江铃Ｂ(200550)2007年年度报告（英文版）

Jiangling Motors Corporation, Ltd. 2007 Annual Report 1 Important Note The Board of Directors and its members, the Supervisory Committee and its members, and the senior executives are jointly and severally liable for the truthfulness, accuracy and completeness of the information disclosed in the report and undertake that the information disclosed herein contains no false statement, misrepresentation or major omission. Chairman Wang Xigao, President Yuan-Ching Chen, CFO Joseph Verga and Chief of Finance Department, Wu Jiehong, ensure that the Financial Report in this Annual Report is truthful and complete. All financial data in this report are prepared under International Financial Reporting Standards (‘IFRS’) unless otherwise specify. The Annual Report is prepared in Chinese and English. In case of discrepancy, the Chinese version will prevail. Abbreviations: EVP Executive Vice President CFO Chief Financial Officer VP Vice President 2 Contents Chapter I Brief Introduction ...................................................................... 4 Chapter II Operating Highlight ................................................................... 5 Chapter III Share Capital Changes & Shareholders..................................... 7 Chapter IV Directors, Supervisors, Senior Management and Employees . 12 Chapter V Corporate Governance ............................................................. 19 Chapter VI Shareholders’ Meeting ............................................................. 24 Chapter VII Report of the Board of Directors ............................................. 24 Chapter VIII Report of the Supervisory Committee .....................................37 Chapter IX Major Events............................................................................ 38 Chapter X Financial Report....................................................................... 45 Chapter XI Catalog on Documents for Reference...................................... 96 3 Chapter I Brief Introduction Company’s Chinese name: 江铃汽车股份有限公司 English name: Jiangling Motors Corporation, Ltd. Abbreviation: JMC Company legal representative: Mr. Wang Xigao JMC’s Board secretary: Mr. Wan Hong (Tel: 86-791-5235675) Person for financial information disclosure: Mr. Joseph Verga (Tel: 86-791-5266503) JMC’s securities affairs representative: Mr. Quan Shi (Tel: 86-791-5266178) Contact address: No. 509, Northern Yingbin Avenue, Nanchang City, Jiangxi Province, P.R.C Switchboard: 86-791-5266000 Fax: 86-791-5232839 E-mail: relations@jmc.com.cn Company registered address & headquarters address: No. 509, Northern Yingbin Avenue, Nanchang City, Jiangxi Province, P.R.C Postal Code: 330001 JMC’s website: http://www.jmc.com.cn Newspapers for information disclosure: China Securities, Securities Times, Hong Kong Commercial Daily Website designated by CSRC for publication of JMC’s Annual Report: http://www.cninfo.com.cn Place for archiving Annual Report: Securities Department, Jiangling Motors Corporation, Ltd. Place of listing: Shenzhen Stock Exchange Share’s name: Jiangling Motors Jiangling B Share’s code: 000550 200550 Other Information: 1. JMC was registered with Nanchang Municipal Bureau of Industrial & Commercial 4 Administration on November 28, 1993. The company registration was changed with Jiangxi Provincial Bureau of Industrial & Commercial Administration on January 8, 1997, on October 25, 2003, on September 23, 2004, on January 11, 2006 and on June 21, 2007. 2. Business License Registration Number: 002473. 3. Taxation Registration Number: 360100612446943. 4. Organization Code: 61244694-3. 4. Accounting Firm appointed by JMC for audit under both China General Acceptable Accounting Principles (‘China GAAP’) and International Financial Reporting Standards (‘IFRS’): Name: PricewaterhouseCoopers Zhong Tian CPAs Limited Company (‘PwC Zhong Tian’) Headquarters address: 11th Floor, PricewaterhouseCoopers Center, 202 Hu Bin Road, Shanghai City, P.R.C. Chapter II Operating Highlight I. Certain Financial Indexes of the Reporting Year Unit: RMB ‘000 Operating Profit 802,650 Profit Before Income Tax 860,878 Profit Attributable to the Equity Holders of the Company 753,445 Net Cash Generated From Operating Activities 837,905 Impact of IFRS adjustments on the net profit: Unit: RMB ‘000 Net Assets Net profit December 31, 2007 2007 As Prepared under the China GAAP* 3,615,289 775,460 Adjustment per IFRS: Deferred Income -31,791 -3,147 Staff Bonus and Welfare Fund appropriated - -3,260 from Net Profit of a Subsidiary As Restated in Conformity with IFRS 3,583,498 769,053 * Based on the financial statements audited by PwC Zhong Tian per the China GAAP. 5 II. Main accounting data and financial ratios of the past three years. 1. Main accounting data of the past three years Unit: RMB ‘000 Year-on-year 2007 2006 2005 Change (%) Sales 8,455,549 7,654,741 10.46 6,600,773 Profit Before Income Tax 860,878 747,550 15.16 601,514 Profit Attributable to the Equity 753,445 623,197 20.90 490,872 Holders of the Company Net Cash Generated From 837,905 1,150,212 -27.15 1,001,152 Operating Activities Increase or Decrease End of End of End of Compared with Year 2007 Year 2006 Year 2005 the end of Previous Year (%) Total Assets 6,125,140 5,312,494 15.30 4,722,421 Shareholders’ Equity Attributable to the Equity Holders of the 3,496,128 3,001,647 16.47 2,810,410 Company 2. Main financial ratios of the past three years Year-on-year 2007 2006 2005 Change (%) Basic Earnings Per Share (RMB) 0.87 0.72 20.83 0.57 Diluted Earnings Per Share (RMB) 0.87 0.72 20.83 0.57 Up 0.79 Fully Diluted Return on Net Asset Ratio 21.55% 20.76% 17.47% percentage points Weighted Average Return on Net Asset Up 0.72 23.19% 22.47% 18.67% Ratio percentage points Net Cash Per Share Generated From 0.97 1.33 -27.15 1.16 Operating Activities (RMB) Increase or Decrease End of End of End of Compared with Year 2007 Year 2006 Year 2005 the end of Previous Year (%) Net Assets Per Share Attributable to the 4.05 3.48 16.47 3.26 Equity Holders of the Company (RMB) Note: The Return on Net Asset Ratio and Earnings Per Share were calculated in accordance with the No. 9 Rule about Information Disclosure of Companies Making Public Offering of Securities (revised in 2007) issued by China Securities Regulatory Commission (‘CSRC’). 6 Chapter III Share Capital Changes & Shareholders I. Table of the changes of shareholding structure Before the change Change (+, -) After the change Reserve- Proportion New Bonus Proportion Shares of total converted Others Subtotal Shares of total shares (%) shares Shares shares (%) shares I. Limited tradable 401,620,060 46.53% -84,927,215 -84,927,215 316,692,845 36.69% A shares 1.State-owned - - - - - - shares 2. State-owned legal 354,176,000 41.03% -43,160,700 -43,160,700 311,015,300 36.03% person shares 3. Other domestic 47,444,060 5.50% -41,766,515 -41,766,515 5,677,545 0.66% shares Including: Domestic legal 47,438,000 5.50% -41,765,000 -41,765,000 5,673,000 0.66% person shares Domestic natural 6,060 - -1,515 -1,515 4,545 - person shares (Management Shares) II. Unlimited 461,593,940 53.47% 84,927,215 84,927,215 546,521,155 63.31% tradable shares 1. A shares 117,593,940 13.62% 84,927,215 84,927,215 202,521,155 23.46% 2. B shares 344,000,000 39.85% - - 344,000,000 39.85% III. Total 863,214,000 100% - - 863,214,000 100% JMC did not issue shares or derivative securities during the past three years as of December 31, 2007. JMC’s total shares remained the same in 2007, and the trading restriction on parts of the limited tradable A shares was relieved respectively on February 16 and November 9, 2007 thereby causing the changes in shareholding structure. Change Table of Shares with Trading Restriction by December 31, 2007 Quantity of Increase of Quantity of Decrease of Shares with Shares Shares with Shares with Reason for Trading with Trading Listing Shareholder Name Trading Trading Restriction at Trading Restriction Date Restriction in restriction the Beginning Restriction at the End of the Year of Year in the Year Year Jiangling Holdings Limited 354,176,000 43,160,700 - 311,015,300 Share Reform 2007.2.16 Shanghai Automotive Co., 25,970,000 25,970,000 - - Share Reform 2007.2.16 Ltd. China Baoan Group Co., Ltd. 12,000,000 12,000,000 - - Share Reform 2007.2.16 Shenzhen Tongqian 600,000 600,000 - - Share Reform 2007.2.16 Investment Co., Ltd. Fuoshan Automobile Trading 240,000 240,000 - - Share Reform 2007.2.16 Corporation Fuzhou Maidian 240,000 240,000 - - Share Reform 2007.2.16 Advertisement Plan Co., Ltd. 7 Shenzhen Nan-guang 192,000 192,000 - - Share Reform 2007.2.16 (Group) Corporation, Ltd. Tsingtao Infrastructure 120,000 120,000 - - Share Reform 2007.2.16 Material Co., Ltd. Beijing Ninggao Investment 120,000 120,000 - - Share Reform 2007.2.16 Company Nanchang Hongyan Express 120,000 120,000 - - Share Reform 2007.2.16 Mail Company Wuhan Yuanchen Group 120,000 120,000 - - Share Reform 2007.2.16 Company Jiangxi Jiangxin Zhiye 120,000 120,000 - - Share Reform 2007.2.16 Company Zhengzhou Yuzheng 120,000 120,000 - - Share Reform 2007.2.16 Mechanical and Electrical Equipment Company Shanghai Shanyou 120,000 120,000 - - Share Reform 2007.2.16 Investment Consulting Company Shanghai Hedge Investment 120,000 120,000 - - Share Reform 2007.2.16 Management Co., Ltd. Dandeng Auto Business 120,000 120,000 - - Share Reform 2007.2.16 Company Jiujiang Mechanical and 120,000 120,000 - - Share Reform 2007.2.16 Electrical Equipment Company Beijing Ninggao Investment 120,000 120,000 - - Share Reform 2007.2.16 Consulting Company Nanchang Mechanical and 120,000 120,000 - - Share Reform 2007.2.16 Industrial Material Co., Ltd. Fushan Shunde District Yubo 75,000 75,000 - - Share Reform 2007.2.16 Software Company Nanchang Auto Trading 72,000 72,000 - - Share Reform 2007.2.16 Company Hebei Province Foreign 60,000 60,000 - - Share Reform 2007.2.16 Investment Enterprise Material Co., Ltd. Wuhan Xinye Auto 36,000 36,000 - - Share Reform 2007.2.16 Transaction & Sales Company Shenzhen Xinfengbao - - Share Reform 2007.11.9 240,000 240,000 Industrial Co., Ltd. Shenzhen Colorkids - - Share Reform 2007.11.9 240,000 240,000 Company Jintan Diesel Engine Co. Ltd. 120,000 120,000 - - Share Reform 2007.11.9 Jiangxi Yichun Auto - - Share Reform 2007.11.9 Component General 120,000 120,000 Company Haian County Changming - - Share Reform 2007.11.9 60,000 60,000 Trading Co., Ltd. Fujian Province Auto - - Share Reform 2007.11.9 60,000 60,000 Trading Company 4,860 1,215 - 3,645 Management 2008.1.1 Wu Yong shares 1,200 300 - 900 Management 2008.1.1 Xiong Chunying shares Total 395,947,060 84,927,215 - 311,019,845 8 II. Shareholders 1. Total shareholders, top ten shareholders, and top ten shareholders holding unlimited tradable shares JMC had 34,240 shareholders, including 23,961 A-share holders and 10,279 B-share Total shareholders holders, as of December 31, 2007. Top ten shareholders Total Total Amount Shares due to Shareholding Shareholder Shareholding of Shares with mortgage or Shareholder Name Percentage Type Quantity at the Trading frozen (%) End of Year Restriction Jiangling Holdings State-owned 41.03 354,176,000 311,015,300 0 Limited legal person Foreign legal Ford Motor Company 30 258,964,200 0 0 person Shanghai Automotive Co., State-owned 2.37 20,500,000 0 0 Ltd. Legal person Domestic Everbright & Pramerica non-state-owned 1.10 9,529,893 0 0 Stock Investment Fund legal person China Life Insurance State-owned 1.04 8,977,242 0 0 Company Limited legal person Domestic SITICO JPMorgan non-state-owned 0.81 6,983,274 0 0 Fleming Dynamic Fund legal person Domestic UBS SDIC Dynamic non-state-owned 0.72 6,180,759 0 0 Innovation Fund legal person Foreign legal Ftif Templeton Bric Fund 0.71 6,092,263 0 0 person Dragon Billion Greater Foreign legal 0.67 5,757,000 0 0 China Master Fund person China Life Insurance State-owned 0.63 5,445,550 0 0 (Group) Company Legal person Top ten shareholders holding unlimited tradable shares Shareholder Name Quantity of Shares without Share Type Trading Restriction Ford Motor Company 258,964,200 B share Jiangling Holdings Limited 43,160,700 A share Shanghai Automotive Co., Ltd. 20,500,000 A share Everbright & Pramerica Stock Investment 9,529,893 A share Fund China Life Insurance Company Limited 8,977,242 A share SITICO JPMorgan Fleming Dynamic Fund 6,983,274 A share UBS SDIC Dynamic Innovation Fund 6,180,759 A share Ftif Templeton Bric Fund 6,092,263 B share Dragon Billion Greater China Master Fund 5,757,000 B share China Life Insurance (Group) Company 5,445,550 A share 9 Notes on association among China Life Insurance Company Limited is a shareholding above-mentioned shareholders subsidiary of China Life Insurance (Group) Company. 2. Controlling Shareholders The controlling shareholders of JMC are Jiangling Holdings Limited (‘JHC’) and Ford Motor Company (‘Ford’). JHC was founded on November 1, 2004 and its registered capital is RMB 2 billion. Jiangling Motors Company (Group) (‘JMCG’) and Chongqing Changan Automobile Corporation Ltd. held 50% of total equity of JHC respectively. And its legal representative is Mr. Yin Jiaxu. Main scope of business: manufacturing of automobiles, engines, chassis, and automotive components and parts, sales of self-produced products, as well as related after-sales services; industrial investment; management & agent for merchandise and technology export & import; property management; sales of household articles, mechanical & electronic equipment, artistic handicrafts, agricultural by-products and steel; consulting business in enterprise management. On January 3, 2008, JMCG, Chongqing Changan Automobile Corporation Ltd. and JHC entered into a Subscription Agreement, upon which JMCG and Chongqing Changan Automobile Corporation Ltd. additionally contributed cash of RMB 500 million respectively into JHC as capital investment. Having completed the additional funding, JHC’s registered capital was adjusted to RMB 2 billion from 1 billion. Ford, founded in 1903, is a US-based listed company. Its ownership interest is US$ 3.5 billion. Chairman: William Clay Ford, Jr. Main scope of business: design, manufacturing, assembly and sales of cars, trucks, parts and components, financing, leasing of vehicles and equipment, and insurance business. 3. Actual Controlling Parties The actual controlling party of JHC is China South Industries Group. China South Industries Group was founded on June 29, 1999 with its registered capital of RMB 12,645,210,000 and was subordinate to the State-owned Assets Supervision and Administration Committee of the State Council (‘SASAC’). Its legal representative is Mr. Xu Bin. Business scope and major products: investment and management of state-owned assets, manufacturing of armaments, engineering prospecting, designing, contracting, construction supervision, equipment installation, etc. 10 Ownership and control relations between the Company and the actual controlling parties is shown as follows: SASAC 100% China South Industries Group 100% China South Automobile Co., Ltd. Nanchang Municipal Government 45.55% 100% Chongqing Changan Automobile Co., Ltd. JMCG 50% 50% JHC Ford 41.03% 30% JMC III. Trading of JMC’s share 1. Jiangling A shares Total First Highest Price Closing Price Total Lowest Price of Volume Total Amount Year Transaction of the Year at the Year Transaction the Year (date) (million (RMB million) Price (RMB) (date) End (RMB) Days shares) 2005 5.12 7.10(08/19) 3.52(05/10) 5.99 227 755 4050 2006 5.13 12.87(12/28) 4.68(03/08) 12.40 218 844 6776 2007 12.52 26.20(09/20) 11.36(02/02) 20.93 239 1225 20021 2. Jiangling B shares First Highest Price Closing Price Total Total Volume Lowest Price of Total Amount Year Transaction of the Year at the Year Transaction (million the Year (date) (HK$ million) Price (HK$) (date) End (HK$) Days shares) 2005 2.89 3.60(08/15) 2.45(04/26) 3.32 235 136.37 419 2006 3.33 9.30(12/28) 3.31(01/04) 9.02 239 243.96 1427 2007 9.05 13.20(05/15) 8.36(02/01) 10.90 239 225.05 2437 11 Chapter IV Directors, Supervisors, Senior Management and Employees I. Directors, Supervisors and Senior Management 1. Basic Information Position Name Gender Age Term of Office Shares Shares Share Cause of as of as of Change in Share Dec. 31, Dec. 31, Year 2007 Change 2006 2007 Directors： Chairman Wang Xigao Male 58 2005.6～2008.6 0 0 0 Vice Chairman Mei Wei Cheng Male 58 2005.6～2008.6 0 0 0 Director Yin Jiaxu Male 52 2005.11～2008.6 0 0 0 Director Philip Spender Male 54 2005.6～2008.6 0 0 0 Director Howard Welsh Male 50 2005.6～2008.6 0 0 0 Director & EVP Tu Hongfeng Male 60 2005.6～2008.6 0 0 0 Independent Director Zhang Zongyi Male 44 2005.6～2008.6 0 0 0 Independent Director Pan Yuexin Male 50 2005.6～2008.6 0 0 0 Independent Director Lok Kim Chai Male 61 2005.6～2008.6 0 0 0 Supervisors： Chief supervisor Wu Yong Male 58 2005.6～2008.6 4,860 4,860 0 Supervisor Alvin Qing Liu Male 51 2005.6～2008.6 0 0 0 Supervisor Zhu Yi Male 38 2005.6～2008.6 0 0 0 Supervisor Jin Wenhui Male 41 2005.6～2008.6 0 0 0 Supervisor Zhang Yong Male 38 2006.6～2008.6 0 0 0 Senior Management: President Yuan-Ching Chen Male 56 2005.6～2008.6 0 0 0 EVP Xiong Chunying Female 44 2005.6～2008.6 1,200 1,200 0 EVP Liu Nianfeng Female 47 2005.6～2008.6 0 0 0 CFO Joseph Verga Male 48 2006.2～2008.6 0 0 0 VP & Board Secretary Wan Hong Male 47 2005.6～2008.6 0 0 0 VP Zhong Wanli Male 45 2005.6～2008.6 0 0 0 VP Zhou Yazhuo Male 45 2005.6～2008.6 0 0 0 VP Mustafa Menkü Male 38 2006.5～2008.6 0 0 0 VP Tamer Açıkel Male 47 2006.5～2008.6 0 0 0 VP Li Qing Male 43 2006.12～2008.6 0 0 0 2. Positions at the shareholder entities held by the JMC directors and the supervisors: Name Shareholder Title Term of Compensation Paid Entity Office by Shareholder Entity (Y/N) Wang Xigao JHC Vice Chairman 2004.11— N Mei Wei Cheng Ford Vice President 1999.1— Y 12 Yin Jiaxu JHC Chairman 2004.11— N Wu Yong JHC Chief supervisor 2004.11— N Zhu Yi JHC Board member 2004.11— N 3. Particulars about working experience of directors, supervisors and senior management in the past five years Directors: Mr. Wang Xigao, born in 1950, is a senior engineer equivalent to professor, and holds a Bachelor’s Degree in Thermodynamics from Tsinghua University and a Bachelor’s Degree in Economic Management from Fudan University. In the past five years, Mr. Wang Xigao held various positions including General Manager & Chairman of Jiangxi Boiler & Petroleum Machining Joint Company, Ltd., Vice-Chairman, Chairman of JMCG, Chairman of Jiangling-Isuzu Motors Company Limited, and Vice-Chairman of JHC. Since March 2004, Mr. Wang Xigao assumed the post of the chairman of JMC. Mr. Mei Wei Cheng, born in 1950, holds a Bachelor’s Degree in industrial engineering/operations research from Cornell University. He has MBA Degree from Rutgers University and is a graduate of Dartmouth’s Amos Tuck Executive Program and MIT’s Program for Senior Executives. In the past five years, Mr. Mei Wei Cheng held various positions including Vice President of Ford, Chairman & CEO of Ford Motor (China), Ltd., and Vice Chairman of Changan Ford Mazda Automobile Corporation Limited. Since June 1999, Mr. Mei Wei Cheng assumed the post of Vice Chairman of JMC. Mr. Yin Jiaxu, born in 1956, is a master & senior engineer equivalent to the professor. In the past five years, Mr. Yin Jiaxu used to be Deputy General Director of Southwest Industries Bureau of China Industries Company, General Manager & Chairman of Changan Auto Group Co., Ltd., Chairman of Chongqing Changan Automobile Co., Ltd., General Manager & Executive Director of China South Automobile Co., Ltd., Vice General Manager of China South Industries Group, and Chairman of JHC. Mr. Yin Jiaxu was appointed as a Director of JMC on November 2005. Mr. Philip Spender, born in 1954, holds a Bachelor’s Degree in Engineering from New Zealand. He completed the senior management course at the Graduate School of Melbourne University and was granted an honorary Ph.D. in Business Administration. In the past five years, Mr. Philip Spender held various positions in Ford including President of Ford India, President of US based Auto Alliance International, Inc., President of Changan Ford Mazda Automobile Corporation Limited, and Chief Operating Officer of Ford Motor (China) Ltd. Mr. Philip Spender was appointed as a Director of JMC on June 2007. Mr. Howard Welsh, born in 1957, holds a Bachelor’s Degree in Engineering from Pennsylvania State University and a MBA from University of Pittsburgh. In the past five years, Mr. Howard Welsh held various positions including Northern America Controller of Ford Customer Service Division, Northern America Business Strategy Manager of Ford, 13 and Vice President & CFO of Ford Motor (China), Ltd. Mr. Howard Welsh was appointed as a Director of JMC on December 2004. Mr. Tu Hongfeng, born in 1948, senior engineer, holds a College Degree. In the past five years, Mr. Tu Hongfeng held various positions including Vice General Manager of JMCG, Director, EVP of JMC, and Director, General Manager of Jiangling-Isuzu Motors Company Limited. Mr. Tu Hongfeng was appointed as a Director of JMC on June 2005. Mr. Zhang Zongyi, born in 1964, is a professor, professor of doctorate program and holds a Doctor Degree in Engineering from Chongqing University as well as a Doctor Degree in Economics from University of Portsmouth, U.K. In the past five years, Mr. Zhang Zongyi held various positions including Dean of the Economic and Business Administration School of Chongqing University, Vice President of Chongqing University and Dean of the Graduate School of Chongqing University. Mr. Zhang Zongyi was appointed as an Independent Director of JMC on June 2005. Mr. Pan Yuexin, born in 1958, lawyer, is a graduate of Chinese Academy of Social Sciences in Economic Laws. In the past five years, Mr. Pan Yuexin held various positions including General Secretary of Education Committee of Chinese Lawyer Association, Independent Director of the second Board of Directors of Sino-Chem International Co., Ltd., Vice General Manager of Sino-Chem International Co., Ltd., and a partner of Junhe Law Firm. Mr. Pan Yuexin has been an Independent Director of JMC since June 2002. Mr. Lok Kim Chai, born in 1947, is a senior member of the Association of Chartered Certified Accountants (UK), the Institute of Chartered Accountants of New Zealand, the Malaysian Institute of Accountants and the Institute of Chartered Secretaries and Administrators (UK). In the past five years, Mr. Lok Kim Chai served a Fortune 500 USA company as the vice chairman, vice president and CFO of its China subsidiary and prior to this, also its IT manager for the Asia Region. He is currently the business advisor of a UK-based technology company. Mr. Lok Kim Chai has been an Independent Director of JMC since September 2003. Supervisors: Mr. Wu Yong, born in 1951, is a senior counselor for political work, and holds a Bachelor’s Degree in Business Management. In the past five years, Mr. Wu Yong held various positions including Director, Vice Secretary of the Party Committee, Secretary of Discipline Inspection Committee of the Communist Party, Chairman of the Labor Union of JMCG, and Chairman of the Supervisory Committee of JHC. Mr. Wu Yong has been the Chief Supervisor of JMC since 1993. Mr. Alvin Qing Liu, born in 1957, has a Jurisprudence Doctor Degree and a Master Degree in International Economics from Marquette University, U.S.A. and is a member of American Bar Association and was admitted to practice in the U.S. Federal Court for the Eastern District of Wisconsin. In the past five years, Mr. Alvin Qing Liu was counsel for 14 Asia Pacific Region, Chrysler Corporation, U.S.A., counsel of Mergers and Acquisitions Group and Northeast Asia Operations, Daimler-Chrysler A.G., Germany, an International Counsel in the Office of General Counsel, Ford Motor Company, and Vice President, General Counsel of Ford Motor (China), Ltd. Mr. Alvin Qing Liu has been a Supervisor of JMC since June 2002. Mr. Zhu Yi, born in 1970, is an accountant, and holds a Bachelor’s Degree in Business Management. In the past five years, Mr. Zhu Yi used to be the Chief of JMCG Asset & Finance Department, Assistant to General Manager, Vice General Manager of JMCG, and Director of JHC. Mr. Zhu Yi has been a Supervisor of JMC since June 2002. Mr. Jin Wenhui, born in 1967, is a senior engineer, and holds a Bachelor’s Degree in Mechanical Manufacturing from Huazhong University of Science and Technology. In the past five years, he has held the positions of Chief of Die Centre for JMC and Chief of Manufacturing Department for JMC. Mr. Jin Wenhui has been a Supervisor of JMC since June 2002. Mr. Zhang Yong, born in 1970, holds a Bachelor’s Degree in Chinese Literature from Jiangxi Normal University. In the past five years, Mr. Zhang Yong has held the positions of Secretary of the Communist Youth League of JMCG, Vice Secretary of the Party Committee, Secretary of Discipline Inspection Committee of the Communist Party, and Chairman of the Labor Union of JMC Engine Plant. Mr. Zhang Yong held the post of supervisor of JMC since June 2006. Senior management: Mr. Yuan-Ching Chen, born in 1952, holds mechanical engineering Degree from National Cheng Kung University of China Taiwan. In the past five years, Mr. Yuan-Ching Chen held various positions including Chief Technical Officer of Ford Lio Ho Motor Company, Chief Marketing & Sales Officer of Ford Lio Ho Motor Company, and Vice President of Ford (China) in charge of business operating & planning, and the President of JMC. Ms. Xiong Chunying, born in 1964, a senior engineer, graduated from Jiangsu Engineering College, and holds a Bachelor’s Degree in Automotive Engineering. In the past five years, Mrs. Xiong has held the positions of Vice President, Executive Vice President of JMC. Ms. Liu Nianfeng, born in 1961, holds a Bachelor of Science Degree in Engineering from ZheJiang University and a MBA from the University of Texas at Arlington. In the past five years, Ms. Liu has held the positions of Deputy Plant Manager of JMC Engine Plant, Plant Manager of JMC Framing Plant, and Executive Vice President of JMC. Mr. Joseph Verga, born in 1960, holds a Master’s Degree in Engineering from the University of the Witwatersrand, South Africa and a MBA from the University of Michigan, U.S.A. In the past five years, Mr. Joseph Verga held various positions including Finance Manager in charge of Product Development and Powertrain Operations for Ford Motor Company, China Product Develop Controller for Changan Ford Mazda Automobile 15 Corporation Limited, and Chief Financial Officer of JMC. Mr. Wan Hong, born in 1961, is an engineer, and holds a College Degree in Management Engineering. In the past five years, Mr. Wan Hong has held the positions of Chief of Human Resource and Enterprise Management for JMC, Assistant to President for JMC, and Vice President and Board Secretary of JMC. Mr. Zhong Wanli, born in 1963, holds a Bachelor’s Degree from Nanchang Aeronautical Institute and a Master’s Degree from Jiangxi University of Finance & Economics. In the past five years, Mr. Zhong Wanli has held the positions of President of Zhongtian Hi-tech Special Vehicle Co., Ltd., Deputy Director of China Sourcing Office for Ford (China), and Vice President of JMC. Mr. Zhou Yazhuo, born in 1963, is a senior engineer, and holds a Bachelor’s Degree in Forging from the Central China Engineering College. In the past five years, Mr. Zhou Yazhuo has held the positions of Assistant to President and Chief of Manufacturing Department for JMC, and Vice President of JMC. Mr. Mustafa Menkü, born in 1970, holds a Bachelor’s Degree in Mechanical Engineering from Middle East Technical University and a MBA from Koc University in Turkey. In the past five years, Mr. Mustafa Menkü has held the positions of Manager of Truck Area of the Inonu Plant for Ford Otosan, and Vice President of JMC. Mr. Tamer Açıkel, born in 1961, holds a Master’s Degree in Mechanical Engineering from Istanbul Technical University in Turkey. In the past five years, Mr. Tamer Açıkel has held the positions of Assistant Manager of Body Engineering for Ford Otosan, and Vice President of JMC. Mr. Li Qing, born in 1965, holds a Bachelor’s Degree in Marketing from Wuhan University of Technology and a MBA from University of South Australia and Jiangxi University of Finance & Economics. In the past five years, Mr. Li Qing has held the positions of Vice General Manager and General Manager of the former Jiangling Motors Sales General Company, General Manager of JMC Sales & Services Branch, and Vice President of JMC. 4. Particulars about positions and concurrent positions in other entities other than shareholder entities: Relationship with the Name/Title in the Company Entity Title Company JMCG holding 50% JMCG Chairman equity of JHC Wang Xigao/Chairman Jiangling-Isuzu Motors Shareholding Subsidiary Chairman Company Limited Mei Wei Cheng/ Ford wholly-owned Ford Motor (China) Ltd. Chairman & CEO Vice Chairman subsidiary 16 Changan Ford Mazda Ford associated Automobile Corporation companies holding 50% Vice Chairman Limited equity China South Industries Vice General Manager Group China South See the figure in General Manager & Yin Jiaxu/Director Automobile Co., Ltd. Chapter III Executive Director Chongqing Changan Chairman Automobile Co., Ltd. Ford wholly-owned Chief Operating Philip Spender/Director Ford Motor (China) Ltd. subsidiary Officer Ford wholly-owned Howard Welsh/Director Ford Motor (China) Ltd. Vice President & CFO subsidiary Vice President of Zhang Zongyi/ Chongqing University Chongqing University No relationship Independent director and Dean of the Graduate School Pan Yuexin/ Junhe Law Firm No relationship Partner Independent director Lok Kim Chai/ Lumiwave Limited No relationship Business Advisor Independent Director JMCG holding 50% Wu Yong/Chief Supervisor JMCG Director equity of JHC Ford wholly-owned Alvin Qing Liu/Supervisor Ford Motor (China) Ltd. General Counsel subsidiary JMCG holding 50% Zhu Yi/Supervisor JMCG Vice General Manager equity of JHC Yuan-Ching Chen/ Jiangling-Isuzu Motors Shareholding Subsidiary Director President Company Limited JMCG holding 50% JMCG Director equity of JHC Tu Hongfeng/EVP Jiangling-Isuzu Motors Director & Shareholding Subsidiary Company Limited General Manager JMCG holding 50% Xiong Chunying/EVP JMCG Director equity of JHC JMCG holding 50% Liu Nianfeng/EVP JMCG Director equity of JHC Jiangling-Isuzu Motors Joseph Verga/CFO Shareholding Subsidiary Director Company Limited 5. Annual Compensation Directors and supervisors who did not concurrently hold other management positions in JMC were not paid by JMC. Director Wang Xigao, Supervisors Wu Yong and Zhu Yi were paid by JMCG. Directors Mei Wei Cheng, Philip Spender, Howard Welsh and Supervisor Alvin Qing Liu were paid by Ford. Director Yin Jiaxu was paid by China South Industries Group. (1) In accordance with the Senior Executive Compensation & Incentive Plan of JMC approved by the Board of Directors and the Senior Executive Base Salary Plan of JMC 17 agreed by the Compensation Committee, the compensation for the Chinese-side senior management consists of base salary, short-term incentive and long-term incentive. In 2007, the Company paid annual compensation of approximately RMB 980 thousand to Mr. Tu Hongfeng, Director & EVP of JMC, paid Ms. Xiong Chunying and Ms. Liu Nianfeng, EVPs of JMC, approximately RMB 760 thousand per person, paid VP & Board Secretary Wan Hong and VP Zhou Yazhuo approximately RMB 600 thousand per person, paid VP Li Qing approximately RMB 570 thousand. Two employee-representative supervisors, Mr. Jin Wenhui and Mr. Zhang Yong, were paid about RMB 220 thousand and RMB 110 thousand respectively. The total compensation paid by JMC for the aforesaid persons was about RMB 4.60 million in the reporting period. (2) JMC pays Ford annual compensation for Ford-seconded senior management personnel in accordance with the Personnel Agreement signed between Ford and JMC, and Ford pays the senior management and other foreign personnel seconded to JMC. Subject to the Amendment to Personnel Agreement on Ford-seconded Personnel approved by the Board, JMC in 2007 should pay US$ 250 thousand to Ford for President Yuan-Ching Chen, US$ 250 thousand for CFO Joseph Verga, and RMB 250 thousand for VP Zhong Wanli. Pursuant to the Supplementary Agreement of the Agreement of Personnel Secondment Principles among the Company, Ford and Ford Otosan, JMC in 2007 should pay US$ 250 thousand to Ford Otosan for VP Mustafa Menkü and VP Tamer Açıkel per person. These payments made by JMC to Ford do not reflect the actual salaries earned by Ford-seconded senior management. (Ford Otosan is a subsidiary of Ford.) (3) Pursuant to the resolutions of JMC 2003 Annual Shareholder’s Meeting, the annual compensation for the JMC independent directors is RMB 80 thousand per person, and JMC bears their travel-related expenses associated with JMC’s business. 6. Changes of Directors, Supervisors and Senior Management Director Change: Given that Mr. Yuan-Ching Chen resigned from his directorship in the Company due to work reason, Mr. Philip Spender was elected as JMC’s director upon approval of 2006 Annual Shareholders’ Meeting. II. Employees At the end of 2007, JMC had a total of 8,008 employees, of which 5,673 were production workers, 329 sales personnel, 1,073 technical personnel, 79 finance personnel, 854 administrative staff. The employees with polytechnic school degrees or above accounted for 34% of the total. There were 888 persons with junior technical titles, 673 with intermediate technical titles and 157 with senior technical titles, altogether accounting for 21% of the total. There were 839 early-retired employees and 52 lay-offs. JMC had a total of 1,072 retired employees with Company funded retirement benefits. 18 Chapter V Corporate Governance Structure 1. Status of the Corporate Governance in JMC During the reporting period, the Company continued to improve its corporate governance in compliance with the Company law, the Code of Corporate Governance for Listed Companies in China, the Rules Governing Listing of Stock on Shenzhen Stock Exchange, the Rules on Strengthening the Protection of Public Shareholders’ Rights and Interests, the Notice on Developing Listed Company Governance Review Special Program, as well as relevant laws and regulations. The measures included the following items: (1) formulated the Rules Concerning Administration of Information Disclosure of JMC and Rules Concerning Administration of JMC Shares and Their Trade Held by the Directors, Supervisors and Senior Management Personnel; (2) developed a corporate governance review special program positively, and improved the items that need to be improved with respect to protection of intellectual property rights and the issues raised by CSRC Jiangxi Branch in the on-site review; (3) further improved the compensation & evaluation mechanism for senior management, and formulated the Senior Executive Base Salary Plan of JMC. Statement on the Company Governance Review Special Program of JMC in 2007 The Company disclosed the Self-audit Report and Improvement Plan on Corporate Governance for JMC on the website www.cninfo.com.cn on June 28, 2007, as approved by the ninth session of JMC fifth Board of Directors. In the interim, a special telephone and an electronic mailbox were established to receive suggestions and advice from investors and the public. According to the results of self-audit, the Company developed an improvement plan for items that need to be improved with respect to protection of intellectual property rights. These actions have been implemented consistent with the requirements. CSRC Jiangxi Branch made an on-site review at the Company concerning corporate governance on September 6-7, 2007 and issued a Rectification Notice regarding JMC’s Corporate Governance to the Company. It was indicated in the notice that following issues were present in the Company: (1) Parts of statements in the Article 107 of the Articles of Association of the Company did not comply with the Guidance for the Articles of Association of Listed Companies (2006 Revision), and these statements need to be modified; (2) The operation of special committees of the Board of Directors shall be further regulated; (3) The management of the records of the Three Meetings (Shareholders’ meetings, Board meetings, and Supervisory Committee meetings) shall be further strengthened, and categorizing clearly including complementing paper documents. The Company disclosed the JMC Improvement Report on Corporate Governance on the website www.cninfo.com.cn on September 15, 2007, as approved by the tenth session of JMC fifth Board of Directors. With respect to the above-mentioned issues, the Company formulated an improvement plan as follows: 19 (1) The Company intends to delete the relevant statements in the Article 107 of the Articles of Association of the Company upon the Board resolution, and then to submit this to the next shareholders’ meeting for approval. (2) Special committee meetings shall be operated in the future strictly according to the work rules of special committees. (3) Records of the Three Meetings will be categorized including paper documentation further. 2. Independent Directors’ Performance of Duty JMC has appointed three independent directors so far. The independent directors exercised their fiduciary duties regarding routine work and major decision-making of the Board of Directors. They studied every proposal reviewed by the Board of Directors thoroughly and raised their opinions, inquired about major events which required opinions from the independent directors and issued their written opinions, and actively engaged in the affairs of Compensation Committee and Audit Committee in the reporting period, to protect the interests of the Company and all shareholders. (1) Particulars about independent directors’ attendance to the Board meeting: Required Actual Presence by Name Board Presence in Absence Proxy Attendance Person Zhang Zongyi 11 9 2 0 Pan Yuexin 11 10 1 0 Lok Kim Chai 11 11 0 0 (2) Disagreements for JMC related matters The independent directors of the Company did not object to any proposal and issue of the Company reviewed at Board meetings in the reporting period. 3. Separation between JMC and the Controlling Shareholders in respect of Personnel, Assets and Finance, and Independence concerning Organization and Business: (1) With respect to personnel matters, the positions of chairman and president are held by different individuals; JMC’s senior management do not hold positions other than director positions with its controlling shareholders; JMC senior management personnel are paid by JMC; labor, personnel matters and compensation management of JMC are completely independent. (2) With respect to assets, JMC assets are complete. The assets utilized by JMC, including production system, supporting production system and peripheral facilities, and non-patent technology, are owned and/or controlled by JMC. (3) With respect to finance, JMC has an independent finance department and independent accounting system, and has a uniform and independent accounting system and financial control system for its branches and subsidiaries. JMC has its own bank accounts, and there are no bank accounts jointly owned by JMC and its controlling shareholders. JMC pays taxes independently in accordance with relevant laws. 20 (4) With respect to organization, JMC’s organization is independent, complete and scientifically established with a sound and efficient operating mechanism. The establishment and the operation of JMC’s corporate governance are strictly carried out per the Articles of Association of JMC. Production and administrative management are independent from the controlling shareholders. JMC has established an organization structure that meets the need for ongoing development. (5) With respect to business, JMC has independent purchasing, production and sales systems. The purchasing, production and sales of main materials and products are carried out through its own purchasing, production & sales functions. JMC is independent from the controlling shareholders in respect to its business, and has independent and complete business and self-sufficient operating capability. In principle, controlling shareholders did not engage in production or sales of similar products in competition with JMC. 4. Self-assessment Report on the Internal Control System of JMC (1) Briefing JMC attaches great importance to internal control management and the establishment of internal control policies. Per the request of Internal Control Guidance for Listed Companies published by Shenzhen Stock Exchange, JMC’s internal control policies have been established and optimized. Additionally, per the request of Listed Company Governance Review Special Program, its implementation and effect on internal control policies have been reviewed. i. The Board has reviewed and approved Internal Control Policies, Rules Concerning Administration of Information Disclosure, Related Party Transaction Management Policies, Rules Concerning Administration of JMC Shares and Their Trade Held by the Directors, Supervisors and Senior Management Personnel, and other policies, which established an internal control system covering environmental issues, management and company risks, human resources, sales, purchasing, production, quality, finance, information technology, information communication and disclosure. The Board approved implementation of China New GAAP commencing in January 1, 2007 (Please see details in the announcement published in China Securities, Securities Times, Hong Kong Commercial Daily and www.cninfo.com.cn on April 26, 2007). ii. JMC established an Internal Audit Office in 2001, which is staffed with 8 people. As defined in the Internal Audit Work Manual, the Internal Audit Office is responsible for supervising and reviewing the implementation of the internal control policies, for assessing the effectiveness of the internal control, for providing recommendations on corrective actions for issues identified by internal and external auditors, and for tracking the corrective actions. The Internal Audit Office reports to the Audit Committee regarding the annual Internal Control Work Plan, audit findings, and corrective actions at least twice each year. iii. During JMC’s own self-audit and on-site review by CSRC Jiangxi Branch in the Listed Company Governance Review Special Program, some areas for improvement have been 21 identified and an action plan has been established accordingly (Please see details in the announcement published in China Securities, Securities Times, Hong Kong Commercial Daily and www.cninfo.com.cn on September 18, 2007). iv. Internal Audit Office conducted a sample review on the implementation on Internal Control Policies. The results indicate that the company management procedures have been executed strictly and there is no major management vulnerability or fraudulent behavior. (2) Key Internal Control Activities i. Internal Control Status of Subsidiary Joint Venture Company The Subsidiary Joint Venture Company has established and optimized its internal control policies. JMC performs an effective management and control on the subsidiary by assigning board directors, management personnel and an external auditor to review these appropriate controls, and it has been proved to be effective. ii. Internal Control Status over Related Party Transaction JMC complies with the Related Party Transaction Procedure for related party transaction approval and transaction disclosure. iii. Internal Control Status of External Guarantee Per the regulation of external guarantee from Shenzhen Stock Exchange, the Board approved the external guarantee to Ford Automotive Finance (China) Company Ltd. (Please see details in the announcement published in China Securities, Securities Times, Hong Kong Commercial Daily and www.cninfo.com.cn on December 18, 2007). This guarantee has followed the approval procedure strictly and has related supervision procedure on the risks of this guarantee. This is the only external guarantee that JMC has granted at present. iv. Internal Control Status of Fund Usage There is no funding plan this year. v. Internal Control Status of Company Major Investment The approval of major company investment is cautious and follows the requirement of the Articles of Association of the Company and Authorization Delegation. There is no unusual issue. vi. Internal Control Status of Company Information Disclosure The Rules Concerning Administration of Information Disclosure has been established and improved, in which the scope, contents and responsible of major information are defined. JMC is following the rules to disclose information on time and will continue to improve the level on information disclosure management. (3) The Issues in Internal Control and Its Action Plan JMC is developing steadily and its management level is improving. Per the requests of 22 regulation and Internal Control Guidance, the internal control policies are established and optimized continuously as follows: i. Execution of information disclosure policies shall be reinforced and the company will further improve the information disclosure and communication procedures. ii. Company intellectual protection shall be improved; the audit on suppliers and service parts providers shall be reinforced. (4) General Assessment of the Internal Control Status Internal Audit Office conducted reviews on the implementation of company internal control policies and the conclusions are: the company internal control policies are complete and effective; the company operates according to its policies; and for minor issues identified, the operation departments are making corrections according to the plan. (5) Opinions from the Supervisory Committee on Internal Control Self-assessment Report of JMC Per the request of Internal Control Guidance for Listed Companies published by Shenzhen Stock Exchange as well as other related regulations, the Supervisory Committee expressed its opinions on the Internal Control Self-assessment Report as follows: i. The Company has established an integrated and complete internal control system in accordance with relevant requirements of Shenzhen Stock Exchange and considering the Company’s actual situation. The control of operation is effective. ii. Internal control organization of the Company is complete. An internal audit department has been set up and is sufficiently provided with professional staffs. It ensures the effective implementation of internal control policies and internal control supervision. iii. The issues in internal control are addressed objectively and accurately, and corrective action plans are made appropriately. (6) Opinions from independent directors on Internal Control Self-assessment Report of JMC The independent directors reviewed the Company’s Internal Control Self-assessment Report and its related material. The following opinions are expressed: i. The company’s internal control policies are integrated and conform with the requirements of government laws, regulations and supervision agents. ii. The key internal control initiatives follow the requirement of company’s internal control policies. The internal control is strict, sufficient and effective, which ensures the proper business operation and management. iii. The corrective action plans are made appropriately to address issues in internal control and the internal control system is further improved. We believe that the company’s internal control policies are integrated and complete. The Internal Control Self-assessment Report reflects the company actual status. 5. Compensation & Incentive Mechanism for Senior Management in the Reporting Period In accordance with the Senior Executive Compensation & Incentive Plan of JMC approved 23 by the Board of Directors on December 18, 2006 and the Senior Executive Base Salary Plan of JMC agreed by the Compensation Committee on March 2007, the compensation for senior management consists of base salary, short-term incentive and long-term incentive. The base salary grade of senior management is in line with his/her position, and the funding of the short-term incentives and long-term incentives are all derived from an incentive fund based on the pre-tax profit. These plans are applicable only to the Chinese-side senior management. Chapter VI Introduction to Shareholders’ Meetings The 2006 annual shareholders’ meeting of JMC was held in the conference room on the fourth floor of the Administration Building of JMC on June 25, 2007. Resolutions passed at the 2006 annual shareholders’ meeting are as follows: 1. approved the 2006 Work Report of Board of Directors; 2. approved the 2006 Work Report of the Supervisory Committee; 3. approved the 2006 Financial Report; 4. approved the Proposal on the Profit Distribution for Year 2006; 5. approved the Report on Independent Directors’ Work in 2006; 6. approved the Transfer of the Routine Related Party Transactions Previously Concluded with Jiangling Landwind Company; 7. approved the Transfer of the Related Party Transactions for Sourcing Transmission; 8. approved the Related Party Transactions with Ford Motor Company on the Import Parts and Components for the V348 Vehicles; 9. approved the Transfer of the Related Party Transactions for Sourcing Rear Axle and Other Auto Components; 10. approved the Related Party Transactions with JMCG Modification Factory; 11. approved N350 Program; 12. approved the Proposal on Director Change; and 13. approved Proposal on Continuing to appoint PricewaterhouseCoopers Zhong Tian CPAs Limited Company as JMC’s A & B Share Auditor in the Year of 2007. Public announcement on the resolutions of the annual shareholders’ meeting was published in China Securities, Securities Times and Hong Kong Commercial Daily on June 26, 2007. Chapter VII Report of the Board of Directors I. Management Discussion and Analysis 1. Operating Results JMC’s core business is production and sales of light vehicles and related components. Its major products include JMC series light truck and pickup, and Transit series commercial bus. The Company also produces engine, casting and other components. In 2007, JMC sales volume reached a record of 95,059 units including 38,752 light trucks, 921 Yunba microbuses, 23,982 pickups, 4,819 Baowei SUV and 26,585 Ford Transit 24 commercial vehicles. Total sales volume was up 12% from last year. Total production volume was 96,147 units, including 40,015 light trucks, 871 Yunba microbuses, 23,822 pickups, 4,871 Baowei SUV, and 26,568 Transits. The Company’s sales increase is primarily explained by industry increases and new model introduction. Compared with last year, Transit sales volume increased 16%, light truck sales were 18% higher and Baowei sales were 36% higher. In 2007, the Company achieved a share of about 1.1% of the Chinese automotive market, decreasing by 0.1 percentage point from last year’s level. (In 2007, the Company achieved a share of about 2.7% of the Chinese commercial automotive market, decreasing by 0.2 percentage points from last year’s level.) JMC light trucks (including pickup) accounted for 5.7% of the light truck market, decreasing about 0.4 percentage points from a year ago. Transit, along with the JMC brand Yunba microbus, achieved about 11.9% of the light bus market, about 0.7 percentage points lower than last year. (Data source for above analysis: China Association of Automobile Manufacturers and the Company sales records) The Table below summarizes Revenue & Cost of Goods Sold from Core Business. Unit: RMB’000 Y-O-Y costs Y-O-Y gross Y-O-Y Cost in core Gross in core margin Product Turnover turnover business Margin business change change (%) change (%) (points) I. Vehicle 7,425,226 5,529,292 25.5% 10.3% 8.5% 1.2 II. Components 713,899 549,568 23.0% 11.9% 11.1% 0.5 Total 8,139,125 6,078,860 25.3% 10.5% 8.7% 1.2 Including: Related party 932,803 755,646 19.0% 31.5% 30.9% 0.4 transaction 25 Regional classifications of JMC’s core business are: Unit: RMB’000 Region Turnover Year-on-year changes (%) North-east China 385,224 3.9 North China 866,063 32.8 East China 4,365,095 10.9 South China 1,289,255 3.6 Central China 464,313 11.5 North-west China 284,625 7.2 South-west China 484,550 0.2 2. Operating Results of Subsidiaries Name of Business Main Products Registered Assets Turnover Operating Net Profit Subsidiaries Capital (RMB’000) (RMB’000) Profit (RMB’000) (RMB’000) Jiangling-Isuzu N series Light Manufacturing $ 30 million 1,345,077 4,399,758 72,002 65,208 Motors Truck, T series Company, Ltd. Pickup, Microbus, SUV 3. Main Suppliers and Customers The total amount of purchases from the top 5 suppliers was RMB 1,536 million, accounting for 25% of JMC’s total annual purchasing value. The total sale amount to the top 5 customers was RMB 1,708 million, accounting for 21% of JMC’s total turnover. 4. Operational Challenges and Resolutions In 2007, the Company continued to face competitive challenges, and intensifying cost pressures. Simultaneously, the Company focused on initiating new product development. Regarding competition, the Company continued to experience market share pressure from lower price competitors in all its segments. In response, the Company introduced new Light Truck model in the First Quarter. Additionally, we lowered prices of Baowei SUV, Pickup, Yunba and Transit Logistic Models in January. The Company also accelerated launch of Transit brand-specific stores to provide sales focus and enhance customer purchase experience. A new income tax regulation will be implemented in January 2008. Enterprises who are presently subject to a favorable policy are requested to transition to a higher income tax rate over the next five years. Final tax legislation regarding qualification rules for continued application of favorable tax policies are still pending. The company will work with government authorities to apply for tax exemptions subject to and in compliance with all government policies. 26 The company anticipates continued market pressures including raw material price increase, competitive pricing reduction, new vehicle entries in selected market segments, government policy revision and more stringent regulatory requirements. The company continues to leverage previously established processes and work groups to cost reduce existing production cost and eliminate operating waste throughout the enterprise. Additionally, we are providing emphasized focus on maximizing part sourcing localization and cost reduction for the new products we are introducing in 2008. The Company's management remains focused on (1) leveraging existing product platforms to generate new revenue streams, and (2) introducing new products. The Company continues to execute the four major projects approved with the support of our technology partners. These programs are the V348 project (the next generation commercial vehicle product with technology provided by Ford), the N900 project (the next generation truck product which is developed independently), the N350 project (the next generation pickup and SUV vehicle product which is developed independently) and the JX4D24 engine manufacturing project which supports our vehicles with locally produced engines which will meet future regulatory requirements. These actions will introduce competitive and profitable products into the light commercial vehicle market as soon as possible, per the introduction timetable as indicated below. Finally, the company is continuing efforts to ensure sustainable growth, including studying project opportunities for adding incremental products and expanding export and OEM sales. 5. Investment in the reporting period (1) In 2007, JMC did not raise equity funding, nor did it use equity funding raised in previous years. (2) Self funded major projects: Total Progress Investment Investment to be Project Name (Sunk) Planned Job#1 Date Estimate Committed (RMB Mils) (RMB Mils) (RMB Mils) V348 909 735 174 First Half, 2008 Second Half, 2009~ N350 598 69 529 Second Half, 2010 JX4D24 Engine 350 212 138 Second Half, 2008 N900 250 109 141 First Half, 2009 Euro III 195 148 - Completed A4 Press Line 156 - 156 First Half, 2010 C3 Press Line 64 30 34 Second Half, 2008 27 Frame Press Line 53 22 31 First Half, 2008 V348 Petrol EuroIV 35.3 14 21.3 Second Half, 2008 Engine JX4D24 Engine for 30 3 27 Second Half, 2009 N350 High Speed Milling 11.7 - 11.7 Second Half, 2008 Machine 4-Poster Road Testing 11 1 10 Second Half, 2008 Transit Petrol Euro IV 8 6 2 First Half, 2008 Total 2,671 1,349 1,275 The spending will be funded from cash reserves. 6. Product Development As a result of intensified efforts to develop and implement new vehicle programs, spending in this area has increased by 3.4% in 2007 relatives to 2006 levels. Product development efforts are focused on responding to market needs as well as regulatory compliance. The new V348 Transit development was executed by utilizing the latest engineering tools (CAE analysis, Mathematical Modeling) and integrating this with modern quality methods (including supplier selection, part durability and quality testing), and proprietary manufacturing processes, to deliver a new benchmark for Light Bus quality and functionally. Powertrain performance, emissions compliance, ride and handling, safety, and the overall driver and passenger environment have been improved substantially to deliver a commercial vehicle that drives like car. Similarly, the N900 and N350 programs will reflect market driven improvements including increased payloads, new styling, improved powertrain, while continuing to deliver the premium standards expected by our customers. The JX4D24 project will expand company engine manufacturing capacity and capability by machining major PUMA engine components in-house and delivering an engine that can achieve future emissions requirements. 7. Financial Results Revenue in 2007 was RMB 8,456 million, up 10% from last year. This increase primarily reflects higher vehicle sales volume, partially offset by price reduction. Under International Financial Reporting Standards, net profit was RMB 753 million, up 21% from last year. Distribution costs increased by RMB 124 million, up 25% from last year, primarily reflecting volume-related changes including vehicle delivery costs, warranty, promotion expenses and advertisement expenditure. Administrative expenses increased by RMB 39 million, up 8% from same period last year, primarily reflecting higher program spending and technical development fees associated with higher Transit sales volume. Cash flow from operations was positive RMB 838 million, reflecting profitability and operating-related changes. Cash flow from investing activities was negative RMB 500 28 million, reflecting primarily spending for capital goods such as facilities, equipment and tooling. Financing cash flow was negative RMB 399 million, primarily reflecting dividend payment, bank loan pay down and interest expenses. At the end of 2007, the Company held a total of RMB 2,107 million cash and cash equivalents, decreasing RMB 61 million from the end of 2006. The balance of bank borrowing was RMB 49 million, decreasing RMB 83 million from 2006 year end. Total assets were RMB 6,125 million, up 15% from RMB 5,312 million at year-end 2006, primarily reflecting higher CIP, receivables and inventory. Higher CIP is primarily driven by program spending increases. Receivables and inventory increases are driven by higher volume and V348 Transit launch activities. The asset structure remains unchanged from 2006. Total liabilities, excluding minority interest, were RMB 2,542 million, up 16% from RMB 2,185 million at year end 2006, primarily reflecting higher accounts payable due to higher production volume and investment. Shareholder equity was RMB 3,583 million at December 31, 2007, up RMB 456 million from year-end 2006. This increase is explained by net profit earned in the reporting period. Dividend payments partially offset the equity increase. 8. 2008 Year Plan The Company is projecting revenue about RMB 10 billion for 2008. Intensified competition resulting from new market entries and the launch of news models will require increased levels of marketing expense to support expanded market share. Additionally, R&D and capital expenditures are projected to be higher as we progress with new product programs and capacity expansion actions. In 2008, the Company continues to focus on generating cash and profits, enhance formulation of new product development strategies, and execute plans for future growth. Specific actions include: i. Accelerate efforts to strengthen our brands through enhancing the Company's distribution network, including brand-specific shop expansion and JMC Cares service strategy deployment. ii. Work with our technology partners to execute theV348, N900, JX4D24 and N350 projects iii. Increase cost reduction efforts by focusing on customer value and eliminating waste. iv. Develop product plans to add new products for introduction in the Chinese market. v. Expand the export and OEM component sales business. II. Routine Work of the Board of Directors 1. Board Meetings and Resolutions in the Reporting Period 29 The Board of Directors approved in form of paper meeting the following resolution on January 4, 2007: approved the transfer of sourcing transmissions from Nanchang Gear Co. to GETRAG (Jiangxi) Transmission Company, where all other terms and conditions with respect to the related transaction remain unchanged, and submit such transaction to the Shareholders’ Meeting for approval. Public announcement on the resolution of the Board Meeting was published in China Securities, Securities Times and Hong Kong Commercial Daily on January 9, 2007. The Board of Directors approved in form of paper meeting the following resolution on January 24, 2007: approved contracting JMCG (Jiangxi) Engineering & Construction Ltd. to construct the N900 Frame Paint Line with a total contract amount of RMB 23.68 million, and the Board of Directors required Jiangling Motors Company (Group) to provide a performance guarantee for the timely completion and quality of the construction project. The Board of Directors authorized the Executive Committee to execute this related party transaction with JMCG (Jiangxi) Engineering & Construction Ltd. Public announcement on the resolution of the Board Meeting was published in China Securities, Securities Times and Hong Kong Commercial Daily on January 25, 2007. The eighth session of the fifth Board of Directors was held in the Lvjiao conference room of Hainan Kangle Garden HNA Resort, Xingliong Tour City, Hainan Province, P.R.C. on March 23, 2007. The following resolutions were passed at the meeting: i. approved Transit Emission Stage IV Gas Engine program; ii. approved Four-poster Road Test Simulator Program; iii. approved A4 Press Line Program; iv. approved the Related Party Transactions; and v. approved the Rules Concerning Administration of Information Disclosure of JMC. Public announcement on the resolutions of the Board Meeting was published in China Securities, Securities Times and Hong Kong Commercial Daily on March 27, 2007. The Board of Directors approved in form of paper meeting the following resolutions on April 4, 2007: i. approved the proposal on 2006 profit distribution plan; and ii. approved 2006 Annual Report of the Company and the extracts from the Annual Report. Public announcement on the resolutions of the Board Meeting was published in China Securities, Securities Times and Hong Kong Commercial Daily on April 6, 2007. The Board of Directors approved in form of paper meeting the following resolutions on April 24, 2007: i. approved JMC 2006 First Quarter Report; and 30 ii. approved to implement China new GAAP from January 1, 2007 and relevant changes of JMC accounting policies. Public announcement on the resolutions of the Board Meeting was published in China Securities, Securities Times and Hong Kong Commercial Daily on April 26, 2007. The Board of Directors approved in form of paper meeting the following resolutions on May 31, 2007: i. Given that Mr. Yuan-Ching Chen would like to resign from his directorship in the Company due to work reason and Ford Motor Company has nominated Mr. Philip Spender as a director candidate, the Board of Directors agreed to submit the aforesaid director nomination by Ford to the shareholders’ meeting for approval; ii. agreed to continue to appoint PricewaterhouseCoopers Zhong Tian CPAs Limited Company as JMC’s A and B share auditor in the year of 2007, and submitted this appointment to the shareholders’ meeting for approval. Upon approval of this matter by the shareholders' meeting, the Board of Directors will obtain the relevant authorization and be responsible for implementing matters related this appointment.; iii. approved the related party transaction with Ford Motor Company on the import parts and components for the V348 vehicles. Projected transaction value for 2007 and 2008 are RMB 117 million and RMB 485 million respectively. Upon approval of this matter by the shareholders' meeting, the Board of Directors will obtain the relevant authorization and will further delegate the Company's Executive Committee for the implementation of this transaction; iv. JMC is currently engaged with the JMCG Modification Factory in a recurring related party transaction on the Transit stamping parts and chassis assembly purchases and sales. Projected transaction value in 2007 is RMB 164 million. The Board of Directors agreed to submit this transaction to the shareholders’ meeting for approval; and v. approved the Notice on Holding 2006 Annual Shareholders’ Meeting of JMC. Public announcement on the resolutions of the Board Meeting was published in China Securities, Securities Times and Hong Kong Commercial Daily on June 1, 2007. The ninth session of the fifth Board of Directors was held in the conference center on the second floor of the Administration Building of JMC on June 25-26, 2007. The following resolutions were passed at the meeting: i. elected Mr. Philip Spender as a member of the Strategy Committee of the Board.; ii. approved the transfer of the Company’s land use rights for the 53.6 Mu land located in JMC Axle Plant as well as affixtures thereon at a price no less than RMB 4.56 million, and approved the acquisition of the land use rights for the 17.84 Mu land located in Cai Jia Fang at a price no more than RMB 5.33 million. The Board of Directors authorized the Executive Committee to handle the implementation of the aforesaid transactions and the Chairman of the Board to sign relevant contracts for the relevant land transactions; iii. approved Five Axis High Speed CNC Milling Machine program; 31 iv. approved Routine Relate Party Transactions; v. approved the Self-audit Report on Corporate Governance and Rectification Plan of JMC; and vi. approved Rules Concerning Administration of JMC Shares and Their Trade Held by the Directors, Supervisors and Senior Management Personnel. Public announcement on the resolutions of the Board Meeting was published in China Securities, Securities Times and Hong Kong Commercial Daily on July 28, 2007. The Board of Directors approved in form of paper meeting the following resolution on August 27, 2007: approved JMC 2007 Half-year Report. The tenth session of the fifth Board of Directors was held in the conference center on the second floor of the Administration Building of JMC on September 14, 2007. The following resolutions were passed at the meeting: i. approved V348 State IV Gasoline Program; ii. approved the Ford Puma Technology Licensing Contract and authorized the Chairman of the Board to sign the Contract on behalf of the Company; iii. Subject to Ford’s consent on the proposal and supplier for the development of the FIE system of the JX4D24 engine, the Board of Directors approved the JX4D24 Engine (Match for N350) Development Program; iv. approved the routine related party transaction with Nanchang JMCG Liancheng Auto Component Co.; and v. approved the Improvement Report on Corporate Governance of JMC. Public announcement on the resolutions of the Board Meeting was published in China Securities, Securities Times and Hong Kong Commercial Daily on September 18, 2007. The Board of Directors approved in form of paper meeting the following resolution on October 23, 2007: approved JMC 2007 Third Quarter Report. The eleventh session of the fifth Board of Directors was held in the conference center on the second floor of the Administration Building of JMC on December 13, 2007. The following resolutions were passed at the meeting: i. approved the change of related party transaction with Ford Automotive Finance (China) Ltd. and dealers from consignment sale arrangement to a conditional sale arrangement; ii. approved the related party transactions; iii. according to the authorization of JMC Shareholders’ Meeting, the Board of Directors approved 2007 audit fee of RMB 1.32 million for PricewaterhouseCoopers Zhong Tian CPAs Limited Company; the Board of Directors approved to continue appointing PricewaterhouseCoopers Zhong Tian CPAs Limited Company as JMC’s A & B share auditor for year 2008 with an audit fee of RMB 1.32 million, and to submit this proposal to the Shareholders’ Meeting for approval; iv. approved 2007 Eight Accounting Provisions & Write-off proposal; and v. agreed to authorize CFO Joseph Verga with full power to handle the loan financing between JMC and financial institutions. The duration of the authorization is one year, i.e., from January 1, 2008 to December 31, 2008. 32 Public announcement on the resolutions of the Board Meeting was published in China Securities, Securities Times and Hong Kong Commercial Daily on December 18, 2007. 2. Board of Directors’ implementation of the Resolutions of the Shareholders’ Meetings According to the 2006 year profit distribution plan approved by the 2006 shareholders’ meeting, the announcement on the implementation of the 2006 year dividend distribution was published in China Securities, Securities Times and Hong Kong Commercial Daily on July 13, 2007, and it has been put into effect. The 2006 year dividend distribution plan was as follows: Based on the total share capital of 863,214,000 shares, cash dividend of RMB 3 (before tax) per 10 shares is to be distributed to shareholders. Individual shareholders and investment funds holding the Company’s A shares will receive after-tax cash dividend of RMB 2.7 per 10 shares, and the cash dividend for B-share holders shall be exempted from tax. Equity record date and ex-dividend date for A shares were July 19 and July 20, 2007 respectively; Last transaction date, ex-dividend date and equity record date for B shares were July 19, July 20, and July 24, 2007 respectively. The cash dividend for B-share holders was paid in Hong Kong Dollars based on the middle exchange rate between HK dollar and RMB quoted by the People’s Bank of China on the first business day (June 26, 2006) after the resolution of the Shareholders’ Meeting. The exchange rate was HKD 1.00 / RMB 0.9751. JMC did not convert capital reserve into share capital in the reporting period. 3. Audit Committee’s Works A. 2007 Diligence Report of the Audit Committee According to Audit Committee Work Rules, the Audit Committee conducted communication, supervision and review on internal and external audit. i. The Audit Committee has reviewed the company’s internal control work plan and internal control implementation results regularly. ii. The Audit Committee reviewed the external auditor audit plan, letter of engagement, risks and controls, etc. iii. The Audit Committee has supervised the external auditor, so that the audit report can be submitted within the appointed period. iv. Before the external auditor on-site audit and after receiving the external auditor's initial opinion on 2007 financial reports, Audit Committee reviewed the company's financial reports. It met with the external auditors at a face-to-face meeting to communicate on important items, potential items which may affect accounting estimation, audit adjustment items and important accounting policies, and it believes that these are truthful, accurate and it fully reflecting the company’s actual status. v. The Audit Committee has submitted the 2007 External Auditor Summary Report to Board of Directors for review. vi. The Audit Committee has recommended PWC to be the external auditor for the 2008 Financial Report audit. vii. The Audit Committee reviewed the internal control self assessment report and agreed to 33 submit this to the Board for approval. viii. The Audit Committee reviewed the committee work rules for compliance with the latest guidance published by the China Security Regulation Committee, and ensured that the rules complied with these regulations. It agreed to submit this to the Board for approval. B. Written opinions on JMC financial statements The Audit Committee reviewed the unaudited financial report prepared by the Company and issued its written opinions on January 10, 2008 as follows: The Audit Committee reviewed the Financial Report compiled by JMC and believes that the Financial Report has in all material respects reflected the actual company status. The Audit Committee will continue to keep in close contact with auditor. After receiving the auditor’s initial audit comments, Audit Committee will review Company Financial Report a second time. The Audit Committee reviewed the financial statements prepared by JMC after the external auditor issued its initial audit opinions, and issued its written opinions on February 27, 2008 as follows: i. Financial statements have been prepared according to China New GAAP and the company’s financial policies. ii. The financial status reported for December 31, 2007 including Balance Sheet, Income Statement and Cash Flow is accurate and truthful. The Audit Committee made resolutions on the audited 2007 financial report as follows: The Audit Committee reviewed the 2007 Financial Report which is audited by PWC and believes that in all material respects, the financial status reported for December 31, 2007 including Balance Sheet, Income Statement and Cash Flow is accurate and truthful. The Audit Committee agrees to submit it to BOD for approval. C. 2007 External Auditor Summary Report Audit Committee reviewed the 2007 Annual Audit Work Plan submitted by PWC. There was thorough communication with PWC team leaders. Agreement was achieved regarding timing and content, and both parties believe that the plan ensures a smooth completion of the 2007 audit. The external auditor thoroughly communicated with operating management and Audit Committee Members regarding the financial report consolidation, accounting adjustments, implementation of accounting policies and accounting issues that were found in the audit that can be improved. As a result, all parties have a more in-depth understanding of the business status, finance treatment and the implementation of China New GAAP. Therefore, a solid foundation was laid for a fair audit conclusion by the external certified public auditor. Audit Committee believed that the external certified auditor has executed the audit work consistent with the requirements of China Certified Auditor Independent Audit Principles. The audit period is adequate and the allocation of personnel resources is sufficient to 34 deliver an audit report which reflects the finance status on December 31, 2007, the operation results, and 2007 cash flow. The audit conclusions conform with the company actual status. 4. 2007 Diligence Report of the Compensation Committee The Company Compensation Committee is a special committee under the Company Board of Directors and consists of five directors and one secretary, including three independent directors. The chairman of the Committee is one of the independent directors and the Committee secretary is the Board Secretary. The roles and responsibilities of the Committee are as follows: i. to formulate compensation policies or plans for the senior management, including but not limited to, the performance review system, standards, and procedure, rewards and punishments rules; ii. to supervise the performance of the senior management personnel and conduct annual performance review of such personnel; iii. to supervise the implementation of the Company's compensation policies; and iv. to handle other matters assigned by the Board of Directors. In the reporting period, the Compensation Committee exercised its duties as follows: i. supervised the implementation of 2006 Senior Executive Compensation Plan of JMC; ii. appointed a professional human resource consulting advisor to improve the salary system for JMC senior management. In accordance with the Senior Executive Compensation & Incentive Plan of JMC approved by the Board of Directors on December 18, 2006 and the Senior Executive Base Salary Plan of JMC agreed by the Compensation Committee on March 2007, the compensation for senior management consists of base salary, short-term incentive and long-term incentive. The base salary grade of senior management is in line with his/her position, and the funding of the short-term incentives and long-term incentives are all derived from an incentive fund based on the pre-tax profit. iii. the Compensation Committee approved the Y2007 Senior Executive Year-end Bonus Plan of JMC according to the senior management’s performance of KPI and the evaluation results made by the Company’s President. The Compensation Committee’s opinions on the annual compensation of the directors, supervisors and senior management disclosed in this Report are as follows: The 2007 annual compensation for the Chinese-side senior management was paid upon the principles promulgated in the Senior Executive Compensation & Incentive Plan of JMC and the Senior Executive Base Salary Plan of JMC. The 2007 annual compensation for Ford-seconded senior management personnel was paid in accordance with the Personnel Agreement and the Amendment to Personnel Agreement signed between Ford and JMC. The annual compensation for the director and supervisor that the Company paid abided by JMC salary management system. In the reporting period, the annual compensation of the directors, supervisors and senior executives disclosed in this Report was complied with JMC salary management system, and there was neither breach nor inconsistency of this system. 5. Proposal on 2007 Year Profit Distribution Plan Details on the profit available for appropriation of the Company in 2007 prepared in 35 accordance with the China GAAP and International Financial Reporting Standard (‘IFRS’) are as follows: Unit: RMB’000 China GAAP IFRS Retained earning at Dec. 31, 2006 986,213 955,409 2007 net profit 759,158 753,445 Reserve -75,916 -75,916 Allocation of dividend for 2006 -258,964 -258,964 Staff bonus and welfare fund -2,445 - Retained earning at Dec. 31, 2007 1,408,046 1,373,974 The upper limit of profit available for distribution was based on the lower of the un-appropriated profit calculated in accordance with the China GAAP and that calculated in accordance with IFRS. Therefore, the Company’s retained earnings available for distribution as of December 31, 2007 was RMB 1,373,974 thousand. The Board approved to submit to the 2007 Annual Shareholders’ Meeting the following proposal on year 2007 profit distribution: (1). to appropriate 10% of the 2007 net profit calculated in accordance with the China GAAP as the statutory surplus reserve; (2). to appropriate for the dividend distribution from 2007 net profit, which shall be equal to RMB 0.3 per share and shall apply to the Company’s total share capital; and (3). to carry forward the reminder of the 2007 net profit i.e. the un-appropriated portion to the following fiscal year. Profit distribution proposal: A cash dividend of RMB 3 (including tax) will be distributed for every 10 shares held. Based on the total share capital of 863,214,000 shares as of December 31, 2007, total cash dividend distribution amounts shall be RMB 258,964,200. B share dividend shall be paid in Hong Kong Dollars and converted based on the HKD-to-RMB exchange rate published by the People’s Bank of China on the first working day following the approval on the profit distribution proposal by the Shareholders’ Meeting of the Company. The Board decided not to convert capital reserve to share capital this time. 6. The independent directors’ explanation and independent opinions on the Company’s outside guarantee and implementation of relevant regulations The Company Board of Directors approved on December 13, 2007 to provide guarantee to Ford Automotive Finance (China) Ltd. (‘FAFC’) with vehicle pledge for Suzhou Hejun Auto Trading Limited, Shanghai Jiuha Auto Industrial Limited, Wuxi Jiangling Auto Sales Limited and Shenzhen Shuncheng Jiangling Auto Trading Limited with a total credit line no more than RMB 55.5 million. Please see details in the announcement published in China 36 Securities, Securities Times and Hong Kong Commercial Daily on December 18, 2007. The total guarantee the Company provided for the aforesaid four dealers was RMB 32,830 thousand, accounting 0.9% of the Company net assets, as of December 31, 2007. We believed that the risk derived from the vehicle pledge provided for such credit facilities is offset because the Company has received the cash payment of the vehicles from FAFC on behalf of the dealers. The Company has no other outside guarantee except the aforesaid guarantee provided for the dealers in the reporting period. 7. Others JMC continues to designate China Securities, Securities Times and Hong Kong Commercial Daily as the newspapers for information disclosure. Chapter VIII Report of the Supervisory Committee I. Work of the Supervisory Committee Pursuant to the relevant regulations in the Company Law, Securities Law and JMC Articles of Association as well as consistent with the spirit of being responsible to the shareholders, the Supervisory Committee earnestly fulfilled its duties stipulated by the laws and regulations and energetically worked to perform its functions fully in 2007. The Chief Supervisor attended all the board meetings as a non-voting attendee, and all the supervisors attended the annual Shareholders’ Meeting. The committee held 5 meetings during the reporting period. The following is the information in regard to the meetings and the subjects at the meetings: 1. The Supervisory Committee reviewed and passed in form of paper meeting the following resolutions on April 4, 2007: i. reviewed and passed the 2006 annual work report of the Supervisory Committee; and ii. reviewed and passed 2006 Annual Report of JMC and the extracts from the annual report. 2. The Supervisory Committee reviewed and passed the following resolution in form of paper meeting on April 24, 2007: reviewed and passed 2007 First Quarter Report of JMC. 3. The Supervisory Committee reviewed and passed the following resolution in form of paper meeting on August 27, 2007: reviewed and passed 2007 Half-year Report of JMC. 4. The Supervisory Committee reviewed and passed the following resolution in form of paper meeting on October 23, 2007: reviewed and passed 2007 Third Quarter Report of JMC. 5. The Supervisory Committee reviewed and passed the following resolution in form of 37 paper meeting on December 13, 2007: regarding 2007 Eight Accounting Provisions & Write-off proposal approved by the Company Board of Directors, the Supervisory Committee believed that it complied with JMC’s actual needs & situation. II. Supervisory Committee’s independent opinion on the following matters during the reporting period: 1. JMC’s operation in conformity with laws JMC operated in conformity with the laws and regulations, such as the Company Law, the Securities Law and the Articles of Association in 2006. The decision-making procedure was standardized and legal, and a relatively complete internal control system was established. No behaviors violating laws, regulations and the Articles of Association or harming JMC’s interest by the Directors, President and other senior management in carrying out their duties were found. 2. JMC’s financial status PwC Zhong Tian audited JMC’s 2006 financial statements and issued unqualified audit reports. We believe the reports reflect JMC’s financial status, operating results and asset changes objectively and accurately. 3. In 2006, JMC’s procedure for asset sales was legal and the sales prices were reasonable. There were no insider trading, deals, or situations harmful to shareholders’ interest or will lead to a JMC’s asset loss. 4. JMC’s related transactions: negotiated arm-length prices applied in imported component purchasing. The pricing for localized components was determined through the process of inviting public bidding, discussion and business negotiation. The prices were adjusted periodically, were fair and reasonable. 5. Please see the Article 4, Chapter V for the independent opinions from the Supervisory Committee on the Self-assessment Report on Internal Control System of JMC. Chapter IX Major Events 1. JMC had no major litigation or arbitration issue in 2007. 2. JMC had no securities investment in 2007. There was neither the equity in other listed companies nor the equity in non-listed finance companies and companies applying to be listed in the reporting period. 3. Purchase or Sale of Assets The Board of Directors approved the transfer of the Company’s land use right for the 218 Mu land, located in Majiashan, Nanchang city, as well as affixtures thereto for RMB 33 million, and acquisition of the land use right for a 2000 Mu Greenfield, located in Xiaolan Economic Development Zone, Nanchang city, P.R.C., for RMB 33 million on July 10, 2006. As of the date of the issuance of this Annual Report, the contract on sale and purchase of 38 the aforesaid land use right has not been signed yet. 4. Major Related Transactions (1) Routine related party transactions A. JMC purchased certain raw materials, auxiliary materials and components from related parties. Transactions with annual value over RMB 30 million are listed as below: Pricing Settlement Amount As % of Total Transaction Parties Principle Method (RMB’000) Purchases JMCG Contracted 60 days after price delivery 338,418 5.51 Ford Contracted Letter of credit price 286,991 4.67 Jiangxi Jiangling Chassis Contracted 60 days after Company price delivery 283,231 4.61 JMCG Interior Trim Factory Contracted 60 days after price delivery 232,949 3.79 GETRAG (Jiangxi) Contracted 60 days after Transmission Company price delivery 230,897 3.76 Jiangling-Lear Interior Trim Contracted 60 days after Factory price delivery 156,953 2.55 Jiangxi FuChang Climate Contracted 60 days after System Co. price delivery 125,667 2.04 JMCG Modification Factory Contracted Monthly Netting price off payment of purchased goods 86,411 1.41 Jiangxi JMCG Industrial Contracted 60 days after Company price delivery 35,650 0.58 Nanchang JMCG Liancheng Contracted 60 days after Auto Component Co. price delivery 32,018 0.52 Necessity and continuity: the purchase of the imported components will immediately stop when the respective localization is achieved, and these components will be substituted by localized ones; some components from other related parties were unique parts for JMC’s Transit series, N series and T series, and other general components were purchased through open bidding. B. The sales of products by JMC to related parties with annual value over RMB 30 million: Ratio to the Pricing Settlement Amount Transaction Parties Transactions Principle Method (RMB’000) of the Same Kind JMCG Import and Export Co., Contracted 30 days after price delivery 653,717 8.03 Ltd. JHC Market 30 days after 168,488 2.07 price invoicing Jiangxi JMCG Industrial Contracted Monthly 127,499 1.57 39 Company price Netting off payment of purchased goods JMCG Modification Factory Contracted Monthly price Netting off payment of 75,375 0.93 purchased goods GETRAG (Jiangxi) Contracted Monthly Transmission Company price Netting off payment of 66,662 0.82 purchased goods JMCG Interior Trim Factory Contracted Consignment price after receiving payment of 47,040 0.58 purchased goods Jiangxi Jiangling Material Market Monthly price settlement 35,607 0.44 Utilization Co., Ltd. Necessity and continuity: JMCG Import and Export Co., Ltd. has a mature network and human resources to support import & export trade. JMC will continue to use its sales network to sell products to overseas markets. JMC will also continue supplying relevant components to JHC as long as an attractive margin is secured. In the above mentioned pricing principle, market price means that it is based on the market price of similar products, and contracted price means that for unique products or services for which comparable market data is difficult to obtain, prices are determined through the process of supplier quotes, cost assessment and negotiations. C. Management Compensations Pursuant to an agreement between the Company and Ford on March 24, 2005, some employees of Ford were assigned to the Company as management staff. In 2007, the Company should pay approximately US$ 3,017 thousand and RMB 2,301 thousand to Ford as service fee for these employees. Pursuant to an agreement between the Company, Ford and Ford Otosan on December 8, 2006, some employees of Ford Otosan were assigned to the Company as management staff. In 2007, the Company should pay approximately US$ 774 thousand to Ford Otosan as service fee for these employees. Pursuant to an agreement between the Company and JHC in January 2007, some employees of JHC were assigned to the Company as management staff. In 2007, the Company should pay approximately RMB 579 thousand to JHC as service fee for these employees. D. General Service 40 JMCG bears the middle school and primary school educational fees and retired employees expenses for JMC and its subsidiaries, and provides services such as cable television. The related costs were shared by JMC and its subsidiaries according to agreed percentages based on headcount ratio. In 2007, RMB 2.50 million of the above-mentioned costs was shared by JMC and its subsidiaries. E. Purchasing Agency JMCG Import & Export Co., Ltd. was the import agent of JMC for acquiring import materials, equipment and technology services with a commission rate of 1.3% for existing business and 0.8% for new program business. In 2007, JMC paid JMCG Import & Export Co., Ltd. commission totaling RMB 7.33 million. (2) The Company had no related party transaction concerning transfer of assets or equity in 2007. (3) Creditor’s rights, liabilities and guarantees between JMC and related parties. A. Balance of accounts due to or due from major related parties with value over RMB 30 million: Ratio to the Amount Item Related Parties Balance of the (RMB ‘000) Item Accounts and bills Ford 81,963 5.69 payable Accounts and bills Jiangxi Jiangling Chassis 5.44 78,382 payable Company Accounts and bills JMCG 59,524 4.13 payable Accounts and bills Jiangling-Lear Interior 56,922 3.95 payable Trim Factory Accounts and bills GETRAG (Jiangxi) 3.16 45,469 payable Transmission Company Accounts and bills JMCG Interior Trim 2.89 41,598 payable Factory Accounts and bills Jiangxi FuChang Climate 34,958 2.43 payable System Co. Accounts and bills JMCG Modification 31,764 2.21 payable Factory Other payables Ford 81,838 13.57 B. Deposit At the end of year 2007, JMC had a deposit of RMB 85.77 million in JMCG Finance Co., Ltd. and charged interest according to same period bank deposit interest rate (RMB at 0.72% - 2.61%, US$ at 1.15%). JMC received a total of RMB 2.11 million in interest from JMCG Financial Co., Ltd. in 2007. C. Guarantee JMCG Finance Co, Ltd provided a guarantee for portions of JMC’s bank loans, of which the maximum was US$ 2.28 million. As of December 31, 2007, JMCG Finance Co. Ltd provided a guarantee for JMC’s bank loans of US$ 1.31 million. 41 (4) Other major related party transactions in 2007 According to the Joint Development Agreement and the 2nd Amendment Contract to the Joint Development Agreement signed by JMC and Ford, JMC is to pay technology development fee totaling US$ 40 million to Ford. JMC bore a technology development fee of US$ 7.03 million (equal to RMB 52.93 million) in 2007 reflecting 1.8% of Transit sales revenue. 5. Major Contracts and Execution (1) There was neither entrustment, contract or lease of assets from other companies, nor entrustment, contract or lease of JMC’s assets to other companies from which profit was generated to exceed 10% of 2007 total profit in the reporting period. (2) Please see the Article 6, Chapter VII for the outside guarantee of the Company. (3) JMC did not entrust other people with cash asset management in the reporting period. 6. Commitments of the Company or the shareholder holding 5% or more of the Company shares JHC, holding 41.03% of JMC total shares, issued letters of commitment, and declared and promised the following: (1) according to the requirements of Rules on Implementing the Full Tradable Share Reform of the Listed Companies, legal commitments will be fulfilled in accordance with provisions of the stock exchange laws and regulations; (2) the promisees ensure that they will compensate for losses to other shareholders resulting from partial or complete non-fulfillment of his promises; and (3) the promisees will fulfill their commitments faithfully and undertake relevant legal responsibility, and they will not transfer their shares unless the transferee agrees and accepts liability to undertake the responsibility of the promise. JHC promises specifically to pay the consideration on behalf of the unlisted-share holders who oppose the Share Reform or did not express their opinions. The above-mentioned unlisted-share holders should repay the consideration paid by JHC and the interest, or obtain written consent from JHC, if they want to list their shares. In the reporting period, JHC exercised its commitments sincerely and did not breach the promise. 7. Appointment or Dismissal of Accounting Firms The Board of Directors approved to appoint PwC Zhong Tian as JMC’s year 2008 A & B share auditor, and to submit this proposal to the Shareholders’ Meeting for approval. The firm has offered JMC audit services for seven consecutive years. The compensation paid to the accounting firm is as follows: Accountant Firm Year 2006 Out of Pocket Expense 42 RMB 1.32 million Included in audit fee. PwC ZhongTian (Both A & B share) 8. Neither JMC nor its Directors or senior management were punished by regulatory authorities in 2007. 9. External research and media interview to the Company In the reporting period, JMC welcomed institutional investors including 35 persons and discussed operating highlights, development strategy and other matters with them. The Company does not disclose, reveal or divulge major information not yet disclosed to special person or entities. Table of external research, communication and media interviews with the Company is as follows: Date Place Communication Object Information Discussed and Method Materials offered May 16, In the Oral A fund manager from JMC Operating highlights and 2007 Company communication Dacheng Fund development strategy Management Co., Ltd. and an analyst from Foundation Asset Management Co., Ltd. May 17, The Lake One to one, one to 15 analysts from JMC Operating highlights and 2007 View Hotel, many Shenying & Wanguo development strategy Nanchang communication Securities Co., Ltd., SYWG BNP PARIBAS Asset Management Co., Ltd., INVESCO Great Wall Fund Management Co., Ltd. and others June 1, 2007 In the Oral An analyst from China JMC Operating highlights and Company communication Life Insurance Asset development strategy Management Co., Ltd. June 5, 2007 In the Oral An analyst from Bank JMC Operating highlights and Company communication of Communication & development strategy Schroders Fund Management Co., Ltd. June 8, 2007 In the Oral An analyst from Boshi JMC Operating highlights and Company communication Fund Management Co., development strategy Ltd. June 22, In the Oral 5 analysts from Guosen JMC Operating highlights and 2007 Company communication Securities Company, development strategy Guangfa Fund Management Co., Ltd., Changsheng Fund Management Co., Ltd. and Fullgoal Fund Management Co., Ltd. September In the Oral A fund manager from JMC Operating highlights and 21, 2007 Company Communication GuoDu Securities Co., development strategy Ltd. September In the Telephone An analyst from Value JMC Operating highlights and 27, 2007 Company Communication Partners Limited development strategy October 11, In the Oral An analyst from JMC Operating highlights and 43 2007 Company Communication AXA-SPDB development strategy Investment Managers Co., Ltd. October 17, In the Oral 5 analysts from JMC Operating highlights and 2007 Company Communication Everbright Securities development strategy Co., Ltd., China International Investment Management Co., Ltd., Greatwall Fund Management Co., Ltd., and CITIC-Prudential Fund Management Co., Ltd. November 8, In the Oral An analyst from JMC Operating highlights and 2007 Company Communication Lombarda China Fund development strategy Management Co., Ltd. December 5, In the Oral An analyst from GF JMC Operating highlights and 2007 Company Communication Securities Co., Ltd. development strategy 44 Chapter X Financial Report 45 Jiangling Motors Corporation, Ltd. Consolidated Financial Statements 31 December 2007 46 普华永道中天会计师事务所有限公司 11th Floor PricewaterhouseCoopers Center 202 Hu Bin Road Shanghai 200021, P.R.C. Telephone +86 (21) 6123 8888 Facsimile +86 (21) 6123 8800 www.pwccn.com Independent Auditor's Report 2008/SH-029/BMC/LLF To the Shareholders of Jiangling Motors Corporation, Ltd. Report on the financial statements We have audited the accompanying consolidated financial statements of Jiangling Motors Corporation, Ltd. (the “Company”) and its subsidiaries (together the “Group”) which comprise the consolidated balance sheet as at 31 December 2007 and the consolidated income statement, consolidated statement of changes in equity and consolidated cash flow statement for the year then ended and a summary of significant accounting policies and other explanatory notes. Management’s responsibility for the financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditor’s responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 47 Opinion In our opinion, the accompanying consolidated financial statements give a true and fair view of the financial position of the Group as at 31 December 2007, and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards. PricewaterhouseCoopers Zhong Tian CPAs Limited Company Shanghai, the People’s Republic of China 13 March 2008 48 Jiangling Motors Corporation, LTD. CONSOLIDATED BALANCE SHEET AS AT 31 DECEMBER 2007 (All amounts in RMB unless otherwise stated) As at 31 December 31 December Note 2007 2006 RMB’000 RMB’000 ASSETS Non-current assets Property, plant and equipment 5 2,208,056 1,819,529 Lease prepayment 6 139,813 143,289 Intangible assets 7 35,987 36,971 Investments in associates 8 17,764 16,120 Deferred income tax assets 9 107,902 74,814 2,509,522 2,090,723 Current assets Inventories 10 866,076 595,717 Trade and other receivables 11 642,630 437,934 Held-to-maturity investment 12 - 19,895 Cash and cash equivalents 13 2,106,912 2,168,225 3,615,618 3,221,771 Total assets 6,125,140 5,312,494 EQUITY Capital and reserves attributable to the Company’s equity holders Share capital 14 863,214 863,214 Share premium 14 816,609 816,609 Other reserves 15 442,331 366,415 Retained earnings 1,373,974 955,409 3,496,128 3,001,647 Minority interests in equity 87,370 126,012 Total equity 3,583,498 3,127,659 LIABILITIES Non-current liabilities Borrowings 16 9,088 10,227 Retirement benefits obligations 17 69,701 69,350 Deferred income 31,791 28,648 Warranty provisions 18 106,910 104,738 217,490 212,963 Current liabilities Trade and other payables 19 2,268,798 1,823,228 Current income tax liabilities 276 10,081 Borrowings 16 40,088 122,108 Retirement benefits obligations 17 14,990 16,455 2,324,152 1,971,872 Total liabilities 2,541,642 2,184,835 Total equity and liabilities 6,125,140 5,312,494 The notes on pages 53 to 95 are an integral part of these consolidated financial statements. 49 Jiangling Motors Corporation, LTD. CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2007 (All amounts in RMB unless otherwise stated) Year ended 31 December Note 2007 2006 RMB’000 RMB’000 Sales 20 8,455,549 7,654,741 Sales tax and surcharge (145,208) (129,891) Net sales 8,310,341 7,524,850 Cost of sales (6,355,766) (5,819,901) Gross profit 1,954,575 1,704,949 Distribution costs (618,713) (494,481) Administrative expenses (541,944) (503,128) Other gains/(losses) – net 8,732 (5,593) Operating profit 802,650 701,747 Finance income 23 56,339 48,058 Finance costs 23 (5,368) (7,889) Finance income-net 23 50,971 40,169 Share of profit of associates 7,257 5,634 Profit before income tax 860,878 747,550 Income tax expense 24 (91,825) (99,116) Profit for the year 769,053 648,434 Attributable to: Equity holders of the Company 753,445 623,197 Minority interests 15,608 25,237 769,053 648,434 Earnings per share for profit attributable to the equity holders of the Company (expressed in RMB per share) - Basic and diluted 25 0.87 0.72 Dividends 26 258,964 439,376 The notes on pages 53 to 95 are an integral part of these consolidated financial statements. 50 Jiangling Motors Corporation, LTD. CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2007 (All amounts in RMB unless otherwise stated) Attributable to equity holders of the Company Share Shares Other Retained Minority Total Note Capital Premium Reserves Earnings Interests Equity RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Balance at 1 January 2006 863,214 816,609 295,977 834,610 116,451 2,926,861 Profit for the year 25 - - - 623,197 25,237 648,434 Transfer to statutory reserve 15 - - 63,022 (63,022) - - Acquisition of additional interests in an associate 15 - - 7,416 - - 7,416 Dividend relating to 2005 - - - (439,376) - (439,376) Dividend appropriated to minority shareholders of a subsidiary - - - - (15,676) (15,676) Balance at 31 December 2006 863,214 816,609 366,415 955,409 126,012 3,127,659 Profit for the year 25 - - - 753,445 15,608 769,053 Transfer to statutory reserve 15 - - 75,916 (75,916) - - Dividend relating to 2006 26 - - - (258,964) - (258,964) Dividend appropriated to minority shareholders of a subsidiary 26 - - - - (54,250) (54,250) Balance at 31 December 2007 863,214 816,609 442,331 1,373,974 87,370 3,583,498 The notes on pages 53 to 95 are an integral part of these consolidated financial statements. 51 Jiangling Motors Corporation, Ltd. CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2007 (All amounts in RMB unless otherwise stated) Year ended 31 December Note 2007 2006 RMB’000 RMB’000 Cash flows from operating activities Cash generated from operations 27 971,318 1,267,076 Interest paid (4,737) (6,515) Income tax paid (128,676) (110,349) Net cash generated from operating activities 837,905 1,150,212 Cash flows from investing activities Purchase of held-to-maturity investments (541,673) (19,895) Purchase of property, plant and equipment (“PPE”) (589,582) (500,400) Acquisition of a subsidiary - (24,699) Proceeds from disposal of PPE 27 5,951 2,224 Interest received 56,418 47,568 Proceeds from disposal of held-to-maturity 563,024 - investments Dividends received 5,613 3,314 Other cash flows from investing activities - 788 Net cash used in investing activities (500,249) (491,100) Cash flows from financing activities Proceeds from borrowings 45,429 162,704 Repayments of borrowings (125,562) (163,481) Dividends paid to company’s shareholders (263,833) (432,913) Dividends paid to minority shareholders of subsidiary (54,250) (15,676) Other cash paid relating to financing activities (372) (777) Net cash used in financing activities (398,588) (450,143) Effects of exchange rate changes (381) (199) Net increase in cash and cash equivalents (61,313) 208,770 Cash and cash equivalents at beginning of year 2,168,225 1,959,455 Cash and cash equivalents at end of year 2,106,912 2,168,225 The notes on pages 53 to 95 are an integral part of these consolidated financial statements. 52 Jiangling Motors Corporation, Ltd. FOR THE YEAR ENDED 31 DECEMBER 2007 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (All amounts in RMB unless otherwise stated) 1 General information Jiangling Motors Corporation, Ltd. (the “Company”) was established in the People’s Republic of China (the “PRC”) under the Company Law of the PRC and under the approval of Hongban (1992) No. 005 of Nangchang Revolution and Authorization Group of Company’s Joint Stock as a joint stock limited company to hold certain operational assets and liabilities of the automotive manufacturing business of Jiangxi Motors Manufacturing Factory, Which was owned by Jiangling Motors Corporation Group (“JMCG”). The legal representative’s operating license of the Company is No.002473. The address of the Company’s registered office is No.509, Northern Yingbin Avenue, Nanchang, Jiangxi Province, the PRC. In December 1993, the Company issued 494,000,000 domestic ordinary shares (“A share”). In addition, the Company issued 25,214,000 A shares as bonus shares to the existing shareholders in 1994. The bonus shares were issued by utilisation of the Company’s retained earnings. In 1995, the Company issued 174,000,000 domestically listed foreign shares (“B share”) and the Company issued 170,000,000 B shares in 1998. As at 31 December 2007, the total issued shares of the Company are 863,214,000 shares, which are all listed on the Shenzhen Stock Exchange, the PRC. The Company and its subsidiaries (the “Group”) are principally engaged in the development, manufacturing and selling of automobiles, engines and automobile related parts, dies and tools. These consolidated financial statements have been approved for issue by the Board of Directors on 13 March 2008. 2 Summary of significant accounting policies The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. A Basis of preparation The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”). The consolidated financial statements have been prepared under the historical cost convention except as disclosed in the accounting policies below. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimations are significant to the consolidated financial statements are disclosed in Note 4. 53 Jiangling Motors Corporation, Ltd. FOR THE YEAR ENDED 31 DECEMBER 2007 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (All amounts in RMB unless otherwise stated) 2 Summary of significant accounting policies (continued) A Basis of preparation (continued) Standards, amendment and interpretations effective in 2007 • IFRS 7, 'Financial instruments: Disclosures', and the complementary amendment to IAS 1, 'Presentation of financial statements – Capital disclosures', introduces new disclosures relating to financial instruments and does not have any impact on the classification and valuation of the Group’s financial instruments, or the disclosures relating to taxation and trade and other payables. • IFRIC 8, 'Scope of IFRS 2', requires consideration of transactions involving the issuance of equity instruments, where the identifiable consideration received is less than the fair value of the equity instruments issued in order to establish whether or not they fall within the scope of IFRS 2. This standard does not have any impact on the Group’s financial statements. • IFRIC 10, 'Interim financial reporting and impairment', prohibits the impairment losses recognised in an interim period on goodwill and investments in equity instruments and in financial assets carried at cost to be reversed at a subsequent balance sheet date. This standard does not have any impact on the Group’s financial statements. Standards, amendments and interpretations effective in 2007 but not relevant The following standards, amendments and interpretations to published standards are mandatory for accounting periods beginning on or after 1 January 2007 but they are not relevant to the Group’s operations: • IFRS 4, 'Insurance contracts'; • IFRIC 7, 'Applying the restatement approach under IAS 29, Financial reporting in hyper-inflationary economies'; and • IFRIC 9, 'Re-assessment of embedded derivatives'. The following interpretation to published standard is mandatory for accounting periods beginning on or after 1 March 2007 but it is not relevant to the Group’s operations: • IFRIC 11, 'IFRS 2 – Group and treasury share transactions'. Standards, amendments and interpretations to existing standards that are not yet effective and have not been early adopted by the Group The following standards, amendments and interpretations to existing standards have been published and are mandatory for the Group’s accounting periods beginning on or after 1 January 2008 or later periods, but the Group has not early adopted them: • IAS 23 (Amendment), 'Borrowing costs' (effective from 1 January 2009). The amendment to the standard is still subject to endorsement by the European Union. It requires an entity to capitalise borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset (one that takes a substantial period of time to get ready for use or sale) as part of the cost of that asset. The option of immediately expensing those borrowing costs will be removed. The Group will apply IAS 23 (Amended) from 1 January 2009. 54 Jiangling Motors Corporation, Ltd. FOR THE YEAR ENDED 31 DECEMBER 2007 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (All amounts in RMB unless otherwise stated) 2 Summary of significant accounting policies (continued) A Basis of preparation (continued) Standards, amendments and interpretations to existing standards that are not yet effective and have not been early adopted by the Group (continued) • IFRS 8, 'Operating segments ' (effective from 1 January 2009). IFRS 8 replaces IAS 14 and aligns segment reporting with the requirements of the US standard SFAS 131, ‘Disclosures about segments of an enterprise and related information’. The new standard requires a 'management approach', under which segment information is presented on the same basis as that used for internal reporting purposes. The Group will apply IFRS 8 from 1 January 2009. The expected impact is still being assessed in detail by management, but it appears likely that it does not have any impact on the Group’s accounts. • IFRIC 14, 'IAS 19 – The limit on a defined benefit asset, minimum funding requirements and their interaction' (effective from 1 January 2008). IFRIC 14 provides guidance on assessing the limit in IAS 19 on the amount of the surplus that can be recognised as an asset. It also explains how the pension asset or liability may be affected by a statutory or contractual minimum funding requirement. The Group will apply IFRIC 14 from 1 January 2008, but it is not expected to have any impact on the Group’s accounts. Interpretations to existing standards that are not yet effective and not relevant for the Group’s operations The following interpretations to existing standards have been published and are mandatory for the Group’s accounting periods beginning on or after 1 January 2008 or later periods but are not relevant for the Group’s operations: • IFRIC 12, 'Service concession arrangements' (effective from 1 January 2008). IFRIC 12 applies to contractual arrangements whereby a private sector operator participates in the development, financing, operation and maintenance of infrastructure for public sector services. IFRIC 12 is not relevant to the Group’s operations because none of the group’s companies provide for public sector services. • IFRIC 13, 'Customer loyalty programmes' (effective from 1 July 2008). IFRIC 13 clarifies that where goods or services are sold together with a customer loyalty incentive (for example, loyalty points or free products), the arrangement is a multiple-element arrangement and the consideration receivable from the customer is allocated between the components of the arrangement using fair values. IFRIC 13 is not relevant to the Group’s operations because none of the Group’s companies operate any loyalty programmes. 55 Jiangling Motors Corporation, Ltd. FOR THE YEAR ENDED 31 DECEMBER 2007 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (All amounts in RMB unless otherwise stated) 2 Summary of significant accounting policies (continued) B Consolidation (1) Subsidiaries Subsidiaries are all entities (including special purpose entities) over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases. The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the income statement. Inter-company transactions, balances and unrealised gains on transactions between group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. (2) Transactions and minority interests The Group applies a policy of treating transactions with minority interests as transactions with equity owners of the Group. For purchases from minority interests, the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary is deducted from equity. Gains or losses on disposals to minority interests are also recorded in equity. For disposals to minority interests, differences between any proceeds received and the relevant share of minority interests are also recorded in equity. 56 Jiangling Motors Corporation, Ltd. FOR THE YEAR ENDED 31 DECEMBER 2007 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (All amounts in RMB unless otherwise stated) 2 Summary of significant accounting policies (continued) B Consolidation (continued) (3) Associates Associates are all entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method of accounting and are initially recognised at cost. The Group’s investment in associates includes goodwill identified on acquisition, net of any accumulated impairment loss (see Note 2 H). The Group’s share of its associates’ post-acquisition profits or losses is recognised in the income statement, and its share of post-acquisition movements in reserves is recognised in reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate. Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the Group. Dilution gains and losses in associates are recognised in the income statement. C Segment Reporting The Group’s turnover and profit for the year ended 31 December 2007 were mainly derived from the manufacture and domestic sale of automobiles, related spare parts and components, and the principal assets employed by the Group are located in the PRC. Therefore, no additional business segment or geographical segment data is presented. D Foreign currency translation (1) Functional and presentation currency Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the “functional currency”). The consolidated financial statements are presented in Renminbi (“RMB”), which is the Group’s functional and presentation currency. (2) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing on the first day of the month in which the transactions take place. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at period-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement. 57 Jiangling Motors Corporation, Ltd. FOR THE YEAR ENDED 31 DECEMBER 2007 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (All amounts in RMB unless otherwise stated) 2 Summary of significant accounting policies (continued) D Foreign currency translation (continued) (2) Transactions and balances (continued) Changes in the fair value of monetary securities denominated in foreign currency classified as available for sale are analysed between translation differences resulting from changes in the amortised cost of the security, and other changes in the carrying amount of the security. Translation differences related to changes in the amortised cost are recognised in profit or loss, and other changes in carrying amount are recognised in equity. Translation differences on non-monetary financial assets and liabilities are reported as part of the fair value gain or loss. Translation differences on non-monetary financial assets and liabilities such as equities held at fair value through profit or loss are recognised in profit or loss as part of the fair value gain or loss. Translation differences on non-monetary financial assets such as equities classified as available for sale are included in the available-for-sale reserve in equity. E Property, plant and equipment Property, plant and equipment are stated at historical cost less accumulated depreciation and any impairment losses. Historical cost includes expenditure that is directly attributable to the acquisition or construction of the items. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognised. All other repairs and maintenance are charged to the income statement during the financial period in which they are incurred. Depreciation is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives, as follows: Buildings 35-40 years Plant and machinery 10-15 years Motor vehicles 6-10 years Moulds 5 years Others 5-7 years The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount (Note 2 H). Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognised in the income statement. Assets under construction represent buildings under construction and plant and equipment pending installation, and are stated at cost. Costs include construction and acquisition costs. No provision for depreciation is made on assets under construction until such time as the relevant assets are completed and ready for intended use. When the assets concerned are brought into use, the costs are transferred to property, plant and equipment and depreciated in accordance with the policy as stated above. 58 Jiangling Motors Corporation, Ltd. FOR THE YEAR ENDED 31 DECEMBER 2007 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (All amounts in RMB unless otherwise stated) 2 Summary of significant accounting policies (continued) F Lease prepayment Lease prepayments represent upfront prepayments made for the land use rights, and are expensed in the income statement on a straight line basis over the period of the lease or when there is impairment; the impairment is expensed in the income statement. G Intangible assets (1) Research and development Research expenditure is recognised as an expense as incurred. Costs incurred on development projects (relating to the design and testing of new or improved products) are recognised as intangible assets when the following criteria are fulfilled: (a) it is technically feasible to complete the intangible asset so that it will be available for use or sale; (b) management intends to complete the intangible asset and use or sell it; (c) there is an ability to use or sell the intangible asset; (d) it can be demonstrated how the intangible asset will generate probable future economic benefits; (e) adequate technical, financial and other resources to complete the development and to use or sell the intangible asset are available; and (f) the expenditure attributable to the intangible asset during its development can be reliably measured. Other development expenditures that do not meet these criteria are recognised as an expense as incurred. Development costs previously recognised as an expense are not recognised as an asset in a subsequent period. Capitalised development costs are recorded as intangible assets and amortised from the point at which the asset is ready for use on a straight-line basis over its useful life. No development costs were capitalised by the Group during the year ended 31 December 2007. (2) Technical know-how Technical know-how are initially recorded at costs incurred to acquire and are amortised over the estimated useful lives of 6 years. H Impairment of non-financial assets Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment losses whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest level for which there are separately identifiable cash flows (cash-generating units). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date. 59 Jiangling Motors Corporation, Ltd. FOR THE YEAR ENDED 31 DECEMBER 2007 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (All amounts in RMB unless otherwise stated) 2 Summary of significant accounting policies (continued) I Financial assets The Group classifies its financial assets in the following categories: at fair value through profit or loss, loans and receivables, held-to-maturity financial assets and available for sale. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition. (1) Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss are financial assets held for trading. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term. Derivatives are classified as held for trading unless they are designated as hedges. Assets in this category are classified as current assets. (2) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the balance sheet date. These are classified as non-current assets. Loans and receivables are classified as trade and other receivables in the balance sheet (Note 2 L). (3) Held-to-maturity financial assets Held-to-maturity financial assets are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Group’s management has the positive intention and ability to hold to maturity. If the Group were to sell other than an insignificant amount of held-to-maturity financial assets, the whole category would be tainted and reclassified as available for sale. Held-to-maturity financial assets are included in non-current assets, except for those with maturities less than 12 months from the balance sheet date; these are classified as current assets. 60 Jiangling Motors Corporation, Ltd. FOR THE YEAR ENDED 31 DECEMBER 2007 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (All amounts in RMB unless otherwise stated) 2 Summary of significant accounting policies (continued) I Financial assets (continued) (4) Available-for-sale financial assets Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless management intends to dispose of the investment within 12 months of the balance sheet date. Regular purchases and sales of financial assets are recognised on the trade-date – the date on which the Group commits to purchase or sell the asset. Investments are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or loss are initially recognised at fair value, and transaction costs are expensed in the income statement. Financial assets are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and the Group has transferred substantially all risks and rewards of ownership. Available-for-sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value. Loans and receivables and held-to-maturity financial assets are carried at amortised cost using the effective interest method. Gains or losses arising from changes in the fair value of the ‘financial assets at fair value through profit or loss’ category are presented in the income statement within other (losses)/gains – net, in the period in which they arise. Dividend income from financial assets at fair value through profit or loss is recognised in the income statement as part of other income when the Group’s right to receive payments is established. Changes in the fair value of monetary securities denominated in a foreign Currency and classified as available-for-sale are analysed between translation differences resulting from changes in amortised cost of the security and other changes in the carrying amount of the security. The translation differences on monetary securities are recognised in profit or loss; translation differences on non-monetary securities are recognised in equity. Changes in the fair value of monetary and non-monetary securities classified as available for sale are recognised in equity. When securities classified as available for sale are sold or impaired, the accumulated fair value adjustments recognised in equity are included in the income statement as gains and losses from investment securities. Interest on available-for-sale securities calculated using the effective interest method is recognised in the income statement as part of other income. Dividends on available-for-sale equity instruments are recognised in the income statement as part of other income when the Group’s right to receive payments is established. 61 Jiangling Motors Corporation, Ltd. FOR THE YEAR ENDED 31 DECEMBER 2007 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (All amounts in RMB unless otherwise stated) 2 Summary of significant accounting policies (continued) I Financial assets (continued) (4) Available-for-sale financial assets (continued) The fair values of quoted investments are based on current bid prices. If the market for a financial asset is not active (and for unlisted securities), the Group establishes fair value by using valuation techniques. These include the use of recent arm’s length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis and option pricing models, making maximum use of market inputs and relying as little as possible on entity-specific inputs. The Group assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of equity securities classified as available for sale, a significant or prolonged decline in the fair value of the security below its cost is considered as an indicator that the securities are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss – is removed from equity and recognised in the income statement. Impairment losses recognised in the income statement on equity instruments are not reversed through the income statement. Impairment testing of trade receivables is described in Note 2 L. J Derivative financial instruments and hedging activities Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured at their fair value. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group has no derivative instruments that qualifying for hedge accounting. Changes in the fair value of any derivative instruments that do not qualify for hedge accounting are recognised immediately in the income statement. K Inventories Inventories are stated at the lower of cost and net realisable value. Cost is determined using the weighted average cost method. The cost of finished goods and work in progress comprises raw materials, direct labour, other direct costs and related production overheads (based on normal operating capacity). It excludes borrowing costs. Net realisable value is the estimated selling prices in the ordinary course of business, less applicable variable costs of completion and selling expenses. 62 Jiangling Motors Corporation, Ltd. FOR THE YEAR ENDED 31 DECEMBER 2007 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (All amounts in RMB unless otherwise stated) 2 Summary of significant accounting policies (continued) L Trade and other receivables Trade and other receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision made for impairment. 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 or financial reorganisation, and default or delinquency in payments are considered indicators that the trade receivable is impaired. The amount of the provision is the difference between the carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account, and the amount of the loss is recognised in the income statement within “administrative expenses”. When a trade receivable is uncollectible, it is written off against the allowance account for trade receivables. Subsequent recoveries of amounts previously written off are credited against “administrative expenses” in the income statement. M Cash and cash equivalents Cash and cash equivalents includes cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities on the balance sheet. N Shares capital Share capital consists of “A” and “B” ordinary shares. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds. O Trade and other payables Trade and other payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method. P Borrowings Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest method. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date. 63 Jiangling Motors Corporation, Ltd. FOR THE YEAR ENDED 31 DECEMBER 2007 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (All amounts in RMB unless otherwise stated) 2 Summary of significant accounting policies (continued) Q Current and deferred income tax The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date in the countries where the company’s subsidiaries and associates operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation and establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred income tax is provided on temporary differences arising from investments in subsidiaries and associates, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future. R Employee benefits (1) Pension obligations The Group contributes on a monthly basis to a defined contribution retirement scheme managed by the PRC government. The contribution to the scheme is charged to the income statement as and when incurred. The Group’s obligations are determined at a certain percentage of the salaries of the employees. In addition, the Group provides supplementary pension subsidies to certain qualified employees. Such supplementary pension subsidies are considered as under defined benefit plans. The liability recognised in the balance sheet in respect of these defined benefit plans is the present value of the defined obligation at the balance sheet date less the fair value of plan assets, together with adjustments for unrecognised actuarial gains or losses and past service cost. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows according to the terms of the related pension liability. 64 Jiangling Motors Corporation, Ltd. FOR THE YEAR ENDED 31 DECEMBER 2007 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (All amounts in RMB unless otherwise stated) 2 Summary of significant accounting policies (continued) R Employee benefits (continued) (2) Housing fund and other benefits The Group’s full-time employees are entitled to participate in a state-sponsored housing fund. The fund can be used by the employees for the purchase of apartment accommodation, or may be withdrawn upon their retirement. The Group is required to make annual contributions to the state-sponsored housing fund equivalent to a certain percentage of the employees’ salaries. (3) Profit sharing and bonus plan The Company recognises a liability and expense for bonus plans based on a formula that takes into consideration the profit attributable to the Company’s shareholders. The Group recognises a provision where contractually obliged or where there is a past practice that has created a constructive obligation. S Provisions Provisions, mainly warranty costs, are recognised when the Group has a present legal or constructive obligation as a result of past events, it is more likely than not that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. Provisions are not recognised for future operating losses. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognised as interest expense. T Revenue recognition Revenue comprises the fair value of the consideration received or receivable for the sale of goods and services in the ordinary course of the Group’s activities. Revenue is shown net of value-added tax, returns, rebates and discounts and after elimination sales within the Group. The Group recognises revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the entity and specific criteria have been met for each of the Group’s activities as described below. The amount of revenue is not considered to be reliably measurable until all contingencies relating to the sale have been resolved. The Group bases its estimates on historical results, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement. (1) Sales of goods Revenue from the sale of goods is recognised when significant risks and rewards of ownership of the goods are transferred to the customer, and the customer has accepted the products and collectibility of the related receivables is reasonably assured. 65 Jiangling Motors Corporation, Ltd. FOR THE YEAR ENDED 31 DECEMBER 2007 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (All amounts in RMB unless otherwise stated) 2 Summary of significant accounting policies (continued) T Revenue recognition (continued) (2) Sales of services Sales of services are recognised in the accounting period in which the services are rendered, by reference to completion of the specific transaction assessed on the basis of the actual service provided as a proportion of the total services to be provided. (3) Interest income Interest income is recognised on a time proportion basis, taking account of the principal outstanding and the effective rate over the period to maturity, when it is determined that such income will accrue to the Group. (4) Rental income Rental income is recognised on an accruals basis in accordance with the substance of the relevant agreements. (5) Dividend income Dividend income is recognised when the right to receive payment is established. U Dividend distribution Dividend distribution to the Company’s shareholders is recognised as a liability in the Group’s financial statements in the period in which the dividends are approved by the Company’s shareholders. V Government grants Grants from the government are recognised at their fair value where there is a reasonable assurance that the grant will be received and the Group will comply with all attached conditions. Government grants relating to costs are deferred and recognised in the income statement over the period necessary to match them with the costs they are intended to compensate. Government grants not relating to future costs are recognised on receipt basis. Government grants relating to the purchase of property, plant and equipment are included in non-current liabilities as deferred income and are credited to the income statement on a straight line basis over the expected lives of the related assets. 66 Jiangling Motors Corporation, Ltd. FOR THE YEAR ENDED 31 DECEMBER 2007 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (All amounts in RMB unless otherwise stated) 3 Financial risk management 3.1 Financial risk factors The Group’s activities expose it to a variety of financial risks: market risk (including currency risk, fair value interest rate risk, cash flow interest rate risk and price risk), credit risk and liquidity risk. The Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group’s financial performance. Risk management is carried out by Finance Department under policies approved by the Board of Directors. (1) Market risk (a) Currency risk The Group is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the US dollar, UK pound and Japanese Yen. Foreign exchange risk arises from future commercial transactions, recognised assets and liabilities. Foreign exchange risk arises when future commercial transactions or recognised assets or liabilities are denominated in a currency that is not the Group’s functional currency. To manage their foreign exchange risk arising from future commercial transactions and recognises assets and liabilities, the Group uses external forward contracts to manage the net position in each foreign currency. (b) Commodity price risk Commodity price risk is the possibility of higher or lower costs due to changes in the prices of commodities, such as non-ferrous metals (e.g. aluminium), ferrous metals (e.g. steel and iron castings), energy (e.g. natural gas and electricity), and plastics/resins (e.g. polypropylene), which we use in the production of motor vehicles. Steel and resins are our two largest commodity exposures and are among the most difficult to hedge. Our purchasing department negotiates contracts to ensure continuous supply of raw materials. In some cases, these contracts stipulate minimum purchase amounts and specific prices, and as such, play a role in managing price risk. (c) Cash flow and fair value interest rate risk The Group’s income and operating cash flows are substantially independent of changes in market interest rates. As at 31 December 2007, substantially all of its borrowings were at fixed rate. The Group has not used any interest rate swaps to hedge its exposure to interest rate risk. As at 31 December 2007, if the interest rate of the Group’s bank borrowings had been increased/decreased by 10% and all other variables were held constant, the Group’s net profit and owners’ equity would decrease/increase by RMB392,000 for the year ended 31 December 2007. 67 Jiangling Motors Corporation, Ltd. FOR THE YEAR ENDED 31 DECEMBER 2007 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (All amounts in RMB unless otherwise stated) 3 Financial risk management (continued) 3.1 Financial risk factors (continued) (2) Credit risk The Group does not have a significant exposure to any individual customer or counterparty. Credit risk on receivables has already been accounted for in the financial statements as they are shown net of provisions for bad and doubtful debts. As at 31 December 2007, all the Group’s bank deposits are deposited in major financial institutions located in the PRC, which management believes are of high credit quality without significant credit risk. All the Group’s trade and other receivables have no collateral. However, the Group has policies in place to ensure that sales are made to customers with appropriate credit history and the Group performs periodic credit evaluations of its customers. The Group assesses the credit quality of each customer by taking into account its financial position, past experience and other factors. Credit limit and terms are reviewed on periodic basis, and the financial department is responsible for such monitoring procedures. In determining whether allowance for bad and doubtful debts is required, the Group takes into consideration the aging status and the likelihood of collection. In this regards, the directors of the Company are satisfied that the risks is minimal and adequate allowance for doubtful debts, if any, has been made in the financial statements after assessing the collectability of individual debts. Further quantitative disclosures in respect of the impairment of trade and other receivables are set out in Note 11. (3) Liquidity risk Prudent liquidity risk management implies maintaining sufficient cash and marketable securities, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions. Due to the dynamic nature of the underlying businesses, the Group aims to maintain flexibility in funding by keeping committed credit lines available. The table below analyses the Group’s financial liabilities into relevant maturity groupings based on the remaining period at the balance sheet to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. Balances due within 12 months equal their carrying balances, as the impact of discounting is not significant. Less than 1 Between 1 and Between 2 year 2 years and 5 years Over 5 years RMB ‘000 RMB ‘000 RMB ‘000 RMB ‘000 At 31 December 2007 Bank borrowings 40,088 478 1,435 7,175 Trade and other payables 2,110,445 113,410 41,629 3,314 2,150,533 113,888 43,064 10,489 At 31 December 2006 Bank borrowings 122,108 511 1,534 8,182 Trade and other payables 1,756,914 38,759 24,190 3,365 1,879,022 39,270 25,724 11,547 68 Jiangling Motors Corporation, Ltd. FOR THE YEAR ENDED 31 DECEMBER 2007 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (All amounts in RMB unless otherwise stated) 3 Financial risk management (continued) 3.2 Capital risk management The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. Consistent with others in the industry, the Group monitors capital on the basis of the gearing ratio. This ratio is calculated as borrowings divided by total capital. Total capital is calculated as equity, as shown in the combined balance sheets, plus borrowings. The gearing ratios at 31 December 2006 and 2007 were as follows: 31 December 2007 31 December 2006 RMB’000 RMB’000 Total borrowings 49,176 132,335 Total equity 3,583,498 3,127,659 Total capital 3,632,674 3,259,994 Gearing ratio 1.35% 4.06% 3.3 Fair value estimation The carrying amounts of the Group’s financial assets including cash and cash equivalents, deposits in approved financial institutions, trade and other receivables; and financial liabilities including trade and other payables, short-term borrowings, approximate their fair values due to their short maturities. The face values less any estimated credit adjustments for financial assets and liabilities with a maturity of less than one year are assumed to approximate their fair values. In assessing the fair value of non-traded financial instruments, the Group uses a variety of methods and makes assumptions that are based on market conditions existing at the balance sheet date. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate available to the Group for similar financial instruments. 69 Jiangling Motors Corporation, Ltd. FOR THE YEAR ENDED 31 DECEMBER 2007 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (All amounts in RMB unless otherwise stated) 4 Critical accounting estimates and judgements Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. 4.1 Critical accounting estimates and assumptions The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, rarely equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are outlined below. (1) Depreciation and amortisation The Group’s management determines the estimated residual value, useful lives and related depreciation / amortisation charges for the property, plant and equipment and intangible assets with reference to the estimated periods that the Group intends to derive future economic benefits from the use of these assets. Management will revise the depreciation and amortisation charge where useful lives are different to previously estimated, or it will write-off or write-down technically obsolete or non-strategic assets that have been abandoned or sold. (2) Impairment of non-financial assets Non-financial assets are reviewed for impairment in accordance with the accounting policy stated in Note 2H. The recoverable amount of an asset or a cash-generating unit is determined based on value-in-use calculations. The value-in-use calculation requires the entity to estimate the future cash flows expected to arise from the cash-generating unit and a suitable discount rate in order to calculate present value, which has been prepared on the basis of management’s assumptions and estimates. Detailed sensitivity analyses have been performed and management is confident that the carrying amount of the relevant assets will be recovered in full. (3) Impairment of trade and other receivables Provision for impairment of trade and other receivables is determined based on the evaluation of collectibility of trade and other receivables. A considerable amount of judgment is required in assessing the ultimate realisation of these receivables, including the current creditworthiness, the past collection history of each customer and the current market condition. (4) Inventories Management estimates the net realisable value for inventory based primarily on the latest invoice prices less costs to sell or value in use. The Group carries out an inventory review on a product-by-product basis at each balance sheet date and make provision for impairment on obsolete and slow-moving items or write-downs inventories to net realisable value. (5) Provisions The Group provides warranties on automobile and undertakes to repair or replace items that fail to perform satisfactorily based on certain pre-determined conditions. Management estimates the related warranty claims based on historical warranty claim information including level of repairs and returns as well as recent trends that might suggest that past cost information may differ from future claims. 70 Jiangling Motors Corporation, Ltd. FOR THE YEAR ENDED 31 DECEMBER 2007 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (All amounts in RMB unless otherwise stated) 4 Critical accounting estimates and judgements (continued) 4.1 Critical accounting estimates and assumptions (continued) (5) Provisions (continued) Factors that could impact the estimated claim information include the success of the Group’s productivity and quality controls, as well as parts and labour costs. Any increase or decrease in the provision would affect profit or loss in future years. (6) Pension benefits The present value of the pension obligations depend on a number of factors that are determined on an actuarial basis using a number of assumptions. Any changes in these assumptions will impact the carrying amount of pension obligations. Key assumptions for pension obligations are based in part on current market conditions. Additional information is disclosed in Note 17. (7) Taxation The Group is subject to various taxes in the PRC, e.g. profit tax, value added tax, consumption tax, etc. Significant judgment is required in determining the provision for these taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Group recognises liabilities for anticipated tax issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from amounts that were initial recorded, such differences will impact the tax provisions in the period such determination is made. Deferred income tax assets relating to certain temporary differences are recognised as management considers it is probable that future taxable profit will be available against which the temporary differences can be utilised. Where the expectation is different from the original estimate, such differences will impact the recognition of deferred tax assets and tax in the periods in which such estimate is changed. As at 31 December 2007, the Group has deferred tax assets in the amount of approximately RMB107,902,000. To the extent that it is probable that taxable profit will be available against which the deductible temporary differences will be utilised, deferred tax assets are recognised for temporary differences arising from impairment provisions taken on inventory and receivables, deferred income and retirement benefit obligations. In March 2007, the PRC Government passed the China Corporate Income Tax Law (“CIT Law”). Under the CIT Law, the enterprise income tax (“EIT”) for domestic invested enterprises and foreign invested enterprises are combined into one and the new EIT rate is 25%, which will become effective 1 January 2008. The new EIT rate of 25% will be gradually effective in a 5 years period for enterprises that currently enjoying low tax rates due to various tax incentive programs granted by tax authorities. According to the Notice of enterprise income tax rate transition regulation issued by the State Council of the PRC, the Group will apply 18% EIT rate in 2008, 20% in 2009, 22% in 2010, 24% in 2011 and 25% in 2012. The increment in tax rate rendered a further increase of deferred tax asset in the amount of approximately RMB20,638,000 (Note 24). 71 Jiangling Motors Corporation, Ltd. FOR THE YEAR ENDED 31 DECEMBER 2007 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (All amounts in RMB unless otherwise stated) 5 Property, plant and equipment Plant and Motor At 1 January 2006 Buildings Machinery Vehicles Moulds Others RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Cost 629,535 1,509,304 50,279 623,582 697,509 Accumulated depreciation and impairment (126,053) (1,000,263) (26,695) (532,399) (452,999) Net book amount 503,482 509,041 23,584 91,183 244,510 Year ended 31 December 2006 Opening net book amount 503,482 509,041 23,584 91,183 244,510 Additions 4,059 9,377 3,468 488 19,789 Acquisition of a subsidiary 292 357 89 - 244 Transfers 1,735 187,576 3,447 2,469 45,601 Disposals (4,518) (623) (390) - (395) Other deduction - - - - - Impairment charge (Note 21,27) (1,417) (3,710) (7) - (2,139) Depreciation charge (Note 21,27) (15,608) (123,353) (6,017) (31,001) (79,473) Closing net book amount 488,025 578,665 24,174 63,139 228,137 At 31 December 2006 Cost 626,590 1,696,579 53,667 616,446 749,325 Accumulated depreciation and impairment (138,565) (1,117,914) (29,493) (553,307) (521,188) Net book amount 488,025 578,665 24,174 63,139 228,137 Year ended 31 December 2007 Opening net book amount 488,025 578,665 24,174 63,139 228,137 Additions - - - - 1,400 Transfers 31,538 117,471 7,218 89,713 142,651 Disposals (2,880) (1,142) (86) - (626) Other deduction - - - - - Impairment charge (Note 21,27) - (56) - - (278) Depreciation charge (Note 12,27) (15,114) (98,245) (5,520) (28,420) (72,359) Closing net book amount 501,569 596,693 25,786 124,432 298,925 At 31 December 2007 Cost 654,535 1,806,859 59,923 706,159 886,340 Accumulated depreciation and impairment (152,966) (1,210,166) (34,137) (581,727) (587,415) Net book amount 501,569 596,693 25,786 124,432 298,925 72 Jiangling Motors Corporation, Ltd. FOR THE YEAR ENDED 31 DECEMBER 2007 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (All amounts in RMB unless otherwise stated) 5 Property, plant and equipment (continued) In connection with the Group’s reorganisation in 1993, the Group’s property, plant and equipment were revalued on 31 December 1992 by Zhonghua (Shenzhen) Certified Public Accountants on a depreciated replacement value basis. The opening accumulated depreciation of the revalued assets was computed using depreciation rates as stipulated by the State regulations, which are generally consistent with those applied by the Group for the preparation of its financial statements. Since this was a special purpose valuation conducted for the purposes of the formation of a joint stock limited company, this became deemed costs of the Company’s property, plant and equipment. Subsequent revaluations have not been performed and all further additions have been recorded at cost. For the year ended 31 December 2007, depreciation expense of approximately RMB194,216,000 (2006: RMB227,477,000) has been charged in cost of goods sold, RMB1,845,000 (2006: RMB1,641,000) in selling and marketing costs and RMB23,597,000 (2006: RMB26,334,000) in administrative expenses. 6 Lease prepayment Lease prepayments represent the Group’s interests in land which are held on leases of 50 years. The movements are as follows: 31 December 31 December 2007 2006 RMB’000 RMB’000 Opening net book amount 143,289 146,765 Amortisation charge (Note 21,27) (3,476) (3,476) Closing net book amount 139,813 143,289 Cost 175,560 175,560 Accumulated amortisation (35,747) (32,271) Net book amount 139,813 143,289 All amortisation expenses have been charged in administrative expenses. 73 Jiangling Motors Corporation, Ltd. FOR THE YEAR ENDED 31 DECEMBER 2007 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (All amounts in RMB unless otherwise stated) 7 Intangible assets After-sale management model Software Other Total RMB’000 RMB’000 RMB’000 RMB’000 Year ended 31 December 2006 Opening net book amount - - - - Acquisition of a subsidiary 36,978 - 1,600 38,578 Amortisation charge (Note 21,27) (1,540) - (67) (1,607) Closing net book amount 35,438 - 1,533 36,971 At 31 December 2006 Cost 36,978 - 1,600 38,578 Accumulated amortisation (1,540) - (67) (1,607) Net book amount 35,438 - 1,533 36,971 Year ended 31 December 2007 Opening net book amount 35,438 - 1,533 36,971 Addition - 5,632 - 5,632 Amortisation charge (Note 21,27) (6,164) (185) (267) (6,616) Closing net book amount 29,274 5,447 1,266 35,987 At 31 December 2007 Cost 36,978 5,632 1,600 44,210 Accumulated amortisation (7,704) (185) (334) (8,223) Net book amount 29,274 5,447 1,266 35,987 After-sale management model was obtained through acquisition of all equity interests of Jiangxi Fujiang After-Sales Services Co., Ltd. (“Jiangxi Fujiang”) in September 2006. All amortisation expenses have been charged in administrative expenses. 74 Jiangling Motors Corporation, Ltd. FOR THE YEAR ENDED 31 DECEMBER 2007 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (All amounts in RMB unless otherwise stated) 8 Investments in associates (a) Movements of investment in associate are set out as follows: 31 December 31 December 2007 2006 RMB’000 RMB’000 At beginning of the year 16,120 21,245 Share of results of associates (Note 27) 7,257 5,634 Dividends received (5,613) (3,314) Transfer - (7,445) At end of the year 17,764 16,120 In March 1996, the Company entered into a Sino-foreign equity joint venture agreement with Visteon International Holding Co., Ltd. (“Visteon”) to form Jiangxi Fuchang Climate Systems Co., Ltd. (“Jiangxi Fuchang”). The tenure of Jiangxi Fuchang is 30 years, and its principal activities include manufacture and sale of air-conditioners and spare parts for motor vehicles. Jiangxi Fuchang has a registered capital of USD5.6 million, of which Visteon has an 80.85% interest and the Company has the remaining 19.15% interest. Jiangxi Fuchang is regarded as a 19.15% owned associate of the Company. Jiangxi Fujiang is a Sino-foreign equity joint venture with a registered capital of USD 4.4 million, of which Ford Motors Company (“Ford”) has an 80% interest and the Company has the remaining 20% interest. Jiangxi Fujiang’s principal activity includes after-sales services. In September 2006, the Group acquired the 80% equity interest in Jiangxi Fujiang as owned by Ford. Thereafter, the Group took on all the business and operations of Jiangxi Fujiang and Jiangxi Fujiang was liquidated on 31 December 2006 and no longer be managed as an associate of the Company. (b) The Group’s share of assets, liabilities, revenue and results of its associates are as follows: 31 December 31 December 2007 2006 RMB’000 RMB’000 Total assets 25,864 22,116 Total liabilities (8,100) (5,996) Net assets 17,764 16,120 Year ended 31 December 2007 2006 RMB’000 RMB’000 Revenue 39,034 34,810 Profit for the year 7,257 5,634 75 Jiangling Motors Corporation, Ltd. FOR THE YEAR ENDED 31 DECEMBER 2007 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (All amounts in RMB unless otherwise stated) 9 Deferred income tax assets Deferred income taxes are calculated in full on temporary differences under the liability method using applicable tax rate as stated in Note 4.1(7). The movements on the deferred income tax assets account are as follows: 31 December 31 December 2007 2006 RMB’000 RMB’000 At beginning of the year 74,814 58,698 Credit to income statement (Note 24) 33,088 16,116 At end of the year 107,902 74,814 Depreciation Provision for Retirement of property, impairment of benefits Accrued plant and assets obligation expenses equipment Others Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 At 1 January 2006 5,790 11,269 37,659 - 3,980 58,698 Credited/(charged) to the income statement (1,156) (1,823) 13,694 6,237 (836) 16,116 At 31 December 2006 4,634 9,446 51,353 6,237 3,144 74,814 Credited/(charged) to the income statement 777 4,517 19,312 3,533 4,949 33,088 At 31 December 2007 5,411 13,963 70,665 9,770 8,093 107,902 The amounts shown in the balance sheet include the followings: 31 December 31 December 2007 2006 RMB’000 RMB’000 Deferred tax assets to be recovered after more than 12 months 15,016 11,800 10 Inventories 31 December 31 December 2007 2006 RMB’000 RMB’000 Raw materials 516,599 331,452 Work in progress 70,059 67,295 Finished goods 279,418 196,970 866,076 595,717 The cost of inventories recognised as expenses and included in cost of sales amounted approximately RMB6,349,780,000 (2006: RMB5,812,482,000). 76 Jiangling Motors Corporation, Ltd. FOR THE YEAR ENDED 31 DECEMBER 2007 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (All amounts in RMB unless otherwise stated) 11 Trade and other receivables 31 December 31 December 2007 2006 RMB’000 RMB’000 Trade receivables 260,626 229,711 Less: Provision for impairment of receivables (1,303) (1,149) Trade receivables – net 259,323 228,562 Notes receivables 310,387 88,818 Prepayments 55,169 107,981 Other receivables 17,751 12,573 642,630 437,934 Refer to Note 30 for details of receivables from related parties. The carrying amounts of accounts receivable approximate their fair values. Movements on the provision for impairment of trade receivables are as follows: 31 December 31 December 2007 2006 RMB’000 RMB’000 At beginning of the year (1,149) (3,279) Provision for impairment of receivables (154) (565) Receivables written-off during the year as uncollectible - 2,695 At end of the year (1,303) (1,149) Trade receivables that are less than three months past due are not considered impaired. As at 31 December 2007, trade receivables of RMB7,025,000 (2006: RMB2,276,000) were past due but not impaired. These trade receivables have been collected till reporting date. The aging analysis of these trade receivables is as below: 31 December 31 December 2007 2006 Up to three months 7,025 2,276 The maximum exposure to credit risk at the reporting date is the carrying value of each class of receivable mentioned above. The group does not hold any collateral as security. 12 Held-to-maturity investment As at 31 December 2006, held-to-maturity investments represented marketable securities of approximately RMB19,895,000 with an interest rate of 2.3% per anmum. All of these investments were maturated and disposed during the year ended 31 December 2007. 77 Jiangling Motors Corporation, Ltd. FOR THE YEAR ENDED 31 DECEMBER 2007 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (All amounts in RMB unless otherwise stated) 13 Cash and cash equivalents 31 December 31 December 2007 2006 RMB’000 RMB’000 Cash at bank and in hand 1,011,923 893,275 Short-term bank deposits (a) 1,094,989 1,274,950 2,106,912 2,168,225 As of 31 December 2007, the Group had cash deposits of approximately RMB85,770,000 (2006: RMB77,175,000) placed with Jiangling Motor Group Finance Company (“JMCF”) (Note 30 (iii)). The interest rates range from 0.72% to 2.61% per annum (2006: 0.72% to 1.62%). JMCF, a non-bank financial institution, is a 100% owned subsidiary of JMCG. (a) Short-term bank deposits have maturities within 12 months and can be withdrawn at the discretion of the Group without any restriction. 14 Share capital and share premium Number of shares Share (thousands) Share capital premium Total RMB’000 RMB’000 RMB’000 At 31 December 2007 and 31 December 2006 863,214 863,214 816,609 1,679,823 The total authorised number of ordinary shares is 863,214,000 (2006: 863,214,000) with a par value of RMB1 per share (2006: RMB 1 per share). All issued shares are fully paid. In January 2006, the Company implemented the share reform scheme (the “Share Reform Scheme”) in accordance with relevant PRC regulations after which the Company’s shares would become tradable in the stock market. With the approval from State-Owned Assets Supervision and Administration Committee of Guozichanquan [2006] No. 36, the shareholders of the Company approved the Share Reform Scheme on 16 January 2006. On 25 January 2006, the change on the nature of the shares relating to the Share Reform Scheme was approved by the Ministry of Commerce of the PRC of Shangzipi [2006] No. 387. According to the Share Reform Scheme, registered tradable A-share shareholders of the Company as at 13 February 2006 received cash consideration of RMB13.40 per 10 shares on 14 February 2006, and subsequently these previously non-tradable A shares would be tradable with conditions. 78 Jiangling Motors Corporation, Ltd. FOR THE YEAR ENDED 31 DECEMBER 2007 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (All amounts in RMB unless otherwise stated) 15 Other reserves Statutory Statutory surplus reserve public Reserve Others fund (a) welfare fund fund (b) Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 At 1 January 2006 204,503 72,847 18,627 - 295,977 - Profit appropriation 63,022 - - - 63,022 - Reclassification 72,847 (72,847) - - - - Acquisition of additional interests in an associate - - - 7,416 7,416 At 31 December 2006 340,372 - 18,627 7,416 366,415 - Profit appropriation 75,916 - - - 75,916 At 31 December 2007 416,288 - 18,627 7,416 442,331 (a) In accordance with the relevant laws and regulations in the PRC and Articles of Association of the Company, it is required to appropriate 10% and 5%-10% of its annual net profit, after offsetting any prior years’ losses as determined under the PRC GAAP, to the statutory surplus reserve fund and statutory public welfare fund respectively before distributing the net profit. When the balance of the statutory surplus reserve fund reaches 50% of the Company’s share capital, any further appropriation is at the discretion of shareholders. The statutory surplus reserve fund can be used to offset prior years’ losses, if any, and may be converted into share capital by issuing new shares to shareholders in proportion to their existing shareholders or by increasing the par value of the shares currently held by them. The fund is non-distributable except for liquidation situation. Pursuant to the Articles of Association of the Company, approximately RMB75,916,000 was appropriated to the statutory surplus reserve fund from the net profit for the year ended 31 December 2007. (b) The Group owned 20% equity interests in Jiangxi Fujiang prior to 30 September 2006 and has been accounted for as an associate of the Group. On 30 September 2006, the Group acquired the remaining 80% equity interests in Jiangxi Fujiang. Thereafter, Jiangxi Fujiang became wholly owned by the Group. In this connection, the difference between the carrying amount of Jiangxi Fujiang and the attributable share of the fair value of Jiangxi Fujiang before this acquisition is recorded as "other reserve" in 2006. 79 Jiangling Motors Corporation, Ltd. FOR THE YEAR ENDED 31 DECEMBER 2007 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (All amounts in RMB unless otherwise stated) 16 Borrowings 31 December 31 December 2007 2006 RMB’000 RMB’000 Current Bank borrowings - secured 478 256 - unsecured 39,610 121,852 40,088 122,108 Non-current Bank borrowings - secured 9,088 10,227 Total borrowings 49,176 132,335 Bank borrowings of USD1,309,683 (equivalent to approximately RMB9,566,000) (2006:USD1,342,425, equivalent to approximately RMB10,483,000) were guaranteed by JMCF (Note 30 (v)). The interest rate of bank borrowings is ranging from 1.50% to 6.10% per annum (2006: 1.50% to 6.23%). The fair value of borrowings approximates their carrying values. The maturity of non-current borrowings is as follows: 31 December 31 December 2007 2006 RMB’000 RMB’000 Between 1 and 2 years 478 511 Between 2 and 5 years 1,435 1,534 Over 5 years 7,175 8,182 9,088 10,227 The carrying amounts of the Group’s borrowings are denominated in the following currencies: 31 December 31 December Currency 2007 2006 RMB’000 RMB’000 RMB 25,000 75,000 US dollar 24,176 57,335 49,176 132,335 The group has the following undrawn borrowing facilities: 31 December 31 December 2007 2006 RMB’000 RMB’000 Fixed rate – Expiring within one year 154,774 130,000 80 Jiangling Motors Corporation, Ltd. FOR THE YEAR ENDED 31 DECEMBER 2007 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (All amounts in RMB unless otherwise stated) 17 Retirement benefits obligations The amount of early retirement and supplemental benefit obligations recognised in the balance sheet is as follows: 31 December 31 December 2007 2006 RMB’000 RMB’000 Present value of defined benefits obligations Defined benefit obligations 85,292 85,805 Unrecognised past service cost (601) - Liability on the balance sheet 84,691 85,805 The movements of early retirement and supplemental benefit obligations for the year ended 31 December 2007 and 2006 are as follows: 31 December 31 December 2007 2006 RMB’000 RMB’000 At beginning of the year 85,805 97,236 For the year -Current service cost 74 - -Interest Cost 2,933 3,634 -Payment (15,547) (16,455) -Past service cost 11,760 - -Actuarial losses/(gains) (334) 1,390 At end of the year 84,691 85,805 Current 14,990 16,455 Non-current 69,701 69,350 84,691 85,805 The material actuarial assumptions used in valuing these obligations are as follows: (1) Discount rate adopted: 4.5% (2006: 3% to 3.15%) (2) The salary and supplemental benefits inflation rate of retiree, early-retiree and employee at post: 0% to 5% (2006: 0%) (3) Mortality: average life expectancy of residents in the PRC. Based on the assessment and IAS 19, the Group estimated that, at 31 December 2007, a provision of RMB84,691,000 is sufficiently to cover all future retirement-related obligations. Obligation in respect of retirement benefits of RMB84,691,000 is the present value of the unfunded obligations, of which the current portion amounting to RMB14,990,000 (2006: RMB16,455,000) has been included under current liabilities. 81 Jiangling Motors Corporation, Ltd. FOR THE YEAR ENDED 31 DECEMBER 2007 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (All amounts in RMB unless otherwise stated) 18 Warranty provisions The movements on the warranty provisions are as follows: 31 December 31 December 2007 2006 RMB’000 RMB’000 At beginning of the year 104,738 103,508 Charged for the year 81,271 67,833 Utilised during the year (79,099) (66,603) At end of the year 106,910 104,738 The above represents the warranty costs for repairs and maintenance, which are estimated based on present after-sale service policies and prior years’ experience on the incurrence of such cost. The warranty period is the sooner of two years and fifty thousand kilometres since the motor vehicles are sold to consumer. 19 Trade and other payables 31 December 31 December 2007 2006 RMB’000 RMB’000 Trade payables 982,396 819,252 Amount due to an associate (Note 30) 35,037 36,568 Amount due to related parties (Note 30) 537,557 421,520 Payroll and welfare payable 125,407 117,462 Dividend payables 4,567 9,659 Other payables 425,502 361,871 Other accrual related to sales 158,332 56,896 2,268,798 1,823,228 20 Sales The Group principally derives its turnover from the manufacture, assembly and sale of automobiles, related spare parts and components, and sales are made principally in the PRC. Sales represent the total invoiced value of goods supplied to customers, net of returns and allowances. Accordingly, no segment information is presented. 82 Jiangling Motors Corporation, Ltd. FOR THE YEAR ENDED 31 DECEMBER 2007 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (All amounts in RMB unless otherwise stated) 21 Expenses by nature Year ended 31 December 2007 2006 RMB’000 RMB’000 Raw materials and consumables used 5,751,467 5,229,142 Employee benefit expenses (Note 22) 418,375 350,520 Depreciation on property, plant and equipment (Note 5) 219,658 255,452 Impairment charges of property, plant and equipment (Note 5) 334 7,273 Repairs and maintenance expenditure on property, plant and equipment 79,408 53,941 Research and development expenditure 259,678 236,977 Amortisation of lease prepayment (Note 6) 3,476 3,476 Amortisation of intangible assets (Note 7) 6,616 1,607 Impairment for write-down of inventory 2,050 7 Impairment for/(reversal of) receivables and other receivables 80 (428) Others 775,281 679,543 Total cost of sales, distribution costs and administrative expenses 7,516,423 6,817,510 22 Employee benefit expenses Year ended 31 December 2007 2006 RMB’000 RMB’000 Wages and salaries 323,135 273,272 Social security costs 19,876 15,336 Pension costs − defined contribution plans 27,741 25,372 Pension costs − defined benefit plan (Note 17) 14,433 5,024 Others 33,190 31,516 418,375 350,520 The employees of the Group participated in a retirement benefit plan organised by the municipal and provincial governments under which the Group was required to make defined contributions monthly to this plan. In addition, the Group also paid certain pension subsidies to certain retired employees. In accordance with the Group’s early retirement programs, the Group was also committed to make periodic benefit payments to certain early-retired employees until they reach their legal retirement ages. 83 Jiangling Motors Corporation, Ltd. FOR THE YEAR ENDED 31 DECEMBER 2007 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (All amounts in RMB unless otherwise stated) 23 Finance income and cost Year ended 31 December 2007 2006 RMB’000 RMB’000 (a) Finance income Interest income on bank deposits 45,325 38,515 Interest income on credit sales 11,014 9,543 56,339 48,058 (b) Finance cost Interest expense on bank loans (4,617) (6,528) Bank charges (751) (1,361) (5,368) (7,889) Net finance income 50,971 40,169 24 Taxation (a) Enterprise income tax (“EIT”) The Company is subject to the PRC EIT and local income tax. As the Company is qualified as a domestic enterprise in encouraged industries and approved by the relevant tax authorities, the Company is entitled to a preferential EIT rate of 15% and is exempted from local income tax. Jiangling Isuzu Motor Corporation, Ltd. (“Jiangling Isuzu”), a subsidiary of the Company, is qualified as a foreign investment production enterprise. Accordingly, the applicable EIT rate is 15% and it is exempted from local tax. Under the CIT Law passed in March 2007, the EIT for domestic enterprises and foreign invested enterprises are combined into one and the new EIT rate is 25%, which will become effective on 1 January 2008. The new EIT rate of 25% will be gradually effective in a 5 years periods, the Group applicable tax rate was stated in Note 4.1(7). The amounts of income tax expense charged to the income statements represented: Year ended 31 December 2007 2006 RMB’000 RMB’000 Current tax (124,913) (115,232) Deferred tax (Note 9) 33,088 16,116 (91,825) (99,116) 84 Jiangling Motors Corporation, Ltd. FOR THE YEAR ENDED 31 DECEMBER 2007 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (All amounts in RMB unless otherwise stated) 24 Taxation (continued) (a) Enterprise income tax (“EIT”) (continued) The difference between the actual income tax charge in the income statements and the amounts which result from applying the enacted tax rate to profit before income tax can be reconciled as follows: Year ended 31 December 2007 2006 RMB’000 RMB’000 Profit before tax 860,878 747,550 Tax calculated at a tax rate of 15% (2006: 15%) (129,132) (112,132) Tax concessions 13,206 11,737 Expense not deductible for tax purposes (606) (1,359) Income not subject to tax 4,069 2,638 Effect of different tax rates applied for the periods in which the temporary differences are expected to reverse 20,638 - Tax charge (91,825) (99,116) (b) Value-added tax (“VAT”) Output VAT is levied at a general rate of 17% on the selling price of goods. Input VAT paid on purchase of goods can be used to offset the output VAT to determine the net VAT payable. (c) Consumption Tax (“CT”) The Group’s automobile sale is subject to CT at 5% on the selling price of goods. 25 Earnings per share Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during the years. Year ended 31 December 2007 2006 Profit attributable to equity holders of the Company (RMB ‘000) 753,445 623,197 Weighted average number of ordinary shares in issue (thousands) 863,214 863,214 Basic earnings per share (RMB per share) 0.87 0.72 Diluted earnings per share equals to basic earnings per share as there were no dilutive potential ordinary shares outstanding during the year ended 31 December 2007. 85 Jiangling Motors Corporation, Ltd. FOR THE YEAR ENDED 31 DECEMBER 2007 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (All amounts in RMB unless otherwise stated) 26 Dividends A final dividend for 2006 of RMB258,964,000(RMB0.3 per share) was paid in 2007. A final dividend for 2007 of RMB 3 per ten shares, amounting to a total dividend of RMB 258,964,200 is to be proposed at the Directors’ Meeting on 13 March 2008. These financial statements do not reflect this dividend payable. Jiangling Isuzu (a 75% subsidiary of the Company) paid a dividend of RMB217,000,000 in 2007. 27 Cash generated from operations Year ended 31 December 2007 2006 RMB’000 RMB’000 Profit for the year 769,053 648,434 Income tax (Note 24) 91,825 99,116 Depreciation (Note 5) 219,658 255,452 Amortisation of lease prepayment (Note 6) 3,476 3,476 Amortisation of intangible assets (Note 7) 6,616 1,607 Impairment charge of PPE (Note 5) 334 7,273 Impairment for/(reversal of) receivables and other receivables (Note 21) 80 (428) Impairment for write-down of inventory (Note 21) 2,050 7 (Gain)/loss on disposals of PPE (1,217) 3,702 Interest expense (Notes 23) 5,368 7,889 Interest income (Notes 23) (56,339) (48,058) Net foreign exchange transaction gain (4,369) (3,314) Share of profit of associates (Note 8) (7,257) (5,634) Income from held-to-maturity investment (1,456) - Changes in working capital (excluding the effects of acquisition and exchange difference on consolidation): - (Increase) / decrease in inventories (279,403) 24,895 - Increase in trade and other receivables (204,776) (74,077) - Increase in warranty provisions 2,172 1,230 - Increase in deferred income 3,143 2,536 - Increase in trade and other payables 423,474 354,401 - Decrease in pensions and other retirement benefits (1,114) (11,431) Cash generated from operations 971,318 1,267,076 In the cash flow statement, proceeds from disposal of property, plant and equipment comprise: Year ended 31 December 2007 2006 RMB’000 RMB’000 Net book amount 4,734 5,926 Gain (loss) on disposal of property, plant and equipment 1,217 (3,702) Proceeds from disposal of property, plant and equipment 5,951 2,224 86 Jiangling Motors Corporation, Ltd. FOR THE YEAR ENDED 31 DECEMBER 2007 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (All amounts in RMB unless otherwise stated) 28 Contingencies At 31 December 2007, the Group did not have any significant contingent liabilities. 29 Commitments (a) Capital commitments Capital expenditure contracted for at the balance sheet date but not recognised in the financial statements, comprises purchases of buildings, plant and machinery and additional investments in associates, are as follows: 31 December 31 December 2007 2006 RMB’000 RMB’000 Contracted but not provided for: Purchases of buildings, plant and machinery 198,900 461,301 (b) Royalty fee payable to a shareholder Pursuant to a joint development agreement entered into with Ford on 21 August 1995, and an amendment on 29 September 2000, Ford agreed to provide technical assistance to the Company for the production of automobiles. In return, the Company agreed to pay Ford the royalty fee with a total amount of USD40,000,000, and it is calculated based on 1.8% of sale value of Transit series automobiles. As at 31 December 2007, the Company has paid approximately USD32,316,000. The outstanding amount approximately USD7,684,000 will be paid in future but not recognised in the financial statement. 30 Related party transactions Related parties are those parties that have the ability to control the other party or exercise significant influence in making financial and operating decisions. Parties are also considered to be related if they are subject to common control. Jiangling Holdings Limited (“Jiangling Holdings”), which owns 41.03% of the Company’s shares, and Ford, which owns 30% of the Company’s shares, are major shareholders of the Company as at 31 December 2007. In addition, Chongqing Changan Automobile Corporation Ltd. (“Changan Auto”) and JMCG hold 50% equity interest of Jiangling Holdings, respectively. The following is a summary of the significant transactions carried out between the Group, its associates, JMCG and its subsidiaries, Ford, Isuzu-Motors Corporation of Japan (“Isuzu”) and their subsidiaries in the ordinary course of business during the year ended 31 December 2007: 87 Jiangling Motors Corporation, Ltd. FOR THE YEAR ENDED 31 DECEMBER 2007 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (All amounts in RMB unless otherwise stated) 30 Related party transactions (continued) i) Purchases of goods, provision of services Purchase of goods: Year ended 31 December 2007 2006 RMB’000 RMB’000 JMCG 338,418 499,083 Ford 286,991 205,050 JMCG Interior Trim Factory 232,949 201,086 JMCG Modification Factory 86,411 51,262 Jiangxi JMCG Industrial Co. 35,650 32,752 Jiangxi Jiangling Material Co. 27,769 21,855 Jiangxi Fuchang 125,667 133,182 Jiangxi Jiangling Chassis Company 283,231 2,894 Jiangling Forging Co., Ltd. - 8,061 Jiangling-Lear Interior Trim Factory 156,953 153,562 Jiangling Metal Casting Co. 16,507 16,449 Nanchang Gear Co., Ltd. 6,159 193,166 Jiangling Hua Xiang Auto Components Co. 572 63,603 Jiangling Auto Component Co. 7,619 4,135 Ford Trading Company 17,332 - JMCG Industrial Co. Shangrao Motor Parts Plant 5,450 5,019 JMCG Industry Co. Printing Plant 2,109 1,999 JMCG Special Purpose Vehicle Plant 968 1,915 GETRAG (Jiangxi) Transmission Company 230,897 - Ford Otosan Company 4,101 6,604 Nanchang JMCG Liancheng Auto Component Co. 32,018 - JMCG Hequn Costume Co., Ltd. 2,502 1,370 Others 675 5 1,900,948 1,603,052 88 Jiangling Motors Corporation, Ltd. FOR THE YEAR ENDED 31 DECEMBER 2007 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (All amounts in RMB unless otherwise stated) 30 Related party transactions (continued) i) Purchases of goods, provision of services (continued) Provision of services and others: Year ended 31 December 2007 2006 RMB’000 RMB’000 JMCG Import & Export Co., Ltd. - commission expenses 7,332 5,860 JMCG Construction & Development Co. - services 9,406 15,880 JMCG - services (a) 2,390 4,750 - rental expense 2,769 2,169 - other 128 102 Ford Otosan Company - services 2,476 3,230 Jiangxi JMCG Industrial Co. - services 5,657 - Getrag Ford Transmissions Gmbh - services 2,450 - Ford Motor (China) Co., Ltd. - services 747 1,127 Ford - services 27,896 32,573 JMCG Jiangxi Engineering Construction Co., Ltd. - services 46,423 20,083 Jiangling-Lear Interior Trim Factory - services 2,524 180 GETRAG (Jiangxi) Transmission Company - services 11,500 - JMCG Property Co. - services 1,275 973 Others 1,855 664 124,828 87,591 (a) JMCG bears the middle school and primary school educational fees of existing employees and certain retired employees' expenses of the Group, and provides services such as cable television. The related costs were borne by the Group according to agreed percentages as determined by headcount ratio of the Group and JMCG. Purchases of property, plant and equipment : Year ended 31 December 2007 2006 RMB’000 RMB’000 JMCG - 4,099 JMCG Modification Factory 616 3,860 Others 199 660 815 8,619 89 Jiangling Motors Corporation, Ltd. FOR THE YEAR ENDED 31 DECEMBER 2007 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (All amounts in RMB unless otherwise stated) 30 Related party transactions (continued) ii) Sales of goods and provision of services Sales of goods: Year ended 31 December 2007 2006 RMB’000 RMB’000 JMCG Import & Export Co., Ltd. 653,717 414,875 Jiangling Land Wind Vehicle Co., Ltd. - 50,343 JMCG Interior Trim Factory 47,040 59,407 JMCG Modification Factory 75,375 33,879 JMCG Property Co. 6,440 6,279 Jiangxi JMCG Industrial Co. 127,499 126,405 Jiangxi Jiangling Chassis Company 27,776 34,849 Nanchang Gear Co., Ltd. 6,083 51,086 Jiangling Hua Xiang Auto Components Co. 4,111 9,909 Jiangling Auto Component Co. - 13,324 Land Wind Sales Company 2,845 2,943 Jiangling Fu Da Auto Component Co. - 24,209 Jiangling Material Utilization Co., Ltd. 35,607 29,149 JMCG Special Purpose Vehicle Plant 4,443 1,115 Jiangling Holdings 168,488 124,918 GETRAG (Jiangxi) Transmission Company 66,662 - Nanchang JMCG Liancheng Auto Component Co. 10,767 - Others 1,858 2,206 1,238,711 984,896 Year ended 31 December Rental income: 2007 2006 RMB’000 RMB’000 Jiangxi Jiangling Material Co. 132 132 Others 63 103 195 235 90 Jiangling Motors Corporation, Ltd. FOR THE YEAR ENDED 31 DECEMBER 2007 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (All amounts in RMB unless otherwise stated) 30 Related party transactions (continued) iii) Balances arising from sales/purchases of goods/services Receivables from related parties: 31 December 31 December 2007 2006 RMB’000 RMB’000 Jiangxi JMCG Industrial Co. 13,551 8,001 JMCG Import & Export Co., Ltd. 19,052 32,326 JMCG Modification Factory 5,000 16,219 Nanchang Gear Co., Ltd. - 10,612 Jiangling Holdings 24,041 14,551 Jiangling Auto Component Co. - 2,029 Jiangling Material Utilization Co., Ltd. 3,148 - Others 955 21 65,747 83,759 Prepayment for construction in progress: 31 December 31 December 2007 2006 RMB’000 RMB’000 JMCG Import & Export Co., Ltd. 595 17,624 JMCG Jiangxi Engineering Construction Co., Ltd. 3,006 20,083 Others 475 787 4,076 38,494 91 Jiangling Motors Corporation, Ltd. FOR THE YEAR ENDED 31 DECEMBER 2007 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (All amounts in RMB unless otherwise stated) 30 Related party transactions (continued) iii) Balances arising from sales/purchases of goods/services (continued) Payables to related parties: 31 December 31 December 2007 2006 RMB’000 RMB’000 Jiangxi JMCG Industrial Co. 4,586 7,930 Ford 163,801 92,591 JMCG 59,584 90,713 JMCG Interior Trim Factory 41,798 39,861 JMCG Modification Factory 33,039 30,098 Jiangxi Fuchang 35,037 36,568 Jiangxi Jiangling Chassis Company 79,223 3,834 JMCG Import & Export Co., Ltd. 2,873 1,792 Jiangling-Lear Interior Trim Factory 58,387 62,951 Nanchang Gear Co., Ltd. 1,525 50,370 Jiangling Hua Xiang Auto Components Co. 572 19,706 Jiangling Metal Casting Co. 3,810 4,033 JMCG Industrial Co. Shangrao Motor Parts Plant 1,400 1,510 GETRAG (Jiangxi) Transmission Company 56,969 - Jiangxi Jiangling Material Co. 1,024 874 Jiangling Auto Component Co. 2,405 379 Nanchang JMCG Liancheng Auto Component Co. 10,697 - JMCG Jiangxi Engineering Construction Co., Ltd. 6,317 - Ford Motor (China) Co., Ltd. 2,602 2,637 Ford Otosan Company 2,320 9,876 Getrag Ford Transmissions Gmbh 2,286 - Others 2,339 2,365 572,594 458,088 92 Jiangling Motors Corporation, Ltd. FOR THE YEAR ENDED 31 DECEMBER 2007 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (All amounts in RMB unless otherwise stated) 30 Related party transactions (continued) iii) Balances arising from sales/purchases of goods/services (continued) Cash deposit in related parties: 31 December 31 December 2007 2006 RMB’000 RMB’000 JMCF(Note 13) 85,770 77,175 iv) Service fee paid to Ford, Ford Otosan Company and Jiangling Holdings for management staff Pursuant to an agreement between the Company and Ford in March 2005, some employees of Ford were assigned to the Company as management staff. In 2007, the Company paid approximately USD3,017,000 and RMB2,301,000 to Ford as service fee for these employees. Pursuant to an agreement between the Company, Ford and Ford Otosan Company in December 2006, some employees of Ford Otosan Company were assigned to the Company as management staff. In 2007, the Company paid approximately USD774,000 to Ford Otosan Company as service fee for these employees. Pursuant to an agreement between the Company and Jiangling Holdings in January 2007, some employees of Jiangling Holdings were assigned to the Company as management staff. In 2007, the Company paid approximately RMB579,000 to Jiangling Holdings as service fee for these employees. v) Guarantee As at 31 December 2007, bank loans of USD1,309,683 (equivalent to approximately RMB9,566,000) (2006: USD1,342,425, equivalent to approximately RMB10,483,000) were guaranteed by JMCF (Note 16). vi) Key management remuneration In 2007, the total remuneration of the key management was about RMB4,845,000. vii) Royalty fee As mentioned in Note 29 (b), pursuant to the joint development agreement, the Company commit royalty fee to Ford with a total amount of USD40,000,000. As at 31 December 2007, the Company has paid approximately USD32,316,000. The outstanding amount approximately USD7,684,000 will be paid in future. Pursuant to a development agreement between the Company and Ford. The Company commit royalty fee to Ford with the amount of 2.6% of V348 series automobiles net sale. As at 31 December 2007, the total amount of the royalty fee was approximately USD102,000 (equivalent to approximately RMB746,000) has not been paid. 93 Jiangling Motors Corporation, Ltd. FOR THE YEAR ENDED 31 DECEMBER 2007 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (All amounts in RMB unless otherwise stated) 30 Related party transactions (continued) viii) Transaction with other state-owned entities The Group’s largest shareholder is Jiangling Holdings, which was established by state-owned enterprises, Changan Auto and JMCG, with the equity interests of 50% and 50%, respectively. Jiangling Holdings is owned by Changan Auto, and the Group is thereby considered to be indirectly controlled by the PRC Government, which controls a substantial number of entities in the PRC. In accordance with IAS 24 “Related Party Disclosure”, state-owned enterprises and their subsidiaries, other than Changan Auto and its subsidiaries as well as JMCG and its subsidiaries, directly or indirectly controlled by the PRC Government are also deemed as related parties of the Group (“other state-owned entities”). For purpose of related party transactions disclosure, the Group has in place procedures to assist the identification of the immediate ownership structure of its customers and suppliers as to whether they are state-owned entities. Many state-owned entities have multi-layered corporate structure and the ownership structures change overtime. Nevertheless the Management believes that meaningful information relating to such kind of related parties transactions has been adequately disclosed. Transactions with other state-owned entities: Year ended 31 December 2007 2006 RMB’000 RMB’000 Purchase of goods 1,230,197 977,917 Purchase of fixed assets 53,961 56,892 Purchase of services 73,548 39,650 Sales of goods 5,845 4,139 Interest income 43,217 36,737 Interest expense 4,617 6,515 Borrowings 45,429 162,704 Repayment of borrowings 125,562 163,481 Balances with other state-owned entities: 31 December 31 December 2007 2006 RMB’000 RMB’000 Cash and cash equivalents 2,021,142 2,093,390 Borrowings 49,176 132,335 Trade and other receivables 37,974 88,056 Trade and other payables 184,484 145,672 94 Jiangling Motors Corporation, Ltd. FOR THE YEAR ENDED 31 DECEMBER 2007 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (All amounts in RMB unless otherwise stated) 31 Principal subsidiary As of the date of this report, the Group has the following subsidiary: Place and date of Percentage of equity Entity incorporation interest held Principal activities Jiangling Isuzu Nanchang, PRC / 75% Manufacture and sale of 10 March 1993 automobiles and spare parts 32 Events after the balance sheet date A final dividend for 2007 of RMB 3 per ten shares, amounting to a total dividend of RMB 258,964,200 is to be proposed at the Directors’ Meeting on 13 March 2008. 95 Chapter XI Catalog on Documents for Reference 1. Originals of 2007 financial statements signed by legal representative and Chief Financial Officer. 2. Originals of the Independent Auditor’s Reports signed by Independent accountants and stamped by the accounting firm. 3. Originals of all the documents and public announcements disclosed in newspapers designated by CSRC in 2007. 4. The Annual Report in the China GAAP. Board of Directors Jiangling Motors Corporation, Ltd. March 13, 2008 96