changes: The increase of principal sales is contributed by the increase of sales revenue due to strong market demand during the report period, and the principal profit increase is caused by fast increase of principal sales, and also the lower increase of three period expenditures than that of principal sales, while the net profit attributed to shareholders of listed company is contributed by increase of principal profit. ②The principal business and its operation 16 a. Principal business achievements assorted by products and trade type Unit: CNY’0000 More or less More or less More or less than Principal Principal Gross Profit than last year of than last year of Product last year of the Sales Cost Ratio % the principal the gross profit principal sales % cost % ratio Wine & alcoholic 273,017 82,700 69.71 25.97 14.40 ↑3.06% beverage Total 273,017 82,700 69.71 25.97 14.40 ↑3.06% by product Wine 212,497 60,119 71.71 30.28 18.01 ↑2.94% Brandy 45,005 16,602 63.11 13.89 5.42 ↑2.96% Healthy Liquor 10,113 3,753 62.89 3.70 9.42 ↓1.94% Sparkling Wine 2,601 1,417 45.52 21.14 4.58 ↑8.63% Others 2,801 809 71.12 59.96 59.88 ↑0.02% Total 273,017 82,700 69.71 25.97 14.40 ↑2.93% Related party 788 418 46.95 100 100 no transaction b. Principal business achievements assorted by territory distribution Uni：CNY’0000 District Principal Sales More or less than last year of the principal sales % The coastal region 228,640 25.23 The middle region 30,943 28.67 The western region 13,434 39.28 Total 273,017 25.97 c. Business situations of key products taking over 10% of the Company’s sales The sales of wine and brandy took 10% or more of the Company’s principal business, and the sales revenue, sale cost and gross profit ratio were set below: Unit: CNY’0000 Product Name Sales Sale Cost Gross Profit Ratio (%) Wine 212,497 60,119 71.71 Brandy 45,005 16,602 63.11 During the report period, the Company’s principal business and its structure did not change a lot compared with that of the last year. d. Major suppliers and clients Unit ： CNY’0,000 Total purchases from the top 5 suppliers 9,047 Proportion of all purchases 17.3% Total products sold to the top 5 clients 20,943 Proportion of all products sold 7.7% 17 ③The Company’s asset compositions and changes of financial data Unit: CNY’0000 December 31, 2007 December 31, 2006 Increase or decrease of Entry proportion in total Proportion in total Amount Proportion in Amount assets assets (%) total assets (%) Account receivable 8,249 2.54 7,152 2.54 ↑0.00% Inventory 83,591 25.71 71,491 21.99 ↓0.28% Investable realty 0 0 0 0 - Long-term 1,000 0.31 1,000 0.36 ↓0.05% investment Fixed assets 64,071 19.71 50,267 17.88 ↑1.83% Unfinished project 4,865 1.50 4,598 1.64 ↓0.14% Short-term loans 0 0 0 0 - Long-term loans 0 0 0 0 - Increased or decreased Entry Amount for this year Amount for last year amount % Operating cost 62,465 50,133 24.60 Overheads 17,797 21,630 -17.72 Finance cost 2,338 2,120 10.28 Income tax 31,055 16,750 85.40 Remark to the main factors causing major changes: a) The operating cost is increased due to enlargement of business scope, also the increase of promotion expenditure and total rewards to sales staff. b) The decrease on overheads is mainly due to performance of new Chinese accounting standard which does not withdraw the staff welfare. c) The finance cost increase is contributed by increase on bank deposit interest income. d) It is caused by the general increase of business profit. The practical tax rate in 2007 is basically same as that of 2006. ④ Relevant changes of the Company’s cash flow during report period Unit: Y’0000 Entry Amount this year Amount last year Increased or decreased amount % Cash flow generated from operating activities Subtotal of cash inflow 3,483,762,866 2,574,349,329 35.33 Subtotal of cash outflow 2,667,601,708 2,176,274,882 22.58 Net cash flow generated from operating activities 816,161,158 398,074,447 105.03 Cash flow generated from investment activities Subtotal of cash inflow 80,748,868 88,946,589 -9.22 Subtotal of cash outflow 324,434,271 109,349,494 196.69 Net cash flow generated from investment activities 243,685,403 -20,402,905 1,094.37 Cash flow generated from capital-raising activities Subtotal of cash inflow 33,000,000 - - Subtotal of cash outflow 421,824,000 283,920,000 48.57 Net cash flow generated from capital-raising 388,824,000 283,920,000 36.95 activities Remark to the main factors causing major changes: a)The great change on cash flow from operating activities is caused by large increase of cash 18 inflow, cash outflow and net cash flow from operating activities mainly due to better operation achievements and enlargement on business scope . b) The great change on cash flow from investment is caused by much increase on cash flow and outflow from investment activities due to the increase of investment on fixed assets during report period. c) The great change on cash flow from capital-raising activities is produced by increase of cash dividends of CNY 421.82 million for 2006 Profit Distribution plan during the report period, which was a great increase than the cash dividends in the last year. ⑤ Utilization of the Company’s equipment, market and flow of technicians During the report period, the Company’s equipment was maintained in good running condition, production ran smoothly, capacity factors of equipment kept high, and no production accidents took place. By means of scientific planning and meticulous scheduling, the Company not only ensured stable production but also met market needs and with neither overstocking of products nor serious shortage of supply. There was no change of technicians and backups, thus no impact on the Company’s operations and management. ⑥ The operations and analysis of major holding and sharing company Unit: CNY Registered Total Net Sharing Business Major Products or Net Profit Company Name Capital Assets Assets Ratio Scope Services Yantai To research, 19,596 Dry red wine, dry Changyu-Castl produce and white wine and e Wine Chateau 70% sell wine and USD5 million 21,100 15,482 sparking wine of Co. LTD. sparkling Changyu-Castle wine Longfang 3,842 To produce Dry red wine, Castel-Changyu 49% USD3 million 4,718 1,163 and sell wine Dry white wine Wine Co. LTD. Yantai Kylin To produce 2,660 Cork, aluminum Packaging Co. and sell USD1.4 50% cap, PVC capsule 5,143 579 LTD. packaging million and so on. material Chateau To research, 10,630 Brandy, premium Changyu AFIP produce and 70% dry red wine and 11,000 11,223 372 Global sell brandy white wine and wine Chateau 2,689 Liaoning To produce 51% Ice wine 2,630 3,502 124 Changyu Ice ice wine Wine Co., Ltd. The net profit from Yantai Changyu-Castel Chateau accounts for 24.23% of the Company’s total and the chateau’s income on main operations is CNY 284.90million, profit from the main operations CNY 173.13million, and net profit CNY154.82 million. Since China will adopt a unified tax rate for both Chinese businesses and foreign ones as from 2008, this company will no longer enjoy the preferential tax policy for Sino-foreign joint ventures from 2008, that’s to say, its income tax will be increased to 25% from present 15%, producing negative impact on the Company’s profitability. But optimistically speaking, as the demand for the Company’s Chateau Wine has been strong, it is predicted that the Company can still maintain a higher speed of increase in 2008 which may alleviate or even offset the impact generated from increase of income tax. ⑦ Specific subject under control of the Company During the report period, the Company neither had any specific subject under its control nor needed to report related data in a consolidated statement because of existence of a specific subject. 19 (2) Looking forward to the Company’s Development ① Developing trend of the wine industry and the competition The company predicts that the Chinese wine sector will still maintain the steady growing momentum in 2008 under the macro-circumstances of fast growth of Chinese economy and with the increase of people’s incomes and the change of people’s consumption concept, and the amplification of middle-range and high-end wine representing high quality will be higher than the sector’s average amplification. On the other hand, due to the increase of similar products from abroad and domestic competitors’ size expansion, the competition in Chinese wine market will surely get more and more intense, the exploitation of market will be more and more difficult and consequently, the marketing outlay has to be increased but anyhow, the competition in which the giants like Changyu, Great Wall and Dynasty play leading roles will still exist. ② The Company’s development strategy and marketing plan Facing situations of opportunity and challenge, the Company will continue to carry out a diversified strategy, of doing its best to optimize the structures of products and sales channels, gradually increase the sales portion of middle-range and high-end products and strengthen the Company’s ability in making profits in a sustainable and steady way. The Company anticipates a turnover not less than CNY 3 billion in 2008 and plans to hold the main operating cost and other three costs under CNY 1.9 billion. To realize the abovementioned goals, the Company will mainly take the following measures: First, the Company will continue to stick to the policy of taking the market as its central focus, reinforce construction of sales teams, give more financial support to promotion and market exploitation and further enhance the Company’s marketing level. In 2008 greater efforts will be made to build and perfect the reserve capacity of management force, to train reserve personnel, and to imporve sales staff quality by means of effective training, examination and performance assessment. More expenditure on advertising will be budgeted for Cabernet, AFIP wine and ice wine. The tactics of positioning wine as the pillar product while developing different categories will be consistently adhered to, especially as regards tapping new markets for AFIP Chateau wine and ice wine while doing better in selling brandy, medicated wine and foreign alcohols in provincial cities and developed cities. Marketing management will be further tightened, innovations in the field of sales will be praised of and rewarded, the professional knowledge of salesmen at different levels will be enriched and the sales network operating efficiency increased. Secondly, the Company will tighten financial management and auditing, perfect its information management system, effectively control operating risks and enhance the company’s efficiency. The Company will do its utmost to strengthen control and assessment of controllable costs and expenses, establish a system of quantified index assessment, perfect the use and management of capital, actively and steadily enhance the efficiency of capital use, improve the system of financial settlement and enhance the efficiency of settlement.It will focus audits on cost, storage expense, transport charges and input-output ratio of the wine base. Efforts will be taken to promote and perfect construction of DRP information system, complete the information system of warehousing and logistics, and extend use of e-bank. Thirdly, the Company will continue to increase its production capacity and develop a relatively complete support system in terms of all links of grape supply, storage and bottling to ensure the Company’s production needs are met for coming three years. Fourthly, the Company will accelerate personnel system reforms and pay more attention to workers’ training in a bid to increase their quality and strengthen their ability. The Company will implement more reforms in its personnel recruitment, selecting first from its own employees, and gradually opening positions to the community to recruit talents so as to form a vigorous personnel mechanism of offering posts to talents who can give full play to their initiative, continue to including all workers into its training program to improve their working skills, professionalism and quality. ③ The Company’s capital demand and investment plan The Company will invest its own capital CNY 85 million in construction of the unfinished Beijing Changyu-AFIP International Chateau and adding 10,000t storage tanks in 2008. ④ Potential risks and countermeasures a) Risks of fluctuation of raw material prices 20 Grapes are the main raw materials for the Company to produce wine. The yield and quality of grapes are closely related to some natural factors like drought, rains, snow and frost and so on, which will generate impact on the quantity and price of grapes procured by the Company and make the outcome of the Company’s production and profitability even more unpredictable. Therefore, the Company will optimize the layout of vineyards to lower the risks of grape price by means of the methods such as developing new vineyards in Ningxia and Shanxi as well as extending the area of self-run vineyards. b) Risks of uncertainty of input-output ratio Under the circumstances of intensified market competition and to meet the needs for market exploitation, the Company has to invest more and more in the market that it makes sales cost stand at a higher level in the turnovers, and the Company’s operation outcome will be greatly influenced by the input-output ratio and there may be risks in some aspects that some investments can’t get the predicted returns. Therefore, the Company will try to enhance the accuracy of market prediction by virtue of intensifying the market survey and analysis, and continue to perfect its input-output assessment system to ensure that investment can reach the predicted goals. c) Risks in product transport The Company’s products are fragile but they are sent to all places in China mainly by sea, railway and highway because of strong market demand, especially in the cold winter when it is peak season of sales. As the products may not be duly transported to the markets due to the factors such as short of transport means, wind, snow and freezing, the Company will face the risks that the products can’t be sent to markets in time during the peak season of sales. To overcome the disadvantages, the Company will make its efforts to lower those risks by doing well in sales prediction and effective linking production to sales, arranging production and transport reasonably, and increasing the inventories in the distant markets before the peak season of sales. 2. Investment of the Company (1) The Uses of the Proceeds Collected in the Report Period The Company made a public offering of 32 million A Shares for capital increase in October of 2000, and received net proceeds of CNY 613.46 million. The Company actually invested in same projects as disclosed in the Prospectus, by end of report period, and there is no any change on imvestment project. During the report period, CNY 63.31 million has been invested in project of Chateau Changyu AFIP Global, the shortage of investment was supplied by the Company’s own capital. Except those projects for improvement of middle procedures on production and sales which were difficult to rationally confirm the benefit, other productive projects all made good benefits. (2). Projects invested with non-raised capital During the report period, the Company totally invested self-possessed capital CNY 28.92 million in the following three projects: The first one was CNY 10.69 million in construction of Changyu-Afip Chateau Beijing. The second one was CNY 11.93 million in the adjusting and improving of 7000mu vineyard bases in Penglai and Ningxia. The third one was CNY 6.30 million on purchasing one working office respectively in Dalian, Guiyang and Shijiazhuang so as to improve the image of the Company’s sales branch in those cities and ensure the supply ability of local market. 3. Audits and Changes of Accounting Policies Ernest & Yong Huaming audited the Company’s 2007 financial report and accordingly compiled a standard auditing report with unreserved audit advice. Please read the appendix of financial statement of the Company for the change of accounting policy and accounting estimation or alteration of accounting error, or the difference between China and International accounting standards. 21 4. Information of Routine Work of the Board of Directors (1) Meetings and resolutions of the Board of Directors during the report period Seven meetings of the board of directors were convened during the report period. ①The 2nd meeting of the 4th-term Board of Directors was held on March 14th , 2007, the resolution announcement was published in “China Securities Newspaper”, “Securities Times” in the PRC and “Hong Kong Commercial Daily” on March 17th , 2007. ②The 3rd meeting of the 4th-term Board of Directors was held on April 20th, 2007, the proposal of The First Quarter Report of 2007 was deliberated and approved. ③The 4th meeting of the 4th-term Board of Directors was held on August 2nd , 2007, the resolution announcement was published in “China Securities Newspaper”, “Securities Times” in the PRC and “Hong Kong Commercial Daily” on August 4th , 2007. ④The 5th meeting of the 4th-term Board of Directors was held on August 15th, 2007, the resolution announcement was published in “China Securities Newspaper”, “Securities Times” in the PRC and “Hong Kong Commercial Daily” on August 18th , 2007. ⑤The 6th meeting of the 4th-term Board of Directors was held on Sept. 23rd, 2007, the resolution announcement was published in “China Securities Newspaper”, “Securities Times” in the PRC and “Hong Kong Commercial Daily” on Sept. 25th , 2007. ⑥The 7th meeting of the 4th-term Board of Directors was held on Oct. 18th, 2007, the proposal of The Third Quarter Report of 2007 was deliberated and approved. ⑦The 8th meeting of the 4th-term Board of Directors was held on Nov.10th , 2007, the resolution announcement was published in “China Securities Newspaper”, “Securities Times” in the PRC and “Hong Kong Commercial Daily” on Nov.. 13th , 2007. (2) Information on the execution of the resolutions of shareholders’ meetings by the Board of Directors ① According to the resolutions of 2006 Shareholders’ meeting, the Company has invested all remaining capital CNY63.31 million from increased public offering of A share in 2000 on the project of Chateau Changyu AFIP Global, the first phase of this project was completed and put into production from June 6th, 2007. ②. The execution of the scheme on the Company’s profit distribution 2006 According to the resolution of 2006 Shareholders’ Meeting, the Board of Directors executed the following profit distribution scheme of 2006 during the report period: The company’s total 527.28 million shares by the end of 2006 were taken as cardinal number to distribute CNY 8.00 in cash for every 10 shares to all the shareholders (tax included, the actual after-tax dividend distributed to the individual shareholders and fund investors is CNY7.20 per 10 shares). The announcement of the profit distribution was made public in “China Securities News”, “Securities Times” and “Hong Kong Commercial Daily” on April 21st , the date of April 25th , 2007 was set as the registration date of Stock A ownership and the last trading date of Stock B, the ex dividend date was April 26th, 2007 for both Stock A and Stock B. The said profit distribution was completed by the end of April 2007. (3) Summarized report on performance of the auditing committee under the Board of Directors a) Before the auditors started auditing of the Company’s 2007 financial activities, the auditing committee examined the company-compiled financial statements on January 19th, 2008 and aired its opinions which read “① The Company’s 2007 annual financial statement is the first annual report after the Company began to follow the new accounting standards, for which the Company may be required to adjust the data in its 2006 annual report and 2005 annual report and the Company’s financial department must take it into serious consideration. ②The Company shall deal with the affairs in relation to the subsidiary companies it newly acquired in 2007 properly as they are relatively large and located in other places. ③The certified public accountants firm that the Company engaged to make an auditing of the Company’s annual financial statements shall perform its auditing duties strictly in accordance with the “Guidelines on Chinese Certified Public 22 Accountants’ Professional Activities” and duly communicate with this committee whenever it finds important problems. We believe that this financial statement can be submitted to the certified public accountants for annual auditing”. We exchanged ideas with the certified public accountants firm on January 30th, 2008 on the issues of auditing procedures and corresponding arrangements. b) The auditing committee examined the Company’s financial statements once again after the engaged accountants had aired their preliminary opinions and afterwards discussed with the accountants on March 21th, 2008, when they made out the written comments which read “we compared notes in detail with the certified public accountants firm who was responsible for auditing the Company’s annual financial statements and made detailed explanations of the problems found during auditing and the items to be adjusted. The Company has made an adjustment to the items in reference to the certified public accountants’ comments. According to the auditing results we learnt from the said accountants and the production and sales results in the year that were reported to us by the Company’s management as well as the progress of important issues, we came to a conclusion at last that we have no objection to the Company’s 2007 financial statements preliminarily determined by Ernst & Young Hua Ming and its preliminary auditing opinions. c) After the Company’s financial statements were finally decided, the auditing committee held a meeting on March 10th , 2008 to vote for the Company’s 2007 financial statements and made out a written resolution which reads “It is unanimously agreed to submit the Company’s 2007 financial statements audited by Ernst & Young Hua Ming to the Company’s Board of Directors for deliberation”. The auditing committee gave full play to its supervision function during the course of auditing the Company’s 2007 financial statements and safeguarded the auditing independency. (4) Summarized report on performance of the emolument committee under the Board of Directors The emolument committee under the Board of Directors is responsible for assessment of the performance of the directors, supervisors and senior managers who get paid by the Company and examine the pay policy and scheme on the Company’s directors, supervisors and senior managers. The emolument committee of the Company’s Board of Directors examined in 2007 the paying details on the directors, supervisors and senior managers who received their salaries in this Company in 2006 and checked the payroll of the Company’s directors, supervisors and senior managers which was disclosed in 2007 annual report. It is believed that the assessment was made on the salaries of the directors, supervisors and senior managers who get paid by the Company entirely in accordance with the Company’s economic responsibility system and the salaries disclosed by the Company were in conformity with the actually paid amount. 5. Preliminary plan for profit distribution Audited by Ernest & Yong Huaming, the Company realized net profit CNY638,894, after deducting the minority shareholders’ equity, the net profit attributed to the Company is CNY635,627,764. In view of current sufficient capital which could ensure the support of capital investment within two years, the Board of Directors proposes to distribute the profits made in 2007 as follows: based on a total of 527.28 million shares of the Company registered on 31st December, 2007 to pay CNY11.00 in cash for every 10 shares (including personal income tax for CNY common stock, after deducting the personal income tax, the actual distribution is CNY 9.90 per 10 shares to individual shareholders of common share and investment funds) as dividends to all shareholders, totaling CNY 580.008 million. The cash dividends paid to the shareholders of domestically listed foreign-currency stock (Stock B) shall be transferred to the beneficiaries’ accounts in HKD at the middle rate of CNY to HKD listed by People’s Bank of China on the first working day after the day when the resolution of shareholders’ meeting was made. The above distribution plan will be submitted to 2007 shareholders’ meeting for deliberation. 6. Other Disclosed Information The newspapers for the Company to disclose information remained the same and still are “China Securities Newspaper”, “Securities Times” in PRC and “Hong Kong Commercial Daily” at abroad. 23 IX. BOARD OF SUPERVISORS’ REPORT 1. Meetings of the Board of Supervisors Four meetings of the Board of Supervisors were convened during the report period. The 7th meeting of the 3rd-term Board of Supervisors was held on March 14th , 2007, two proposals were deliberated including “Proposal on 2006 Annual Report ”, “2006 Profit Distribution Scheme ”, while “The Report of Board of Supervisors 2006 ”was deliberate and passed. The 8th meeting of the 3rd-term Board of Supervisors was held on April 22nd, 2007, one proposals was deliberated and approved as “The Proposal of First Quarter Report 2007”. The 9th meeting of the 3rd-term Board of Supervisors was held on August 15th , 2007, one proposals was deliberated and approved as “The Semi-annual Report 2007”. The 10th meeting of the 3rd-term board of supervisors was held on October 18th, 2007, the proposal as “The Report of Third Quarter 2007” was delibrated and approved. 2. Independent Comments of the Board of Supervisors for Relative Issues 2007 During the report period, the Board of Supervisors of the Company conscientiously performed its duties, was active in its work, attended several meetings of the board of directors as non-voter, well supervised major issues of the Company including shareholders’ meeting, the meeting procedures of Board of Directors, resolutions, resolutions execution of shareholders’ meeting by board of directors, the duty performance of top management, carried out a series of supervisory and checking activities in the Company’s operations, financial condition, interrelated transactions, use of raised capital, etc.The following comments are hereto written out after careful studies: (1) During the report period, the operation of the Company was completely in accordance with the Company Law of the People’s Republic of China, Articles of the Association, also relevant policies and statutes of state. The decision-making procedure of the Company was within the law, and the Company had established perfect inner management system. During the report period, the directors and senior managerial staff of the Company were honest and dedicated to their work, abided by laws and rules, could conscientiously execute the resolutions of the shareholders’ meetings and the decisions of the Board of Directors, followed the national laws, rules and the Company-made regulations while performing their duties, safeguarded the interests of both the Company and all shareholders, and were found no conducts and behaviors against laws, rules, the company-made regulations or of infringements upon the interests of the Company. (2) The Company’s financial management is up to the standards and accounting system is complete. The Company followed the standards and system strictly and we’ve not found the phenomenon that the Company’s assets were illegally impropriated or capital was lost. During the report period, the Company’s various expenses were reasonable and rational and its reserves accorded with the provisions in law, rules and articles of association. The Company’s financial condition was good and asset quality satisfactory and calculation and confirmation of revenues, outlays and profits were true and accurate. Ernest & Yong Huaming conducted audits to the Company’s 2007 financial statements according to the international accounting standards and Chinese accounting standards respectively and issued an auditing report with clean opinion accordingly. This Board of Directors believes that the report mirrored out the Company’s financial standing, operating outcomes and cash flow authentically, objectively and accurately. (3) During the report period, the Company had no conduct of raising capital, and in October 2000 the Company issued 32,000,000 shares of CNY-denominated common stock and the capital raised thereof was actually invested in the promised projects which were in conformity with those as written in the “Booklet of Directions on Stock Issuance”, and the said capital was not used for any other projects. The projects that have been put into operation have generated satisfactory investment cost recovery. (4) No conducts of underground deals and infringements upon shareholders’ interests or of making the losses of corporate assets were found. (5) The interrelated transactions occurred during the report period were carried out strictly in the light of the relevant state stipulations and with complete formalities and on the basis of impartial transaction, which were all for the good of the company and shareholders. The Company had no corporate or private guarantee/ pledge-related contracts. (6) The Board of Directors and managerial group of the Company fully executed all resolutions of shareholders’ meetings, and made well achievements on operation. 24 X．Major Issues 1. The Company had no major lawsuit and arbitration over the year. 2. The relative issues about bankruptcy and reform During the report period, the Company had no any bankruptcy and reform activity. 3. The information about holding share equity of other listed company or financial enterprise. The Company does not hold share equity of other listed company, or any financial enterprises including commercial bank, securities company, insurance company, trust company and futures company. 4. Important merger and acquisition, sales of assets. The Company had no merger and acquisition, sales of assets during the report period. 5. The performance on share equity incentive scheme The Company does not constitute or execute any share equity incentive scheme. 6. Significant interrelated deals 1) Renting the houses and land from the controlling party During the report period, the Company signed a “Leasing Agreement of Houses and Land” with its controlling stockholder Yantai Changyu Group Co., Ltd. to rent 56,943.5m2 land and 25,702.27m2 houses with annual rental CNY 6.383 million. The transaction amount of this interrelated deal accounted for 0.28% of the Company’s 2007 unaudited net assets and the deal was examined and passed by the Company’s fourth session Board of Directors’ 2nd meeting. 2) Interrelated creditor’s rights and liabilities By the end of report period, the running capital CNY 13.9 million involved between the Company and its controlling shareholder has already been paid back to the Company. During the report period, neither the controlling party nor its affiliated businesses ever used the Company’s capital for non-operating purpose, and there is also no any guarantee activity occurred. The Company provided capital CNY 0 to its controlling shareholder and subsidiary companies during the report period and the balance so far is CNY 0. The capital circulations among the Company and its controlling shareholder and subsidiary companies all belong to operating capital flow and the interrelated credits and debts between the Company and its controlling shareholder will not produce any impact on the Company’s operating results and financial condition. 3) Read the remark of financial statements “8. Relationship between the Interrelated Parties and Their Deals” for the interrelated deals extended from the previous year(s) to the report period. 7. Major and important contracts and execution results (1) During the report period, the Company had no guarantee/ pledge-related contracts. It didn’t trust, contract or lease the assets of other companies, and vice versa. (2) Major guarantee During the report period, the Company neither had any immature guarantee nor provided any guarantee to any units including the subsidiary companies of the Company and individuals. (3) Financing entrustment During the report period, the Company established no trusteeship with any party in terms of its monetary capital nor was there entrusted financing extended from the previous years to the report period 8. Issues Promised by the Company During the report period, the controlling party Yantai Changyu Group Co., Ltd. promised that as from the day of being granted the right of circulation on stock market, it would not transact or transfer its shareholding in the Company within 36 months and within 12 months as from the day of the expiry of the afore-said promising period, the amount of the former non-circulating stock that Changyu Group may list for transaction at Stock Exchange can’t be over 5% of its total and within 24 months after that, can’t be over 10% of its total. The group company also promised to propose over the shareholders’ meetings 2005, 2006 and 2007 to distribute the Company’s profit in cash no less than 65% of the distributable profit realized in the same year and ensure to have the proposal passed. Yantai Changyu Group Co., Ltd. realized its promise during the report period to have 2006 profit distribution scheme passed over 2006 shareholders’ meeting and agreed to distribute in cash all the distributable profits made in 2006. 25 Except that, neither the Company nor any of the shareholders who held over 5% (including 5%) of the Company’s shares ever made any promises during the report period that might generate significant influence on the company’s operating outcomes and financial activities. 9. Information about appointing and dismissing certified public accountants firm The resolution was passed during the first temporary shareholders’ meeting in 2007 in which the Company decided to appoint Ernest & Yong Huaming to be the auditor for the Company in 2007 for a length of one year. The annual auditing expenditure totalled up to CNY1.3 million including travel fees and all operating cost. 10. Records of punishments, criticism in the form of circular or open reprimands made by the competent authorities During the report period, no punishment records, enquiries, administrative punishment, written criticism, public reprimand nor investigations were made or filed against this company, its directors, supervisors, senior managers, stockholders or actual controller by the China Securities Regulatory Commission, securities exchanges, or other competent authorities, judicial departments or disciplinary inspection departments. Nor were there any prosecutions or individuals detained for criminal responsibilities. 11. The Company’s Receptions, Studies and Visits Reception date Reception place Reception way Visitor Main topic and material provided Feb.13rd 2007 Meeting room of the Field survey Gongyin Ruixin Principal operation, Company Funds future development March 18th, 2007 Meeting room of the Field survey Changjiang Principal operation, Company future development Securities April 8th, 2007 Meeting room of the Field survey Guoxin Securities Principal operation, Company future development May 22nd,2007 Meeting room of the Field survey Changcheng Funds Principal operation, Company future development June 3rd, 2007 Meeting room of the Field survey Guojin Securities Principal operation, Company future development Aug. 23rd, 2007 Meeting room of the Field survey Tidemen Principal operation, Company future development Investment Aug. 23rd, 2007 Meeting room of the Field survey Deutschebank Principal operation, Company future development Sept. 23rd, 2007 Meeting room of the Field survey Avenue Capital Principal operation, Company future development U.S.A Sept. 23rd, 2007 Meeting room of the Field survey Huaxia Fund Principal operation, Company future development Sept. 23rd, 2007 Meeting room of the Field survey Zhonghai Fund Principal operation, Company future development Sept. 23rd, 2007 Meeting room of the Field survey Nanfang Fund Principal operation, Company future development Sept. 23rd, 2007 Meeting room of the Field survey Jinbilian Fund Principal operation, Company future development Sept. 23rd, 2007 Meeting room of the Field survey Rosefinch Principal operation, Company Investment future development Sept. 23rd, 2007 Meeting room of the Field survey Shenyin Wanguo Principal operation, Company Securities future development Oct.10th , 2007 Meeting room of the Field survey Chang Xin Assets Principal operation, Company future development Oct.11th , 2007 Meeting room of the Field survey Guangfa Funds Principal operation, Company future development Nov. 8th , 2007 Meeting room of the Field survey Guotaijunan Principal operation, 26 Company Securities future development Nov.12th , 2007 Meeting room of the Field survey Guangfa Securities Principal operation, Company future development Dec.14th , 2007 Meeting room of the Field survey CITICS Principal operation, Company future development Dec.16th , 2007 Meeting room of the Field survey Pengyuan Principal operation, Company management future development & consulting Dec.16th , 2007 Meeting room of the Field survey KAIGI consulting Principal operation, Company future development 12. Other Major Issues (1) During the report period, because of the good quality and sufficient supply of winemaking grape yields in the major winemaking grape growing areas including China’s Jiaodong Penninsula, the Company’s spending in purchasing grapes in 2007 almost kept the same as last year, which was beneficial to control the cost, keep and increase the gross profit rate of the Company. (2) The Company will not make any financing through the issuance any shares or bonds within the prescient one year. 27 XI. Financial Report INDEPENDENT AUDITORS’ REPORT To the shareholders of Yantai Changyu Pioneer Wine Company Limited (A joint stock limited company incorporated in the People’s Republic of China) We have audited the financial statements of Yantai Changyu Pioneer Wine Company Limited (the “Company”) and its subsidiaries (collectively the “Group”) set out on pages 3 to 101, which comprise the consolidated and company balance sheets as at 31 December 2007, and the consolidated and company income statement, statement of changes in equity and cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes. Directors’ responsibility for the financial statements The directors of the Company are responsible for the preparation and the true and fair presentation of these financial statements in accordance with Chinese Accounting Standards. This responsibility includes designing, implementing and maintaining internal control relevant to the preparation and the true and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditors’ responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with PRC Standards on Auditing issued by the Chinese Institute of Certified Public Accountants. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance as to whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity’s preparation and true and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 28 Opinion In our opinion, the financial statements give a true and fair view of the state of affairs of the Company and of the Group as at 31 December 2007 and of the Group’s profit and cash flows for the year then ended in accordance with Chinese Accounting Standards. Ernst & Young Hua Ming Chinese Certified Public Accountant: Li Di Chinese Certified Public Accountant: Qian Xiao Yun Beijing, the People’s Republic of China 21 March 2008 29 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED CONSOLIDATED BALANCE SHEET Year ended 31 December 2007 ASSETS Notes 6 31 December 2007 31 December 2006 (restated) CURRENT ASSETS Cash and cash equivalents 1 1,322,898,600 1,192,475,575 Bills receivable 2 11,524,698 11,150,117 Trade receivables 3 82,490,201 71,519,265 Advances to suppliers 4 35,046,532 28,438,937 Interest receivable 5 13,518,196 11,017,756 Other receivables 6 24,581,648 22,671,853 Inventories 7 835,906,849 714,905,943 257,84 263,38 Other current assets 8 8 Total current assets 2,326,224,572 2,052,442,834 NON-CURRENT ASSETS Held-to-maturity investments 8 15,000,000 15,000,000 Long term equity investments 9 10,000,000 10,000,000 Property, plant and equipments 10 640,710,159 502,669,698 Construction in progress 11 48,646,061 45,984,471 Intangible assets 12 100,592,748 92,941,524 Biological assets 13 19,821,941 - Long term prepaid expense 14 11,808,079 7,397,324 Deferred tax assets 15 69,806,649 74,682,066 Other non-current assets 8,614,265 10,438,664 Total non-current assets 924,999,902 759,113,747 Total assets 3,251,224,474 2,811,556,581 The notes on page 14 to page 101 are an integral part of these financial statements. 30 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED CONSOLIDATED BALANCE SHEET(CONTINUED) Year ended 31 December 2007 LIABILITIES AND EQUITY Notes 6 31 December 2007 31 December 2006 (restated) CURRENT LIABILITIES Trade payables 17 202,289,452 125,473,928 Advances from customers 18 45,118,769 46,604,282 Employee benefits 19 126,456,239 178,742,999 Tax payable 20 338,885,842 155,045,432 Other payables 21 224,095,102 226,161,906 Other current liabilities - 10,708,238 Total current liabilities 936,845,404 742,736,785 Total liabilities 936,845,404 742,736,785 EQUITY Issued capital 22 527,280,000 527,280,000 Capital reserve 23 557,222,454 557,222,454 Surplus reserve 24 295,942,630 295,942,630 Retained earnings 25 848,575,292 634,771,528 Equity attributable to equity holders of the Company 2,229,020,376 2,015,216,612 Minority interest 26 85,358,694 53,603,184 Total equity 2,314,379,070 2,068,819,796 Total liabilities and equity 3,251,224,474 2,811,556,581 The notes on page 14 to page 101 are an integral part of these financial statements. The financial statements on pages 3 to 101 have been signed by: Director/General Manager Financial controller/Chief AccountantAccounting Supervisor 21 March, 2008 21 March, 2008 21 March, 2008 31 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED CONSOLIDATED INCOME STATEMENT Year ended 31 December 2007 Notes 6 Year ended 31 December 2007 2006 (restated) REVENUE 27 2,730,166,091 2,167,274,933 Cost of sales 27 827,001,088 722,876,381 Less: Taxes and surcharges 28 186,317,901 160,456,063 Selling expenses 624,646,818 501,333,602 Administrative expenses 177,966,052 216,301,506 Provision on impairment of assets 29 ( 9,633,943 ) 22,166,952 Add: Interest income 30 23,379,783 21,203,836 Investment income 31 1,033,356 6,130 Operating profits 948,281,314 565,350,395 Non-operating income 32 5,634,857 1,341,934 Less: non-operating expenses 33 4,472,745 1,669,102 Including: losses on disposal of non-current assets 2,226,670 123,885 Profits before income tax 949,443,426 565,023,227 Less: income tax expense 34 310,548,848 167,503,611 Profit for the year 638,894,578 397,519,616 Attributable to Equity holders of the Company 635,627,764 394,517,034 Minority interests 3,266,814 3,002,582 Earnings per share Basic earnings per share 35 1.21 0.75 Diluted earnings per share 35 1.21 0.75 32 The notes on page 14 to page 101 are an integral part of these financial statements. 33 YA NT YANTAI CHANGYU PIONEER WINE COMPANY LIMITED AI CONSOLIDATED STATEMENT OF CHANGES IN EQUITY CH Year ended 31 December 2007 AN Year ended 31 December 2007 Attributable to equity holders of the Company GY Capital Surplus Retained Minority U Issued capital surplus reserve earnings subtotal interest Total PIO At 31 December 2006 527,280,000 557,222,454 295,942,630 629,268,045 2,009,713,129 53,603,184 2,063,316,313 NE Add :retrospective adjustments on ER first-time adoption of CAS( No.25 of Notes 3) - - - 5,503,483 5,503,483 - 5,503,483 WI 1 January 2007 At (after retrospective NE adjustments) 527,280,000 557,222,454 295,942,630 634,771,528 2,015,216,612 53,603,184 2,068,819,796 CO for the year Profit - - - 635,627,764 635,627,764 3,266,814 638,894,578 Disposal of a MP subsidiary( No.39 of 4,511,3 Notes6) - - - - - ( 4,511,304) 04) AN Transferred from capital surplus( No.26 of Y Notes6) - - - - - 33,000,000 33,000,000 LI Appropriation to reserves ( No.27 of MI Notes6) - - - - - - - TE dividend ( No.28 Final of Notes6 ) - - - (421,824,000) 421,824,000) - 421,824,000) D At 31 December 2007 CO 527,280,000 557,222,454 295,942,630 848,575,292 2,229,020,376 85,358,694 2,314,379,070 NS OL Year ended 31 December 2006 Attributable to equity holders of the Company ID Capital Surplus Retained Minority AT Issued capital surplus reserve earnings subtotal interest Total ED At 1 January 2006 405,600,000 678,902,454 251,556,299 513,711,071 1,849,769,824 37,713,602 1,887,483,426 CA Add :retrospective SH adjustments on first-time FL adoption of CAS( No.25 of Notes 3) - - - 54,849,754 54,849,754 - 54,849,754 O 1 January 2006 At W (after retrospective adjustments) 405,600,000 678,902,454 251,556,299 568,560,825 1,904,619,578 37,713,602 1,942,333,180 ST AT for the year Profit - - - 394,517,034 394,517,034 3,002,582 397,519,616 EM Disposal of a subsidiary - - - - - - - EN Transferred from capital T surplus 121,680,000 (121,680,000) - - - 12,887,000 12,887,000 Appropriation of Yea reserves ( No.27 of r Notes6) - - 44,386,331 ( 44,386,331) - - - end Final dividend ( 283,920,00 ed of Notes6) (No.28 - - - (283,920,000) 0) - ( 283,920,000) 删除的内容: YANTCHANGYU 31 PIONEER WINE COMPANY At 31 December 2006 LIMITED Dec 527,280,000 557,222,454 295,942,630 634,771,528 2,015,216,612 53,603,184 2,068,819,796 CONSOLIDATED STATEMENT em OF CHANGES IN EQUITY ber The notes on page 14 to page 101 are an integral part of these financial statements. Year ended 31 December 2007 200 34 ... [1] 7 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED CONSOLIDATED CASH FLOW STATEMENT Year ended 31 December 2007 Year ended 31December Notes 6 2007 2006 CASHFLOWS FROM OPERATING ACTIVITIES Cash received from sales 3,440,017,628 2,539,919,808 Cash received form tax refund - Cash received from other operating activities 43,745,238 34,429,521 Cash inflow from operating activities 3,483,762,866 2,574,349,329 Purchase of goods (1,263,057,469 ) (1,016,190,476 ) Payment of employee benefits ( 218,228,237 ) ( 136,496,268 ) Taxes paid ( 632,805,773 ) ( 501,236,488 ) Cash paid for other operating activities 36 ( 553,510,229 ) ( 522,351,650 ) Cash outflow from operating activities (2,667,601,708 ) (2,176,274,882 ) Net cash inflow from operating activities 37 816,161,158 398,074,447 CASHFLOWS FROM INVESTING ACTIVITIES Decrease in time deposit (over three months) 53,095,022 62,452,158 Cash received from interest income 23,244,756 22,421,288 Proceeds from disposals of property, plant and equipment 4,409,090 2,850,013 Disposal of a subsidiary - 1,223,130 Cash inflow from investing activities 80,748,868 88,946,589 Purchase of property, plant and equipment, intangible assets and other non-current assets ( 319,940,385 ) (109,349,494 ) ) Disposal of a subsidiary ( 4,493,886 - Cash outflow from investing activities ( 324,434,271 ) ( 109,349,494 ) Net cash outflow from investing activities ( 243,685,403 ) ( 20,402,905 ) 35 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED CONSOLIDATED CASH FLOW STATEMENT(CONTINUED) Year ended 31 December 2007 Year ended 31 December Notes 6 2007 2006 CASH FLOWS FROM FINANCING ACTIVITIES Cash contribution from MI 26 33,000,000 - Cash inflow from financing activities 33,000,000 - Dividends paid 25 ( 421,824,000 ) ( 283,920,000 ) Cash outflow from financing activities ( 421,824,000 ) ( 283,920,000 ) Net cash outflow from financing activities (388,824,000 ) ( 283,920,000 ) NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 183,651,755 93,751,542 Add: Cash and cash equivalents at beginning of year 672,882,876 579,131,334 CASH AND CASH EQUIVALENTS AT END OF YEAR 38 856,534,631 672,882,876 The notes on page 14 to page 101 are an integral part of these financial statements. 36 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED BALANCE SHEET Year ended 31 December 2007 ASSETS Notes 15 31 December 2007 31 December 2006 批注 [H1]: (restated) CURRENT ASSETS Cash and cash equivalents 1 1,075,006,949 1,051,755,177 Bills receivable 5,498,698 2,616,917 Trade receivables 2 10,237,494 15,581,976 Advances to suppliers 6,812,603 11,061,750 Interest receivable 13,518,196 11,017,756 Dividend receivable 16 116,085,055 - Other receivables 3 117,846,668 16,431,605 Inventories 4 433,048,652 421,567,271 Other current assets 65,875 63,393 Total current assets 1,778,120,190 1,530,095,845 NON-CURRENT ASSETS Held-to maturity investments 15,000,000 15,000,000 Long term equity investments 5 168,027,178 125,669,074 Property, plant and equipment 6 376,081,728 358,766,720 Construction in progress 2,334,103 18,976,128 Intangible assets 7 96,717,460 92,931,391 Biological assets 5,841,679 - Deferred tax assets 8 17,089,266 20,946,845 Other non-current assets 8,044,965 9,714,126 Total non-current assets 689,136,379 642,004,284 Total assets 2,467,256,569 2,172,100,129 The notes on page 14 to page 101 are an integral part of these financial statements. 37 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED BALANCE SHEET(CONTINUED) Year ended 31 December 2007 LIABILITIES AND EQUITY Notes 15 31 December 2007 31 December 2006 (restated) CURRENT LIABILITIES Trade payables 10 154,766,924 173,165,141 Employee benefits 11 109,276,553 167,757,850 Tax payable 12 60,392,343 42,846,754 Other payables 13 47,094,459 933,435,176 Other current liabilities - 4,055,268 Total current liabilities 371,530,279 1,321,260,189 Total liabilities 371,530,279 1,321,260,189 EQUITY Issued capital No.22 of Notes 6 527,280,000 527,280,000 Capital reserve No.23 of Notes 6 557,222,454 557,222,454 No.24 of Notes Surplus reserve 6 295,942,630 295,942,630 Retained earnings No.14 of Notes 6 715,281,206 ( 529,605,144 ) Total equity 2,095,726,290 850,839,940 Total liabilities and equity 2,467,256,569 2,172,100,129 The notes on page 14 to page 101 are an integral part of these financial statements. The financial statements on pages 3 to 101 have been signed by: Director/General Manager Financial controller/Chief Accountant Accounting Supervisor 21 March, 2008 21 March, 2008 21 March, 2008 38 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED INCOME STATEMENT Year ended 31 December 2007 Notes 15 2007 2006 (restated) REVENUE 15 1,044,073,399 948,396,074 Cost of sales 15 766,664,404 708,849,045 Less: Taxes and surcharges 119,953,382 117,409,824 Administrative expenses 107,033,805 146,669,238 Provision on impairment of assets 16 ( 328,085 ) 8,328,085 Add: Interest income 21,707,941 21,343,769 Investment income 1,627,148,419 82,974,285 Operating profits 1,699,606,253 71,457,936 Non-operating income 3,068,835 756,839 Less :non-operating expenses 1,727,300 1,553,917 Profits before income tax 1,700,947,788 70,660,858 Less: income tax expense 34,237,438 3,942,387 Profit for the year 1,666,710,350 66,718,471 Earning per share Basic earnings per share 3.16 0.13 Diluted earnings per share 3.16 0.13 The notes on page 14 to page 101 are an integral part of these financial statements. 39 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED STATEMENT OF CHANGES IN EQUITY Year ended 31 December 2007 Year ended 31 December 2007 Capital Surplus Retained Issued capital surplus reserve earnings Total At 31 December 2006 527,280,000 557,222,454 295,942,630 629,268,045 2,009,713,129 Add :retrospective adjustments on first-time adoption of CAS (No.25 of Notes 3) - - - (1,158,873,189) (1,158,873,189) At 1 January 2007 (after retrospective adjustments) 527,280,000 557,222,454 295,942,630 (529,605,144) 850,839,940 Profit for the year - - - 1,666,710,350 1,666,710,350 Transferred from capital surplus reserve Final dividend (No.25 of Notes 6) - - - ( 421,824,000) ( 421,824,000 At 31 December 2007 527,280,000 557,222,454 295,942,630 715,281,206 2,095,726,290 Year ended 31 December 2006 Capital Surplus Retained Issued capital surplus reserve earnings Total At 31 December 2005 405,600,000 678,902,454 251,556,299 513,711,071 1,849,769,824 Add :retrospective adjustments on first-time adoption of CAS (No.25 of Notes 3) - - - ( 781,728,355) ( 781,728,355) At 1 January 2006 (after retrospective adjustments) 405,600,000 678,902,454 251,556,299 ( 268,017,284) 1,068,041,469 Profit for the year - - - 66,718,471 66,718,471 Transferred from capital surplus reserve 121,680,000 (121,680,000) Appropriation from reserves - - 44,386,331 44,386,331) - Final dividend (No.25 of Notes 6) - - - ( 283,920,000) ( 283,920,000 ) At 31 December 2006 527,280,000 557,222,454 295,942,630 ( 529,605,144) 850,839,940 The notes on page 14 to page 101 are an integral part of these financial statements. 40 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED CASH FLOW STATEMENT(CONTINUED) Year ended 31 December 2007 Year ended 31 December Notes 15 2007 2006 CASHFLOWS FROM OPERATING ACTIVITIES Cash received from sales 1,301,180,899 1,311,721,888 Cash received from other operating activities 31,268,038 31,362,807 Cash inflow from operating activities 1,332,448,937 1,343,084,695 Purchase of goods ( 996,044,835 ) ( 805,132,011 ) Payment of employee benefits ( 205,002,621 ) ( 89,624,350 ) Taxes paid ( 181,459,155 ) ( 163,260,619 ) Cash paid for other operating activities ( 68,833,514 ) ( 32,035,515 ) Cash outflow from operating activities (1,451,340,125 ) ( 1,090,052,485) Net cash outflow from operating activities 17 ( 118,891,188 ) 253,032,210 CASHFLOWS FROM INVESTING ACTIVITIES Decrease in time deposits with a maturity over three months 53,095,022 62,452,158 No. 39 of Disposal of a subsidiary Notes 6 3,413,961 1,223,130 Cash received from interest income 16 23,244,756 22,421,288 Proceeds from disposals of fixed assets 1,926,515 1,660,009 Cash received from other operating activities 627,389,356 85,614,285 Cash inflow from investing activities 709,069,610 173,370,870 Purchase of property, plant and equipment, intangible assets and other non-current assets ( 44,873,920 ) ( 70,608,527) Increase in investment in subsidiary ( 47,000,000 ) ( 55,563,000) Cash outflow from investing activities ( 91,873,920 ) ( 126,171,527) Net cash outflow from investing activities 617,195,690 47,199,343 CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid 14 ( 421,824,000 ) ( 283,920,000 ) Net cash outflow from financing activities ( 421,824,000 ) ( 283,920,000 ) NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 76,480,502 16,311,553 Add: Cash and cash equivalents at beginning of year 18 532,162,478 515,850,925 CASH AND CASH EQUIVALENTS AT END OF YEAR 18 608,642,980 532,162,478 41 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2007 1. CORPORATE INFORMATION Yantai Changyu Pioneer Wine Co., Ltd. (the “Company”) was incorporated as a joint stock limited company in accordance with the Company Law of the People’s Republic of China (the “PRC”) in a reorganization carried out by Yantai Changyu Group Co., Ltd. (“Changyu Group Company”), in which Changyu Group Company injected certain assets and liabilities in relation to the brandy, wine, sparkling wine and cider and tonic wine production and sales businesses to the Company. The Company and its subsidiaries (the “Group”) are principally engaged in the production and sales of wine, brandy, sparkling wine and healthy liquor. Pursuant to the approval from the Government of Shandong Province (Luzheng[1997]119), the Company was reorganized as a joint stock limited company on 10 April 1997. On 23 September 1997, the Company was approved by China Securities Regulatory Commission (the “CSRC”) ([1997] No. 52) to issue 88,000,000 domestically listed foreign shares (“B shares”) on Shenzhen Stock Exchange. On 18 September 1997, the Company obtained the business license with the registered number No. 26718011-9. In October 2000, the Company was approved by CSRC to issue 32,000,000 domestically listed Shares (“A Shares”). The A shares were listed on Shenzhen Stock Exchange on 26 October 2000. Pursuant to the share reform notices issued by the Company in February 2006, Chanyu Group Company transferred its 13,977,600 shares to the shareholders of A share of the Company. After the reform, percentage of equity attributable to Changyu Group Company decreased from 53.8% to 50.4%. At 31 December 2007, the total shares issued by the Company amounts to 527,280,000. Please refer to No.22 of Notes 6 in detail. The holding company of the Group is Changyu Group Company, which was ultimately controlled by Yantai SASAC, ILLVA Saronno Investment Italy, International Finance Corporation and Yaitai Yuhua Investment and Development Company Limited. 2 BASIS OF PREPARATION AND ANNOUNCEMENT ON COMPLIANCE WITH CAS These financial statements have been prepared in accordance with Chinese Accounting Standards (“CAS”) published by Ministry of Finance in 2006. The CAS is comprised of basic standards, detailed standards, guidelines and other regulations. On 23 September 1997, the Company has domestically listed on Shenzhen Stock Exchange, and prepared its B share financial statements according to International Financial Reporting Standards (“IFRS”) simultaneously. Pursuant to the Explanation Notes No. 1 to CAS, retrospective adjustments have been proposed on relevant transactions and items in accordance with the information obtained in preparation of B share financial statements. The accounting policies as stated in Note 3 below are adopted in all accounting periods covered by the financial statements. Comparative amounts have been restated in accordance with the requirement of CAS. The financial statements fulfill the requirement of CAS and give a true and fair view of the 42 financial position of the Company and of the Group as at 31 December 2007, and of the operating results and cash flows for the year then ended. 2 BASIS OF PREPARATION AND ANNOUNCEMENT ON COMPLIANCE WITH CAS (continued) The financial statements are prepared on a going concern basis. In accordance with the minutes of first temporary board meeting dated 12 January 2002, the Bandy Sales Department, which is the branch of the Company, was entrusted to Yantai Changyu Pioneer Wine Sales Co., Ltd. (“Sales Company), the subsidiary of the Company. The Sales Company was entitled the power to govern the financial and operating policies of the Brandy Sales Company and monitor its financial records. On 15 February 2002, the Company entered into an entrusted operation agreement with the Sales Company for a ten-year entrusting period commencing from 3 January 2002 to 31 January 2012. Accordingly, the financial results of Bandy Sales Department from 1 January 2002 to 31 December 2007 were combined in the financial statements of the Sales Company. Such arrangement does not give any impact to the disclosure of the consolidated financial statements. 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES Except for those balances retrospectively adjusted in accordance with the requirement of No 5 to No. 19 in CAS 38, the comparative figures are prepared in accordance with Old PRC GAAP. Certain differences exist between the accounting policies stated in Old PRC GAAP and CAS. Those differences have been disclosed in No. 25 of Note 3. The financial statements of the Company and the Group in 2007 are prepared in accordance with the following significant accounting policies and estimates as stated in CAS. (1) Accounting year The accounting year of the Group is from 1 January to 31 December. (2) Reporting currency The Group reporting and presentation currency is the Renminbi (“RMB”). Unless otherwise stated, the unit of the currency is Yuan. (3) Basis of accounting and measurement basis Except for certain financial instruments, the Group accounts have been prepared on an accrual basis using the historical cost as the basis of measurement. Assets are recorded at cost when they are acquired. Subsequently, if the assets are impaired, impairment provisions are made in accordance with the relevant requirements. 43 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (4) Business combination A business combination is the bringing together of separate entities or businesses into one reporting entity, classifying into the business combination under common control and business combination under non-common control. Business combination under common control A business combination involving entities or businesses under common control is a business combination in which all of the combining entities or businesses are ultimately controlled by the same party or parties both before and after the business combination, and that control is not transitory. The combining entity that obtains control of the other combining entities or businesses is the acquirer, and the other entities involved are the acquirees. The combination date is when the acquirer effectively obtains the control of the acquiree. The assets and liabilities obtained by the acquirer shall be measured on the basis of the carrying amount in the acquiree's accounts as at the date of combination. Where there is a difference between the carrying amount of the net assets acquired by the acquirer and the carrying amount of the consideration paid by it (or the total par value of the shares issued), capital surplus shall be adjusted. If the capital surplus is not sufficient to offset the value of the net assets acquired, retained earnings shall be adjusted. Any costs directly attributable to the combination are recognised as expenses when incurred. 44 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (continued) (5) Consolidated financial statements The consolidation scope of consolidated financial statements is determined on the basis of control. The consolidated financial statements include the financial statements of the Company and its subsidiaries for the year ended 31 December 2007. Control refers to the authority of an enterprise to decide on the financial and business policies of another enterprise and benefit from its business activities in accordance with the policies. Accounting policies adopted by the subsidiaries are in consistency with the policies adopted by the Company. All significant intercompany transactions and balances within the Group are eliminated on consolidation. The share of the owner's equity of subsidiaries not enjoyed by the Company are treated as minority interest and be listed as "minority interest" separately under the owner's equity item of a consolidated balance sheet. For the subsidiaries acquired through business combination under non-common control, their operating result and cash flow shall be included in the Group from the date the parent company obtains the control. In preparation of the consolidated financial statements, the financial statements of the subsidiary shall be adjusted on the basis of the fair value of the identifiable assets and liabilities and contingent liabilities determined on the acquisition date. For the subsidiaries acquired through business combination under common control, their operating result and cash flow shall be included in the opening balances of the Group in the acquisition period. (6) Cash equivalents Cash equivalents refers to short term highly liquid investments which are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value. (7) Foreign currencies Foreign currency transactions Foreign currency transactions are initially recorded using the functional currency rates ruling at the date of the transactions. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rates of exchange ruling at the balance sheet date. All differences are taken to the income statement with the exception of differences on specified foreign currency in accordance with the capitalisation treatment permitted in Borrowing Costs. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. 45 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (continued) (8) Inventories Inventories comprised raw materials, finished good, goods shipped in transit and turnover materials, which 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. The inventories are initially measured in cost. The cost of inventory consists of purchase costs, processing costs and other costs. The harvest cost of agricultural products of a productive biological asset are determined on the basis of the expenses of the materials and labor, indirect expenses to be apportioned, and other necessary disbursements incurred during the course of output or gathering. The carrying amounts of the productive biological assets are carried over as the cost of agricultural products on weighted average basis. The agricultural products after the harvest are measured in accordance with the CAS. 1- Inventories. The actual cost of sending out inventories are determined the weighted average method. Perpetual inventory system is adopted by the Company. Low value consumables and packaging materials are expensed in full when issued for use. Inventories are stated at the lower of cost and net realisable value at the balance sheet date. If the cost of inventories is higher than the net realizable value, the provision for the loss on decline in value of inventories are made and be recognized in income statement. If the factors causing any impairment of the inventories have disappeared, the amount of impairment are resumed and be reversed from the provision for the loss on decline in value of inventories that has been made. The reversed amount is recognised in the income statement of current year. The net realisable value is determined based on the estimated selling prices less any estimated costs to be incurred to disposal. The inventory provision for finished goods are assessed on the ground of each item of inventories, and that for raw materials are made on the ground of the categories of inventories. 46 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (continued) (9) Long-term equity investments Long-term equity investments comprise investments in subsidiaries, investments in joint ventures and investments in associates, which are initially measured at initial investment cost. The invested entities over which the Group have no controls, have no joint control or significant influence, have no quoted market price in an active market and the fair value cannot be reliably measured are measured on cost method basis. The long term equity investments are measured at its initial investment cost by employing the cost method. The dividends or profits declared to distribute by the invested entity are recognized as the current investment income. The investment income recognized by the Group is 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 Group exceeds the aforesaid amount, it is be regarded as recovery of initial investment cost. The invested entities over which the Group has joint control or significant influence are measured on equity method basis. Excess of the initial cost of investment over the Group’s interest in the fair value of the identifiable net assets of the invested entity should be included in the initial cost of long-term equity investment; Excess of the Group’s interest in the fair value of identifiable net assets of the invested entities over the initial cost of investment should be recognized in income statement. The Group will recognize the investment profits or losses and adjust the book value of the long-term equity investment in accordance with the attributable share of the net profits or losses of the invested entity on equity method basis. The attributable share of the net profits and losses of the invested entity should be recognised on the ground of the fair value of all identifiable assets in accordance with the accounting policy and accounting period of the Group, and the inter-company transactions between the associate and joint ventures attributable to the Group on the ground of the interest in invested entities should be eliminated after making adjustments on the net profits of the invested entities. For the investment in associate and joint ventures before the first-time adoption date, the debit balance of the investments, if any, also should be deducted from the investment income. The Group will reduce the book value of the long-term equity investment in accordance with the share of profits or cash dividends declared to distribute by the invested entities. The net losses of the invested entity should be recognized until the book value of the long-term equity investment and other long-term rights and interests which substantially form the net investment made to the invested entities are reduced to zero, unless the Group has the obligation to assume extra losses. 47 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (continued) (9) Long-term equity investments (continued) 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 are adjusted and be included in the owner's equity, which will be transferred to the income statement according to a certain proportion when disposing of the long-term equity investment. When disposing of a long-term equity investment, the difference between its book value and the actual sales price is recognised in the income statement of the corresponding period. (10) Biological assets The biological assets of the Group are vines. No biological asset may be recognized unless it satisfies the following conditions simultaneously: (i) The Group possesses or controls this biological asset due to past transaction or event, (ii) The economic benefits or services potential related to this biological asset is likely to flow into the Group, and (iii) The cost of this biological asset can be measured reliably. Biological assets comprise consumptive biological assets, productive biological assets, and public welfare biological assets. Biological assets are initially measured at its cost. The Group made deprecation for whose expected production and business purpose has been realized, and recorded as costs of relevant assets or expenses to the income statement of the current year. The depreciation method of productive biological asset is straight-line method. The useful life, expected net residual value and annual depreciation rate are as follows: Category Estimated useful Estimated residual Annual depreciation rate life value Vines 20years - 5% Consumptive biological assets and productive biological assets are examined as at each balance sheet date. If any reliable evidence shows that the realizable net value of any consumptive biological asset or the recoverable amount of any productive biological asset is lower than its book value due to natural disaster, plant diseases and insect pests, animal disease or change of market demand, provision should be made on the basis of the difference between the realizable net value or the recoverable amount and the book value and be recorded in the income statement of the current period. If the factors which cause any impairment of a consumptive biological asset have disappeared, the amount of impairment are resumed and reversed limited to the provision which has been made. The reversed amounts are recoginised in the income statement of the current period. No provision should be made for public welfare biological assets. 48 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (continued) (10) Biological assets (continued) The Group reviewed the useful life, expected net salvage value, and the depreciation method of the property, plant and equipment at the end of each year. The costs of productive agriculture assets at the time of harvest are calculated by the total of materials expenses, labor fee and allocated overheads, and transferred to costs of agriculture products based on weighted average method. The costs of agriculture products before the harvest of productive biological asset are measured based on CAS1- Inventories. At the time of sale, loss, death, damage or destroy of a biological asset, the balance after deducting the carrying amount and the relevant taxes from the disposal income are recognised in the income statement of the current period. (11) Property, plant and equipment Property, plant and equipment refers to the assets held for the purpose of producing commodities, providing labor service, renting or business management, and the useful life exceeds one fiscal year. No property, plant and equipment may be recognized unless it simultaneously satisfies the following conditions: (i) The economic benefits relating to the property, plant and equipment are likely to flow into the Group, and (ii) The cost of the property, plant and equipment can be measured reliably. Expenditure incurred on property, plant and equipment meet the aforesaid recognition standards is capitalised as an additional cost of that asset, otherwise is normally charged to the income statement in the period in which it is incurred. Property, plant and equipment are initially measured at its cost. The cost of a purchased property, plant and equipment includes the purchase price, relevant taxes, freight, loading and unloading fees, professional service fees and other expenditures attributed to the property, plant and equipment before they have been put into operation. Depreciation is calculated on the straight-line basis. The estimated useful life and residual value are as follows: Estimated useful Estimated residual Annual depreciation life value rate Buildings 30-40years 5-40% 2%-3.2% Machinery 10-20years 5% 4.8%-9.5% Motor vehicles 6-12years 5% 7.9%-15.8% If the components of a property, plant and equipment have different useful lives or provide economic benefits to the Group in different patterns, different depreciation rates should be used. 49 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (continued) (11) Property, plant and equipment (continued) The Group reviewed the useful life, expected net salvage value, and the depreciation method of the property, plant and equipment at least at the end of each year, and made adjustment on if necessary. (12) Construction in progress Construction in progress are measured on actual construction costs, including the direct costs of construction, capitalised borrowing costs during the period of construction and other expenditures. Construction in progress is reclassified to the property, plant and equipment when completed and ready for use. (13) Intangible assets Intangible assets are initially measured at its cost. The estimated useful lives are determined on the periods during which it can bring economic benefits to the Group. If the periods cannot be reliably determined, the intangible assets are classified as intangible assets with indefinite useful life. The useful lives of the intangible assets are as follows: Useful life Land use rights 50years Software 5years The land use rights obtained by purchase or payment of land lease prepayment are recorded as intangible assets. For self-constructed buildings, the land use rights and plants are recorded as intangible assets and property, plant and equipment respectively. Purchased buildings are allocated between land use rights and buildings based on actual payments, and are totally recorded as property, plant and equipment when it is difficult to allocate. Intangible assets with finite lives are amortised over the useful life on the straight-line basis. The amortisation period and amortisation method for an intangible asset with a finite useful life are reviewed at least at each balance sheet date. Intangible assets with indefinite lives are assed for impairment every year whenever there is an indication that the intangible asset may be impaired. If there is evidence that the useful lives of the intangible assets are finite, the change in the useful life assessment from infinite to finite is accounted for on a prospective basis. 50 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (continued) (14) Long term prepaid expenses Long term prepaid expenses refer to the prepaid expenses which are amortized over 1 year. Long term prepaid expenses are amortised over the useful economic life on the straight-line basis. (15) Financial instruments Financial instruments refers to the contracts whereby the financial assets of an enterprise are formed, and whereby the financial liabilities or right instruments of any other entity are formed. Recognition and de-recognition of financial instruments The Group recognises the financial assets or financial liabilities as it contracted in financial instruments agreements. If a financial asset meets any of the following requirements, it is recognized: (i) If the contractual rights for collecting the cash flow of the said financial asset are terminated; or (ii) If the financial asset is transferred and it meets the conditions for recognizing the termination of financial assets, as provided for in the following conditions. A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and a recognition of a new liability, and the difference between the respective carrying amounts is recognised in the income statement. Classification and measurement of financial assets Financial assets are classified into four categories when they are initially recognized, including financial assets at fair through profits or losses, held to maturity investments, loans and receivables and available for sale financial assets. Financial assets and financial liabilities initially recognized at fair value. For financial assets measured at fair value through profits or losses, the transaction expenses thereof are directly included in the current profits or losses; for other categories of financial assets and financial liabilities, the transaction expenses thereof are included in the initial costs. 51 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (continued) (15) Financial instruments Financial assets at fair through profits and losses Financial assets at fair value through profit or loss include financial assets held for trading and financial assets designated upon initial recognition as at fair value through profit or loss. Financial assets are classified as held for trading if they meet any of the following requirements: (i) The financial assets being acquired mainly for the purpose of selling or repurchase in the near future; (ii) Forming a part of the identifiable combination of financial instruments, which are managed in a centralized way, and for which there is objective evidence that the enterprise will manage the combination by way of short-term profit-making in the near future; (iii) Being a derivative instrument. Theses financial assets are subsequently measured at fair value, and all the realized and unrealized profits and losses are included in profits and losses of the current year. Gains or losses on these financial assets are recognised in the income statement whenever they are realized or not realized. Held-to-maturity investments Non-derivative financial assets with fixed or determinable payments and fixed maturity are classified as held-to-maturity when the Group has the positive intention and ability to hold to maturity. Held-to-maturity investments are subsequently measured at carried amortised cost using the effective interest method. Gains and losses are recognised in the income statement when the investments are derecognised or impaired, as well as through the amortisation. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are subsequently carried at amortised cost using the effective interest method. Gains and losses are recognised in the income statement when the loans and receivables are derecognised or impaired, as well as through the amortisation process. 52 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (continued) (15) Financial instruments (continued) Available-for-sale financial assets Available-for-sale financial assets are non-derivative financial that are initially designated as available for sale or are not classified into any of the other three categories. After initial recognition, available-for-sale financial assets are measured at fair value, with gains or losses recognised as capital surplus reserve until the investment is derecognised or until the investment is determined to be impaired, at which time the cumulative gain or loss previously reported in equity are recognised in the income statement. Amortised cost is calculated taking into account any discount or premium on acquisition and includes fees that are an integral part of the effective interest rate and transaction costs. Interest and dividends earned are recoded as interest income and dividend income, respectively and are recognised in the income statement. Available-for-sale financial assets which have no quoted price and fair value cannot be reliably measured are measured at cost. Classification and measurement of financial liabilities Financial liabilities are classified into financial liabilities at fair through profits and losses and other financial liabilities when they are initially recognized. For financial liabilities at fair through profits and losses, the transaction expenses thereof are directly included in the current profits or losses, while the transaction expenses of other financial liabilities are include in the initially recognized amounts. Financial liabilities at fair through profits and losses Financial liabilities at fair through profits and losses include transaction financial liabilities, and the designated financial liabilities measured at fair value upon initial recognition, and whose variation is recoginsed in the income statement of the current year. Financial liabilities that meet any of the following requirements are classified as transaction financial liabilities: (i) The financial liability being undertaken mainly for the purpose of selling or repurchase in the near future; (ii) Forming a part of the identifiable combination of financial instruments, which are managed in a centralized way, and for which there is objective evidence that the enterprise will manage the combination by way of short-term profit-making in the near future; (iii) Being a derivative instrument. Theses financial liabilities are subsequently measured at fair value, and all the realized and unrealized profits and losses are recoginsed in the income statement of the current year. 53 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (continued) (15) Financial instruments (continued) Classification and measurement of financial liabilities (continued) Other financial liabilities The financial liabilities are subsequently measured at amortized cost by adopting effective interest rate method. Fair value of financial instruments The fair value of investments that are actively traded in organized financial markets is determined by reference to quoted market prices. For investments where there is no active market, fair value is determined using valuation techniques. Such techniques include using recent arm’s length market transactions; reference to the current market value of another instrument, which is substantially the same; a discounted cash flow analysis; option pricing models and other valuation models. Impairment of financial assets The Group assesses at each balance sheet date whether there is any objective evidence that a financial asset or a group of financial assets is impaired. Positive evidences refer to those occurred after the initial recognition, have effect on estimated future cash flows of the financial assets, and can be measured reliably. Assets carried at amortized cost If there is objective evidence that an impairment loss on financial assets carried at amortized cost has been incurred, the amount of the loss is measured as the difference between the assets’ carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate after taking into account of the collateral over these balances. The Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant. If it is determined that objective evidence of impairment exists for an individually assessed financial asset, the impairment losses are recognized in the income statement of the current year. Not individually significant financial assets are assessed individually or collectively included in a group of financial assets with similar credit risk characteristics. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment. If, in a subsequent period, the amount of impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed. Any subsequent reversal of an impairment loss is recognized in the income statement, to the extent that the carrying value of asset does not exceed its amortized cost at the reversal date. 54 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (continued) (15) Financial instruments (continued) Financial assets carried at cost If there is objective evidence that the financial assets have been impaired, the amount of the impairment loss is measured as the difference between the carrying amount of the financial asset and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset, and recoginsed in the income statement of the current year. Such impairment losses are not be reversed. The impairment on long term equity investment which are measured by employing cost method in accordance with CAS2-Long term equity investments, have no quoted market price in an active market and the fair value cannot be reliably measured are recorded according to the aforesaid requirements. Available-for-sale financial assets When a decline in the fair value of an available-for-sale financial asset has been recognised directly in equity and there is objective evidence that the asset is impaired the cumulative loss that had been recognised directly in capital surplus are removed from equity and recognised in profit or loss of the current period. The amount of the cumulative loss that is removed from equity and recognised in the income statement is be the difference between the acquisition cost (net of any principal repayment and amortisation) and current fair value, less any impairment loss on that financial asset previously recognised in the income statement. Impairment losses on debt instruments are reversed through the profits or losses, if the increase in fair value of the instrument can be objectively related to an event occurring after the impairment loss was recognised in the income statement. Impairment losses on equity instruments classified as available for sale are not reversed through the income statement. Transfers of financial assets Transfer of financial assets refers to an enterprise's (the transferor's) transfer or delivery of a financial asset to a party other than the issuer of the financial asset (the transferee). If the Group has transferred substantially all the risks and rewards of the asset and waived the control of the asset, the asset is derecognized. If the Group has retained substantially all the risks and rewards of the asset, the assets are not de recognized. Where the Group has neither transferred nor retained substantially all the risks and rewards of the asset, if the Group waived the control of the assets, the financial assets are dercognised and the assets and liabilities are recognized accordingly; if the Group did not waive the control of the assets, the financial assets are recognised to the extent of the Group's continuing involvement in the asset, and the liabilities are recognized accordingly. 55 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (continued) (16) Impairment of assets Impairments on assets other than inventories, deferred tax, financial assets and long term equity investments without quoted market price in active market and the fair value cannot be reliably measured are determined according to the following methods: On each balance sheet date, the Group made assessment on whether or not there is any indication of potential asset impairment. If there is any evidence that indicates the possibility of asset impairment, the recoverable amount of the asset is be estimated. Independent of whether there are indication of potential impairment, the goodwill from an enterprise merger and intangible assets whose useful lives are indefinite are subjected to impairment testing each year. The recoverable amount of an asset is the higher of the asset's or cash-generating unit's value in use and its fair value less costs to sell, and is determined for an individual asset. If it is difficult to determine the recoverable amount individually, the recoverable amount is determined for the cash-generating unit to which the asset belongs. Cash generating unit is determined on the ground of the asset generate cash inflows that are largely independent of those from other assets or groups of assets, in which case An impairment loss is recognized only if the carrying amount of an asset exceeds its recoverable amount. An impairment loss is charged to the income statement and provision is made accordingly. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group's cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the combination, and not larger than the reportable segment determined by the Group. When conducting impairment testing on relevant cash-generating units or groups of cash-generating units that have related goodwill, if there is any evidence indicating that impairment of the cash-generating units or groups of units has occurred, the enterprise first carries out impairment testing on the cash-generating units or groups of units excluding goodwill, calculating the recoverable amount, comparing it with the corresponding carrying amount and recognizing any resulting impairment loss. Then impairment testing are conducted on the cash-generating units or groups of units with goodwill included, the carrying amount of these cash-generating units or combinations of cash-generating units (including the carrying amount of the goodwill allocated thereto) compared to the recoverable amount; if the recoverable amount of said cash-generating units or groups of units is below the carrying amount thereof, The impairment loss are first deducted from the carrying amount of the corporate assets and goodwill which have been allocated to the cash-generating unit or group of units, and then deducted from the carrying amount of the remaining assets pro rata with goodwill excluded from consideration. After a loss of asset impairment has been recognized, it is not be reversed in future accounting periods. 56 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (continued) (17) Contingent liabilities The Standard defines provisions as liabilities of uncertain timing or amount. A provision should be recognised when, and only when: (i) The group has a present obligation ( as a result of a past event; (ii) It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and (iii) A reliable estimate can be made of the amount of the obligation. The contingent liabilities are measured at the best estimate of the expenditure required to settle the present obligation at the balance sheet date, taking into consideration of the risks, uncertainties and time value of money. The book value of contingent liabilities is reviewed at each balance sheet date. Whether there is any objective evidence indicating that the book value cannot reflect the best estimated amount, adjustments should be make to the book value. (18) Revenue Revenue is recognised when it is probable that the economic benefits will flow to the Group and when the revenue can be measured reliably, on the following bases: Revenue from the sale of goods When the significant risks and rewards of ownership have been transferred to the buyer, provided that the Group maintains neither managerial involvement to the degree usually associated with ownership, nor effective control over the goods sold, and cost of sales can be measured reliably. Interest income Interest income is measured based on the borrowing periods and effective interest rate. (19) Leases Leases that transfer substantially all the rewards and risks of ownership of assets to the Group, are accounted for as finance leases, otherwise are accounted for as operating leases. As a lessee Rental expenses under the operating leases are credited to related costs of the assets or the income statement on the straight-line basis over the lease terms. 57 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (continued) (20) Employee benefits Employee benefits refer to all kinds of remunerations and other relevant reimbursements made by enterprises to their employees in exchange for services of employees. During accounting periods wherein an employee renders services to an enterprise, the Group recognized the benefits payable as a liability. The benefits payable which will be matured over 1 year are discounted when it is material. Medical insurance, pensions, unemployment insurance, other social insurance and housing fund are recorded as cost of relevant assets or expenses for the current period. If an Group terminates the labor relationship with any employee prior to the expiration of the relevant labor contract or makes a severance package proposal with the purpose of enticing the employees to willingly accept such a termination, the Group recognized the contingent liabilities to be incurred due to severance pay, and recorded them in income statement of the current period. The treatment for the early retirement planning is on the same basis to that of the termination benefits. The salaries and the social insurance expenses for the period from the employee’s termination of service and the normal retirement of these staffs are recognised as employee benefits payable when meeting the above said retirement benefits recognition requirements, and recognised to income statement of the current period. 58 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (continued) (21) Income tax Income tax comprises current and deferred tax. Income tax is recognised in the income statement, or in equity if it relates to goodwill generated from merger or affairs causing recoginition fo equity. Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. Taxable income is adjusted profit before tax in accordance with the corporate income tax law. Deferred tax is provided, using the liability method, on all temporary differences at the balance sheet date between the tax bases of assets and liabilities or items not recognized as assets or liabilities but can be measure at tax bases and their carrying amounts. Deferred tax liabilities are recognised for all taxable temporary difference, except: (i) where the deferred tax liability arises from goodwill or the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and (ii) in respect of taxable temporary differences associated with interests in subsidiaries, associates and joint ventures, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred tax assets are recognised for all deductible temporary differences, carry forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry forward of unused tax credits and unused tax losses can be utilised except: (i) where the deferred tax asset relating to the deductible temporary differences arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and (ii) in respect of deductible temporary differences associated with interests in subsidiaries, associates and joint ventures, deferred tax assets are only recognised to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date. 59 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (continued) (21) Income tax (continued) The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. Conversely, previously unrecognised deferred tax assets are reassessed at each balance sheet date and are recognised to the extent that it is probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. (22) Government grants Government grants refers to monetary or non-monetary assets received by an enterprise from the government, but excludes capital invested in the Group by the government that gives the government ownership rights. Government grants are recognised where there is reasonable assurance that the grant will be received and all attaching conditions will be complied with. Monetary grants are measured on the basis of the amount received or the amount receivable. Non-monetary grants are be measured based on the fair value of relevant assets. Where the grant relates to an asset, the fair value is credited to a deferred income account and is released to the income statement over the expected useful life of the relevant asset by equal annual installments. Government grants relating to income are handled accordingly as follows: (i) Those to be used as compensation for future expenses or losses are recognized as deferred income and are be recorded in the profit and loss account for the period where the relevant expenses are recognized; or (ii) Those to be used as compensation for relevant expenses or losses already incurred are recorded directly in the profit and loss account for the current period. 60 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (continued) (23) Profits distribution Profits after tax are distributed after appropriation of statutory surplus reserves and discretionary common reserve. In accordance with the Company Law of the PRC and the Company’s articles of association, the Company is required to appropriate 10% of the net profit reported in the statutory accounts (after offsetting prior years’ losses) to the statutory surplus reserve fund (“SRF”) until the balance of SRF reaches 50% of the Company’s share capital. The SRF can be transferred to shares. However, SRF is maintained at a minimum of 25% of the registered capital after the transfer. The proposed dividends or profits after the balance sheet date is not recognized as liability and shall be disclosed in the notes to the financial statements. (24) Significant accounting judgments and accounting estimates Estimation uncertainty Deferred tax assets Deferred tax assets are recognised for all unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilised. Significant management judgement is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing and level of future taxable profits together with future tax planning strategies. Depreciation As set out in No.11 of note 3, the depreciation is calculated on the straight-line basis to write off the cost of each item of fixed assts to its residual value over its estimated useful life. The Group’s management determines the estimated useful lives for its property, plant and equipment. This estimate is based on the historical experience of the actual useful lives of property, plant and equipment of similar nature and functions. If the previous estimates have significant changes, and depreciation expenses will be adjusted in the future periods. Useful life of the biological assets The useful life of biological assets is determined based on the industries practice and estimated productive life. If the previous estimates have significant changes, the depreciation expenses will be adjusted in the future periods. 61 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (continued) (24) Significant accounting judgments and accounting estimates (continued) Impairment of biological assets As set out in No. 10 of note 3, the Group examined the consumptive biological assets and productive biological assets at each balance sheet date. If any reliable evidence shows that the realizable net value of any consumptive biological asset or the recoverable amount of any productive biological asset is lower than its book value due to natural disaster, plant diseases and insect pests, animal disease or change of market demand, the Group, on the basis of the difference between the realizable net value or the recoverable amount and the book value, make provision for the loss on decline in value of or for the impairment of the biological asset and are recorded it in the profits and losses of the current period. The aforesaid realizable net value and recoverable amount is determined according to the CAS 1-Inventories and CAS 8-Asset Impairment, respectively. Impairment of non-current assets As set out in No.16 of note 3, the Group assesses whether the recoverable amount is lower than the book value. If there are any indicators that the book value of non-current assets cannot be fully recoverable, impairment losses should be recorded. The recoverable amount is the higher of an asset’s fair value less costs to sell and the present value of the future cash flows expected to be derived from an asset. As it is difficult for the Group to obtain the quoted market price of the assets (or assts group), the fair value of the assets cannot be reliably estimated. When the management make estimation on the expected future cash flows from the asset or cash-generating unit, estimates should be made on choosing a suitable production volume, selling price and related operating costs discount rate in order to calculate the present value of those cash flows. When recoverable amounts are undertaken, management may use all available for use information, including the forecast on production volume, selling price and related operating costs on the ground of the reasonable and supportable assumptions. 62 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (continued) (24) Significant accounting judgments and accounting estimates (continued) Useful life of the intangible assets The estimated useful lives of the intangible assets are determined based on the historical experience of the actual useful lives of intangible assets of similar nature and functions as well as considering the contractual rights and statutory rights applicable to the intangible assets. When the estimated useful lives of finite intangible assets are shortened or extended, the amortization periods should be adjusted accordingly. When there is evidence indicating the useful lives of intangible assets with indefinite useful lives becomes finite, the useful lives should be estimated and the intangible assets should be accounted for in accordance with the standards for the intangible assets with finite useful lives. Estimated provision for trade and other receivables A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy are considered indicators that the trade receivable is impaired. The provision are reassessed at the end of each year. Inventory provision based on net realisable value The inventory are measured on the lower of carrying value and net realisable value, and provision should be made for impairment on obsolete and slow-moving inventories. The group will reassess whether the net realisable value is lower than the carrying cost at the end of each year. Corporate income tax The Company and its subsidiaries are required to pay corporate income tax separately for they are located in different provinces. Because certain affairs have not been confirmed by the tax bureau when income tax expenses are provided, the management should make reliable estimates and judgments based on prevailing tax laws and other related policies. If the final results confirmed by the tax bureau are different from the recorded amounts, the difference will have an impact on income tax expenses provided for the current period. 63 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (continued) (25) First time adoption of CAS As set out in Note 2, the Group adopts CAS from 1 January 2007. The treatment on the change on accounting policies for first time adoption is followed in accordance with CAS. (i) Retrospective adjustments Long-term equity investment Before the adoption of CAS, equity method was applied for long term equity investment. The accounting policies for long term equity investment after the adoption of CAS are set out in No. 9 of Note 3 Long term equity investment. Before 1 January 2007, equity method was applied for the investment in subsidiary while cost method is applied after the adoption of CAS. For detailed treatment, please refer to No 9 of Note 3. On the transition date, retrospective adjustments are proposed on existing investment on subsidiary as if the cost method is applied from the beginning. Investment income is recognized according to the proportion equity interest when cash dividend is proposed or profit distributed in subsidiary. Investment in subsidiary is adjusted retrospectively in the financial statements of the Company, as if the cost method has always been applied. Retirement benefits Before the adoption of CAS, the retirement benefits were recognized in income statement on cash basis. The accounting policies for retirement benefits after the adoption of CAS are set out in No. 20 of Note 3 Employee Benefits. Regarding the plan for terminating the labor relationship existed on the transition date, a liability should be recognized for the compensation which fulfills the requirements as stated in No 20 Note 3, and the retained earning is adjusted. Income taxes Before the adoption of CAS, tax payable method was applied on calculating the corporate income tax. After the adoption of CAS, deferred tax is applied using the liability method on calculating the corporate income tax. The detailed accounting policy is set out in No 21 Note 3 Income tax. Retrospective adjustments are proposed on all temporary differences arising from the carrying amount and tax bases. 64 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (continued) (25) First time adoption of CAS (i) Retrospective adjustments (continued) Consolidated financial statements Before the adoption of CAS, minority interests are separately disclosed between the liabilities and shareholders’ equity. The share of minority interest is presented as a deduction before the consolidated net profit. After the adoption of CAS, the minority interest is presented as a separate item within shareholder’s equity on the consolidated balance sheet, while in the consolidated income statements, the earning attributable to the ordinary equity holders of the company and earnings attributable to minority shareholders are separately presented under the consolidated net profit.. Pre-operation expenses Before the adoption of CAS, pre-operation expenses was first recorded as long term prepaid expenses and fully charged into the income statement in the commencement of operation. After the adoption of CAS, pre-operating expenses are recorded as expenses when incurred. 65 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (continued) (25) First time adoption of CAS (i) Retrospective adjustments (continued) According to CAS38, the Group re-stated the financial statements of the comparative year by making retrospective adjustments. The accumulated effects of changes in accounting policy on the shareholder’s equity as at 1 January 2006 and 31 December 2006 are as follows: The Group Year ended 31 December 2007 2006 Statutory Statutory Surplus Minority Surplus Minority Capital surplus reserve fund Retained profits interest Capital surplus reserve fund Retained profits interest Beginning balance prior to retrospective adjustments 557,222,454 295,942,630 629,268,045 53,603,184 678,902,454 251,556,299 513,711,071 37,713,602 Retrospective adjustments: Retirement benefits - - ( 66,385,563) - - - - - Deferred tax - - 74,682,066 - - - 54,849,754 - Pre-operating expenses - - ( 2,793,020) - - - - - Biological assets Beginning balance after retrospective adjustments 557,222,454 295,942,630 634,771,528 53,603,184 678,902,454 251,556,299 568,560,825 37,713,602 The Company Year ended 31 December 2007 2006 Capital surplus Surplus reserve Retained profits Capital surplus Surplus reserve Surplus reserve Beginning balance prior to retrospective adjustments 557,222,454 295,942,630 629,268,045 678,902,454 251,556,299 513,711,071 Retrospective adjustments: Retirement benefits (60,393,177 ) Deferred tax - - 20,946,845 - - - Cost method investments - - （1,119,426,857 ) - - (781,728,355) Beginning balance after retrospective adjustments 557,222,454 295,942,630 ( 529,605,144 ) 678,902,454 251,556,299 (268,017,284) 66 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (continued) (25) First time adoption of CAS (continued) (i) Retrospective adjustments (continued) The effects of first-time adoption of CAS on the net effects of the net profits of 2006 are as follows: The Group Year ended 31 December 2006 Amounts before retrospective adjustments 443,863,305 Adjustments: Retirement benefits (1) ( 66,385,563) Deferred tax assets (2) 19,832,312 Pre-operating expenses (3) ( 2,793,020) Amounts after retrospective adjustments 394,517,034 The Company Year ended 31 December 2006 Amounts before retrospective adjustments 443,863,305 Adjustments: Retirement benefits (1) ( 60,393,177) Deferred tax assets (2) 20,946,845 Cost long term equity investment (3) (337,698,502) Amounts after retrospective adjustments 66,718,471 Note: (1) Early retirement system was implemented in the Group in 2006. The accounting treatment on the early retirement is same to that of the termination benefits. Employee benefits payable is recognized as a liability when criteria are met. Such benefits are composed of the salaries and the social insurance expenses to be paid for the period from the termination of services to the normal retirement date. The amount recorded into year 2006 is RMB66,385,563, included in which RMB60,393,177 belongs to the Company. (2) The deferred tax assets are recognized for the temporary differences arising from the carrying amount and the tax bases. The deferred tax recognized into 2006 income statements is RMB19,832,312, in which RMB20,946,845 belongs to the Company. (3) Retrospective adjustments are proposed for pre-operating expenses and long term equity investments. 67 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (continued) (25) First time adoption of CAS (continued) (ii) Other than retrospective adjustments Except for the changes in accounting polices with retrospective application, future period application method are applied for the following change in accordance with CAS: Employee welfare Before the adoption of CAS, employee welfare is accrued based on 14% of the salary, and recognized in income statement of the corresponding period. After the adoption of CAS, employee welfare is accrued based on 14% of the salary is demolished. Instead, an employee benefits payable is recognized according to the actual circumstances and employee benefits plan in the corresponding period. In the transition date, the difference between the employee benefits under the CAS and Old PRC GAAP are charged into income statement. (26) Change of accounting estimates An aging analysis method is applied for the inventory provision in prior years. From 1 January 2007, the Group adjusted the estimation on net realizable value on inventory by reference to the historical data and actual sales data. Inventory provision is provided by category. A general provision of 5% is applied to the third party receivable balances not fell in the criteria of the specific provision. From 1 January 2007, the Group enhances the collection of receivables. General provision is no longer applied. Instead, a specific provision is used based on the information of collection history. The effects of changes in accounting estimates on the net profits of 2007 are as follows: The Group Changes in accounting estimates on net realizable value of inventories 18,258,298 Changes in accounting estimates on bad debt provision 3,041,344 Total 21,299,642 The above changes in accounting estimates have been approved and announced by the10th meeting of 4th board committee of 2007, which resulted in the increase in net profits of RMB 21,299,642 and RMB0 for the Group and the Company, respectively. 68 4. TAXES The main taxes and tax rate are as follows: Value added tax - VAT is levied at 17% on the invoiced amount after deduction of eligible input VAT. The subsidiary of the Company, Huanren Changyu Wine National Wines Sales Co., Ltd. was incorporated in Huanren Manchus Autonomous Country. According to Caishui[2006] No. 103 Notice on continuing to implementing VAT preferential policy to goods sold by nationality trading enterprises which are closed to frontier or in nationality areas, the nationality trading enterprise in nationality area is exempt from VAT. Consumption tax - Consumption tax of the healthy liquor is levied at quantity and certain tax rate of gross turnover, namely levied at 20% of total turnover and RMB 1000 per ton. Except for healthy liquor, other taxable products are levied on the gross turnover of products at rates ranging from 10% to 20%, City development tax - levied at 7% of total turnover tax actually paid, Education supplementary tax - levied at 4% of total turnover tax actually paid. 69 4. TAXES (continued) Corporate income tax -Changyu-Castel is a foreign investment production enterprise incorporated in Yantai Development Zone and is subject to corporate income tax of 15%. Changyu-Castel is exempt from local income tax. As approved by the tax authority in 2005, Changyu-Castel is entitled to a two year exemption from income taxes followed by a 50% tax reduction for the succeeding three years, commencing from the first cumulative profit-making year after deducting losses incurred in previous years. Changyu-Castel was entitled to tax exemption in 2003 and 2004. The tax rate in 2007 is 7.5%. Langfang Castel is a foreign investment production enterprise incorporated in Langfang development zone and is subject to corporate income tax of 30%. Langfang Castel is exempt from local income tax. As approved by the tax authority in 2005, Langfang Castel is entitled to a two year exemption from income taxes followed by a 50% tax reduction for the succeeding three years, commencing from the first cumulative profit-making year after deducting losses incurred in previous years. Langfang-Castel was entitled to tax exemption in 2003 and 2004. The tax rate in 2007 is 15%. Yantai Kylin Packaging Co., Ltd. is a foreign investment production enterprise incorporated in Yantai and is subject to corporate income tax of 24%, and exempt from local income tax. Except for the above three subsidiaries, the Company and other subsidiaries are subject to the income tax of 33%. . 70 5. SCOPE OF CONSOLIDATED FINANCIAL STATEMENTS Percentage of equity attributable to the Company Name Place and date of Issued capital Directly Indirect Investment Incorporated Principle registration amount code activities Yantai Changyu Pioneer Wine 1 December 1992 RMB300,000 100% - RMB300,000 165 031 710 Machinery Machine Packaging Co., Ltd Yantai in Shandong subcontracting (“Machine Packaging”) Province, China and repairing Yantai Changyu Pioneer Vehicular 1 December 1992 RMB300,000 100% - RMB300,000 165 031 729 Transportation Transport Yantai in Shandong service Co., Ltd. Province, China Beijing Changyu Sales and 14 July 1998 RMB500,000 70% 30% RMB500,000 634 377 029 Sales of wine Distribution Co., Ltd. Beijing, China Yantai Kylin Packaging Co., Ltd 29 September 1999 USD1,400,000 50% - RMB5,953,878 863 052 455 Production of (“Kylin Packaging”) (a) Yantai in Shandong packaging Province, China materials Yantai Changyu-Castel Wine 3 September 2001 USD5,000,000 70% - RMB 28,968,100 730 682 613 Production and Chateau Co., Ltd. Yantai in Shandong sales of wine (“Changyu-Castel”) (b) Province, China Changyu (Jingyang) Pioneer Wine 5 December 2001 RMB1,000,000 90% 10% RMB 1,000,000 732 663 643 Production and Co., Ltd. Jingyang in Shanxi sales of wine Province, China Yantai Changyu Pioneer Wine 24 December 2001 RMB8,000,000 90% 10% RMB 8,000,000 746 576 380 Sales of wine Sales Co., Ltd. Yantai in Shandong Province, China Langfang Development Zone 1 March 2002 USD3,000,000 49% - RMB 12,142,200 735 624 56X Production and Castel-Changyu Wine Co., Ltd Langang in Hebe sales of wine (“Langfang Castel”) (c) Province, China Changyu (Jingyang) Pioneer Wine 8 April 2002 RMB1,000,000 10% 90% RMB 1,000,000 735 379 154 Sales of wine Sales Co.,(“Jingyang Sales”)Ltd. Jingyang in Shanx Province, China Langfang Changyu Pioneer Wine 19 April 2002 RMB1,000,000 10% 90% RMB 1,000,000 737 388 150 Sales of wine Sales Co.,Ltd. Langang in Hebe (“Langfang Sales”). Province, China Shanghai Changyu Sales and 28 April, 2004 RMB500,000 60% 40% RMB 500,000 749 571 075 Sales of wine Distribution Co., Ltd. Shanghai, China Yantai Changyu Pioneer 29 September 2005 RMB5,000,000 70% 30% RMB 5,000,000 780 766 161 Import and International Co., Ltd.(“Pioneer Yantai in Shandong export of wine International”) Province, China Beijing Changyu Castel Wine 27 October 2005 RMB 70% -- RMB77,000,000 780 953 469 Production and Chateau Co., Ltd. (“Beijing Beijing, China 110,000,000 sales of wine Chateau”) (d) Yantai Changyu Wine Sales Co., 9 January 2006 RMB5,000,000 90% 10% RMB5,000,000 783 487 627 Sales of wine Ltd.( “Wines Sales”) Yantai in Shandong Province, China 71 5. SCOPE OF CONSOLIDATED FINANCIAL STATEMENTS (continued) Percentage of equity attributable to the Company Name Place and date of Issued capital Directly Indirect Investment Incorporated Principle registration amount code activities Hangzhou Changyu Wine 14 June 2006 RMB500,000 - 100% RMB 788 283 631 Sales of wine Sales Co., Ltd. Hangzhou in Zhejinag 500,000 Province ,China Ningxia Changyu 16 November 2006 RMB1,000,000 100% - RMB 788 200 410 Plant and Grape-Growing Co., Yinchuang in Ningxia, 1,000,000 purchase of Ltd.(“Ningxia Growing”) China grape Huanren Changyu Wine 16 November 2006 RMB2,000,000 100% - RMB 794 822 179 Production National Wines Sales Hengren in 2,000,000 and Co., Ltd.(“National Wines”) Liaoning ,China sales of wine Liaoning Changyu Ice Wine 20 November 2006 RMB26,300,000 51% - RMB 747 128 301 Production Chateau Co., Ltd.(“Ice Benxi in Liaonin 13,413,000 and Chateau”) Province, China sales of wine Yantai Development Zone 4 December 2006 RMB5,000,000 - 100% RMB 796 183 411 Sales of wine Changyu Trade Co., Yantai in Shandong 5,000,000 Ltd.(“ Development Zone Province, China Tade”) Shenzhen Changyu Wine 4 December 2006 RMB500,000 - 100% RMB500,000 664 195 20X Sales of wine Marketing Ltd. Yantai in Shandong Province, China Yantai Changyu Trading 4 December 2006 RMB5,000,000 - 100% RMB 660 176 044 Sales of wine Company Yantai in Shandong 5,000,000 Province, China Beijing Meeting Center 4 December 2006 RMB500,000 - 100% RMB500,000 669 926 612 Sales of wine Yantai in Shandong Province, China (a) Kylin Packaging is a sino-foreign joint venture. According to the operating contract, the Company has invested USD700,000 ( about RMB5,794,000 ), accounting of 50% of Kylin’s equity interest. Until 31 December 2007, the Company has fished the investment by property, plant and equipment and inventories of RMB5,953,878. For the Company have over half of the voting rights and therefore has the power to control its strategic operating, investing and financing policies, the financial statements of Kylin Packaging are consolidated in the Group’s financial statements. (b) Changyu-Castel is a sino-foreign joint venture established by the Company investor. According to an operation contract signed by the Company, Changyu-Castel and the foreign investor, the Company is entrusted to manage Changyu-Castel and therefore has the power to control its strategic operating, investing and financing policies, therefore the financial statements of Kylin Packaging are consolidated in the Group’s financial statements. 72 5. SCOPE OF CONSOLIDATED FINANCIAL STATEMENTS (continued) (c) Langfang Castel is a sino-foreign joint venture established by the Company and a foreign investor. According to an operation contract signed by the Company, Langfang Castel and the foreign investor, the Company is entrusted to manage Langfang Castel and therefore has the power to control its strategic operating, investing and financing policies, therefore the financial statements of Kylin Packaging are consolidated in the Group’s financial statements. (d) The issued capital of Chateau increased from RMB50,000,000 to RMB110,000,000 in April 2007. Beijing Qinglang Ecology Agriculture Technology Development Company Limited, one of the shareholders of Beijing Chateau, waived the ( 5% of the issued capital of Beijing Chateau, RMB5,500,000) rights of the capital injection, and the Company takes over the right of investment on Beijing Chateau, which leads to the increase on the share of equity interest from 65% to 70%. 73 6. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Cash and bank 31 December 31 December 2007 2006 Cash on hand 170,398 158,444 Cash in bank 1,320,364,233 1,189,819,454 Others 2,363,969 2,497,677 1,322,898,600 1,192,475,575 31 December 31 December 2007 2006 Restricted assets: Housing fund deposit 2,363,969 2,497,677 Cash and bank are dominated in RMB. The balance of time deposits over three months as at 31 December 2007 of the Group is RMB 464,000,000（The 31 December 2006: RMB 517,095,022）, with maturity terms ranging from 3 months to 1 year, and interest rates ranging from 1.81% to 4.14%. (2) Bills receivable 31 December 2007 31 December 2006 Bank acceptance bill 11,524,698 11,150,117 As at 31 December 2007, there isn’t any bills receivable discounted to secure a bank loan. (31 December 2006: nil) As at 31 December 2007, there isn’t any bills receivable due from the Company’s shareholders with voting rights of 5% or above. (31 December 2006: nil) 74 6. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (3) Trade receivable The credit term of account receivable is normally one month. Major customers can be granted a credit term up to three months. The trade receivable balances are interest free. 31 December 31 December 2007 2006 Trade receivable 82,490,201 75,514,937 Less: provision - ( 3,995,672 ) 82,490,201 71,519,265 The aged analysis is as follows: 31 December 31 December 2007 2006 Within 1 year 82,490,201 75,283,437 Over 3 years - 231,500 82,490,201 75,514,937 31 December 2007 Trade receivable % Provision % Within 1 year 82,490,201 100.0 - - 82,490,201 100.0 - - 31 December 2006 Trade receivable % Provision % Within 1 year 75,283,437 99.7 3,764,172 5.0 Over 3 years 231,500 0.3 231,500 100.0 75,514,937 100.0 3,995,672 75 6. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (3) Trade receivables (continued) The category analysis on trade receivables is as follows: 31 December 2007 Trade receivable % Provision % Individually significant 34,676,283 42.0 - - Others 47,813,918 58.0 - - 82,490,201 100.0 - 31 December 2006 Trade receivable % Provision % Individually significant 35,394,373 46.9 1,769,719 5.0 Others 40,120,564 53.1 2,225,953 5.5 75,514,937 100.0 3,995,672 The movements in provision of trade receivables are as follows: 31 December 2007 31 December 2006 At beginning of year 3,995,672 24,900,011 Accrual - 1,026,848 Reversal (3,882,501 ) - Write off ( 113,171 ) ( 21,931,187) At end of year - 3,995,672 31 December 2007 31 December 2006 Top five of trade receivables 32,673,932 16,935,073 Proportion of total trade receivables 39.6% 22.4% As at 31 December 2007, there aren't any trade receivables due from the shareholders with voting rights of 5% or above. (31 December 2006: nil) (4) Advances to suppliers All advances to suppliers are aged within one year. At 31 December 2007, there aren't any outstanding balances due from the shareholders with voting rights of 5% or above. (31 December 2006: nil) 76 6. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (5) Interest receivable 31 December 2007 31 December 2006 (restated) Interest receivable from bank deposits with maturity of less than one year 13,518,196 11,017,756 (6) Other receivables 31 December 31 December 2007 2006 (restated) Other receivables 32,581,648 30,878,383 Less: provision ( 8,000,000 ) ( 8,206,530 ) 24,581,648 22,671,853 The aged analysis is as follows: 31 December 31 December 2007 2006 (restated) Within 1 year 23,581,648 29,671,853 1-2 year 9,000,000 206,530 Over 3 years - 1,000,000 Total 32,581,648 30,878,383 31 December 2007 Bad debt provisio ther receivables % n % Within 1 year 23,581,648 72.4 - - 1-2 year 9,000,000 27.6 8,000,000 88.9 Total 32,581,648 100.0 8,000,000 31 December 2006 Bad debt provisio Other receivables % n % Within 1 year 29,671,853 96.1 8,000,000 27.0 1-2 year 206,530 0.7 206,530 100.0 Over 3 years 1,000,000 3.2 - - Total 30,878,383 100.0 8,206,530 77 6. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (6) Other receivables (continued) The category analysis for other receivables is as follows: 31 December 2007 Other receivables % Bad debt provision % Individually significant 9,000,000 27.6 8,000,000 88.9 Others 23,581,648 72.4 - - Total 32,581,648 100.0 8,000,000 31 December 2006 Other receivables % Bad debt provision % Individually significant 20,000,000 64.8 8,000,000 40.0 Others 10,878,383 35.2 206,530 1.9 Total 30,878,383 100.0 8,206,530 The movement of bad debt provision is as follows: 31 December 31 December 2007 2006 (restated) At beginning of year 8,206,530 1,976,051 Accrual - 8,206,530 Reversal ( 206,530 ) (1,976,051 ) At end of year 8,000,000 8,206,530 31 December 31 December 2007 2006 (restated) Top five other receivables 12,979,681 17,236,595 Proportion of total other receivables 39.8% 55.8% At 31 December 2007, there aren't any other receivables due from the shareholders with voting rights of 5% or above. (31 December 2006: nil) 78 6. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (7) Inventories 31 December 2007 31 December 2006 Raw materials 59,719,003 29,291,519 Finished goods 357,708,640 430,807,666 Semi-finished products 425,661,338 267,740,332 843,088,981 727,839,517 Less: inventory provision ( 7,182,132 ) ( 12,933,574 ) 835,906,849 714,905,943 The movement of inventory provision is as follow: 31 December Reversal Write off 31 December 2006 2007 Finished goods 12,933,574 ( 5,751,442 ) ( -) 7,182,132 31 December Accrual Write off 31 December 2005 2006 Finished goods - 12,933,574 ( -) 12,933,574 79 6. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (8) Held-to-maturity investment 31 December 31 December 2007 2006 Long term bond investment 15,000,000 15,000,000 Less: impairment - - Net book value 15,000,000 15,000,000 Including: Current portion - - Non-current portion 15,000,000 15,000,000 Interest received Initial during 31 Accumulated Nominal Investment Due current December interest value Interest rate cost date year 2007 received Basic interest rate for bank deposit with maturity of Guotai Junan less than one 31 Securities year plus December Co., Ltd 15,000,000 2.97% 15,000,000 2009 823,500 15,000,000 2,389,500 According to the agreement, Shanghai State-owned Assets Operation Co. Ltd. provides non-cancelled joint liability guarantees to the issuing of the debentures. The Group has evaluated on the intention and capability of holding the long term bond investment, without any changes noted. (9) Long-term equity investment 31 December 31 December 2007 2006 Equity investment by cost method Yantai Dingtao Construction and Development Co., Ltd. (“Yantai Dingtao”) 10,000,000 10,000,000 As at 31 December 2007 and 31 December 2006, the issued capital of Yantai Dingtao is RMB 10,000,000, and the Group hold 18.2% of its’ equity interests. 80 6. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (10) Property, plant and equipment Machineries and Motor Buildings equipments vehicles Total Cost At 1 January 2007(restated) 337,619,001 453,719,398 14,270,482 805,608,881 Purchase 2,313,500 22,506,680 791,444 25,611,624 Transferred from construction in progress 94,240,145 70,830,150 263,300 165,333,595 ( 3,590,05 ( 1,886,8 ( 1,357,19 Disposal 9) 35) 2) ( 6,834,086) At 31 December 2007 430,582,587 545,169,393 13,968,034 989,720,014 Accumulated depreciation At 1 January 2007 68,453,638 225,843,191 8,642,354 302,939,183 Depreciation 12,249,672 34,216,218 1,180,377 47,646,267 Disposal ( 192,958 ) ( 189,413) (1,193,224) ( 1,575,595 ) At 31 December 2007 80,510,352 259,869,996 8,629,507 349,009,855 Net carrying amount At 31 December 2007 350,072,235 285,299,397 5,338,527 640,710,159 At 31 December 2006 269,165,363 227,876,207 5,628,128 502,669,698 Machineries and Motor (restated) Buildings equipments vehicles Total Cost At 1 January 2006 336,146,038 385,321,435 15,154,577 736,622,050 Purchase 4,987,171 32,218,889 298,674 37,504,734 Transferred from construction in progress 393,349 37,429,417 - 37,822,766 Disposal ( 3,907,55 ) ( 1,250,3 ) ( 1,182,769 ) ( 6,340,66 ) At 31 December 2006 337,619,001 453,719,398 14,270,482 805,608,881 Accumulated depreciation At 1 January 2006 59,648,998 196,215,252 8,057,296 263,921,546 Depreciation 10,119,703 30,840,758 1,423,947 42,384,408 Disposal ( 1,315,063 ) ( 1,212,819 ) ( 838,889 ) ( 3,366,771 ) At 31 December 2006 68,453,638 225,843,191 8,642,354 302,939,183 Net carrying amount At 31 December 2007 269,165,363 227,876,207 5,628,128 502,669,698 At 31 December 2006 276,497,040 189,106,183 7,097,281 472,700,504 . 81 6. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (10) Property, plant and equipment (continued) As at 31 December 2007, no buildings were pledged to secure certain bank loans, and no ownership of the buildings were restricted. As at 31 December 2007, no idle machineries, no property, plant and equipment held for disposal, and no property, plant and equipment under finance lease and property, plant and equipment held under operating lease. As at 31 December 2007, the cost and net carrying amount of fully depreciated property, plant and equipment still in use is RMB82,370,609 and RMB3,937,726 , respectively. As at 31 December 2007, the buildings with net book value of approximately RMB53,592,917 are without relevant building ownership certificates. The management of the Group believes that the above mentioned affairs have no significant unfavorable impacts on the financial statements. 82 6. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (11) Construction in progress Transferred to property, Accumulated 1 January plant and 31 December expenditure Budget 2006 Addition equipment 2006 Financing by /budget Cabernet Manufacturing center reconstruction project 31,000,000 5,669,989 5,873,533 ( 11,226,779 ) 316,743 Own funds 97.0% Wine lending system development project in Brandy Company 4,950,000 1,390,870 - - 1,390,870 Own funds 28.1% Oaken barrel and cellar reconstruction project 15,595,300 6,073,777 9,521,480 ( 15,595,257 ) - Own funds 100.0% Sparkling wine reconstruction project 42,000,000 - 30,430,922 ( 29,643,562 ) 787,360 Own funds 72.5% Own funds/raised Beijing Jiuzhuang Project 230,000,000 32,849,835 104,782,834 (106,941,427 ) 30,691,242 funds 59.8% 麒 Kylin Packaging’s purchase of equipments 3,511,481 - 3,511,481 - 3,511,481 Own funds 100.0% Changyu-Castel construction project 10,000,000 - 7,508,224 - 7,508,224 Own funds 75.1% Plants for Ice Wine in Liaoning 5,000,000 - 3,210,141 - 3,210,141 Own funds 64.2% Cabernet aging system 2,400,000 - 1,926,570( 1,926,570 ) - Own funds 80.3% Video Management System 2,460,000 - 1,230,000 - 1,230,000 Own funds 50.0% Total 45,984,471 167,995,185 (165,333,595 ) 48,646,061 Transferred to property, Accumulated 1 January plant and 31 December expenditure Budget 2006 Addition equipment 2006 Financing by /budget Cabernet Manufacturing center reconstruction project 22,750,000 4,787,796 19,396,843 (18,514,650) 5,669,989 Own funds 106.3% Wine lending system development project in Brandy Company 4,950,000 1,390,870 - - 1,390,870 Own funds 28.1% Oaken barrel and cellar reconstruction project 7,400,000 - 6,073,777 - 6,073,777 Own funds 82.1% Sparkling wine reconstruction project 19,308,116 - 19,308,116 (19,308,116) - Own funds 100.0% Beijing Jiuzhuang Project 55,823,680 - 32,849,835 - 32,849,835 Own funds 58.8% Total 6,178,666 77,628,571 (37,822,766 ) 45,984,471 No capitalized interest was included in the addition of construction in progress for the year ended 31 December 2007. At 31 December 2007, there are no indications for the impairment of construction in progress, and no provision was made. 83 6. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (12) Intangible assets Land use right Software Total Cost 1 January 2007(restated) 93,437,000 469,376 93,906,376 Increase 7,047,337 3,480,000 10,527,337 Decrease - ( 469,376 ) ( 469,376 ) 31 December 2007 100,484,337 3,480,000 103,964,337 Accumulated amortization 1 January 2007 505,609 459,243 964,852 Accrual 2,865,980 - 2,865,980 Decrease - ( 459,243 ) ( 459,243 ) 31 December 2007 3,371,589 - 3,371,589 Net carrying amount 31 December 2007 97,112,748 3,480,000 100,592,748 31 December 2006 92,931,391 10,133 92,941,524 (restated) Land use right Software Total Cost 1 January 2006 6,240,000 469,376 6,709,376 Increase 87,197,000 - 87,197,000 31 December 2006 93,437,000 469,376 93,906,376 Accumulated amortization 1 January 2006 375,613 455,443 831,056 Accrual 129,996 3,800 133,796 31 December 2006 505,609 459,243 964,852 Net carrying amount 31 December 2006 92,931,391 10,133 92,941,524 31 December 2005 5,864,387 13,933 5,878,320 84 6. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (13) Biological assets 31 December 31 December 2007 2006 At beginning of year - - Addition 19,821,941 - Depreciation - - Provision - - At end of year 19,821,941 - At 31 December 2007, there were no pledged biological assets. The productive biological assets are vines. The vines may suffer from scourge, plant diseases and insect pests, market demand and other risk factors, which lead to impairment on assets. The Group will adopt effective procedures to prevent plant diseases and insect pests, and strengthen the management of trees and soils to safeguard the biological assets. (14) Long term prepaid expenses 31 December 31 December 2007 2006 (restated) Land lease prepayments 9,477,318 7,397,324 Others 2,330,761 - Total 11,808,079 7,397,324 85 6. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (15) Deferred tax assets The movement of deferred tax assets is as follows: Year ended 31 December 2007 2006 (restated) At beginning of year 74,682,066 54,849,754 Recognised in the income statement of the current year Including: (i) unrealized profits from intercompany transactions 3,642,663 ( 660,686 ) (ii) retirement benefits ( 3,585,595 ) 20,075,292 (iii) provision for impairment of assets ( 4,499,273 ) ( 574,294 ) (iv) pre-operating expenses ( 433,212 ) 992,000 At end of year 69,806,649 74,682,066 Deferred tax assets of the Group are mainly comprised of: 31 December 31 December 2007 2006 (restated) Deferred tax assets Unrealized profits from intercompany transactions 48,962,631 45,319,968 Retirement benefits 16,489,697 20,075,292 Provision for impairment of assets 3,795,533 8,294,806 Pre-operating expenses 558,788 992,000 Total 69,806,649 74,682,066 86 6. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (16) Provision for impairment of assets 1 January Decrease 31 December Accrual 2007 Reversal Write off 2007 Bad debt provision 12,202,202 - (3,882,501) (319,701 ) 8,000,000 Inventory provision 12,933,574 - (5,751,442) - 7,182,132 25,135,776 - (9,633,943) (319,701 ) 15,182,132 1 January Decrease 31 December Accrual 2007 Reversal Write off 2007 Bad debt provision 26,876,062 9,233,378 - (23,907,238) 12,202,202 Inventory provision - 12,933,574 - - 12,933,574 26,876,062 22,166,952 - (23,907,238) 25,135,776 (17) Trade payables The trade payables are interest free. The Group is normally granted a credit period of not more than three months from its suppliers. As at 31 December 2007, no significant outstanding balances are aged over one year. As at 31 December 2007, there aren't any outstanding balances due to the shareholders with 5% or above of voting rights. (31 December 2006: nil) (18) Advance from customers As at 31 December 2007, no significant outstanding balances due to customer are aged over one year. As at 31 December 2007, there aren't any outstanding balances due to the shareholders with 5% or above of voting rights or other related parties. (31 December 2006: nil) 87 6. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (19) Employee benefits payable Year ended 31 December 2007 At beginning At end o f year Addition Reversal Payment of year (restated) Salaries and bonus 47,951,584 117,970,249 - (135,178,997 ) 30,742,836 Staff welfare 26,153,788 12,574,979 (28,420,330) ( 10,308,437 ) - Social insurance - 23,808,176 - ( 23,808,176 ) - Including: Medical insurance - 7,699,478 -( 7,699,478) Pension - 12,949,933 - ( 12,949,933 ) - Unemployment insurance - 1,584,995 -( 1,584,995) - ( 825,4 Injury insurance - 825,492 - 92) - ( 748,2 Pregnant insurance - 748,278 - 78) - Compensation for release of employees 76,824,227 - - ( 10,865,439 ) 65,958,788 Housing fund - 5,291,402 -( 5,291,402 ) - Union fee and education fee - 3,414,552 -( 3,414,552 ) - Allowances 27,813,400 31,302,349 - ( 29,361,134) 29,754,615 Total 178,742,999 194,361,707 (28,420,330) (218,228,137) 126,456,239 Year ended 31 December 2006 (restated) At beginning At end o f year Addition Reversal Payment of year Salaries and bonus 7,396,801 144,050,953 - (103,496,170 ) 47,951,584 Staff welfare 23,778,811 11,012,664 -( 8,637,687 ) 26,153,788 Social insurance - 20,717,402 - ( 20,717,402 ) - Including: Medical insurance - 6,352,490 -( 6,352,490) - Pension - 12,081,845 - ( 12,081,845 ) - Unemployment insurance - 1,322,572 -( 1,322,572) - ( 503,6 Injury insurance - 503,626 - 26) - ( 456,8 Pregnant insurance - 456,869 - 69) - Compensation for release of employees - 76,824,227 - - 76,824,227 Housing fund 13,598,868 5,039,490 - ( 18,638,358 ) - Union fee and education fee - 2,202,078 -( 2,202,078 ) - Allowances 27,813,400 1,631,683 -( 1,631,683) 27,813,400 Total 72,587,880 261,478,497 - (155,323,378) 178,742,999 As at 31 December 2007, performance-related salary payable amounting to RMB14,932,101 is included in the balance of employee benefits payable. 88 6. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (20) Tax Payables 31 December 31 December 2007 2006 (restated) Value added tax 25,131,319 10,670,374 Consumption tax 14,223,346 12,695,690 Corporation income tax 277,647,339 121,995,400 Others 21,883,838 9,683,968 Total 338,885,842 155,045,432 (21) Other Payables 31 December 31 December 2007 2006 (restated) Payables for advertising expenses 86,266,177 79,725,991 Payables for deposition of selling agencies 69,969,101 28,968,815 Payables for deposition of supplies 11,701,550 12,299,934 Due to the Changyu Group Company - 978,563 Due to Changyu Group Company for land use rights transfer - 87,197,000 Payable for trademark usage 23,250,755 - Payables for equipment purchases, construction costs and transportation charges 19,488,091 - Others 13,419,428 16,991,603 Total 224,095,102 226,161,906 At 31 December 2007, the balance due to the shareholders with voting right of 5% or above is RMB 23,250,755 (31 December 2006: RMB 88,175,563.) 89 6. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (22) Share capital The issued capital of the Company is RMB527,280,000 , with a par value of RMB1.00 each. Issued and fully paid ordinary share At 31 December 2007 and 31 December 2006 shares % Restricted listed Domestic non-state owned legal person shares 265,749,120 50.40% Total of Restricted Listed 265,749,120 50.40% Unrestricted Listed - A shares 83,066,880 15.75% - B shares 178,464,000 33.85% Total of Unrestricted Listed 261,530,880 49.60% Total shares 527,280,000 100.00% (23) Capital surplus At 31 December 31 December 2007 2006 RMB RMB Share premium 557,222,454 557,222,454 90 6. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (24) Surplus reserve 2007 1 January 2007 Increase Decrease 31 December 2007 Statutory surplus reserve fund 295,942,630 - - 295,942,630 2006 1 January 2006 Increase Decrease 31 Decemb 200 Statutory surplus reserve fund 125,778,149 170,164,481 - 295,942,630 Including: appropriation of the net profits 125,778,149 44,386,331 - 170,164,480 Transfer from public welfare fund - 125,778,150 - 125,778,150 PWF 125,778,150 - (125,778,150 ) - Total 251,556,299 170,164,481 (125,778,150 ) 295,942,630 In accordance with the Company Law of the PRC and the Company’s articles of association, the Company is required to appropriate 10% of the net profit reported in the statutory accounts (after offsetting prior years’ losses) to the statutory surplus reserve fund (“SRF”) until the balance of SRF reaches 50% of the Company’s share capital. The SRF can be transferred to shares. However, SRF is maintained at a minimum of 25% of the registered capital after the transfer. In prior years, the company and some subsidiaries should appropriate 5%-10% of the net profit reported to public welfare fund. In accordance with Company Law of the PRC (revised in 2005) and the Company’s new articles of association, the Company ceased appropriating the net profit to public welfare fund, and the balance of to public welfare fund as at 31 December 2005 is transferred to statutory surplus reserve. This resolution was approved by the General Meeting. At 31 December 2007, the statutory surplus reserve fund has reached 50% of the issued capital. The board of directors approved that no appropriation of SRF. 91 6. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (25) Retained profits Year ended 31 December 2007 2006 (restated) Ending balance of the prior year 629,268,045 513,711,071 Fist time adoption of CAS 5,503,483 54,849,754 Beginning balance after retrospective adjustments 634,771,528 568,560,825 Add: net profits for the year 635,627,764 394,517,034 Less: appropriation of reserves - ( 44,386,331) Final dividends (421,824,000) (283,920,000) Ending balance of retained profits 848,575,292 634,771,528 Based on the board minutes held on 21 March 2008, a cash dividend in respect of 2007 of RMB1.1 per share (based on the total 527,280,000 shares), amounting to a total cash dividend of 580,008,000 is to be approved by the next Annual General Meeting. The effects of first time adoption of CAS on retained earnings as at 1 January 2007 is set out in No. 25 of Note 3. (26) Minority interest The minority interest of the subsidiaries of the Group is as follows: Year ended 31 December 2007 2006 Beijing Castel (a) 33,005,045 - Ice Chateau 12,887,000 12,887,000 Changyu-Castel 12,174,645 12,174,645 Langfang Castel 12,640,000 12,640,000 Others 14,652,004 15,901,539 85,358,694 53,603,184 (a) The minority shareholders have injected capital of RMB33,000,000 to Beijing Chateau during the current year. 92 6. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (27) Revenue and cost of sales Revenue is as follows: Year ended 31 December 2007 2006 (restated) Sale of merchandise and produce 2,726,615,487 2,162,755,218 Other operating income 3,550,604 4,519,715 Total 2,730,166,091 2,167,274,933 Cost is as follows: Year ended 31 December 2007 2006 (restated) Cost of sales 824,503,294 719,828,173 Other operating costs 2,497,794 3,048,208 Total 827,001,088 722.876,381 Year ended 31 December 2007 2006 Total revenue of the top five customers 209,430,894 233,432,951 Proportion of total revenue 7.7% 10.8% (31) Taxes and surcharges Year ended 31 December 2007 2006 (restated) Consumption Tax 140,180,333 125,483,562 City construction tax 28,624,586 21,991,845 Education surcharges 17,512,982 12,980,656 Total 186,317,901 160,456,063 93 6. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (29) Provision for impairment of assets Year ended 31 December 2007 2006 (restated) Bad debt provision (3,882,501 ) 9,233,378 Inventory provision (5,751,442 ) 12,933,574 Total (9,633,943 ) 22,166,952 (30) Finance income Year ended 31 December 2007 2006 Interest income 26,857,992 23,252,151 Less: bank charges ( 3,478,209 ) ( 2,048,315 ) 23,379,783 21,203,836 (31) Investment income Year ended 31 December 2007 2006 Yield on bond investment 823,500 783,000 Losses on disposal of subsidiaries ( 48,249 ) (776,870)) Other investment income 258,105 - 1,033,356 6,130 At the balance sheet dates, there were no significant restrictions on the repatriation of profit. 94 6. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (32) Non-operation income Year ended 31December 2007 2006 Gains on disposal of non-current assets 233,429 - Penalty 236,822 - Others 5,164,606 1,341,934 Total 5,634,857 1,341,934 (33) Non-operation expenses Year ended 31December 2007 2006 Loss on disposal of non-current assets 2,226,670 123,885 Donation 397,434 - Others 1,848,641 1,545,217 Total 4,472,745 1,669,102 95 6. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (34) Income tax Year ended 31 December 2007 2006 (restated) Current income tax 305,673,431 187,335,923 Deferred income tax 4,875,417 ( 19,832,312 ) Total 310,548,848 167,503,611 Year ended 31 December 2007 2006 (restated) Profit before tax 949,443,426 565,023,227 Income tax at PRC statutory income tax rate (a) 313,316,331 186,457,665 Subsidiaries are subject to different income tax rates ( 31,730,147 ) ( 25,699,689) Tax losses not recognized 6,533,813 2,385,278 Expenses not deductible for taxation purpose 17,152,451 4,360,357 Effect on deferred tax as a result of change in tax rate 5,276,400 - Tax charge at effective tax rate 310,548,848 167,503,611 (a): On 16 March 2007, the National People’s Congress approved the Corporate Income Tax Law of the People’s Republic of China (the “New CIT Law”), which is effective from 1 January 2008. Under the New CIT Law, the corporate income tax rate applicable to domestic companies will decrease from 33% to 25% from 1 January 2008. As a result, the Group recalculated the deferred tax by the new tax rate of 25% for temporary differences expected to be utilized after 1 January 2008. 96 6. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (35) Earnings per-share Year ended 31 December 2007 2006 Earnings Earnings per share attributable to ordinary shareholders 635,627,764 394,517,034 Shares Weighted average number of ordinary shares issued 527,280,000 527,280,000 Basic earnings per share 1.21 0.75 Diluted earnings per share 1.21 0.75 During the period from the balance sheet date to the reporting date, the are no subsequent events taken place which may impact the number of the ordinary shares issued or potential ordinary shares. (36) Cash payments on other operating activities The cash outflow with large amounts is as follows: Year ended 31 December 2007 2006 Transportation expenses 88,272,279 90,606,976 Trademark license fee 57,565,816 43,255,104 Traveling fee 17,541,978 24,048,408 Rental expenses 16,791,204 10,510,055 Advertising fee 274,354,650 257,531,909 Office suppliers 20,608,682 17,918,158 Insurance expenses 24,402,632 17,333,066 Storage expenses 16,791,204 11,510,055 Others 37,181,784 49,637,919 Total 553,510,229 522,351,650 97 6. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (37) Cash flow from operating activities Year ended 31 December 2007 2006 (restated) Reconciled the net profit to Cash flow from operating activities Net profit 635,627,764 394,517,034 Adjustments for: -Provision for impairment of assets ( 9,633,943 ) 22,166,952 -Depreciation 47,646,267 42,384,408 -Intangible assets amortization 2,865,980 133,796 -Minority interests 3,266,814 3,002,582 -Amortisation of long term prepaid expenses 9,293,924 - -Losses on disposal of property, plant and equipment 1,993,241 123,885 -Finance costs ( 23,244,756 ) ( 23,254,217 ) -Investment income ( 1,033,356 ) ( 6,130 ) -Decrease in deferred tax assets 4,875,417 ( 19,832,312 ) -Increase in inventories (115,249,465 ) (197,795,472 ) -Increase in operating receivables (3,888,657 ) (1,516,063 ) -Increase in operating payables 263,641,928 178,149,984 Net cash flow from operating activities 816,161,158 398,074,447 (38) Cash and cash equivalents 31 December 31 December 2007 2006 Cash and bank (No.1 of Note 6) 1,322,898,600 1,192,475,575 Less: restricted bank deposits 2,363,969 2,497,677 time deposits with original maturity of more than three months when acquired 464,000,000 517,095,022 Cash and cash equivalents at end of year 856,534,631 672,882,876 98 6. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (39) Disposal of subsidiary (i) Disposed subsidiary Share of Share of Causes for Date when Place of equity voting not to be a exclude from registration Business interest rights subsidiary consolidation Yantai Changyu-Tr ade Wines Manufactu Co., ring and Ltd.(“Trade sales of Wines”) Yantai cider 51% 51% Note 1 2007 Note 1: Approved by the board of deirectos of the Company, the Yantai Changyu Trade Wine Co., Ltd. was put into liquidation on 16 October 2007, and the liquidation was completed on 30 November 2007. As a result, Yantai Changyu Trade Wine Co., Ltd. was no longer included in consolidated financial statements as at 31 December 2007. 16 October 2007 31 December 2006 Net carrying amounts Net carrying amounts Cash and bank 7,907,847 6,224,015 Trade receivable - 195,005 Prepaid expenses - 67,304 Inventories - 1,220,051 Net carrying amounts of property, plant and equipment 65,667 88,230 Intangible assets - 10,133 Tax payables - 3,400 Other payables - ( 12,725) Minority interest (4,511,304) (3,818,752) 3,462,210 3,976,661 Losses on disposal of subsidiary (No.31 of note 6) ( 48,249) Consideration 3,413,961 99 6. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (39) Disposal of subsidiary (continued) (i) Disposed subsidiary (continued) Period ended 16 October 2007 Revenue 3,053,292 Cost of sales 1,157,368 Net profit 94,607 (ii) Cash flow from disposal of subsidiary Analysis on cash flow from disposal of subsidiary 2007 Considerations 3,413,961 Cash inflow from disposal of subsidiaries 3,413,961 Less: cash and bank held by the disposed subsidiary 7,907,847 Net cash outflow from disposal of subsidiary (4,493,886) 7. SEGMENT INFORMATION Over 90% of the Group’s revenue is generated from domestic customers, and over 90% assets of the Group are located in mainland China. Since the major customers and operating activities are located in mainland China, it is not necessary to disclose detailed geographical segment information. The business of the Group is all related to the manufacturing and sales of wines, so it is not necessary to disclose business segment information. 100 8. RELATED PARTY TRANSACTIONS (1) Definition for related parties One party having control, common control or significant influence on the counterparties, and two or more than two parties which are subject to control, common control or significant influence of one party are defined as related parties. The following parties are the related parties of the Group: (i) the parent of the Group, (ii) the subsidiary of the Group, (iii) fellow subsidiaries under the common control, (iv) investors having common control on the Group, (v) investors having significant influence on the Group, (vi) joint-ventures, (vii) associates, (viii) key investors and their closely families, (ix) key investors and key management person of the Group and their closely families, and (x) other enterprises controlled, common controlled or significantly influenced by key investors and key management person of the Group and their closely families. (2) Parent and subsidiary Place of Percentage Percentage of Code of the Registered registrationScope of business of shares voting rights organisation capital Changyu Group Company Yantai Manufacturing 50.4% 50.4% 265 645 824 50,000,000 During the year ended 31 December 2007, there are no fluctuations in registered capital of the parent company and its share of equity interest and share of voting rights. The subsidiaries of the Company are disclosed in note 5 and No.1 of notes 15. (3) Other related parties Code of the organisation Nature of related parties Yantai Changyu Travelling Company Limited 258 258 654 Fellow subsidiary 101 8. RELATED PARTY TRANSACTIONS (continued) (4) Significant related party transactions (i) Pricing policy All related party transactions are based on the negotiated price. (ii) Services agreement Pursuant to a service agreement dated 18 May 1997, starting from 18 September 1997 (date of the incorporation), Changyu Group Company has provided facilities and services such as kindergarten and canteen to the Company. An annual service fee of RMB500,000 is payable by the Company to Changyu Group Company from the date of incorporation, until the end of the fourth accounting year (i.e. 2000). As from the fifth accounting year, the service fee may be adjusted every three years by not more than 10% of the previous annual service fee. The agreement is effective until 31 December 2007. For the year ended 31 December 2007, the Company paid service fee of RMB500,000 (2006: RMB500,000) to Changyu Group Company. (iii) Trademarks license Pursuant to a trademark’s license agreement dated 18 May 1997, starting from 18 September 1997, the Company may use certain trademarks of Changyu Group Company, which have been registered with the PRC Trademark Office. An annual fee at 2% of the Group’s annual sales is payable to Changyu Group Company. The license is effective until the expiry of the registration of the trademarks. For the year ended 31 December 2007, the Group paid trademarks fee of approximately RMB55,722,350 (2006: approximately RMB43,255,104 ) to Changyu Group Company. (iv) Patents Pursuant to a patents implementation license dated 18 May 1997, starting from 18 September 1997, the Company may use the patents of Changyu Group Company. The annual patents usage fee payable by the Company to Changyu Group Company is RMB50,000. The contract was expired on 20 December 2005. The Company renewed the contract on 20 August 2006 and the expire date is 19 August 2016, the annual patents usage fee payable by the Company to Changyu Group Company is still RMB50,000. For the year ended 31 December 2007, the patents usage fee payable to Changyu Group Company amounted to RMB50,000 (2006: RMB50,000). (v) Property leasing agreements Pursuant to a patents implementation licence dated 28 November 2006, starting from 1 January 2007, the Company may rent properties from Changyu Group Company for operation purposes at a basic annual rental of RMB 6,383,000, and the expired date is 31 December 2011. For the year ended 31 December 2007, the rental expenses payable to Changyu Group Company amounted to RMB6,383,000 (2006: nil). 102 8. Related party transactions (continued) (4) Significant related party transactions (continued) 31 December 31 December 2007 2006 (restated) Yantai Changyu Travelling Co. Ltd. Sales to related parties 6,734,991 - Changyu Group Company Trademark license fee 55,722,350 43,255,104 Service fee 500,000 500,000 Patent fee 50,000 50,000 Rental expenses 6,383,000 - Land use right lease prepayments - 550,000 Purchase of land use right - 87,197,000 (5) Other significant related party transactions 31 December 31 December 2007 2006 (restated) Key management compensation 5,725,000 5,367,000 (6) Amounts due to /from related parties 31 December 31 December 2007 2006 Trade receivables Yantai Changyu Travelling Company Limited 1,387,695 615,547 Other payables Changyu Group Company Trademark license fee payable 23,250,755 - Current accounts payable - 978,563 Land use right payable - 87,197,000 The amounts due to/ from related parties are daily operation current accounts. It was interest -free, unsecured and with no specified repayment date. 103 9. OPERATING LEASE ARRANGEMENTS As lessee At 31 December 2007, the Group had total future minimum lease receivables under non-cancellable operating leases with its tenants falling due as follows: 31 December 31 December 2007 2006 Within one year, inclusive 17,727,558 6,084,980 In second years, inclusive 11,223,549 1,195,000 In the third years, inclusive 10,271,143 1,368,889 Over three years 29,904,485 9,190,191 69,126,735 17,839,060 10. COMMITMENTS 31 December 31 December 2007 2006 Capital commitments Authorized by the board of directors but not contracted 100,850,000 - 104 11. FINANCIAL INSTRUMENTS AND RISK ANALYSIS FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES The Group’s principal financial instruments comprise of cash and held to maturity investments. The main purpose of these financial instruments is to raise funds for the Group’s operations. The Group has other financial assets and liabilities such as trade receivables, and trade and bills payables, which arise directly from its various operations. The main risks arising from the Group’s financial instruments are credit risk, liquidity risk, and market risk. The board of directors reviews and approves policies for managing each of these risks which are summarised as follows: Credit risk Credit risk arises mainly from the risk that counterparties defaulting on the terms of their agreements. The Group monitors the exposure to credit risk by only trading with the recognized and creditworthy third parties. The Group monitors the exposure to credit risk on an ongoing basis and credit evaluations are performed on customers. In addition, receivable balances are monitored on an ongoing basis with the result that the Group’s exposure to bad debts is not significant. For transactions that are not denominated in the functional currency, the Group does not offer credit terms without the specific approval of the Head of Credit Control. Other financial assets comprise of cash and bank, held to maturity investment. The credit risks of the financial assets arise from default of the counterparty or bad management of the counterparty, with a maximum exposure equal to the carrying amounts of these instruments. Due to the nature of the business of the Group, the risks are decentralised to customers, there was no significant concentration of credit risk. Since the Group trades only with recognised and creditworthy third parties, there is no requirement for collateral. Considering the collaterals and other credit increase circumstances, maximum exposure of credit risk is the carrying amounts after deducting provision for impairment. As at 31 December 2007, the Company believed there was no impairment for financial assets that are not overdue, and there were no significant impaired overdue financial assets for which provision has not been provided. Liquidity risk Liquidity risk represents the risk for shortage of fund to repay financial liabilities, which may arise from failure to sell the financial assets at fair value timely, default on counterparties to pay its liabilities, repay the liabilities in advance or no projected cash flows from operations can be generated. 105 11. FINANCIAL INSTRUMENTS AND RISK ANALYSIS (CONTINUED) Liquidity risk (continued) The maturity profile of the Group's financial assets as at the balance sheet date was as follows: 2007 Book value Less than 3 months 3 to less than 12 months 1-5 years Cash and bank 1,322,898,600 858,898,600 464,000,000 - Bill receivables 11,524,698 11,524,698 - - Trade receivables 82,490,201 82,490,201 - - Other receivables 24,581,648 15,581,648 - 9,000,000 Held to maturity investments 15,000,000 - - 15,000,000 1,456,495,147 968,495,147 464,000,000 24,000,000 2006 Book value Less than 3 months 3 to less than 12 months 1-5 years Cash and bank 1,192,475,575 675,380,553 517,095,022 - Bill receivables 11,150,117 11,150,117 - - Trade receivables 71,519,265 71,519,265 - - Other receivables 22,671,853 - 21,671,853 1,000,000 Held to maturity investments 15,000,000 - - 15,000,000 1,312,816,810 758,049,935 538,766,875 16,000,000 The maturity profile of the Group's financial liabilities as at the balance sheet date was as follows: 2007 Book value Less than 3 months 3 to less than 12 months 1-5 years Trade payables 202,289,452 202,089,452 - 200,000 Other payables 224,095,102 224,095,102 - - 426,384,554 426,184,554 - 200,000 2007 Book value Less than 3 months 3 to less than 12 months 1-5 years Trade payables 125,473,928 125,353,928 - 120,000 Other payables 226,161,906 226,161,906 - - 351,635,834 351,515,834 - 120,000 106 11. FINANCIAL INSTRUMENTS AND RISK ANALYSIS (CONTINUED) Fair value The main financial assets of the Group comprise of cash and bank, trade receivables, other receivables and held to maturity financial instruments. As at 31 December 2007, the Group have no other financial assets with significant liquidation restriction except or certain cash and bank (refer to No.1 of note 6). The Group has no financial assets impaired or overdue except for other receivables. The Group’s financing is mainly through issuing of share capital. The financial liabilities of the Group is manly comprised of advances from customers generated from operating activities and trade payables and other payables normally falling due within 3 months (except for deposits and that various guarantees), with the carrying amounts equaling to fair value. The Company believed that the Group can raise enough funds to repay the financial liabilities though the realization of the financial assets, and there were no significant concentration of liquidity risk. Market risk Market risk represents the fair value of financial instruments or the present value of future cash flows may vary by the market price. Market risk includes interest rate risk, foreign currency risk and other pricing risk. Interest rate risk Interest rate risk represents the fair value of financial instruments of the present value cash flows may vary by the change of interest rate. The earnings and cash flow from operating activities are generally independent with fluctuation of market interest rate, and there were no significant interest bearing assets and liabilities except for cash in bank. The company believed that the Group has no significant concentration of interest rate risks, and no interest rate swaps are designated to hedge against interest rate risks. Foreign currency risk Foreign currency risk represents the risks on fluctuation of fair value of financial instruments or the future cash flow as a result of the fluctuation in foreign exchange. The group has no significant concentration of foreign currency risk because its business is principally conducted in PRC and all transactions are denominated in RMB. 107 12. CONTINGENT LIABILITIES The Group and the Company did not have any significant contingent liabilities as at 31 December 2007. 13. POST BALANCE SHEET EVENTS On 7 March 2008, Brandy Sales Department was converted to the Branch of the Sales Company. A business license is obtained (No. 370600100000193). On 21 March 2008, the board of the directors proposed a cash dividend in respect of 2007 issued shares of 527,280,000 of RMB1.1 per share, amounting to a total cash dividend of 580,008,000. The proposed dividend is subject to the approval from the Annual General Meeting. 14. COMPARATIVE AMOUNTS The current year is the first year adoption CAS, the comparative amounts have been restated in accordance with the disclosure requirements. 108 15. NOTES TO FINANCIAL STATEMENTS (1) Cash and bank 31 December 31 December 2007 2006 Cash on hand 34,823 45,259 Cash in bank 1,072,608,157 1,049,212,241 Others 2,363,969 2,497,677 1,075,006,949 1,051,755,177 31 December 31 December 2007 2006 Restricted assets Housing fund deposit 2,363,969 2,497,677 Cash and bank are dominated in RMB. The balance of time deposits over three months as at 31 December 2007 of the Company is RMB 464,000,000（The 31 December 2006: RMB 517,095,022）, with maturity terms ranging from 3 months to 1 year, and interest rates ranging from 1.81% to 4.14%. (2) Trade receivables The credit term of account receivable is normally one month, and the major customers can be granted a credit term up to three months. The trade receivable balances are interest free. December 31 December 31 2007 2006 Trade receivable 10,237,494 15,910,061 Less: provision - ( 328,085 ) Total 10,237,494 15,581,976 109 15. NOTES TO FINANCIAL STATEMENTS (continued) (2) Trade receivables (continued) The aged analysis is as follows: 31 December 31 December 2007 2006 Within 1 year 10,237,494 15,678,561 Over 3 years - 231,500 10,237,494 15,910,061 31 December 2007 Trade receivable Bad debt % provision % Within 1 year 10,237,494 100.0 - - 10,237,494 100.0 - 31 December 2006 Trade receivable % Bad debt provision % Within 1 year 15,678,561 98.5 96,585 0.6 Over 3 years 231,500 1.5 231,500 100.0 15,910,061 100.0 328,085 110 15. NOTES TO FINANCIAL STATEMENTS (continued) (2) Trade receivables (continued) The category analysis for trade receivables is as follows: 31 December 2007 Trade receivable Bad debt % provision % Individually significant 9,329,715 91.1 - - Others 907,779 8.9 - - 10,237,494 100.0 - 31 December 2006 Trade receivable Bad debt % provision % Individually significant 11,932,546 75.0 304,220 2.5 Others 3,977,515 25.0 23,865 0.6 15,910,061 100.0 328,085 The movement of bad debt provision for trade receivables is as follows: 31 December 31 December 2007 2006 At beginning of year 328,085 - Accrual - 328,085 Reversal (328,085 ) - At end of year - 328,085 31 December 2007 31 December 2006 Top five of trade receivables 9,354,777 12,091,646 Proportion of total trade receivables 91.4% 76.0% As at 31 December 2007, there aren’t any trade receivables due from the shareholders with voting rights of 5% or above. (31 December 2006: nil) 111 15. NOTES TO FINANCIAL STATEMENTS (continued) (3) Other receivables 31 December 31 December 2007 2006 (Restated) Other receivables 125,846,668 24,431,605 Less: bad debt provision ( 8,000,000 ) ( 8,000,000 ) 117,846,668 16,431,605 The aged analysis is as follows: 31 December 31 December 2007 2006 Within 1 year 116,846,668 23,431,605 1-2 years 9,000,000 - Over 3 years - 1,000,000 Total 125,846,668 24,431,605 31 December 2007 Other receivable % Bad debt provisio % s n Individually significant 118,410,151 94.1 8,000,000 6.8 Others - 7,436,517 5.9 - Total 125,846,668 100.0 8,000,000 31 December 2006 Other receivables % Bad debt provision % Individually significant 20,000,000 81.9 8,000,000 40.0 Others 4,431,605 18.1 - - Total 24,431,605 100.0 8,000,000 112 15. NOTES TO FINANCIAL STATEMENTS (continued) (3) Other receivables (continued) The movement of bad debt provision of other receivables is as follows: 31 December 31 December 2007 2006 At beginning of year 8,000,000 - Accrual - 8,000,000 Reversal - - At end of year 8,000,000 8,000,000 31 December 31 December 2007 2006 Top five other receivables 118,410,151 17,236,592 Proportion of total other receivables 94.1% 70.6% As at 31 December 2007, there aren’t any other receivables due from the shareholders with voting rights of 5% or above. (31 December 2006: nil) (4) Inventories December 31 December 31 2007 2006 Raw materials 19,988,710 20,400,952 Finished goods 144,182,426 126,743,536 Semi-finished products 268,877,516 274,422,783 433,048,652 421,567,271 Less: inventory provision - - 433,048,652 421,567,271 There weren’t any provisions for inventories as at 31 December 2007 and 31 December 2006. 113 15. NOTES TO FINANCIAL STATEMENTS (continued) (5) Long-term equity investment 2007 31December 2007 Note 1 January 2007 Additions Disposals Equity investment by (restated) cost method -subsidiaries (i) 115,469,074 47,000,000 4,641,896 157,827,178 -other investments (ii) 10,200,000 - - 10,200,000 125,669,074 47,000,000 4,641,896 168,027,178 2006（restated） Note 1 January 2006 Additions Disposals 31December2006 Equity investment by cost method -subsidiaries (i) 60,682,944 55,563,000 776,870 115,469,074 -other investments (ii) 10,200,000 - - 10,200,000 70,882,944 55,563,000 776,870 125,669,074 114 15. NOTES TO FINANCIAL STATEMENTS (continued) (5) Long-term equity investment (continued) (i) Investments in subsidiaries Percentage of 31December 31December Subsidiaries equity interest 2006 additions Disposals 2007 (restated) Machine Packaging 100.0% 300,000 - - 300,000 Vehicular Transportation 100.0% 300,000 - - 300,000 Beijing Changyu Sales and Distribution Co.,Ltd. 70.0% 350,000 - - 350,000 Kylin Packaging 50.0% 5,953,878 - - 5,953,878 Changyu-Castel 70.0% 28,968,100 - - 28,968,100 Changyu (Jingyang) Pioneer Wine Co., Ltd. 90.0% 900,000 - - 900,000 Yantai Changyu Pioneer Wine Sales Co., Ltd. 90.0% 7,200,000 - - 7,200,000 Langfang Castel 49.0% 12,142,200 - - 12,142,200 Shanghai Changyu Sales and Distribution Co., Ltd 60.0% 300,000 - - 300,000 Pioneer International 70.0% 3,500,000 - - 3,500,000 Beijing Chateau（a） 70.0% 30,000,000 47,000,000 - 77,000,000 Wine sales 90.0% 4,500,000 - - 4,500,000 Ningxia Growing 100.0% 1,000,000 - - 1,000,000 National Wine 100.0% 2,000,000 - - 2,000,000 Ice Wine Chateau 51.0% 13,413,000 - - 13,413,000 Trade Wines 51.0% 4,641,896 - 4,641,896 - Total 115,469,074 47,000,000 4,641,896 157,827,178 (a) The Company directly held 60% share of equity interest in the subsidiary as at 31 December 2006. (ii) Other investments Percentage of 31December 31December Invested entity equity interest 2007 Additions Disposals 2006 Jingyang Sales 10.0% 100,000 - - 100,000 Langfang Sales 10.0% 100,000 - - 100,000 Yantai Dingtao 18.2% 10,000,000 - - 10,000,000 Total 10,200,000 - - 10,200,000 115 15. NOTES TO FINANCIAL STATEMENTS (continued) (6) Property, plant and equipment Machineries and Motor Buildings equipments vehicles Total Cost At 1 January 2007(restated) 214,785,751 408,975,369 8,605,142 632,366,262 Purchase 1,588,975 6,926,109 303,137 8,818,221 Transferred from construction in progress 10,405,100 34,234,234 - 44,639,334 Disposal ( 1,933,48 ) ( 7,600 ) ( 42,009 ) ( 1,983,09 ) At 31 December 2007 224,846,337 450,128,112 8,866,270 683,840,719 Accumulated depreciation At 1 January 2007 59,833,886 208,884,756 4,880,900 273,599,542 Depreciation 6,136,737 27,742,419 489,835 34,368,991 Disposal ( 187,958 ) ( 7,283 ) ( 14,301 ) ( 209,542 ) At 31 December 2007 65,782,665 236,619,892 5,356,434 307,758,991 Net carrying amount At 31 December 2007 159,063,672 213,508,220 3,509,836 376,081,728 At 31 December 2006 154,951,865 200,090,613 3,724,242 358,766,720 Machineries and Motor (restated) Buildings equipments vehicles Total Cost At 1 January 2006 214,784,547 358,679,343 8,988,541 582,452,431 Purchase 2,450,107 19,237,032 155,131 21,842,270 Transferred from construction in progress 331,444 32,037,593 - 32,369,037 Disposal ( 2,780,34 ) ( 978 ) ( 538,530 ) ( 4,297,47 ) At 31 December 2006 214,785,751 408,975,369 8,605,142 632,366,262 Accumulated depreciation At 1 January 2006 53,795,913 184,438,586 4,898,054 243,132,553 Depreciation 7,277,221 25,407,158 518,268 33,202,647 Disposal ( 1,239,248 ) ( 960,988 ) ( 535,422 ) ( 2,735,658 ) At 31 December 2006 59,833,886 208,884,756 4,880,900 273,599,542 Net carrying amount At 31 December 2006 154,951,865 200,090,613 3,724,242 358,766,720 At 31 December 2005 160,988,634 174,240,757 4,090,487 339,319,878 116 15. NOTES TO FINANCIAL STATEMENTS (continued) (6) Property, plant and equipment (continued) As at 31 December 2007, no buildings were pledged to secure certain bank loans, and no ownership of the buildings were restricted. As at 31 December 2007, no idle machineries, no property, plant and equipment held for disposal, and no property, plant and equipment under finance lease and no property, plant and equipment held under operating lease. As at 31 December 2007, the cost and net carrying amount of fully depreciated property, plant and equipment still in use is RMB79,854,889 and RMB3,910,698 respectively. As at 31 December 2007, the buildings with net book value of approximately RMB20,235,151 have not obtained the relevant building ownership certificates. The management of the Group believes that the above mentioned affairs have no significant unfavorable impacts on the financial statements. 117 15. NOTES TO FINANCIAL STATEMENTS (continued) (7) Intangible assets Land use right Software Total Cost 1 January 2007(restated) 93,437,000 - 93,437,000 Increase 3,157,766 3,480,000 6,637,766 Decrease - - - 31 December 2007 96,594,766 3,480,000 100,074,766 Accumulated amortization 1 January 2007 505,609 - 505,609 Accrual 2,851,697 - 2,851,697 Decrease - - - 31 December 2007 3,357,306 - 3,357,306 Net carrying amount 31 December 2007 93,237,460 3,480,000 96,717,460 31 December 2006 92,931,391 - 92,931,391 (restated) Land use right Software Total Cost 1 January 2006 6,240,000 - 6,240,000 Increase 87,197,000 - 87,197,000 31 December 2006 93,437,000 - 93,437,000 Accumulated amortization 1 January 2006 375,613 - 375,613 Accrual 129,996 - 129,996 31 December 2006 505,609 - 505,609 Net carrying amount 31 December 2006 92,931,391 - 92,931,391 31 December 2005 5,864,387 - 5,864,387 118 15. NOTES TO FINANCIAL STATEMENTS (continued) (8) Deferred tax assets The movement of deferred tax assets is as follows: Year ended 31 December 2007 2006 (Restated) At beginning of year 20,946,845 - Recognised in the income statement of the current year Including: (i) retirement benefit ( 3,217,579 ) 18,306,845 (ii) provision for impairment of assets ( 640,000 ) 2,640,000 At end of year 17,089,266 20,946,845 Deferred tax assets of the Company are mainly comprised of: 31 December 31 December 2007 2006 (restated) Deferred tax assets: Retirement benefit 15,089,266 18,306,845 Provision for impairment of assets 2,000,000 2,640,000 Total 17,089,266 20,946,845 119 15. NOTES TO FINANCIAL STATEMENTS (continued) (9) Provision Decrease 1 January 31 December 2007 Accrual reversal Write off 2007 Bad debt provision Trade receivables 328,085 - (328,085) - - Other receivables 8,000,000 - - - 8,000,000 8,328,085 - (328,085) - 8,000,000 Accrual Decrease 1 January 2006 reversal Write off Bad debt provision Trade receivables - 328,085 - - 328,085 Other receivables 1,976,051 8,000,000 - 1,976,051 8,000,000 - 8,328,085 - 1,976,051 8,328,085 (10) Trade payables The trade payables are interest free. The Company is normally granted a credit period of not more than three months from its suppliers. As at 31 December 2007, no significant outstanding balances are aged over one year. As at 31 December 2007, there aren’t any outstanding balances due to the shareholders with 5% of voting rights or above. (31 December 2006: nil) 120 15. NOTES TO FINANCIAL STATEMENTS (continued) (11) Employee benefits payable Year ended 31 December 2007 At beginning At end of of year Addition Reversal Payment year (restated) Salaries and bonus 44,456,020 141,230,278 - (166,521,420 ) 19,164,878 Staff welfare 25,381,127 11,290,808 (28,420,330)( 8,251,605 ) - Social insurance - 13,328,810 - ( 13,328,810 ) - Including: Medical insurance - 3,423,356 -( 3,423,356) - Pension - 7,755,612 -( 7,755,612) - Unemployment - insurance - 578,653 ( 578,653) - Injury insurance - 824,019 - ( 824,019) - Pregnant insurance - 747,170 - ( 747,170 ) - Compensation for release of employees 70,107,303 - -( 9,750,242) 60,357,061 Housing fund - 5,054,986 - （ 5,054,986 ) - Union fee and education fee - 2,095,558 -( 2,095,558 ) - Allowances 27,813,400 1,941,214 - - 29,754,614 Total 167,757,850 174,941,654 (28,420,330) (205,002,621) 109,276,553 Year ended 31 December 2006 At beginning At end of of year Addition Payment year Salaries and bonus 7,016,801 137,436,659 ( 99,997,440 ) 44,456,020 Staff welfare 23,778,811 9,921,896 ( 8,319,580 ) 25,381,127 Social insurance - 11,021,758 ( 11,021,758 ) - Including: Medical insurance - 3,684,185 ( 3,684,185 ) Pension - 5,806,952 ( 5,806,952 ) - Unemployment insurance - 571,144 ( 571,144 ) - Injury insurance - 503,228 ( 503,228 ) - Pregnant insurance - 456,249 ( 456,249 ) - Compensation for release of employees - 70,107,303 - 70,107,303 Housing fund 13,598,869 4,939,099 ( 18,537,968 ) - Union fee and education fee - 1,485,859 ( 1,485,859 ) - Allowances 27,813,400 1,595,363 ( 1,595,363 ) 27,813,400 Total 72,207,881 236,507,937 (140,957,968 ) 167,757,850 As at 31 December 2007, performance-related salary payable amounting to RMB14,932,101 is included in the balance of employee benefits payable. 121 15. NOTES TO FINANCIAL STATEMENTS (continued) (12) Tax Payables 31 December 2007 31 December 2006 (restated) Value added tax 7,597,775 6,577,344 Consumption tax 11,166,059 9,021,593 Corporation income tax 24,917,303 20,863,468 Others 16,711,206 6,384,349 Total 60,392,343 42,846,754 (13) Other payables 31December 31December 2007 2006 (restated) Due to the Changyu Group Company - 827,227,693 Payables for deposit of suppliers 10,825,275 6,112,856 Due to Changyu Group Company for land use rights transfer - 87,197,000 Payables for equipment purchases, construction costs and transportation charges 16,371,914 - Others 19,897,270 12,897,627 Total 47,094,459 933,435,176 122 15. NOTES TO FINANCIAL STATEMENTS (continued) (14) Retained profits Year ended 31 December 2007 2006 (restated) Ending balance of the prior year 629,268,045 513,711,071 Fist time adoption of CAS (1,158,873,189) (781,728,355) Beginning balance after retrospective adjustments ( 529,605,144) (268,017,284) Add: net profits for the year 1,666,710,350 66,718,471 Less: appropriation of reserves - ( 44,386,331) Final dividends ( 421,824,000) (283,920,000) Ending balance of retained profits 715,281,206 (529,605,144) Based on the board minutes held on 21 March 2008, a cash dividend in respect of 2007 of RMB1.1 per share (based on the total 527,280,000 shares), amounting to a total cash dividend of 580,008,000 is proposed. Such dividend proposed is subject to the approval from the Annual General Meeting. 123 15. NOTES TO FINANCIAL STATEMENTS (continued) (15) Revenue and cost of sales Year ended 31 December 2007 2006 Sale of merchandise and products 1,041,624,997 946,457,101 Other operating income 2,448,402 1,938,973 Total 1,044,073,399 948,396,074 Cost of sales 764,044,365 706,797,522 Other operating costs 2,620,039 2,051,523 Total 708,849,045 766,664,404 Year ended 31 December 2007 2006 Top revenue of top five customers 1,034,475,945 948,396,074 Proportion of total revenue 99.1% 100.0% (16) Investment income Year ended 31 December 2007 2006 (restated) Yield on bond investment 823,500 783,000 Losses on disposal of subsidiary ( 1,227,935) ( 776,870 ) Gains on subscription of new shares 163,498 - Investment gains by applying cost method 1,627,389,356 82,968,155 Total 1,627,148,419 82,974,285 At the balance sheet dates, there were no significant restrictions on the repatriation of profit. During the year 2007, the subsidiaries have declared dividends of RMB1,627,389,356, including cash dividend of RMB627,389,356, net off the current accounts due to the subsidiaries of RMB883,914,945, and dividend receivable of RMB116,085,055. 124 15. NOTES TO FINANCIAL STATEMENTS (continued) (17) Cash flow from operating activities Year ended 31 December 2007 2006 Reconciled the net profit to Cash flow from operating activities Net profit 1,666,710,350 66,718,471 Add :provision for impairment of assets ( 328,085 ) 8,328,085 Depreciation 34,368,991 33,202,647 Intangible assets amortization 2,851,697 129,996 Losses on disposal of property, plant and equipment 152,959 31,450 Finance income (22,421,256 ) ( 23,254,217 ) Investment income (1,627,148,419 ) ( 82,974,285 ) Decrease in deferred tax assets 3,857,579 ( 20,946,845 ) Increase in inventories ( 11,481,381 ) ( 97,190,051 ) Decrease /(increase) in operating receivables (209,080,605 ) 257,797,024 Increase in operating payables 43,626,982 111,189,935 Net cash flow from operating activities ( 118,891,188 ) 253,032,210 125 15. NOTES TO FINANCIAL STATEMENTS (continued) (18) Cash and cash equivalents 31 December 2007 31 December 2006 Cash and bank (No. 1 of note 15) 1,075,006,949 1,051,755,177 Less: restricted bank deposits 2,363,969 2,497,677 time deposits with original maturity of more than three months when acquired 464,000,000 517,095,022 Cash and cash equivalents at end of year 608,642,980 532,162,478 (19) Related party transactions Sales to related parties Year ended 31 December 2007 2006 Pioneer International 10,285,798 - National Wines 8,963,189 - Yantai Changyu Pioneer Wine Sales Co. Ltd. 941,295,617 938,070,821 Langfang Castel 4,361,192 3,584,715 Yantai Changyu Trading Co. Ltd. 1,572,276 - Wines sales 313,368 - Development Zone Trading 68,229,823 - Changyu (Jingyang) Pioneer Wine Co. Ltd. 5,701,518 6,740,538 Yantai Changyu Traveling Co. Ltd. 3,350,618 - Total 1,044,073,399 948,396,074 Total revenue 1,044,073,399 948,396,074 Proportion of total revenue 100% 100% Purchase from related parties Year ended 31 December 2007 2006 Kylin Packaging 47,561,796 42,410,329 Changyu –Castel 25,455,096 11,607,456 Shanghai Changyu Sales and Distribution Co. Ltd 954,539 - Total 73,971,431 54,017,785 126 15. NOTES TO FINANCIAL STATEMENTS (continued) (19) Related party transactions (continued) Other related party transactions Year ended 31 December 2007 2006 The Group Company Service fee 500,000 500,000 Rental expenses 6,383,000 - Patent fee 50,000 50,000 Purchase of land use rights - 87,197,000 Lease prepayments for land use rights - 550,000 Total 6,933,000 88,297,000 Please refer to No. 4 of note 8 for the detailed content of the contract. Year ended 31 December 2007 2006 Key management person’s emoluments 5,725,000 5,367,000 127 15. NOTES TO FINANCIAL STATEMENTS (continued) (20) Related party transactions (continued) Amounts due from related parties 31 December 31 December 2007 2006 Other receivables Kylin Packaging 2,775,611 Ningxia Growing 22,922,038 National Wines 580,372 - Ice Chateau 2,500,000 Beijing Chateau 81,212,499 Beijing Changyu Sales and Distribution Co. Ltd. 5,900 Jingyang Sales 881,921 Yantia Changyu Pioneer Wine Sales Co. Ltd. 793,289 Total 111,671,630 Dividend receivable Yantia Changyu Pioneer Wine Sales Co. Ltd. 116,085,055 Other payables Changyu Group Company-land use right payable - 87,197,000 Yantai Changyu Pioneer Wine Sales Co., Ltd. - 815,207,482 Yantai Changyu Traveling Company Limited - 11,937,154 Pioneer International - 83,057 Total - 914,424,693 16. APPROVAL OF THE FINANCIAL STATEMENTS The financial statements have been authorized by the board of directors on 21 March 2008. The financial statements will be reported to shareholders meeting for reviewing under the Company’s principles. 128 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED APPENDIX I SUPPLEMENTARY INFORMATION TO FINANCIAL STATEMENTS Year ended 31 December 2007 1. RETRUN ON NET ASSETS AND EARNINGS PRE SHARE Return on net assets Earnings per share Weighted Fully diluted Average Basis diluted Net profit attributable to shareholders of the Company 28.52 30.98 1.21 1.21 Net profit attributable to shareholders of the Company deduct Non-incidental profits/(losses) 28.46 30.92 1.20 1.20 Diluted earnings per share equal to basic earnings per share as there are no potential dilutive shares outstanding. Including: net profit attributable to ordinary shareholders of the Company deducting incidental income/expenses Year ended 31 December 2007 2006 Net profit attributable to shareholders of the Company 635,627,764 394,517,034 Add/(Less): incidental (profits)/losses Profit/loss form disposal of non-current assets 1,993,241 123,885 Investment income ( 209,856) ( 6,130) Other non-operating income ( 3,155,353) 203,283 Tax effect of incidental (profits)/expense ( 404,297) ( 65,060) Net profit deducting incidental (profits)/expenses 633,851,499 394,773,012 Add :attributable to minority shareholders 468,048 - Net profit deducting incidental income/expenses attributable to the ordinary shareholders of the Company 634,319,547 394,773,012 The recognisation of incidental (profits)/losses is based on explanation to information disclosures regulations on Public securities issuing Corporate, CRSC [2007] No.9. 129 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED APPENDIX I SUPPLEMENTARY INFORMATION TO FINANCIAL STATEMENTS Year ended 31 December 2007 2. VARIANCE ANALYSIS Analysis on items with fluctuation more than 30% (inclusive) in consolidated financial statements or balance greater than 5% (inclusive) of the total assets at the balance sheet date or amount greater than 10% (inclusive )of gross profit of the reporting period (1) The balance of cash and bank as at 31 December 2007 was RMB1,322,898,600, which increased RMB 130,423,025 compared with the balance at 31 December 2006. The increase was due to the increased cash inflow from operating activities in line with the sales expansion. (2) The balance of inventory as at 31 December 2007 was RMB835,906,849, increasing by 17% as compared with that of 31 December 2006. The increase was mainly attributable to the increase in purchase of semi-products and raw materials as a result of the sales expansion. (3) The balance of property, plant and equipment as at 31 December 2007 was RMB640,710,159, increasing by 27% as compared with that of 31 December 2006. During the current year, many projects in progress were completed and transferred to property, plant and equipment, and the Group made significant investment in machineries to keep up with the development in production capability. (4) The balance of biological assets as at 31 December 2007 increased of approximately RMB19,821,941, about 100% as compared with that of 31 December 2006, which was mainly due to grape planting expenses was capitalized in accordance with CAS. (5) The balance of long term prepaid expenses was RMB 11,808,097 as at 31 December 2007 which increased more than 60% compared with that of 31 December 2006. The increase was mainly due to the increased in land lease prepayment for vineyard. (6) The balance of account payable was RMB 202,289,452 as at 31 December 2007, increasing by 61% as compared with that of 31 December 2006. The increase was mainly due to the increased storage of the wine liquid and the production dimension and volume enlargement as a result of several new production lines was put into operation during the current year. (7) The balance of tax payable was RMB 338,885,842 as at 31 December 2007, increasing by 119% as compared with that of 31 December 2006. The increase was mainly attributable to income tax payable in line with the increase in gross profit. (8) The balance of other payables was RMB224,095,102 as at 31 December 2007, decreasing abount 1% as compared with that of 31 December 2006. The decrease was mainly contributed by the settlement of advertising expense payables . (9) The balance of other current liabilities was nil as at 31 December 2007, while the balance at 31 December 2006 is RMB 10,708,238. The significant decrease was mainly attributable to the timely settlement of expenses during the current year. (10) The balance of issued capital was RMB527,280,000 as at 31 December 2007, with no fluctuation as compared with that of 31 December 2006. (11) The balance of capital surplus was RMB557,222,454 as at 31 December 2007, with no fluctuation as compared with that of 31 December 2006. (12) The balance of surplus reserve was RMB295,942,630 as at 31 December 2007, and no fluctuation as compared with that of 31 December 2006. As at 31 December 2007, the statutory surplus reserve fund has accounted to the 50% of the issued capital, so no appropriation of net profit is made to SRF. 130 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED APPENDIX I SUPPLEMENTARY INFORMATION TO FINANCIAL STATEMENTS Year ended 31 December 2007 2. VARIANCE ANALYSIS (CONTINUED) (13) The balance of retain earning was RMB 848,575,292 at 31 December 2007, increasing by 34% as compared with that of year 2006. Please refer to No. 25 of note 6 for details. (14)The balance of minority interest at the end of 2007 was RMB 85,358,694, increasing by 59% as compared with that of the year 2006. The increase was contributed by the minority shareholders’ capital injection in the Beijing Chateau of RMB 33,000,000 and the share of profits attributable to the minority shareholders. (15) The operating income for the year ended 31 December 2007 was RMB 2,730,166,091, increasing by 26 % as compared with that of the year 2006. The increase was mainly contributed by the continuously stable growth in sales of wine, champagne and brandy. The operating cost the year ended 31 December 2007 was RMB 827,001,088, increasing by about 14 % as compared with that of the year 2006. The increase was mainly due to the increase in new production lines and further development in production technology. (16) The tax surcharges for the year ended 31 December 2007 was RMB186,317,901, increasing 16% as compared with that of 2006. The increase was in line with the increase in sales income in the current year. (17)The selling expense for the year ended 31 December 2007 was RMB 624,646,818, increasing by 25 % as compared with that of the year 2006. The increase was mainly contributed by the operating scale enlargement, the increase in promotion fee together with the increase in salary and bonus of sales staff. (18) The administrative expense for the year ended 31 December 2007 was RMB 177,966,052, increasing by 18 % as compared with that of the year 2006. The increase was mainly due to the Company has strengthened the control on expenses. Additionally, the welfare expenses decreased significantly for the reversal of the balance of welfare payable in accordance with CAS. (19) The provisions for the year ended 31 December 2007 was RMB -9,633,943, decreasing by 143% as compared with that of the year 2006. The decrease was mainly due to the reversal of provision for the evidences indicating the impairment in current assets disappeared. Please refer to No. 16 of note 6 for details. (20) The investment income was RMB 1,033,356 for the year ended 31 December 2007, increasing about 168 times as compared with that the year 2006. The increase was mainly attributable to the interest income from investment in bonds of about RMB823,500. (21) The non-operating income for the year ended 31 December 2007 was RMB 5,634,857, increasing by 3.2 times as compared with year 2006. The increase was mainly due to gains on disposal of property, plant and equipment and release of the trade payables no longer need to be repaid to the income statement of the current year. (22) The non-operating expense for the year ended 31 December 2007 was RMB 4,472,745, increasing by 168% as compared with the year 2006. The increase was mainly due losses on the disposal of Yantai Castel of RMB 1,843,949 for the irrigation system of the vinery was damaged. (23) The income tax expense was RMB 310,548,848 for the year ended 31 December 2007, increasing by 85% as compared with that of the year 2006. The increase was in line with the growth in the group’s operating profit. No significant fluctuation in effective tax rate in the current year as compared with that of 2006. 131 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED APPENDIX I SUPPLEMENTARY INFORMATION TO FINANCIAL STATEMENTS Year ended 31 December 2007 3 REVISION ANALYSIS OF EQUITY ON FIRST TIME ADOPTION OF CAS When preparing the financial statements, the Company has reviewed assets, liabilities and equity on the date of first time adoption. Reconciliation of equity to the CAS from the old PRC Reporting Standards: Equity on first time adoption of CAS Before After retrospective retrospective adjustments adjustments difference As reported in accordance with old PRC GAAP 2,009,713,129 2,009,713,129 - Retirement benefits (1) - ( 66,385,563) (66,385,563) Pre-operation expenses (2) - ( 2,793,020) ( 2,793,020) Income tax effect (3) 16,862,129 74,682,066 57,819,937 Minority interest 53,603,184 53,603,184 - As restated in accordance with CAS 2,080,178,442 2,068,819,796 (11,358,646 ) Notes: (i) The group has adopted early retirement planning in the year 2006. The accounting treatment for the internal retirement planning is on the same basis to that of the termination benefits. Such benefits are composed of the salaries and the social insurance expenses to be paid for the period from the termination of services to the normal retirement date. The amount recognised in income statement of the current year is RMB 66,385,563. (ii) The Group has proposed retrospective adjustments on pre-operation expenses based on Explanation to CAS No.1. (iii) The group’s deferred tax asset was recognized based on deductible temporary difference which was the difference between the book value and the tax base on balance sheet date. The deferred tax effect generated by the above two adjustments are adjusted accordingly. 132 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED APPENDIX I SUPPLEMENTARY INFORMATION TO FINANCIAL STATEMENTS Year ended 31 December 2007 According to Questions and Answers to Information Disclosures Regulations on Public Issuing Securities Corporate No.7, Preparation and Disclosure for Comparative Financial Information During the Transition Period,( CSRC kuiji [2007] No.10), the Group made net profit reconciliation disclosing the retrospective adjustments for the income statement for the year ended 31 December 2006. Additionally, the Group made the assumption that CAS 1 to CAS 37 were adopted from the beginning of the period (1 January 2006). For the affairs not required to make retrospective adjustments except for the No.5 to No.19 of CAS38- First Time Adoption of CAS, the Group made analysis on the difference between the net profit in accordance with CAS and that in accordance with the old PRC GAAP, and disclosed individually in the reconciliation as follows: Reconciled net profits to CAS from old PRC GAAP for the year ended 31 December 2006 Reconciliation items Amounts Net profits（in accordance with old PRC GAAP） 443,863,305 Retrospective adjustments Early retirement benefit payable ( 66,385,563) Deferred tax 19,832,312 Prepaid expenses ( 2,793,020) Total retrospective adjustments ( 49,346,271) Net profits attributable to equity holders of the Company (in accordance with CAS) 394,517,034 Assume the amounts under full adoption of CAS from beginning of the year are equal to the foresaid amounts. XII. Reference Documents (1)The original of annual report autographed by the chairman. (2)The financial statements autographed and signed by the chairman, chief accountant and accountants in charge. (3)The original of the auditing report signed by the certified public accountants firm and autographed by certified public accountants and the description of special audits on misappropriation of funds by the controlling stockholder of this company and other related parties. (4) The originals of all documents and announcements that the company made public during the report period in the newspapers designated by China Securities Regulatory Commission. Yantai Changyu Pioneer Wine Company Limited Board of Directors March 25th, 2008 133 页 34: [1] 删除的内容 HelpDesk 2008-3-17 4:46:00 YA NT AI CH AN GY U PIO NE ER WI NE CO MP AN Y LI MI TE D CO NS OL ID AT ED CA SH FL O W ST AT EM EN T Yea r end ed