苏常柴Ｂ(200570)2008年年度报告（英文版）

Changchai Company, Limited Summary of Annual Report 2008 CHANGCHAI COMPANY, LIMITED ANNUAL REPORT 2008 April 2009 1 Changchai Company, Limited Summary of Annual Report 2008 Important Notes The Board of Directors, the Supervisory Committee as well as directors, supervisors and senior executives of Changchai Company, Limited (hereinafter referred to as “the Company”) warrant that this report does not contain any false or misleading statements or omit any material facts and all information set forth herein was authentic, accurate and complete. Director Xu zhenpin were absent from the Board meeting due to some reasons, and respectively entrusted Director Shi Jianchun to vote on his behalf. Jiangsu Gongzheng Certified Public Accountants Co., Ltd produced a standard unqualified Auditors’ Report for the Company. Person in charge of the Company Mr. Xue Guojun, person in charge of accounting affairs Mr. He Jianguang and person in charge of accounting firms Mr. Tang Jianzhong hereby confirm that the Financial Report enclosed in this Annual Report was authentic and complete. 2 Changchai Company, Limited Summary of Annual Report 2008 Contents I. Company Profile-------------------------------------------------------------------------------4 II. Summary of Financial Highlights and Business Highlights----------------------------5 III. Changes in Share Capital and Particulars about Shareholders------------------------7 IV. Particulars about Directors, Supervisors, Senior Executives and Employees-----10 V. Corporate Governance Structure----------------------------------------------------------14 VI. Shareholders’ General Meeting----------------------------------------------------------17 VII. Report of the Board of Directors--------------------------------------------------------18 VIII. Report of the Supervisory Committee-------------------------------------------------28 IX. Significant Events--------------------------------------------------------------------------30 X. Financial Report-----------------------------------------------------------------------------34 XI. Documents Available for Reference-----------------------------------------------------87 3 Changchai Company, Limited Summary of Annual Report 2008 I. Company Profile (I) Legal Name of the Company In Chinese: 常柴股份有限公司 In English: CHANGCHAI COMPANY, LIMITED Abbr.: CHANGCHAI CO., LTD. (II) Legal Representative: Mr. Xue Guojun (III) Secretary of the Board of Directors: Mr. Shi Jianchun Securities Affairs Representative: Mr. He Jianjiang Contact Address: No. 123, Huaide Middle Road, Changzhou, Jiangsu, China Tel: (86) 519-86603656-3155, (86) 519-86610041 Fax: (86) 519-86630954 E-mail: sjc000570@changchai.com, hjj000570@changchai.com (IV) Registered Address and Office Address: No. 123, Huaide Middle Road, Changzhou, Jiangsu, China Post Code: 213002 Internet Website: http://www.changchai.com.cn E-mail: cctqm@public.cz.js.cn (V) Newspapers Chosen for Disclosing Information of the Company: Securities Times and Ta Kung Pao The Place Where the Annual Report is Prepared and Placed: Secretariat of the Board Internet Website Designated by CSRC for Publishing the Annual Report of the Company: http://www.cninfo.com.cn (VI) Stock Exchange Listed with: Shenzhen Stock Exchange Short Form of the Stock: Suchangchai A Stock Code: 000570 Suchangchai B 200570 (VII) Other Relevant Information of the Company 1. Initial registration date: May 5, 1994; The registered institution with: Changzhou Municipal Administration Bureau for Industry and Commence 2. The changed registration date: Aug. 30, 2007 The registered institution with: Jiangsu Changzhou Provincial Administration Bureau for Industry and Commence 3. Registered No. of the business license for enterprise legal person: 3204001104784 4. Registered number of tax: 320401137155863 5. Name and address of the Certified Public Accountants engaged by the Company: Domestic: Jiangsu Gongzheng Certified Public Accountants Co., Ltd. Office address: 10/F, Yingtong Commerce Building, Changzhou, Jiangsu 4 Changchai Company, Limited Summary of Annual Report 2008 II. Summary of Financial Highlights and Business Highlights (I) Amount of total profit of this year and its breakdown Unit: RMB Yuan Items Amount Operating profit -88,039,113.16 Total profit -94,317,780.91 Net profit attributable to listed companies’ shareholders -83,993,014.91 Net profit after deducting non-recurring gains and losses attributable to listed companies’ shareholders -56,304,076.89 Net cash flow from operating activities -7,338,573.42 Note: Items of non-recurring gains and losses deducted Items Amount Gains and losses from disposal of non-current assets -696,556.98 Government subsidies recorded into gains and losses in current period 2,078,342.23 Gains and losses from debts restructuring 71,043.26 Gains and losses from changes of fair value of transaction financial assets and transaction financial liabilities, investment income from disposal of transaction financial assets, -37,395,000.00 transaction financial liabilities and financial assets available for sale Switching back impairment reserve of account receivable with single impairment test 7,501,105.20 Net non-operating income and expenses -8,223,380.70 Total -36,664,446.99 Less: Impact on income tax -8,975,508.97 Total -27,688,938.02 Difference of net profit under IFRS and PRC GAAP Items Net profit in 2008 Net assets at the end of 2008 Under PRC GAAP -83,993,014.91 1,155,221,162.41 Under IFRS -83,993,014.91 1,155,221,162.41 Difference No difference (II) Major accounting data and financial index over the past three years as ended the report period Unit: RMB Yuan Increase/decrease 2007 year-on-year (%) Items 2008 2006 Before the After the After the adjustment adjustment adjustment Operating income 1,908,283,161.97 2,042,027,051.07 2,042,027,051.07 -6.55 1,879,053,302.36 Total profit -94,317,780.91 233,959,642.84 233,959,642.84 —— 101,344,957.71 Net profit attributable to shareholders -83,993,014.91 168,116,392.28 168,116,392.28 —— 91,918,374.43 of listed company Net profit attributable to shareholders of listed company after deducting -56,304,076.89 136,604,433.75 -6,001,316.70 —— 100,664,688.07 non-recurring gains and losses Net cash flow arising from operation -7,338,573.42 93,259,316.60 93,259,316.60 —— 181,181,682.05 activities Increase/decrease 31 December 2007 year-on-year (%) 31 December 2008 31 December 2006 Before the After the After the adjustment adjustment adjustment Total assets 1,897,782,775.32 2,310,463,736.43 2,310,463,736.43 -17.86 1,951,517,075.99 Owners’ equity (shareholders’ equity) 1,147,886,088.12 1,483,136,395.02 1,483,136,395.02 -22.60 1,091,307,499.48 Share capital 374,249,551.00 374,249,551.00 374,249,551.00 0.00 374,249,551.00 5 Changchai Company, Limited Summary of Annual Report 2008 Increase/decrease 2007 year-on-year (%) 2008 2006 Before the After the After the adjustment adjustment adjustment Basic earnings per share -0.22 0.45 0.45 —— 0.25 Diluted earnings per share -0.22 0.45 0.45 —— 0.25 Basis earnings per share after deducting -0.15 0.37 -0.02 —— 0.27 non-recurring gain and loss Fully diluted return on equity -7.32% 11.34% 11.34% -18.66% 8.42% Weighted average return on equity -6.49% 11.92% 11.92% -18.41% 9.38% Fully diluted return on equity after -4.91% 9.21% -0.40% -4.51% 9.22% deducting non-recurring gain and loss Weighted average return on equity after -4.35% 9.69% -0.47% -3.88% 10.27% deducting non-recurring gain and loss Net cash flow per share arising from -0.02 0.25 0.25 —— 0.48 operating activities Increase/decrease 31 December 2007 year-on-year (%) 31 December 31 December 2008 Before the After the After the 2006 adjustment adjustment adjustment Net assets per share attributable to 3.07 3.96 3.96 -22.47 2.92 shareholders of listed company (III) Return on net assets and earnings per share calculated according to Compilation Rules for Information Disclosure by Companies Offering Securities to the Public No.9 (Revising in 2007 ) issued by CSRC. Supplementary Statement of Profit Return on net assets (%) Earnings per share (Yuan/share) Profit in the report period Fully diluted Weighted average Fully diluted Weighted average Net profit attributable to common shareholders of Listed Company -7.32% -6.49% -0.22 -0.22 Net profit attributable to common shareholders of Listed Company deducting non-recurring gains and losses -4.91% -4.35% -0.15 -0.15 6 Changchai Company, Limited Summary of Annual Report 2008 III. Changes in Share Capital and Particulars about Shareholders (I) Changes in share capital 1. Statement on changes in shares Before the change Increase/decrease for this time (+, -) After the change Capitalization Number of Proportion Issuance of of public Number of Proportion shares % new share Bonus reserve Other Subtotal shares % I. Shares subject to 98,926,846 26.43% -18,714,353 -18,714,353 80,212,493 21.43% moratorium 1. Shares held by the 98,919,346 26.43% -18,712,478 -18,712,478 80,206,868 21.43% State 2. Shares held by state-owned corporation 3. Other shares held by domestic investors Including: shares held by domestic corporation Shares held by domestic natural person 4. Shares held by foreign investors Including: shares held by foreign corporation Shares held by foreign natural person 5. Shares held by 7,500 0.00% -1,875 -1,875 5,625 0.00% senior executives II. Shares not subject to trading 275,322,705 73.57% 18,714,353 18,714,353 294,037,058 78.57% moratorium 1. RMB ordinary 175,322,705 46.85% 18,714,353 18,714,353 194,037,058 51.85% shares 2. Domestically listed 100,000,000 26.72% 0 0 100,000,000 26.72% foreign shares 3. Overseas listed foreign shares 4. Others III. Total shares 374,249,551 100.00% 0 0 374,249,551 100.00% 2. Changes in shares subject to moratorium Shares subject Shares subject shares subject Shares subject Reason for to moratorium to moratorium to moratorium Date of releasing Name of shareholder to moratorium conditional at the released in increased in moratorium at the year-end sales year-begin this year this year State-owned Assets 18,712,478 shares released Supervision and from moratorium on 30 Commitment Administration Jun. 2008 98,919,346 18,712,478 0 80,206,868 on share Commission of 80,206,868 shares will be reform Changzhou Municipal released from moratorium Government on 19 Jun. 2009 Frozen Abiding by the regulations Lu Gang 7,500 1,875 0 5,625 shares held of stock exchange by directors Total 98,926,846 18,714,353 0 80,212,493 3. Issuance and listing of shares (1) The Company had neither issued shares nor changed the share capital over the past three years ended the report period. 7 Changchai Company, Limited Summary of Annual Report 2008 (2) In the report period, the share capital of the Company remained unchanged. (3) There existed no inner employee’s shares in the Company. (II) About shareholder 1. Quantity of shareholders and particulars about shares held Total number of shareholders 71014 (including 52,598 shareholders of A-share and18,416 shareholders of B-share) Particulars about shares held by the top ten shareholders Proportion Shares Nature of Total shares Non-tradable Name of shareholders of shares pledged or shareholders held shares held held frozen 1. State-owned Assets Supervision and Administration Commission of State-owned 31.43% 117,631,824 80,206,868 56,137,432 Changzhou Municipal People’s shareholder Government Domestic 2. Wu Yingting 1.27% 4,740,748 0 Unknown natural person 3. LGT BANK IN Foreign LIECHTENSTEIN 0.58% 2,180,061 0 Unknown corporation AKTIENGESELLSCHAFT 4. Agricultural Bank of China Domestic —Zhongyou Core Prime Equity non-state-owned 0.49% 1,844,600 0 Unknown Securities Investment Fund corporation Domestic 5. Song Mingqin 0.28% 1,055,098 0 Unknown natural person Domestic 6. Changzhou Wujin Benniu non-state-owned 0.24% 900,000 0 Unknown Agricultural Machinery Factory corporation Domestic 7. Yang Hongmei 0.23% 879,241 0 Unknown natural person Domestic 8. Cheng Shize 0.21% 780,001 0 Unknown natural person Domestic 9. Chen Xinqiong 0.18% 673,800 0 Unknown natural person Domestic 10 Song Miaofang 0.18% 660,000 0 Unkown natural person Particulars about shares not subject to trading moratorium held by the top ten shareholders Shares held not subject to Name of shareholders Type of share trading moratorium 1. State-owned Assets Supervision and Administration A-share Commission of Changzhou Municipal People’s 37,424,956 Government 2. Wu Yingting A-share 4,740,748 3 、 LGT BANK IN LIECHTENSTEIN 2,180,061 B-share AKTIENGESELLSCHAFT 4. Agricultural Bank of China —Zhongyou Core Prime A-share Equity Securities Investment Fund 1,844,600 5. Song Mingqin A-share 1,055,098 6. Changzhou Wujin Benniu Agricultural Machinery A-share Factory 900,000 7. Yang Hongmei A-share 879,241 8. Cheng Shize A-share 780,001 9. Chen Xinqiong A-share 673,800 10. Song Miaofang A-share 660,000 It is unknown whether there was any associated relationship among the top ten tradable shareholders and among the top ten Explanation on associated relationship and shareholders not subject to moratorium, or whether there is any action-in-concert among the top ten shareholders action-in-concert among them as described by Measures for the Administrative of Disclosure of Shareholder Equity Changes. 8 Changchai Company, Limited Summary of Annual Report 2008 Note: (1) On 21 Aug. 2008, 56,137,432 shares, taking up 15% of total share capital of the Company, which was pledged to Industrial & Commercial Bank of China Ltd Changzhou Zhonglou Sub-branch by State-Owned Assets Supervision and Administrative Commission of Changzhou Municipal Government, was released from the pelage. Meanwhile, 56,137,432 shares, taking up 15% of total share capital of the Company, was pledged to Bank of Jiangsu Co., Ltd ChangZhou Branch. 2. Shares subject to moratorium held by the top ten shareholders and conditional sales Number of shares Date of Number of Name of shareholders holding shares Conditional No. subject to listing for additional shares subject to moratorium sales moratorium held trade could list for trade State-owned Assets Supervision and 19 Jun. Legal 1 Administration Commission of Changzhou 80,206,868 80,206,868 2009 commitment Municipal People’s Government 3. State-owned Assets Supervision and Administration Commission of Changzhou Municipal Government was the controlling shareholder of the Company as corporate organ. STATE-OWNED ASSETS SUPERVISION AND ADMINISTRATION COMMISSION OF CHANGZHOU MUNICIPLE PEOPLE’S GOVERNMENG 31.43% CHANGCHAI COMPANY, LIMITED 9 Changchai Company, Limited Summary of Annual Report 2008 IV. Particulars about Directors, Supervisors, Senior Executives and Employees (I) Basic information about directors, supervisors and senior executives: Shares Shares Reason Name Position Sex Age Office term held at held at at for year-begin year-end change Xue Guojun Chairman of the Board Male 45 13 Apr. 2007-13 Apr. 2010 Director, General Manager, He Jianguang Male 44 13 Apr. 2007-13 Apr. 2010 Chief Engineer Lu Jiaxiang Director Male 54 13 Apr. 2007-13 Apr. 2010 Director, Deputy General Shi Jianchun Manager, Secretary of the Male 46 13 Apr. 2007-13 Apr. 2010 Board Director, Deputy General Zhu Xinmin Male 59 13 Apr. 2007-13 Apr. 2010 Manager Director, Deputy General Xu Zhenping Male 52 13 Apr. 2007-13 Apr. 2010 Manager Yin Lihou Deputy General Manager Male 45 24 May 2007-13 Apr. 2010 Xu Yi Deputy General Manager Male 44 24 May 2007-13 Apr. 2010 Ni Shiyuan Deputy General Manager Male 52 24 May 2007-13 Apr. 2010 Qian Shufa Independent Director Male 52 13 Apr. 2007-13 Apr. 2010 He Yihua Independent Director Male 46 13 Apr. 2007-13 Apr. 2010 Lu Gang Independent Director Male 44 13 Apr. 2007-13 Apr. 2010 7500 7500 Chairman of the Supervisory Lv Weimin Committee, Secretary of Male 54 13 Apr. 2007-13 Apr. 2010 Party Committee Yuan Xiaodong Supervisor Female 46 5 May 2007-13 Apr. 2010 Ni Mingliang Supervisor Male 42 13 Apr. 2007-13 Apr. 2010 Lu Zhonggui Supervisor Male 41 13 Apr. 2007-13 Apr. 2010 Wu Keyun Supervisor Male 45 13 Apr. 2007-13 Apr. 2010 (II) Post or Current post of directors, supervisors, senior executives in shareholders’ companies or other units 1. Post in Shareholders’ unit Name Shareholders’ company Position Starting time of office term State-owned Assets Supervision and Administration Lu Jiaxiang Deputy Director Jun. 2007 Commission of Changzhou Municipal People’s Government State-owned Assets Supervision and Administration Yuan Xiaodong Chief Officer Nov. 2005 Commission of Changzhou Municipal People’s Government 2. Post in other units Name Other units Position Starting time of the office term Qian Shufa Nanjing University of Finance & Economics Dean 2006.6 He Yihua Jiangsu Zhongtian Assets Appraisal Office Co., Ltd. Chairman of the Board 1999.12 Lu Gang Jiangsu Changzhou Changlian Law Firm Director 2000.5 (III) Main work experience of the present directors, supervisors and senior executives in past five years. Xue Guojun, successively took the posts of Deputy Factory Director and Factory Director of Foundry Branch Factory of Changchai Company, Limited, Deputy General Manager and General Manager of Changchai Company, Limited. Now he acts as Chairman of the Board, Deputy Secretary of Party Committee of the Company. He Jianguang, successively took the posts of Technician and Deputy Section Chief of Design Section in Changzhou Diesel Engine Factory, Engineer of Products Development Division in Changzhou Diesel Engine Factory, Deputy Director of Joint Venture Office in Changchai 10 Changchai Company, Limited Summary of Annual Report 2008 Company, Limited, Director of the 2nd Board of Directors of Changchai Company, Limited, Deputy Director of Technology Center Changchai Company, Limited, Chief Engineer of the Company. Now he acts as Chairman of the Board, General Manager, and Chief Engineer of the Company. Lu Jiaxiang, successively took the posts of Deputy Section Chief of Propaganda Section and Office Manager in Changzhou Chemical Factory; Deputy General Manager of Changzhou Border Trade Development Corporation; Division Chief of Enterprise Administrative Division, Division Chief of Comprehensive Administration Division, Assistant Director and full-time Commissary in Changzhou Municipal Economic Committee; Deputy General Manager of Changzhou Textile State-owned Assets Operation Co., Ltd., Deputy Secretary of Party Committee, Secretary of the Discipline Inspection Committee and Deputy General Manager in Changzhou Electromechanical State-owned Assets Operation Co., Ltd. Now he acts as Deputy Director of State-owned Assets Supervision and Administration Commission of Changzhou Municipal Government, Director of the Company. Shi Jianchun, successively took posts of Teacher of Xi’an Polytechnic University, Deputy Director of Technology Reformation Office of Changzhou Diesel Engine Factory, Deputy Director of Changzhou Industry Promotion Planning Office, Deputy Director of Technology Reformation Office of Changzhou Municipal Economic Committee, Deputy Chief Engineer of Changchai Company, Limited, and General Manager of Changzhou Vehicle Co., Ltd. Now he acts as Director, Deputy General Manager and Secretary of the Board of the Company. Zhu Xinmin, successively took the posts of Deputy Secretary and Director of Box-body Factory and Section Chief of Sales Section of Wujin Diesel Engine Block Factory; Deputy Manager of Wujin Tractor Industry Company, Deputy Manager of Wujin Machinery Industry Company, Deputy Factory Director of Wujin Diesel Engine Block Factory, Assistant to General Manager of Changchai Company, Limited, General Manager of Changchai Yinchuan Diesel Engine Co., Ltd., Chairman of the Board of Changchai Yinchuan Diesel Engine Co., Ltd., Chairman of the Board of Changchai Group Import & Export Co., Ltd. Now he acts as Director and Deputy General Manager of the Company. Xu Zhenping, successively took the posts of Deputy Director of Jintan Diesel Engine Factory; Director, Deputy General Manager of Changchai Jintan Diesel Engine Co., Ltd, Director and Assistant to General Manager, General Manager of Sales Company of Changchai Company, Limited. Now he acts as Director, Deputy General Manager of the Company. Yin Lihou, successively took the posts of Deputy Secretary, Secretary of the Communist Youth League, Director of Human Resource Department of Changchai Company, Limited, Assistant to General Manager of Changchai Company, Limited. Now he acts as Deputy General Manager of the Company. Xu Yi, successively took the posts of Division Chief of Product Development Department; Deputy Section Chief and Section Chief of Technology Center, Assistant to General Manager of Changchai Company, Limited. Now he acts as Deputy General Manager of the Company. Ni Shiyuan, successively took the posts of Deputy Director of No.1 workshop of Foundry Branch Factory of Changzhou Diesel Engine Factory, Deputy Section Chief of Production Section of Changzhou Diesel Engine Factory; Deputy Director of Foundry Branch Factory of Changchai Company, Limited, Division chief of Material Management Department of Support Company of Changchai Company, Limited, Assistant to General Manager of Changchai Company, Limited. Now he acts as Deputy General Manager of the Company. Qian Shufa, successively took the posts of Deputy Secretary of Communist Youth League of Jiangsu College of Chemistry, Under-secretary of Propaganda Section of the College’s Party Committee, Director and Associate Professor of Social Science Department as well as Director and Professor of Business Administration Department in Jiangsu Petroleum Chemical University. Now he acts as Vice Dean of School of Economics in Nanjing University of Economy and 11 Changchai Company, Limited Summary of Annual Report 2008 Independent Director of the Company. He Yihua, successively took the posts of Clerk of Propaganda & Education Section Changzhou Municipal Finance and Tax Bureau, Officer of Education Section of Changzhou Municipal Bureau of Finance, Section Chief of Training Section of Changzhou Municipal Finance & Accounting Training Center, and Deputy Director of Changzhou Assets Appraisal Firm. Now he acts as Chairman of the Board, General Manager of Jiangsu Zhongtian Assets Appraisal Firm, and Independent Director of the Company. Lu Gang, successively took the posts of Clerk of Changzhou Municipal Justice Bureau, Lawyer of Changzhou No. 1 Law Firm, and Lawyer of Changzhou Union Law Firm. Now he acts as Director of Jiangsu Changzhou Changlian Law Firm and Independent Director of the Company. Lv Weimin, successively took the posts of Deputy Secretary of Communist Youth League, Vice Chairman of Labor Union and Chairman of Labor Union in Changzhou Diesel Engine Factory, Deputy Secretary of Party Committee, Secretary of Discipline Inspection Committee and Chairman of Federation of Trade Unions in Changchai Group Co., Ltd.; and Secretary of Party Committee in Changchai Company, Limited. Now he acts as Secretary of Party Committee of Changchai Company, Limited and Chairman of the Supervisory Committee of the Company. Yuan Xiaodong, successively took the posts of clerk, officer and Deputy Section Chief of Budget Section as well as Deputy Division Chief of Budget Division and Administration Division of Changzhou Municipal Bureau of Finance. Now he acts division chief of Check & Appraisal Division of State-owned Assets Supervision and Administration Commission of Changzhou Municipal People’s Government and supervisor of the Company. Wu Keyun, successively took the posts of Technician of Shanghai Water Pump Plant; Clerk of Preparing General Office of New Foundry Factory in Changzhou Diesel Engine Factory, officer and Assistant to Division Chief of Supervision and Auditing Division in Changchai Company, Limited. Now he acts as Deputy Director of Enterprise Management Department and Supervisor of the Company. Ni Mingliang, successively took the posts of Technician of Foundry Branch Factory in Changzhou Diesel Engine Factory, Cadre of Labor Union in Changchai Company, Limited. Now he acts as Vice Chairman of Labor Union and Supervisor of the Company. Lu Zhonggui, successively took the posts of worker in the No. 1 Factory of Changzhou Diesel Engine Factory, Cadre of Organization and Personnel Section and special Discipline Inspector of Supervision and Auditing Department in Changchai Company, Limited. Now he acts as special Discipline Inspector of Discipline Inspection Committee and Secretary of Organ Party General Branch as well as supervisor of the Company. (VI) Particulars about the annual remuneration 1. In 2008, the annual remuneration drawn by directors, supervisors and senior executives from the Company were paid on monthly according to the relevant provisions of wage management and rank standard established by the Company, and paid bonus at the end of the year based on the Company’s benefit situation and checking results. Both Mr. Lu Jiaxiang, director of the Company, and Mr. Yuan Xiaodong, supervisor of the Company, drew the payment from shareholders’ company. 2. About annul remuneration drew by Directors, Supervisors and Senior Executives Total annual remuneration Name Position (RMB’0000) Xue Guojun Chairman of the Board 25.12 He Jianguang Director, General Manager, Chief Engineer 25.24 Director, Deputy General Manager, Secretary of the Shi Jianchun 21.92 Board Zhu Xinmin Director, Deputy General Manager, 22.13 Xu Zhenping Director, Deputy General Manager 21.99 Yin Lihou Deputy General Manager 20.94 12 Changchai Company, Limited Summary of Annual Report 2008 Xu Yi Deputy General Manager 20.95 Ni Shiyuan Deputy General Manager 21.06 Qian Shufa Independent Director 5 He Yihua Independent Director 5 Lu Gang Independent Director 5 Chairman of the Supervisory Committee, Secretary Lv Weimin 25.30 of Party Committee Ni Mingliang Supervisor 7.96 Lu Zhonggui Supervisor 7.24 Wu Keyun Supervisor 7.50 Total 242.35 (V) Directors and supervisors who were elected or resigned office, name of senior executives who were engaged or dismissed and reasons for resign of directors and supervisors and dissmission of senior executives in the report period The Company held the 5th Meeting of the 5th Supervisory Committee on 19 Apr. 2008, at which reviewed and approved proposal on change of part supervisors. Supervisor Mr. Yan Gang left his post due to job transfer, and the Supervisory Committee nominated Ms. Yuan Xiaodong as candidate of supervisor of the Company. The Company held Shareholders’ General Meeting 2007 on 5 May 2008, at which reviewed and approved proposal on change change of part supervisors and elected Ms. Yuan Xiaodong as supervisor of the Company. (VI) About employees As at the end of 2008, the Company had totally 3510 employees registered in book, including 2861 production personnel; 60 salespersons; 130 technicians; 28 financial personnel, 288 administration personnel. Education Background: 8 staff with postgraduate degree; 211 staff hold university diploma; 256 staff hold college degree; 86 persons graduated from secondary technical school; 1179 staff graduated from senior high school and 1770 persons graduated from junior high school or lower. No costs of retirees need be paid by the Company. 13 Changchai Company, Limited Summary of Annual Report 2008 V. Corporation Governance Structure (I) Corporate Governance of the Company In the reporting period, in accordance with requirements of No. 28 public notice of China Securities Regulatory Commission and Jiangsu Securities Regulatory Bureau, the Company further implemented the special campaign to strengthen corporate governance. In order to consolidate the achievement of the special campaign for corporate governance and continue to promote the campaign, the Company carefully estimated the implementation of rectification report on the special campaign for Corporation Governance 2007 and effect of rectifying the problems which needs continuous to improve, and formulated further rectification plan. On the 9th meeting of 5th Board of Directors, Explanation on Relevant Problems in Rectification of Corporate Governance was examined and approved, which was submitted to Jiangsu Securities Regulatory Bureau and Shenzhen Stock Exchange respectively and published on Securities Times and Ta Kung Pao as well as http://www.cninfo.com.cn . In the reporting period, the Company constantly improved corporate governance structure and standardized operation of the Company. There was no difference between the actual status of corporate governance of the Company and the requirements of the normative documents of listed companies. (II) Duty performance of independent directors According to relevant provisions stipulated in laws and regulations, Guiding Opinions of Independent Directors of CSRC and Articles of Association, independent directors performed their duty earnestly, expressed the independent opinions on significant related transaction, remuneration of directors nomination and engagement of directors and senior executives, and significant events which other directors thought may harm the interests and rights of minority shareholders. Independent Directors played an active role in scientific decision-making of the Board of Directors and the operation and development of the Company. In the auditing process of the annual report, in accordance with the requirements of relevant documents from CSRC, the independent directors communicated thoroughly with the accounting firms and management staff of the Company to ensure that information disclosure of the annual report is authentic, accurate, complete and timely. 1. Particulars about Independent Directors attending the Board meeting Times of meetings Times of meeting Times of meetings Times of Meeting Name Note should be attended attended in person be attended by agent absent Qian Shufa 8 8 0 0 He Yihua 8 7 1 0 Lu Gang 8 8 0 0 2. There was no objection put forward by three independent directors on proposals from Boarding Meeting and other meetings. (III) Separation from the controlling shareholder in personnel, business, assets, organization and financing 1. In respect of personnel: the Company established special HR department, formulated independent labor personnel and remuneration system, assessed, trained, encouraged and punished the employees through strict regulations and systems. Engagement and dismission of the directors, supervisors and senior executives were performed in conformity with legal procedure. Directors, supervisors, senior executives and employees in all departments of the Company have taken no position in shareholders’ units. 2. In respect of business: the Company’s the production and operation, R&D and administration were completely independent with controlling shareholders. There was no horizontal competition in term of products with controlling shareholders. 14 Changchai Company, Limited Summary of Annual Report 2008 3. In respect of assets: the Company has independent production, auxiliary production system, auxiliary facilities, land use right, industrial property right and non-patent technology; established independent system of purchase and sale service. The assets are independent and integral and the property right is clear. 4. In respect of organization: the establishment of the Company’s organizations is independent and integral and the office address and the sites of production and operation of the Company are separated from the controlling shareholder. There existed neither affiliation relationship between the function departments of the Company and the holding shareholders nor mixed operation and offices. 5. In respect of business: the Company set up independent financing department, has independent accountants and bank account, paid taxes according to laws and has independent accounting settlement system and perfect financing management system. (IV) The establishment and perfect of internal control system 1. General appraisal of internal control of the Company The establishment of internal control system of the Company is basically complete, which can adapt to the requirements of the Company’s management staff and the demand for the Company’s development, provide reasonable guarantee for a true and fair financial statement, ensure the health operation of the Company’s various business activities and execution of the relevant laws and regulations of country and the internal of the departments. The Company’s various systems have been effectively implemented since their establishment. (1) Perfected corporate governance structure. In accordance with the requirements of the law and regulations, such as the Company Laws, the Company established and perfected rules and decision-making procedures of the Shareholders’ General Meeting, the Board of Directors, the Supervisory Committee and other governance organizations, and have fulfilled the duties stated in the Company Law and Articles of Association. (2) Standardized relationship between the Company and controlling shareholders. The Company is separated from the controlling shareholders in aspects of organization, personnel, assets, financing and business, which clarified that the shareholders only enjoy the right of investor in accordance with the requirements of the laws and regulations. (3) Organization structure of the Company: Based on its own operation, the Company has established related functional departments to suit for its management system structure, and made it clear the main duties of the various department. An internal control organization system of responsible to their own job, cooperative, restrain and highly related, which played an essential role in production organization, scale expansion, quality improvement, efficiency increase and safety insurance. (4) Senior executives of the Company are honest, cautious and conscientious, fair and upright, and stick to their principals. The Chairman of the Board and General Manager have taken long-term office in the Company. They are professional, good at leading, and able in explore and create. (5) Internal Audit: The Company set up Enterprise Management Department, which is responsible for internal audit work. It is important guarantee for creating a law-abiding, fair, righteous internal environment to strengthen internal audit supervision, and formed fine environment of combination of responsibilities and obligations and management supervision. 2. General appraisal on internal control of the Company expressed by the Supervisory Committee The Supervisory Committee considered that the Company established and perfected the rules on internal control which covered all parts and links of the Company in accordance with the relevant regulations of CSRC and Shenzhen Stock Exchange, basing on the principals of internal 15 Changchai Company, Limited Summary of Annual Report 2008 control and its actual status, which ensured the normal operation of the Company, protected safety and integrity of assts. Internal control organization of the Company was completed and internal audit department as well as personnel allocation was suitable, which ensured implementation of key activities of the internal control and full effective supervision. In 2008, the Company had not disobeyed the regulations of the Guidelines on Internal Control of Listed Companies and Internal Control System of Shenzhen Stock Exchange. 3. General appraisal on internal control of the Company expressed by independent directors The independent directors believed that the various internal control systems of the Company were in conformity with the requirements of state relevant laws and regulations. The key activities of internal control were carried out in line with regulations of the various internal control systems and strict, complete and effective of the internal control concerning subsidiaries of the Company, related transaction, external guarantee, use of raised capital, significant investment and information disclosure ensured the operation management of the Company, which was reasonable, complete and effective. (V) Appraisement and incentive mechanism for senior executives of the Company At the beginning of 2008, the Company confirmed Annual Remuneration Assessment Plan 2008 based on operation target proposed by the Board of Directors. The Board of Directors and Staff Representative Meeting carried out performance appraisal on senior executives in accordance with appraisal plan and the audited financial statements at the end of 2008, then encouraged or punished them according to appraisal result. 16 Changchai Company, Limited Summary of Annual Report 2008 VI. Shareholders’ General Meeting In the reporting period, the Company held Shareholders’ General Meeting once. The Annual Shareholders’ General Meeting 2007 was held on 5 May 2008, at which reviewed and approved the following events: 1. Report of the Board of Directors 2007; 2. Report of the Supervisory Committee 2007; 3. Annual Report 2007 and its Summary; 4. Profit Distribution Scheme 2007; 5. Resolution on Reengagement of Audit Institution of the Company 2008 and Remuneration for Audit; 6. Resolution on Replacement of Some Supervisors; Public notice on resolutions of the Shareholders’ General Meeting was published in Securities Times and Hong Kong Ta Kung Pao on 6 May 2008. 17 Changchai Company, Limited Summary of Annual Report 2008 VII. Report of the Board of Directors (I) Retrospection of operation of the Company in the reporting period 1. General status of operation during the reporting period In 2008, the Company sold various diesel engines amounting to 791,200 sets, down 28.13% year-on-year. Among which 708,400 sets were single cylinder diesel engines, down 30.2% year-on-year and 82,700 sets of multi-cylinder diesel engine, down 2.93% year-on-year. The Company realized independent export of 71,000 sets diesel engines, up 18% year-on-year and foreign exchange from export amounting to USD 20,280,000, up 48% year-on-year. Sales income including tax was RMB 211,600 million, down 8.7% year-on-year. The Company realized profit in 2008 amounting to RMB -94,320,000, net profit being RMB -83,990,000. During the report period, economic environment at home and abroad greatly changed, price of raw and auxiliary materials went up and labor cost increased in the first half year when demand of the agricultural machinery market declined sharply due to the world economic crisis in the second half year. Sales of single cylinder diesel engines, main products of the Company, dropped 30%, which leaded to loss of the main business. Meanwhile, income from 4.5 million shares of Foton Motor, which was held by the Company as transaction financial assets, accumulatively increased RMB 37.395 million during the report period due to change of fair value. Overall, macro-economic situation was complicated and changeful in the year 2008 and key economic indicators of the Company declined with different degree. In aspect of macro-economy, the government implemented tight monetary policy in the first half year; after the outbreak of the global financial crisis, the domestic real economy has suffered an unprecedented shock since September. There was a decline in the market of diesel, and a severe insufficient in the purchasing power, making the reflow of corporate sale income more difficult. Suppliers shut down their plants on a large scale, capital market fell dramatically, and the Company suffered a great suspended deficit in the market value of the shares of Foton Motor. In aspect of the development of the industry, the country has begun a tenacious battle of “energy conservation and emission reduction” and regulations on diesel technology were getting severe, which is unfavorable for the normal operation of the Company. However, with the constant development of the urbanization and continuous stimulation and guide of the subsidy policy for agricultural machinery for five years, traditional agricultural machinery products were accelerating to develop into modern agricultural equipments and the scale is being undertaken gradually. In 2008, the Company focused on implementation of exploiting diesel engine model 4B28TC GIII and 4F20 GIV, aimed at auxiliary light car and exploited electric controlled VE pump diesel engines with model 4D20TCI, 4D28TC and 4D28TCI which was in accordance with emission standard of GIV, continued to promote masterpiece project of single cylinder diesel engine, accelerated the access of series T and H single cylinder diesel engines into the market. In order to improve process quality of machine of multi-cylinder diesel engines, the Company introduced advance processing center from abroad and implemented processing base. Production workshop of 6000 m2 has been completed and equipments has been installing. Foundry equipments, chip production centre and grit processing project has been implementing as scheduled. 2. About main operations of the Company and its operation (1) In the reporting period, the breakdown of income from main operations of the Company classified according to product is as follows: Indexes Income from main operations Cost of main operations Profit rate of main operations Increase Increase Cost of main Proportion Increase Amount (RMB) year-on-year year-on-year operations (%) year-on-year (%) Product (%) (%) Diesels engine and 1,908,283,161.97 -6.55 1,750,367,812.85 -3.31 8.28 -26.58 fittings of diesels 18 Changchai Company, Limited Summary of Annual Report 2008 Total 1,908,283,161.97 -6.55 1,750,367,812.85 -3.31 8.28 -26.58 (2) In the reporting period, the breakdown of income from main operations of the Company classified according to area is as follows: Area Operating income (RMB) Operating profit (RMB) East China 845,796,487.45 -43,000,318.64 Northeast 94,294,711.46 -4,793,945.94 Southwest 183,826,629.76 -9,345,751.34 Central China 178,246,124.84 -9,062,038.30 North China 140,793,106.31 -7,157,925.72 Northwest 56,919,623.65 -2,893,795.36 South China 107,818,832.52 -5,481,512.66 Export 123,993,341.92 -6,303,825.20 (3) Main suppliers and clients of the Company: In 2008, the purchase amount of the top five suppliers of the Company took up 16.15% of annual amount of purchase and the sales amount of the top five clients took up 25.26% of the total amount of sales of the Company. 3. Particulars about changes in the Company’s assets structure and expenses in the reporting period compared with the same period of last year: Unit: RMB Proportion in Proportion in At the end of At the end of Increase/decrease Items total assets at the total assets at the 2008 2007 (%) end of 2008 (%) end of 2007(%) Tradable financial assets 21,645,000.00 1.14% 59,040,000.00 2.56% -63.34% Accounts receivable 204,208,036.51 10.76% 219,326,634.59 9.49% -6.89% Other receivable 28,063,069.38 1.48% 33,677,504.81 1.46% -16.67% Inventories 323,777,713.81 17.06% 304,592,189.76 13.18% 6.30% Financial asset available for 174,033,250.00 9.17% 473,960,000.00 20.51% -63.28% sale Long-term equity investment 93,179,255.93 4.91% 93,026,880.79 4.03% 0.16% Fixed assets 364,125,318.48 19.19% 388,310,743.34 16.81% -6.23% Construction in process 69,705,698.81 3.67% 22,442,799.22 0.97% 210.59% Long-term loans 51,200,000.00 2.70% 29,700,000.00 1.29% 72.39% Long-term loans 42,000,000.00 2.21% 0 0.00% —— Increase/decrease compared with the 2008 2007 year 2007(%) Operating expense 85,553,636.23 61,760,030.60 38.53% Administrative expense 151,346,365.52 151,698,903.69 -0.23% Financial expense -20,339,625.55 -10,461,861.87 —— Income tax -8,927,876.79 64,328,150.43 —— Analysis on reason for changes: (1) Large decrease of transaction financial assets and financial assets available for sale was because in the reporting period, shares of Fonto Motor held by the Company decreased RMB 8.31 per share in secondary market in 2008. (2) Construction in process increased over the year-begin because the Company implemented project of technical center trial-production workshop and foundry innovation. (3) Short-term loans increased over the year-begin because short-term loan of shareholding subsidiaries increased during the report period. (4) Long-term loans increased over the year-begin because loan for technical innovation of technical center trial-production workshop of parent company. (5) Financial expense decreased over last year because interest income of current period 19 Changchai Company, Limited Summary of Annual Report 2008 increased and interest expense decreased. (6) Income tax decreased over last year because the Company was in loss in current period and fair value shares of Fonto Motor held by the Company, which was listed as transaction financial assets, dropped by a large margin and related referred income tax expense switched back. 4. Analysis on cash flow arising from operating activities, investing activities and financing activities of the Company in the report period: Unit: RMB Items 2008 2007 Explanation on changes I. Net cash flows arising from operating activities -7,338,573.42 93,259,316.60 Cash received from selling commodities and providing labor 2,196,863,357.32 2,294,133,757.17 services Cash paid for purchasing commodities and receiving labor service 1,925,886,102.96 1,924,932,026.55 II. Net cash flows arising from investing activities -58,921,764.46 97,264,387.32 There are investment income from sales of Cash received from investment income 14,427,317.06 104,629,275.45 shares in 2007 , but none in 2008. Net cash paid for purchasing fixed, intangible and other long-term 75,118,400.31 99,113,810.65 assets III. Net cash flows arising from financing activities 23,305,270.42 -200,036,783.08 Cash received from loans 105,700,000.00 122,700,000.00 Cash paid for settling debts Parent Company repaid 50,700,000.00 286,700,000.00 all loans from banks in 2007. Cash paid for dividend and profit distributing or interest paying 31,694,729.58 36,036,783.08 5. About operations of major affiliated companies and controlling subsidiary companies: Unit: RMB’0000 Proportion of Registered Net Name of companies Main products shares holdings Total assets capital profit (%) Changchai Wanzhou Diesel Diesel engine 3500.00 60% 11606.69 8.81 Engine Co., Ltd Changchai Benniu Diesel Parts and fittings of 3378.64 75% 11413.50 24.76 Engine Fittings Co., Ltd diesel engine Nanjing Changli Agro-engine Agricultural 500.00 100% 503.99 -0.75 Fitting Market Co., Ltd machinery products (II) Prospect of the Company 1. Development tendency of industry and opportunities of future development: The central government has consecutively issued Document No.1 for in last five years on the rural work, attaching great importance to the work relating to agriculture, rural areas and farmers. Compensation for the purchase of agricultural engines increased year by year, from RMB 2 billion in 2007 to RMB 4 billion in 2008, and it will reach as much as RMB 10 billion in 2009. Implementation of such policies of strengthening the agriculture and favoring the farmers has maintained the continuous and stable development of the agricultural engines industry. In 2009, the country formulated a series of plans to promote the economy, especially programs to adjust and develop steel industry and car industry, actualized value added tax transformation and fuel tax and fees reform, enhanced execution of the energy conservation and pollution reduction policy. All these policies and measures will promote the adjustment and development of industrial economy, highlight the advantage of the high-tech enterprises, and are good for the development of advanced environmental protection and energy-saving diesel engines. The world financial crisis intensified the external environment of the enterprise and uncertain factors increased, which is unfavorable for export of the Company. 20 Changchai Company, Limited Summary of Annual Report 2008 There are highlights to expect on the development of the agricultural engines industry in the future: Firstly, machinery related to foodstuff safety; secondly, adjustment on agricultural structure brought development of agricultural engines; thirdly, establishment of infrastructure brought great opportunity; fourthly, in order to realize sustainable development of agriculture, there will be good chance for development of equipment on rebuilding grassland and comprehensively utilizing straw. 2. Development Strategy and New Product Development of the Company The Company has instituted the developmental strategy “base on farm machinery and make strong momentum”, paying attention to the development of both the single-cylinder and multi-cylinder diesel engines, as well as both automobile and industry, offering green power for wonderful life. In the development of single-cylinder diesel engines, the Company will focus on developing the EH series, a new generation of single-cylinder diesel engines, by fully draw on the concept and technology in developing multi-cylinder diesel engines. It will also speed up the market access and overall covering of H series single-cylinder diesel engines, so that H series become the competitive products in the single-cylinder diesel engines. Besides, vertical and air-cooled single-cylinder diesel engines as well as small agricultural machinery products support like horticultural machinery and rotary cultivator, will be developed by making full use of the given product resources. As for the overseas markets, a special technical supporting system shall be established to develop export products and further explore the overseas market, with the concept of pursuing height and change. In the development of multi-cylinder diesel engines, while paying close attention to EuropeⅡ and III technology, the Company will focus on applying the automobile supporting technology, such as internal compression and common rail technology, noise reduction technology, to industrial machinery support, which is not designed to use on the road. A type of high power diesel engines in real sense designed not for road use will be developed by investigation and planning. The technical development model will be a road of integrated innovation. The Company will keep close relationship with well-known R&D institutions at home and abroad, engine support customers (main engine plants) and scientific research institutions, so as to introduce, digest and assimilate advanced foreign technologies. Especially, the Company will make use of the strategic cooperation with the British company Lisite to expand the international market as well as its export sales in this year. 3. Operation Plan in 2009 The business target of the Company in 2009: sales of diesel engine product amount to 900,000, creating a sales income of RMB 2 billion and earning foreign exchange of USD 20 million through export. To further promote the healthy development of the Company, ensure the realization of strategic development target, the Company will carry out the work in the following aspects based on the new situation and change of the Company’s development: (1) To continuously implement efficient sales, actively seek new room for market development. (2) To speed up the pace of new products R&D as well as commercialization, so as to put the new products into mass production and carry out related supporting work as soon as possible. (3) To further promote key projects construction and have technical reform investment sufficiently fulfill its efficiency. 21 Changchai Company, Limited Summary of Annual Report 2008 (4) To conduct strict control over quality cost, reduce quality loss, establish and improve the actual application platform for quality cost control procedure, as well as an effective quality efficiency mechanism. (5) To enhance refined management and overall budget management with cost as the focus. (III) Investment in the Reporting Period 1. No refinancing of the Company existed during the previous three years. 2. No investment project invested with non-raised proceeds existed in the reporting period. (IV) Routine Work of the Board of Directors 1. The Meetings and Resolutions of the Board of Directors in the Reporting Period: The Board of Directors of the Company held 8meetings in the reporting period. 1) The 6th meeting of the 5th Board of Directors was held on Jan. 11, 2008, which mainly reviewed and approved the following items: (1) Guideline and target of operation in 2008; (2) Annual report on the work of General Manager 2007; (3) Resolution on examination and verification of senior management personnel’s remuneration in 2008; (4) Resolution on implementation of the examination and verification of senior management personnel’s remuneration in 2008; (5) Resolution on cooperation with AVL Shanghai technical center to develop the Europe IV Project of 4F20TCI diesel engines; (6) Resolution on canceling part of accounts receivable after verification. 2) The 7th meeting of the 5th Board of Directors was held on Apr. 9, 2008, which mainly reviewed and approved the following items: (1) Annual Report of 2007 and Its Summary; (2) Annual report on the work of the Board 2007; (3) Preplan on profit distribution 2007; (4) Resolution on continuous appointment of the 2008 audit institute and audit expanse; (5) Resolution on implementing the technical reform project of foundry workshop; (6) Procedure of reviewing and approving the annual finance statement by the Audit Committee under the Board; (7) Work System of Independent Directors with regard to Annual Reports; 3) The 8th meeting of the 5th Board of Directors was held on Apr. 19, 2008, which mainly reviewed and approved the first quarterly report 2008. 4) The 9th meeting of the 5th Board of Directors was held on Jul. 15, 2008, which mainly reviewed and approved the explanation on relevant problems about the corporate governance rectification. 5) The 10th meeting of the 5th Board of Directors was held on Jul. 28, 2008, which reviewed and approved the following items: (1) Self-check report on the fund transactions and appropriations with big shareholders and other affiliated parties; (2) Revised draft of the Articles of Association; (3) Internal control system of finance (monetary capitals). 6) The extraordinary meeting of the 5th Board of Directors was held on Aug. 5, 2008, which 22 Changchai Company, Limited Summary of Annual Report 2008 reviewed and approved the following items: (1) Resolution on canceling part of accounts receivable after verification. 7) The 11th meeting of the 5th Board of Directors was held on Aug. 6, 2008, which reviewed and approved the Semi-annual Report 2008 and its Summary. 8) The 12th meeting of the 5th Board of Directors was held on Oct. 23, 2008, which reviewed and approved the following items: (1) The Third Quarterly Report 2008 (2) Resolution on providing guarantee for a loan of RMB 5 million by Changchai Beiniu Diesel Engine Fitting Co., Ltd 2. Execution on resolutions of Shareholders’ General Meeting by the Board of Directors: In the reporting period, the Board of Directors performed responsibilities seriously, operated the Company normatively, made decisions prudently, improve legal person governance structure continuously, and strengthen inner control and management consecutively, so that the Company maintained a good operation. On May 5, 2008, the Shareholder’s General Meeting 2007 examined and approved the Profit Distribution Plan 2007, deciding to distribute cash dividends RMB 0.75 to every 10 shares. Notice on implementation of 2007 dividends was published by the Company on May 10, 2007. 3. Summary Report on Responsibility Performance of the Audit Committee under the Board of Directors: During the reporting period, the Audit Committee under the Board of Directors performed its duty according to the diligent and responsible principle, based on relevant regulations such as the Company Law, Guidelines for the Corporate Governance of Listed Companies, the Articles of Association as well as provisions in the Enforcement Regulation of the Audit Committee under the Board of Director of the Company. (1) Major works of Audit Committee in reporting period 1) Periodically examined the working plan and execution of inner control of the Company; 2) Communicated with the accountant office on plan and content of audit; 3) Urged the accountant office to summit report as scheduled; 4) The Audit Committee verified the financial statement of the Company before the audit and after the issuance of preliminary opinion by the accountant office. After it communicated with the accountant office on some important items as well as major accounting estimation items, audit adjustment items and important accounting policies which were likely to have potential influence on the financial statement, it considered that the financial statements reflected the overall situation of the Company authentically, accurately and completely. 5) Submitted summary report on annual audit of the Company conducted by the accountant office to the Board of Directors. 6) Advised to continue the appointment of Jiangsu Gongzheng Tianye Certified Public Accountants Co., Ltd as the audit institution of the Company in 2009. (2) Written opinions on financial statements of the Company issued by the Audit Committee 1) On Mar. 11, 2009, the Audit Committee examined the financial statements of the Company before audit and issued written opinions of examination as follows: The Audit Committee examined financial statements of the Company and considered that the statements reflected 23 Changchai Company, Limited Summary of Annual Report 2008 current financial status of the Company in all important aspects. The Audit Committee kept communication with auditors and examined the financial statements of the Company again after the auditor issued preliminary opinions. 2) On Apr. 8 , 2009, the Audit Committee examined the financial statement of the Company, after the certified public accountants had issued preliminary opinion, and issued written opinions as follows: The financial statement of the Company was made in accordance with New Accounting Standards for Enterprise and relevant regulations of financial system, faithfully reflected the financial status of the Company as of December 31, 2008, as well as business achievement and cash flows in 2008 in all important aspects. The financial statement is true and accurate. 3) With regard to the financial statement 2008 audited, on Apr. 13, 2009, the Audit Committee made the following resolution: the Audit Committee reviewed the financial statement 2008 that it is audited by auditors, and believed that the said financial statement faithfully reflected the financial status of the Company as of December 31, 2008, as well as business achievement and cash flows in 2008 in all important aspects. It agreed to submit the statement to the Board for examination and approval. (3) 2008 Annual Report on the Audit of the Company by the accountant office According to the annual audit plan, which was decided by consultation between the Audit Committee and Jiangsu Gongzheng Tianye Certified Public Accountants Co., Ltd, Jiangsu Gongzheng Tianye Certified Public Accountants Co., Ltd began the audit on Mar. 4, 2008, based on the actual situation of the Company, so as to ensure the 2008 annual audit will be accomplished as scheduled. Auditors communicated with management personnel of the Company and members of the Audit Committee on consolidation of financial statements, accounting adjustment, accounting policy and other accounting work to be improved, which helped both parties knew more about the operation, finance transaction and implementation of New Accounting Standards for Business Enterprise in the Company. With such understanding, the annual audit accountants would make more mature judgment when issuing fair audit conclusion. The Audit Committee held that, the accountant office conducted audit strictly in accordance with provisions stipulated in Independent Auditing Standards for CPA of the PRC. The time of audit was sufficient, and the auditors with excellent ability to practice were deployed reasonably. The issued audit report fully reflected the financial status of the Company as of December 31, 2008, as well as business achievement and cash flows in 2008, and the audit conclusion is in accordance with actual situation of the Company. (4) Resolution on Reappointment of the Accountant Office The meeting of the Audit Committee was held on Apr. 13, 2008, which deliberated the issue of audit institution appointment in 2009, and the opinions were as follows: Jiangsu Gongzheng Tianye Certified Public Accountants Co., Ltd had accomplished the audit of the Company 2008; the audit report reflected the actual financial status of the Company 2008 objectively and fairly. The Audit Committee was satisfied with the audit conducted by Jiangsu Gongzheng Tianye Certified Public Accountants Co., Ltd and decided to reappoint it as audit institution of the 24 Changchai Company, Limited Summary of Annual Report 2008 Company in 2009. Resolution on this decision is agreed and submitted to the 14th meeting of the 5th Board of Directors for deliberation and approval. 4. Summary Report on Responsibility performance of Remuneration & Appraisal Committee under the Board of Directors The Remuneration & Appraisal Committee under the Board of Directors is composed of three Directors, including two Independent Directors and one Inner Director. Independent Director assumes the position of Chairman of the Committee. In the reporting period, the Remuneration & Appraisal Committee raised the resolution on implementation of the examination and verification of senior management personnel’s remuneration in 2008, based on the fulfillment of main financial indicators and operation targets in 2008, which were determined in the Contract for Appraisal of Senior Management Personnel in 2008. The Contract was reviewed and approved by the 6th meeting of the 5th Board of Directors on Jan. 11, 2008. In the reporting period, based on relevant regulations, the Remuneration & Appraisal Committee examined the remuneration of the Company’s senior management personnel in 2008 and issued opinions as follows: The Remuneration & Appraisal Committee held that, the remuneration of the Company’s senior management personnel in 2008 were in accordance with provisions in Contract for Appraisal of Senior Management Personnel in 2008, as well as the laws, regulations and rules of the Company. (V) Profit Distribution Preplan or Preplan of Converting Capital Reserve into Share Capital: According to the audit by Jiangsu Gongzheng Tianye Certified Public Accountants Co., Ltd, the net profit attributable to owners of parent company for the year 2008 was RMB -83,993,014.91, as well as the total profit available for distribution as of the year was RMB 234,663,873.15. Due to the Company’s deficit in 2008, the Board of Directors intends to make profit distribution as below: neither profit distribution nor capitalization of capital reserve. The balance of remained profit of RMB 234,663,873.15 shall be carried down to the next year. The profit distribution preplan will be submitted to Shareholders’ General Meeting 2008 for deliberation and approval. The cash dividends in the recent three years: Unit：(RMB) Yuan Net profit belonging to holders Percentage of cash dividends in Amount of cash of the parent company in the net profit belonging to holders of Year dividends (tax consolidated financial the parent company in the included) statement consolidated financial statement 2007 28,068,716.33 168,116,392.28 16.70% 2006 28,068,716.33 91,918,374.43 30.54% 2005 18,712,477.55 101,355,911.52 18.46% The profits (RMB 74,849,910.21) which the Company has accumulatively distributed in cash in the recent three years takes up 62.13% of the average annual distributable profits (RMB 120,463,559.41) realized in the recent three years. (VI) The Projects Measured by Fair Value and the Possession of Foreign Financial Assets: Unit: RMB (Yuan) 25 Changchai Company, Limited Summary of Annual Report 2008 The profit and The accumulative The decrease of losses on the changes in fair Items Initial amount withdrawal in Closing amount changes in fair value included in the period value equity Financial Assets: Including：1. The financial assets measured by fair value, whose variations 59,040,000.00 -37,395,000.00 21,645,000.00 are accounted into current profits and losses Including ：Ramified financial assets 2. Financial assets 474,486,000.00 -300,452,750.00 174,033,250.00 available for sale Sub-total of Financial 533,526,000.00 -37,395,000.00 -300,452,750.00 195,678,250.00 Assets Financial Liabilities: Fixed assets for investment Capitalized biological assets Others Total 533,526,000.00 -37,395,000.00 -300,452,750.00 195,678,250.00 1. The Company’s major project measured by fair value is the 46,125,000 legal person shares of Foton Automobile Co., Ltd, which was acquired by the Company through asset-replacement with the Changchai Group. All of the legal person shares now become tradable with its cost of RMB 1.16 per share. 2. On Jun. 4, 2007, the Board of Directors held an extraordinary meeting, which agreed to sell 10 million shares of Foton Automobile. The 10 million shares were measured by fair value and its variations were accounted into current profits and losses, while the remaining 36,125,000 shares were treated as financial assets available for sales, whose variation were accounted into profits and losses. 3. Until Dec. 31, 2007, the Company had sold 5.5 million shares in total. In 2008, the Company did not sell the remaining 4.5 million shares measured by fair value, and its variation of RMB -37,395,000.00 were accounted into profits and losses in 2008. The measurement by fair value is based on the variation of initial price and closing price of the share. 4. The Company handled the aforesaid financial assets based on relevant provisions about approval procedure of assets sales in Listing Rules. After the Board of Directors held meetings to fully discuss and approve the handling, the investment and development department was entrusted to put it into detailed practice. Besides, the Company exerted strict control over the authority of examination and approval, the transaction procedure, and fund transfer etc., so that no behaviors breached the laws and regulations. (VII) The Company does not hold any foreign financial assets or financial liabilities. (VIII) Other Issues 1. The newspapers of information disclosure designated by the Company in 2008 were Securities Times and Ta Kung Pao, which remained unchanged. 2. Jiangsu Gongzheng Certified Public Accountants Co., Ltd that provided annual report audit service for the Company merged with Jiangsu Tianye Certified Public Accountants Co., Ltd for 26 Changchai Company, Limited Summary of Annual Report 2008 business development, and thereby it changed its name into Jiangsu Gongzheng Tianye Certified Public Accountants Co., Ltd since Dec. 15, 2008. 27 Changchai Company, Limited Summary of Annual Report 2008 VIII. Report of the Supervisory Board During the reporting period, according to the relevant laws and regulations such as the Company Law and the Articles of Association of the Company, the Supervisory Board conscientiously performed its duties by strictly and thoroughly supervising the major decisions made by the Board of Directors and the management group, the Company’s production and operation, and its financial management, which promoted the Company’s standardized operation and ensured the veracity and legitimacy of its economic operation. (Ⅰ) The meetings of the Supervisory Board The meetings of the Supervisory Board and their resolutions during the report period are as follows: 1. The 5th meeting of the 5th Supervisory Board of the Company was convened on 9 Apr. 2008, which examined and approved the following: (1) 2007 Annual report and its summary; (2) 2007 work report of the Supervisory Board; (3) Overall evaluation of the Company’s internal control status (4) Proposal on the replacement of certain supervisors 2. The 6th meeting of the 5th Supervisory Board was held on 21 Apr. 2008, where the 1st Quarter Report for 2008 was reviewed and approved. 3. The 7th meeting of the 5th Supervisory Board was held on 6 Aug. 2008, where the Semi-annual Report for 2008 and its summary was reviewed and approved. 4. The 8th meeting of the 5th Supervisory Board was convened on 23 Oct. 2008, where the 3rd Quarter Report for 2008 was reviewed and approved. (Ⅱ) Independent opinions from the Supervisory Board 1. About the Company’s operation according to laws: The Supervisory Board was of the opinion that the Board of Directors and other management personnel of the Company conscientiously and responsibly performed their duties in strict accordance with the Company Law of the P.R.C., Securities Law of the P.R.C. and the Articles of Association of the Company; and that a sound internal control system was basically in shape with a legitimate procedure of decision-making. 2. About the inspection of the Company’s financial position: Upon a thorough inspection of the Company’s financial system and financial position, the Supervisory Board was of the opinion that the Company’s financial report for 2008 factually represented the Company’s financial position and operating results; and that the auditor’s opinion and assessment on relevant matters issued by the CPA firm was considered objective and fair. 3. About associated transactions of the Company: During the reporting period, the Company conducted no unfair associated transactions to harm the interests of the Company and its shareholders. 4. About the Supervisory Board’s opinion on the Company’s self-evaluation of its internal control 28 Changchai Company, Limited Summary of Annual Report 2008 In accordance with relevant regulations of China Securities Regulatory Commission and Shenzhen Stock Exchange, as well as the basic principles of internal control combined with the Company’s actual situation, the Company set up a sound internal control system covering all the operation links, which ensured the normal operation activities of the Company and the safety and completeness of the Company’s assets. And the Company enjoyed a coherent organizational structure of internal control with complete departments and personnel for internal auditing, which ensured the full and effective execution and supervision of the key activities of internal control. In the year 2008, the Company had no breach of the Guideline of Shenzhen Stock Exchange for the Internal Controls of Listed Companies or the Company’s Internal Control System. In conclusion, the Supervisory Board is of the opinion that the Company’s self-evaluation on its internal control is a thorough, factual and accurate reflection of the actual situation of the Company’s internal control. 29 Changchai Company, Limited Summary of Annual Report 2008 IX Significant Events (Ⅰ) Lawsuits and arbitrations in the report period The lawsuits and arbitrations in which the Company was involved in the report period were all carried down from the previous periods, with an accumulative currency amount of RMB 60,941,000, taking up 5.28% of the Company’s net assets as at the end of the report period. And the lawsuits and arbitrations are detailed as follows: Involved sum Names of defendants Date of accepting & Names of lawsuits & arbitration (RMB’0000) Remarks hearing organs Pending lawsuits carried down to the report period from the previous periods 1.Tongshan County Tengyu Changzhou Intermediate People’s Agro-machinery Trade 27 Jun. 2001 Court 493.06 Settled Center 2.Nanjing Jinwa Changzhou Intermediate People’s Share-holding Co., Ltd. 9 Jul. 2002 Court 1,419.00 During execution 3.Shandong Hongli Group Changzhou Intermediate People’s Co., Ltd. 27 Jun. 2001 Court 1,436.00 During bankruptcy liquidation 4. Shandong Shuangli st Group Co., Ltd. Jan. 2006 The 1 Intermediate People’s Court 2746.04 of Beijing Total 6094.10 Notes on the progress of the cases: 1. About the lawsuit case of Tongshan County Tengyu Agro-Machinery Trade Center: On 13 Apr. 2002, the Company applied to Changzhou Intermediate People’s Court for compulsory execution. But the defendant still failed to pay RMB 4,930,600 to the Company. Later Xuzhou Railroad Transportation Court was entrusted to perform the execution. On 16 Apr. 2008, due to the lack of property of the defendant to execute upon, Xuzhou Railroad Transportation Court terminated the execution. 2. About the lawsuit case of Nanjing Jinwa Share-holding Co., Ltd.: The Company has signed a settlement agreement where Lishui County Public-owned Assets Operation Co., Ltd. shall pay the debt of RMB 14.19 million owed by Nanjing Jinwa Share-holding Co., Ltd. with 80 mu of land. And the agreement is currently in the course of execution. 3. About the lawsuit case of Shandong Hongli Group Co., Ltd.: The accused company owed accumulatively RMB 14.36 million to the Company. The Company sued to Changzhou Intermediate People’s Court in 2001 and sued for compulsory execution in April, 2002. Currently, the defendant has started the bankruptcy procedure. 4. The lawsuit case on the guarantee loan of Shangdong Shuangli Group Co., Ltd. was disclosed in the 2006 Annual Report of the Company. Owing to the poor management of Shuangli Group, Shangdong Liaocheng Intermediate People’s Court declared that Shuangli Group entered the bankruptcy and debt repayment procedure. The Company applied to the bankruptcy liquidation group of Shuangli Group for its privileged mortgage debt of RMB 27,460,400. The Company actively exercised the land use right involving 93454.43 ㎡ of land provided by Shuangli Group as a counter-guarantee for paying the debt. By the end of 2008, the Company had got in RMB 16 30 Changchai Company, Limited Summary of Annual Report 2008 million, with RMB 7 million recovered in the year 2008. And the outstanding debt of RMB 11,460,400 is in recovery. (Ⅱ) Securities investment in the report period 1. Transaction monetary assets Sequence Kind of Stock code Name of Investment Amount of Book Value at Proportion in the total Profit & loss in No. Securities Securities amount at the shares held period-end securities investment the report beginning (RMB) (Share) (RMB) at period-end (%) period (RMB) 1 Stock 600166 Foton Motor 5204700.00 4500000 21645000.00 100% -37395000.00 Other securities held at period-end 0 0 0 0 0 Profit & loss from securities sales at period-end — — — — 0 Total 5204700.00 — 21645000.00 100% -37395000.00 2. Shareholdings in other listed companies Investment Book Value at Profit & loss Change of owner’s Subject of Stock Name of Proportion of Resource of amount at the period-end in the report equity in the report Accounting Code securities shareholding share beginning (RMB) (RMB) period (RMB) period calculation 600166 Foton Motor Financial assets By exchanging available for sale assets with 41782175.00 3.94% 173761250.00 0 -300198750.00 Changchai Group in 1999 900953 Kaima B Long-term invest By lawsuits ment on stocks 31706441.63 5.49% 31706441.63 0 0.00 600377 Ninghu Financial assets By agreement 90500.00 272000.00 0 -254000.00 Expressway available for sale transfer Total 73579116.63 205739691.63 0 -300452750.00 3. Equity held by the Company in non-listed financial enterprises and companies to be listed Name of Amount of Amount of Proportion Book value at Profits or Changes of Subject of Resource of object initial shares held in equity period-end losses in the owners’ equity Accounting share investment (share) of the report period in the report calculation (RMB) company (RMB) (RMB) period Long-term Bank of Shareholdings 38000000.00 38000000 0.48% 38000000.00 0 0 investment on Jiangsu of promoter stocks Total 38000000.00 38000000 0.48% 38000000.00 0 0 (Ⅲ) In the report period, the Company had no purchases or sales of assets. (Ⅳ) In the report period, the Company had no major associated transactions with the controlling shareholder or other associated companies. And there was no appropriation of the Company’s capital for non-operating purposes by the controlling shareholder or any other associated company. (Ⅴ) Significant contracts and their implementation 1. In the reporting period, there were no such events as significant entrustment, contracting, lease of other companies’ assets by the Company and vice versa. 31 Changchai Company, Limited Summary of Annual Report 2008 2. In the reporting period, the Company provided a loan guarantee of RMB 14.50 million for its controlling subsidiary—Changchai Benniu Diesel Engine Fittings Co., Ltd.. Of the loan guarantee, RMB 9.50 million belonged to the guarantee for the loan renewal, with a guarantee term from 29 Oct. 2008 to 29 Oct. 2009, while the other amount of RMB 5 million was an add-on guarantee with the guarantee term from 31 Oct. 2008 to 31 Oct. 2008. 3. During the reporting period, the Company did not entrust others to manage its cash assets. (Ⅵ) Commitments of the Company or shareholders holding over 5% equity in the report period or lasted till the report period The commitments made by the original non-tradable shareholders in the share merger reform, as well as their implementation, are detailed as follows: Serial Name of shareholder Commitment Implementation No. 1. No trading or transfer of the held non-tradable shares shall be conducted within 12 months since the date when the share merger the State-owned Assets reform was implemented. Supervision and 37,424,956 shares were 1 Administration Commission of 2. After the expiration of the aforesaid commitment period, the original unlocked according to Changzhou People’s non-tradable shares could be sold through listing and trading on regulations. Government Shenzhen Stock Exchange, but the proportion of number of shares sold in total shares of the Company shall not exceed 5 percent within 12 months, as well as not exceed 10 percent within 24 months. In the report period, the State-owned Assets Supervision and Administration Commission of Changzhou People’s Government did not break its commitments made in the share merger reform. Up until now, there has been no transfer of the shares held by the Commission. (Ⅶ) Engagement or dismissal of certified public accountants In the reporting period, the Company continued to engage Jiangsu Gongzheng Certified Public Accountants Co., Ltd. as the auditor for the Company in 2008, which was reviewed and approved in the 7th meeting of the 5th Board of Directors. And the relevant public notice was published in Securities Times and Hong Kong Ta Kung Pao dated 11 Apr. 2008. The auditing fee paid by the Company to Jiangsu Gongzheng Certified Public Accountants Co., Ltd. for the year 2008 was RMB 700,000. And the said auditing agency had provided auditing service for the Company for 7 years in succession. (Ⅷ) During the reporting period, the Company, as well as its directors, supervisors, senior management personnel, actual controller and purchaser received no investigation from authorities; no compulsory measures from judicial and discipline inspection departments; no transfer to judicial bodies for involving criminal responsibility; no investigation, administrative punishment, bans on the entry into the securities market or being considered as unsuitable person by China Securities Regulatory Commission; no punishment from other administrative management departments; and no condemn in public by stock exchanges. (Ⅸ) Field researches, visits and interviews in the reporting period 32 Changchai Company, Limited Summary of Annual Report 2008 Main contents of discussion Reception time Reception place Reception way Visitor and information provided The 3rd meeting room of the Main operation and future 8 Apr. 2008 By field research Huatai Securities Company development of the Company The 3rd meeting room of the Main operation and future 9 May 2008 By field research Haitong Securities Company development of the Company Natural person The Company’s operation in 11 Jun. 2008 The Company By telephone shareholder the first half of 2008 Natural person The Company’s operation in 26 Jun. 2008 The Company By telephone shareholder the first half of 2008 HK Piper Jaffray The 3rd meeting room of the Securities, Jieda Status of the diesel engine 17 Jul. 2008 By field research Company Investment Management industry Co., Ltd. The 3rd meeting room of the Main operation and future 24 Nov. 2008 By field research Morgan Stanley Company development of the Company Macro-economic influence on The 3rd meeting room of the Citic-Prudential Fund 24 Dec. 2008 By field research the Company and the Company Management Co., Ltd. Company’s status 33 Changchai Company, Limited Summary of Annual Report 2008 X. Financial Report TO THE SHAREHOLDERS OF CHANGCHAI COMPANY, LIMITED We have audited the consolidated financial statements of Changchai Company, Limited (the “Company”) which comprise the Balance sheet as at 31 December 2008, and the Income statement, Statement of changes in equity and Cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes. Directors responsibility for the financial statements The directors are responsible for the preparation and the true and fair presentation of these financial statements in accordance with Accounting Standards for Business Enterprises and Accounting System for Business Enterprises of the People’s Republic of China. These responsibilities include designing, implementing and maintaining internal control relevant to the preparation and the true and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditor’s responsibility Our responsibility is to express an opinion on these financial statements based on our audit and to report our opinion solely to you, as a body and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report. We conducted our audit in accordance with Independent Audit Standards promulgated by the Chinese Institute of Certified Public Accountants. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance as to whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the 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 true and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Audit opinion In our opinion, the financial statements give a true and fair view of the state of affairs of the Company as at 31 December 2008 and of the profit and cash flows of the Company for the year then ended in accordance with the Accounting Standards for Business Enterprise and the Accounting System for Enterprises of the People’s Republic of China. Jiangsu Gongzheng Tianye Certified Public Accountants Certified Public Accountant of China CPA: Wang Wenkai Certified Public Accountant of China CPA: Xu Yafen China · Wuxi 13 Apr. 2009 34 Changchai Company, Limited Summary of Annual Report 2008 Financial Statement Balance Sheet Prepared by Changchai Company, Limited 31 Dec. 2008 Unit: RMB Yuan Balance as at 31 Dec. 2008 Balance as at 31 Dec. 2007 Items Consolidation Parent company Consolidation Parent company Current assets: Monetary funds 402,778,967.15 378,820,707.08 443,234,034.61 417,975,515.87 Settlement fund reserve Dismantle fund Transaction financial asset 21,645,000.00 21,645,000.00 59,040,000.00 59,040,000.00 Notes receivable 27,121,088.60 26,721,088.60 52,244,643.94 50,742,531.00 Account receivable 204,208,036.51 160,990,383.74 219,326,634.59 179,407,272.03 Account paid in advance 9,683,253.18 8,569,751.19 35,394,071.23 35,520,970.68 Premium receivables Receivables from reinsurers Reinsurance contract reserve receivables Interest receivable Dividend receivable Other account receivable 28,063,069.38 27,899,889.79 33,677,504.81 33,095,700.83 Financial assets purchased under agreements to resell Inventories 323,777,713.81 289,425,993.52 304,592,189.76 257,646,950.38 Non-current assets due 0.00 0.00 0.00 0.00 within 1 year Other current assets 0.00 0.00 0.00 0.00 Total current assets 1,017,277,128.63 914,072,813.92 1,147,509,078.94 1,033,428,940.79 Non-current assets: Loans and advance Available for sale financial 174,033,250.00 174,033,250.00 474,486,000.00 474,486,000.00 assets Held to maturity investments 0.00 0.00 0.00 0.00 Long-term account 0.00 0.00 0.00 0.00 receivable Long-term equity 93,179,255.93 143,519,055.93 92,936,380.79 143,276,180.79 investment Investing property 72,739,415.63 72,739,415.63 74,947,756.43 74,947,756.43 Fixed asset 364,125,318.48 308,323,648.71 388,310,743.34 332,707,583.04 Project in construction 69,705,698.81 67,525,098.81 22,442,799.22 22,108,799.22 Engineering material 0.00 Fixed asset disposal 0.00 0.00 Bearer biological asset 0.00 0.00 Oil assets 0.00 0.00 Intangible assets 106,102,470.72 103,756,831.97 108,957,970.04 106,550,100.61 Development expense 0.00 0.00 0.00 0.00 Goodwill 0.00 0.00 0.00 0.00 Long-term expense to be 0.00 0.00 171,326.44 0.00 apportioned Deferred tax assets 620,237.12 620,237.12 701,681.23 701,681.23 Other non-current assets 0.00 0.00 0.00 Total of non-current assets 880,505,646.69 870,517,538.17 1,162,954,657.49 1,154,778,101.32 Total assets 1,897,782,775.32 1,784,590,352.09 2,310,463,736.43 2,188,207,042.11 Current liabilities: Short-term borrowings 51,200,000.00 0.00 29,700,000.00 0.00 35 Changchai Company, Limited Summary of Annual Report 2008 Borrowing from Central Bank Deposits and due to banks and other financial institutions Placements from banks and other financial institutions Transaction financial liabilities Notes payable 136,103,600.00 126,990,000.00 56,300,000.00 47,000,000.00 Account payable 361,368,076.43 334,431,191.26 428,095,753.10 387,540,269.07 Account received in 24,690,165.89 24,543,763.01 45,035,644.02 44,889,241.14 advance Financial assets sold under agreements to repurchase Handling charges and commission payable Employee’s compensation 25,369,781.88 21,831,003.69 29,946,856.38 26,228,034.16 payable Tax payable -29,212,801.62 -27,781,020.54 -10,259,273.84 -5,772,128.42 Interest payable dividend payable Other account payable 88,548,123.52 89,518,212.18 105,996,952.49 100,664,577.67 Due to reinsurers Insurance contract reserve Customer deposits Amount payables under security underwriting Non-current liabilities due 0.00 0.00 8,500,000.00 0.00 within 1 year Other current liabilities 4,654,904.31 3,771,298.47 4,294,741.37 3,301,240.01 Total current liabilities 662,721,850.41 573,304,448.07 697,610,673.52 603,851,233.63 Non-current liabilities: Long-term borrowings 42,000,000.00 42,000,000.00 0.00 0.00 Debentures payable Long-term payables Specific purpose account 690,000.00 690,000.00 90,000.00 90,000.00 payables Provisions for contingent liabilities Deferred tax liabilities 37,149,762.50 37,149,762.50 121,611,700.00 121,611,700.00 Other non-current liabilities 0.00 0.00 0.00 0.00 Total non-current liabilities 79,839,762.50 79,839,762.50 121,701,700.00 121,701,700.00 Total liabilities 742,561,612.91 653,144,210.57 819,312,373.52 725,552,933.63 Owner’s equity (or shareholders’ equity) Paid-in capital (or share 374,249,551.00 374,249,551.00 374,249,551.00 374,249,551.00 capital) Capital surplus 272,484,186.26 282,163,372.45 495,672,761.92 507,502,934.95 Less: Treasury Stock Reserved fund 240,369,344.92 240,369,344.92 240,369,344.92 240,369,344.92 General risk provision Retained earnings 260,783,005.94 234,663,873.15 372,844,737.18 340,532,277.61 Foreign exchange difference Total owners' equity 1,147,886,088.12 1,131,446,141.52 1,483,136,395.02 1,462,654,108.48 attributable to holding 36 Changchai Company, Limited Summary of Annual Report 2008 company Minority interest 7,335,074.29 8,014,967.89 Total owner’s equity 1,155,221,162.41 1,131,446,141.52 1,491,151,362.91 1,462,654,108.48 Total liabilities and owner’s 1,897,782,775.32 1,784,590,352.09 2,310,463,736.43 2,188,207,042.11 equity 37 Changchai Company, Limited Summary of Annual Report 2008 Income Statement Prepared by Changchai Company, Limited Jan.- Dec. 2008 Unit: RMB Yuan Amount in 2008 Amount in 2007 Items Consolidation Parent company Consolidation Parent company I. Total sales 1,908,283,161.97 1,920,243,316.68 2,042,027,051.07 2,045,641,233.66 Including: Sales 1,908,283,161.97 1,920,243,316.68 2,042,027,051.07 2,045,641,233.66 Interests income Premium income Handling charges and commission income II. Total cost of sales 1,973,597,467.33 1,976,326,932.54 2,013,719,492.70 2,020,541,018.79 Including: Cost of sales 1,750,367,812.85 1,778,369,960.83 1,810,357,382.25 1,830,553,542.04 Interests expenses Handling charges and commission expenses Claim expenses-net Provision for insurance liability reserve Expenses for reinsurance accepted Payments on surrenders Policyholder dividends Taxes and associate charges 630,330.96 0.00 1,494,637.63 1,196,514.77 Selling and distribution 85,553,636.23 82,266,081.37 61,760,030.60 59,539,959.43 expenses Administrative expenses 151,346,365.52 139,795,861.68 151,698,903.69 144,888,570.38 Financial expense -20,339,625.55 -23,241,095.72 -10,461,861.87 -12,601,114.39 Impairment loss 6,038,947.32 -863,875.62 -1,129,599.60 -3,036,453.44 Add: gain/(loss) from change -37,395,000.00 -37,395,000.00 53,835,300.00 53,835,300.00 in fair value (“-” means loss) Gain/(loss) from investment 14,670,192.20 14,670,192.20 106,711,389.66 106,711,389.66 (“-” means loss) Including: income form investment on affiliated enterprise and jointly enterprise Foreign exchange difference (“-” means loss) III. Business profit (“-” means -88,039,113.16 -78,808,423.66 188,854,248.03 185,646,904.53 loss) Add: non-business income 6,470,527.20 4,247,297.00 54,470,449.24 52,205,668.80 Less: non-business expense 12,749,194.95 12,505,867.36 9,365,054.43 9,309,525.76 Including: loss from non-current asset disposal IV. Total profit (“-” means -94,317,780.91 -87,066,994.02 233,959,642.84 228,543,047.57 loss) Less: Tax expense -8,927,876.79 -9,267,305.89 64,328,150.43 64,311,877.30 V. Net profit (“-” means loss) -85,389,904.12 -77,799,688.13 169,631,492.41 164,231,170.27 -Attributable to parent -83,993,014.91 168,116,392.28 company -Minority interest -1,396,889.21 1,515,100.13 VI. Earnings per share (I) basic earnings per share -0.22 0.45 (II) diluted earnings per share -0.22 0.45 38 Changchai Company, Limited Summary of Annual Report 2008 Cash Flow Statement Prepared by Changchai Company, Limited Jan.- Dec. 2008 Unit: RMB Yuan Amount in 2008 Amount in 2007 Items Consolidation Parent company Consolidation Parent company 1. Cash flows for operating activities: Cash received from sales of 2,196,863,357.32 2,174,856,968.85 2,294,133,757.17 2,334,029,019.90 goods or rending of services Cash received on deposits and from banks and other financial institutions Net increased cash received on borrowings from central bank Cash received on placements from other financial institutions Premium received Cash received from reinsurance Net increased amount received on policyholder deposit and investment Cash received from disposal of held for trading financial assets Interests, handling charges and commission received Cash received on placements from bank, net Cash received under repurchasing, net Refund of tax and fare 22,725,789.27 21,651,599.63 13,922,215.96 12,147,451.49 received Other cash received relating 16,542,195.39 25,515,566.99 6,685,710.74 5,681,010.74 to operating activities Sub-total of cash inflows 2,236,131,341.98 2,222,024,135.47 2,314,741,683.87 2,351,857,482.13 Cash paid for goods and 1,925,886,102.96 1,929,883,745.83 1,924,932,026.55 2,006,651,312.56 services Loans and advances drawn Cash paid to central bank, banks and other financial institutions, net Claims paid Interests, handling charges and commission paid Dividends paid to policyholders Cash paid to and on behalf of 202,047,642.85 184,281,969.55 174,360,811.02 156,853,644.39 employees Tax and fare paid 17,248,618.00 10,634,472.31 36,762,810.52 31,320,922.43 Other cash paid relating to 98,287,551.59 98,468,814.53 85,426,719.18 81,626,025.94 operating activities Sub-total of cash outflows 2,243,469,915.40 2,223,269,002.22 2,221,482,367.27 2,276,451,905.32 Net cash flow from operating -7,338,573.42 -1,244,866.75 93,259,316.60 75,405,576.81 activities 39 Changchai Company, Limited Summary of Annual Report 2008 2. Cash Flows from Investment Activities: Cash received from return of 0.00 0.00 9,301,300.00 9,301,300.00 investments Cash received from 14,427,317.06 14,427,317.06 104,629,275.45 104,629,275.45 investment income Net cash received from disposal of fixed assets, 1,769,318.79 1,607,318.79 82,447,622.52 82,359,152.16 intangible assets and other long-term assets Proceeds from sale of subsidiaries and other operating units Other cash received relating to investment activities Sub-total of cash inflows 16,196,635.85 16,034,635.85 196,378,197.97 196,289,727.61 Cash paid for acquiring fixed assets, intangible assets and 75,118,400.31 67,843,985.31 99,113,810.65 93,670,690.65 other long-term assets Cash paid for acquiring 0.00 0.00 0.00 5,000,000.00 investments Net cash used in loans Net cash used in acquiring subsidiaries and other operating units Other cash paid relating to investment activities Sub-total of cash outflows 75,118,400.31 67,843,985.31 99,113,810.65 98,670,690.65 Net cash flow from investing -58,921,764.46 -51,809,349.46 97,264,387.32 97,619,036.96 activities 3. Cash Flows from Financing Activities: Cash received from absorbing investment Including: Cash received from increase in minority interest Cash received from 105,700,000.00 42,000,000.00 122,700,000.00 61,500,000.00 borrowings Cash received from issuing debentures Other proceeds relating to financing activities Sub-total of cash inflows 105,700,000.00 42,000,000.00 122,700,000.00 61,500,000.00 Cash paid for settling debt 50,700,000.00 0.00 286,700,000.00 226,500,000.00 Cash paid for distribution of dividends or profit or 31,694,729.58 28,100,592.58 36,036,783.08 33,595,421.08 reimbursing interest Including: dividends or profit paid to minority interest Other cash payments relating to financing activities Sub-total of cash outflows 82,394,729.58 28,100,592.58 322,736,783.08 260,095,421.08 Net cash flow from financing 23,305,270.42 13,899,407.42 -200,036,783.08 -198,595,421.08 activities 4. Effect of foreign exchange 0.00 0.00 40 Changchai Company, Limited Summary of Annual Report 2008 rate changes 5. Increase in cash and cash -42,955,067.46 -39,154,808.79 -9,513,079.16 -25,570,807.31 equivalents Add : Cash and cash 443,234,034.61 417,975,515.87 452,747,113.77 443,546,323.18 equivalents at year-begin 6. Cash and cash equivalents 400,278,967.15 378,820,707.08 443,234,034.61 417,975,515.87 at the end of the year 41 Changchai Company Statement of Change in Owners’ Equity（Consolidation） Prepared by Changchai Company, Limited Year 2008 Amount in 2008 Owners’ equity attributable to parent company Owners’ equity a Items Pain-up Total of Pain-up Lessen: Surplus General Minority Lessen: capital (or Capital Retained owners’ capital (or Capital treasury public risk Others equity treasury share reserve profits equity share reserve stock reserve reserve stock capital) capital) 374,24 495,67 240,36 372,84 1,491,1 374,24 170,61 8,014,9 I. Balance as at 31 Dec. 2007 9,551.0 2,761.9 9,344.9 4,737.1 51,362. 9,551.0 8,064.3 67.89 0 2 2 8 91 0 4 Add: Change in accounting policy 73,273, 478.00 Correction of previous accounting errors Other 374,24 495,67 240,36 372,84 1,491,1 374,24 243,89 8,014,9 II. Balance as at 1 Jan. 2008 9,551.0 2,761.9 9,344.9 4,737.1 51,362. 9,551.0 1,542.3 67.89 0 2 2 8 91 0 4 -223,1 -112,0 -335,9 251,78 II. Increase/decrease in 2008 (“-” -679,8 means loss) 88,575. 61,731. 30,200. 1,219.5 93.60 66 24 50 8 -83,99 -85,38 （I）Net profit -1,396, 3,014.9 9,904.1 889.21 1 2 -223,1 -222,4 251,78 （II）Gain/loss recorded in 716,99 owners’ equity directly 88,575. 71,580. 1,219.5 5.61 66 05 8 1. Net amount on changes in -300,4 -300,4 323,24 fair value of financial assets 52,750. 52,750. 8,100.0 available for sale 00 00 0 2. Effect on changes in other owners’ equity of invested units 2,150,9 2,150,9 596,07 under equity method 86.84 86.84 2.58 3. Effect of income tax -72,06 recorded in owners’ equity 75,113, 75,113, 2,953.0 187.50 187.50 0 Changchai Company 4. Other 716,99 716,99 5.61 5.61 -223,1 -83,99 -307,8 251,78 -679,8 Subtotal of (I) and (II) 88,575. 3,014.9 61,484. 1,219.5 93.60 66 1 17 8 （III）Input and reduced capital of owners 1. Capital input by owners 2. Amount of shares-based payment recorded in owner’s equity 3. Other -28,06 -28,06 （IV）Profit distribution 8,716.3 8,716.3 3 3 1. Appropriating surplus reserve 2. Appropriating general risk reserve -28,06 -28,06 3. Districtution to owners (shareholders) 8,716.3 8,716.3 3 3 4. Other （V）Internal carry-over of owner’s equity 1. Transferring capital reserve into capital (share capital) 2. Transferring surplus reserve into capital (share capital) 3. Making up losses with surplus reserve 4. Other 374,24 272,48 240,36 260,78 1,155,2 374,24 495,67 7,335,0 IV. Balance as at 31 Dec. 2008 9,551.0 4,186.2 9,344.9 3,005.9 21,162. 9,551.0 2,761.9 74.29 0 6 2 4 41 0 2 Changchai Company Statement of Change in Owners’ Equity（Parent company） Prepared by Changchai Company, Limited Year 2008 Amount in 2008 Pain-up Pain-up Items Lessen: Surplus General Total of Lessen: capital (or Capital Retained Minority capital (or Capital treasury public risk Others owners’ treasury share reserve profits equity share reserve stock reserve reserve equity stock capital) capital) 374,24 507,50 240,36 340,53 1,462,6 374,24 184,88 9,551.0 2,934.9 9,344.9 2,277.6 54,108. 9,551.0 4,697.0 0 5 2 1 48 0 8 I. Balance as at 31 Dec. 2007 71,433, 090.87 Add: Change in accounting policy 374,24 256,31 Correction of previous accounting errors 9,551.0 7,787.9 0 5 Other 374,24 507,50 240,36 340,53 1,462,6 251,18 II. Balance as at 1 Jan. 2008 9,551.0 2,934.9 9,344.9 2,277.6 54,108. 5,147.0 0 5 2 1 48 0 -225,3 -105,8 -331,2 II. Increase/decrease in 2008 (“-” means loss) 39,562. 68,404. 07,966. 50 46 96 -77,79 -77,79 251,18 （I）Net profit 9,688.1 9,688.1 5,147.0 3 3 0 -225,3 -225,3 323,24 （II）Gain/loss recorded in owners’ equity directly 39,562. 39,562. 8,100.0 50 50 0 1. Net amount on changes in -300,4 -300,4 fair value of financial assets 52,750. 52,750. available for sale 00 00 2. Effect on changes in other -72,06 owners’ equity of invested units 2,953.0 under equity method 0 Changchai Company 3. Effect of income tax 75,113, 75,113, recorded in owners’ equity 187.50 187.50 251,18 4. Other 5,147.0 0 -225,3 -77,79 -303,1 Subtotal of (I) and (II) 39,562. 9,688.1 39,250. 50 3 63 （III）Input and reduced capital of owners 1. Capital input by owners 2. Amount of shares-based payment recorded in owner’s equity 3. Other -28,06 -28,06 （IV）Profit distribution 8,716.3 8,716.3 3 3 1. Appropriating surplus reserve 2. Appropriating general risk reserve -28,06 -28,06 3. Districtution to owners (shareholders) 8,716.3 8,716.3 3 3 4. Other （V）Internal carry-over of owner’s equity 1. Transferring capital reserve into capital (share capital) 2. Transferring surplus reserve into capital (share capital) 3. Making up losses with surplus reserve 374,24 507,50 4. Other 9,551.0 2,934.9 0 5 IV. Balance as at 31 Dec. 2008 374,24 282,16 240,36 234,66 1,131,4 374,24 184,88 Changchai Company 9,551.0 3,372.4 9,344.9 3,873.1 46,141. 9,551.0 4,697.0 0 5 2 5 52 0 8 Changchai Company, Limited Summary of Annual Report 2008 Notes to Financial Statement Note 1: General information Changchai Company Limited (the Company for short hereafter) was founded in People’s Republic of China in 1994. The domestic A share and the overseas B share of the Company were respectively listed in 1994 and 1996. The Company mainly engaged in the production and sales of small and medium-sized single cylinders and multi-cylinder diesel engine with the label of Changchai Brand. The diesel engine produced and sold by the Company were mainly used in tractors, combine harvest models, light commercial vehicle, small-sized construction machinery, generator units and ships, etc. There were such departments as Office Room of the Company, Financial Department, Political Department, Investment and Development Department, Enterprise Management Department, Human Recourses Department, Production Department, Procurement Department, Sales Company, Chief Engineer Office, Technology Center, Quality Assurance Department, Foundry Branch, Machine Processing Branch, Single-cylinder Engineer Branch, Multi-cylinder Engineer Branch and Harvest Model Branch in the Company . Note 2: Declaration on following Accounting Standard for Business Enterprises Declaration from the Company: the Financial Report made by the Company was in line with Accounting Standard, which reflected the financial status, business result and cash flow of the Company truly and objectively. Note 3: Compiling foundation of financial statements With going-concern assumption as the basis, the Company prepares its financial statement in light of the actual transactions and matters, as well as recognition and measurement in line with the accounting standard for business enterprise and its application guidelines promulgated by the Ministry of Finance of PRC on 15 Feb. 2006. The financial statements shall be presented in line with the provision in the Accounting Standard for Business Enterprise No. 30 – Presentation of Financial Statement, in which the accounting information shall be prepared in light of the accounting policies and accounting estimated of the Company. Such accounting policies and accounting estimated shall be drawn up at the accounting standard for business enterprises and the actual status of the Company. Note 4: The main accounting policies and accounting estimation of the Company 1. Accounting periods The accounting periods were divided into accounting year and metaphase, the accounting year was from Jan. 1 to Dec. 31 and as the metaphase included monthly, quarterly and semi-yearly periods. 2. Functional currency RMB was the functional currency of the Company. 3. The items of the statements of which the measurement attributes changed and the adopted measurement attributes in the report period. The Company measured according to the canonical accounting measurement attributes. In the report period, measurement attributes were not changed. The Company conducted the 47 Changchai Company, Limited Summary of Annual Report 2008 measurement of the accounting elements commonly by historical cost. If using the way of replacement cost, net realizable value, present value and fair value, the measurement should be on the basis of the amount of the accounting element which could be obtained and measured reliably. 4. The standard for recognizing cash equivalent when making cash flow statement Cash equivalent means the highly liquid, very safe investment which can be easily converted into cash, and the company can hold it for a very short time (3 months from the date of purchase). 5 Method of foreign currency translation When foreign currency translation occurs, the spot exchange rate on the date of translation (i.e., the middle price of the intraday foreign exchange rate of RMB published by People’s Bank of China) shall be converted into RMB for keeping accounts while the occurred foreign currency exchange or the foreign exchange transactions shall be translated according to exchange rate adopted in actual transactions. On the balance sheet date, the foreign currency monetary items and foreign currency non-monetary items shall be treated in accordance with the following provisions: The foreign currency monetary items shall be translated at the spot exchange rate on balance sheet date, of which happen during the normal business period shall be recorded into gains and losses at the current period; of which happen during organization period shall be recorded into long-term deferred expense. The exchange gains or losses caused by the borrowing belonging to acquiring fixed assets shall be treated by the capitalization of borrowing costs. Currency monetary items refer to the currency funds, assets charged from the fixed or confirmed amount or debt payable, including cash on hand, bank deposit, accounts receivable, other accounts receivable, long-term accounts receivable, short-term accounts receivable, account payable, other account payable, long-term borrowing, debentures payable and long-term account payable, etc. Foreign currency non-monetary items shall be translated at spot rate on the date of transaction, not changing the amount of functional currency. Foreign currency non-monetary items refer to the items other than the monetary ones. The foreign currency non-monetary items measured through fair value shall be translated at the spot rate on the date of confirming the fair value. The difference between the amount of functional currency after translation and that of original functional currency shall be treated as fair value fluctuation (exchange rate fluctuation), being recorded into gains of losses at the current period. 6. The recognition and measurement of financial instruments and the transfer of the financial instruments 1) Recognition of the financial assets When an enterprise becomes a party to a financial instrument, it shall recognize a financial asset or financial liability. Where a financial asset satisfies any of the following requirements, the recognition of it shall be terminated: (1) Where the contractual rights for collecting the cash flow of the said financial assets are 48 Changchai Company, Limited Summary of Annual Report 2008 terminated; (2) Where the said financial asset has been transferred and meets the conditions for recognizing the termination of financial assets as provided for in Accounting Standard for Business Enterprises No. 23 – Transfer of Financial Assets. Only when the prevailing obligations of a financial liability are relieved in all or in part may the recognition of the financial liability be terminated in all or partly. 2) The classification, recognition and measurement of financial assets and financial liabilities The financial assets or financial liabilities got or born by the Company are measured according to the following classifications: (1) The financial assets or financial liabilities which are measured at their fair value and the variation of which is recorded into the profits and losses of the current period The interest rate or cash dividend which was gained in the period when the financial assets held by the Company are measured at its fair value and of which the variation is recorded into the profits and losses in the current period shall be recognized as investment income. On balance sheet date, the in change in the fair value of the financial asset or financial liability which is measured at its fair value and of which the variation is recorded into the profits and losses of the current period, shall be recorded into the profits and losses of the current period; When the said financial assets of financial liabilities are on disposal, the difference between the fair value and the amount in initial account shall be recognized as investment income, meanwhile, the profits and losses arising from the change in fair value shall be adjusted. (2) The investments which will be held to their maturity The investments which will be held to their maturity will regard the sum between the gained fair value and the transaction expense thereof as the initially recognized amount. The interest on bonds in payment, of which the mature interest is not drawn, shall be solely recognized as the receivables. The interest revenue which is measured and recognized by the amortized cost and actual interest rate during the period of the investments which will be held to their maturity shall be recorded into investment income. The actual interest rate which is recognized in the period of gaining the investments which will be held to their maturity, shall maintain unchanged within the predicted term of existence or within a shorter applicable term of the said investment which will be held to their maturity. The little difference between actual interest rate and coupon rate of which interest revenue can be measured at the coupon rate shall be recorded into the profits of losses in the current period. When the investments which will be held to their maturity are on disposal, the difference between the obtained price and investment book value shall be recorded into the profits and losses in the current period. (3) The accounts receivables The creditor’s right receivable formed during the Company selling commodity outside or offering labor shall be regarded as the initially recognize amount in according with the receivable price stipulated in the contract or agreement signed between the Company and 49 Changchai Company, Limited Summary of Annual Report 2008 the buyers. When the Company recovers or disposes the accounts receivable, the difference between the obtained price and the book value of the accounts receivable shall be recorded into the profits and losses in the current period. (4) Financial assets available for sale The financial assets available for sale will be regarded as the initial recognized amount in according with the sum between the fair value obtained from the said financial assets and the transaction expense thereof. The interest on bonds of which the mature interest rate is not drawn in the payment or the cash dividend which is declared but not extended in the payment shall be solely recognized as the receivables. The interest rate or cash dividend gained during the period of holding the financial assets available for sale shall be recorded into investment income. On balance sheet date, the financial assets shall be measured through fair value, while the change in fair value is recorded into capital reserves (other capital reserves). When the financial assets are on disposal, the difference between the obtained price and the book value of the financial assets shall be recorded into investment income, meanwhile, the amount on proposal transferring out from the accumulated amount which is directly recorded into shareholders’ equity and arises from the variation of the fair value, shall be recorded into investment income. (5) Other financial liabilities Other financial liabilities are regarded as the initial recognized amount in accordance with the sum between the fair value and the transaction expense thereof. The Company shall make subsequent measurement on other financial liabilities on the basis of the post-amortization costs. 3) Main recognition method for the fair value of the financial assets or financial liabilities (1) The quotation in the active market shall be used to recognize the fair value of the financial assets or financial liabilities existing in active market. (2) If the financial instruments do not exist in the active market, the fair value shall be recognized by value appraisal techniques. (3) As for the financial assets initially obtained of produced at source and the financial liabilities assumed, the fair value thereof shall be determined on the basis of the transaction price of the market. 4) Main impairment test method of the financial assets and impairment provision method The recognition standard for impairment provision of the financial assets: the Company shall carry out an inspection, on the balance sheet day, on the carrying amount of the financial assets other than those measured at their fair values and of which the variation is recorded into the profits and losses of the current period. Where there is any objective evidence proving that such financial asset has been impaired, an impairment provision shall be made. The withdrawal method for impairment provision of the financial assets: as for the 50 Changchai Company, Limited Summary of Annual Report 2008 impairment provision of the financial assets is measured on the basis of post-amortization costs, if the current value of the predicted future cash flow of the financial assets is below the difference in the carrying amount of the said financial asset, the impairment provision of the financial assets shall be made; as for the impairment provision of the financial assets available for sale, if the recoverable amount is below the difference in the carrying amount, the impairment provision shall be made. Where a sellable financial asset is impaired, even if the recognition of the financial asset has not been terminated, the accumulative losses arising from the decrease of the fair value of the owners’ equity which was directly included shall be transferred out and recorded into the profits and losses of the current period. 7. The recognition standard and the withdrawal method for the bad debt provision of the accounts receivable 1) Receivables are considered uncollectible after liquidation with statutory procedures for debtors are in canceling or bankrupt, due death of debtors who has no bequest and no undertaker on obligation, or caused by debtors fail to perform their obligation to pay a debt over three years, and it will be recognized as bad debt. 2) Allowance method shall be adopted by the company in the computation of the bad debts. An independent impairment test shall be carried out on the accounts receivable with significant single amounts (including accounts receivable and other receivables, single amount is recognized as RMB 1 million), and provision for bad debts shall be withdrawn on the basis of the balance between the current values of the predicted future cash flow lower than book value. The accounts receivable with significant single amounts but without occurring impairment shall be incorporated in accounts receivable after deducting accounts receivable with significant single amounts, and provision for bad debts shall be withdrawn in light of the aging analysis of closing balance. In accordance with such situations as real financial status and cash flow arising from debtors, the provision for bad debts shall be recognized based on aging analysis combining individual recognition, and then recorded into the gains and losses of the current period. 3) Withdrawal proportion of bad debts in every aging stage Aging Proportion taking up the bad debt Proportion taking up the bad debt provision for the accounts provision for the other accounts receivable (%) receivable (%) Within one year 2 2 1-2 years 5 5 2-3 years 15 15 3-4 years 30 30 4-5 years 60 60 Over 5 years 100 100 Withdrawal policies for bad debt reserves of related parties: according to the 9th meeting of the 4th Board of Directors, as for the accounts receivable of the related party of the Company with continuous operation ability, the withdrawal of bad debt reserves could not excess 60% at most. 51 Changchai Company, Limited Summary of Annual Report 2008 8. The classification, pricing and accounting methods for inventories; the recognition standard and withdrawal method of the inventories falling price reserves 1) Classification of the inventories: inventories refer to the raw material, packing material, unfinished products, finished products and low-value consumption which have not been sold and consumed in the production operation process. 2) The inventory system is on the basis of perpetual inventory method. 3) The cost of various inventories shall be measured in light of planned cost when buying in and putting in storage, while the cost shall be recorded in light of weighted average when issuing from the storage; the cost of good manufactured shall be carried forward at actual cost of the current period, while sales cost shall be carried forward at weighted average method. Low value consumables shall be amortized by employing the one-off write-off method when claiming. 4) As for the inventory falling price reserve: the inventories at the end of the report period will be priced according to the lower of the product cost and the net realizable value. When all the inventories are checked roundly, those which were destroyed, outdated in all or in part, sold at a loss, etc, shall be withdrawn the inventory falling price reserve. Where the coat of the single inventory item is higher than the net realizable value, the inventory falling price reserve shall be withdrawn and recorded into profits and losses of the current period. The net realizable inventory falling price reserve refers to the value minus the predicted expense needed in the process of completing the production and sales from the predicted price for sale when the Company runs normally. If the value of the inventory with inventory falling price reserve can be resumed, the inventory falling price reserve and the current income shall be adjusted in line with the increase amount by being resumed (the increase amount should be limited by the original withdrawal amount). 9. The method for measuring long-term equity investment Long-term equity investment includes the equity investment to its subsidiaries by the Company, the equity investment to the joint enterprises and the associated enterprises by the Company, and the long-term equity investment of the Company that does not do join t control or does not have significant influences on the invested entity, and has no offer quotation in the active market and its fair value cannot be reliably measured. 1) Equity investment to the subsidiaries Subsidiary refers to the invested entity that can be controlled by the Company, i.e., the Company has the rights to decide the policies of finance and operation also can be benefited from such operating activities. When ascertaining whether or not it is able to control an invested entity, the Company shall take into consideration the invested entities’ current convertible corporate bonds and the current executable warrants held by the Company, as well as other potential factors concerning the voting rights. As for the investment to the subsidiary, the amount recognized on the basis of cost method shall be listed in the individual financial statements of the Company, and shall be merged after making an adjustment by employing the equity method when it works out consolidated financial statements. The price of a long-term equity investment measured by employing the cost method shall be included its initial investment cost. The dividends or profits declared to distribute by the invested entity shall be recognized as the current investment income. The recognized 52 Changchai Company, Limited Summary of Annual Report 2008 investment income shall be limited to the amount received from the accumulative net profits or cash dividends obtained by the investing entity exceeds the aforesaid amount, it shall be regarded as recovery of initial investment cost. The Company purchased a few equity held by the minority shareholders of the Company. When the Company made the consolidated financial statements, goodwill was recognized by the difference between attributable share of the fair value of the subsidiaries’ identifiable net assets on the transaction date which was measured and recognized by employing the new equity proportion, and the increase long-term equity investment cost owing to buying the equity. Apart from the part for goodwill, the difference between the increase long-term investment cost and the attributable share of the fair value of the subsidiaries’ identifiable net assets which began to account constantly since the purchase date (or combination date) and was measured and recognized by employing the new equity proportion, was adjusted to capital reserves and retained earnings. 2) The investment to the joint enterprise and the associated enterprise Where the Company and other parties do joint control over an invested entity, the invested entity shall be their joint enterprise; where the Company is able to have significant influences on an invested entity, the invested entity shall be its associated entity. The initial measurement of the joint enterprise and the associated enterprise is carried out on the basis of historical cost, and the subsequent measurement of them is conducted by employing the equity method. If initial investment cost in more than the investing enterprise’ attributable share of the fair value of the invested entity’s identifiable net assets for the investment, the difference shall be included in the initial investment cost. If the initial investment cost is less than the investing enterprise’ attributable share of the fair value of the invested entity’s identifiable net assets for the investment, the difference shall be included in the current profits and losses and the investment cost shall be adjusted simultaneously. When measuring by employing equity method, the Company firstly makes an adjustment for the net profits and losses of the invested entity, including the adjustment on the basis of the fair value of the invested entity’s identifiable net capital when obtaining the investment, and the adjustment conducted during the period of unifying the accounting and its policies, then recognized the investment profits and losses of the current period according to the attributable share of the net profits and losses of the invested entity. The Company shall recognize the net losses of the invested enterprise until the book value of the long-term equity investment and other long-term rights and interests which substantially form the net investment made to the invested entity are reduced to zero. However, the Company has the obligation to undertake extra losses, the investment losses and predicted liabilities shall be recognized continuously. The other change in shareholders’ equity of the invested entity except the net profits and losses, shall be directly recorded into capital reserve by the Company in accordance with attributable or undertaken part measured by employing the proportion of holding equity, which are carried out under the condition of unchanged proportion of holding equity. The Company shall, in the light of the profits or cash dividends declared to distribute by the invested entity, calculate the proportion it shall obtain, and shall reduce the book value of the long-term equity investment correspondingly. 53 Changchai Company, Limited Summary of Annual Report 2008 3) Other long-term equity investment An long-term equity investment of the Company that does not do joint control or does not have significant influences on the invested entity, and has no offer in the active market and its fair value cannot be reliably measured, which was measured by employing cost method. 10. The measure of measuring investment real estates 1) The classification of investment real estate The investment real estate includes the right to use land which has already been rented, the right to use any land which is held and prepared for transfer after appreciation, and the right to use any building which has already been rented. 2) The initial measurement of the investment real estate shall be made at its cost. (1) The cost of an investment real estate by acquisition consists of the acquisition price, relevant taxes, and other expense directly relegated to the asset. (2) The cost of a self-built investment real estate composes of the necessary expenses for building the asset to the hoped condition for use. (3) The cost of an investment real estate obtained by other means shall be recognized in accordance with the relevant accounting standards. 3) The investment real estate shall be measured by means of cost pattern on balance sheet date, depreciation or amortization for investment real estate shall be conducted in the light of such relevant policies as depreciation or amortization of fixed assets and intangible assets. 11. The method of measuring fixed assets 1) The standard of fixed assets: are the houses, buildings, machines, engines, tanks, transportation vehicles and other equipments, apparatus and instruments related to production and operation which have been used over one year. So are the articles with value of over RMB 2000 and over two years’ service life, which do not belonged to the major equipments for production an operation. 2) The initial measurement of a fixed asset shall be made at its cost. The cost of a purchased fixed asset is based on the actual expense; the cost invested to a fixed asset by the investor shall be ascertained in accordance with the value as stipulated in the investment contract or agreement; the cost of a self-constructed fixed asset shall be formed by the necessary expenses incurred for bringing the asset to the expected condition for use; the costs of fixed assets acquired through the exchange of non-monetary assets, recombination of liabilities, merger of enterprises, and financial leasing shall be respectively ascertained in accordance with the Accounting Standard for Business Enterprises No. 7 - Exchange of Non-monetary Assets, the Accounting Standard for Business Enterprises No. 12 – Debt Restructuring, the Accounting Standard for Business Enterprises No. 21 – Leases. 3) If the relevant economic benefits are likely to flow into the enterprise and the cost of the fixed asset can be measured reliably, the subsequent expenses related to a fixed asset shall be included in the cost of fixed assets; otherwise, they shall be included in the 54 Changchai Company, Limited Summary of Annual Report 2008 current profits and losses. 4) The depreciation shall be made when the fixed assets reach to the expected condition for use, which shall be measured through straight-line method. expected life and annual depreciation rate of various fixed assets: Fixed assets Predicted useful life Annual depreciation (year) rate Houses and buildings 20-30 3.33%-5% Machine equipments 6-15 6.67%-16.67% Transportation 5-10 10%-20% equipments Other equipments 5-10 10%-20% For a fixed asset, the provision for depreciation has been made, the depreciable amount shall be measured on the basis of deducting the accumulative amount of the provision for impairment of the depreciated fixed asset. 5) The Company shall, at the end of each year, have a check on the useful life, expected net salvage and depreciation method of the fixed assets. If the fixed asset is in a state of disposal or the fixed asset is unable to generate any economic benefits through use or disposal as expected, the recognition of the fixed assets shall be terminated. When the Company sells, transfers or discards any fixed asset, or any fixed asset of the Company is damaged or destroyed, the Company shall deduct the book value and relevant taxes from the disposal income, and include the amount in the current profits and losses. If the recoverable amount of the fixed assets is less than the book value, the book value shall be reduced to the recoverable amount. 12. The method of measuring construction in process The construction in process refers to the workshops, equipments and other facilities under construction, consisting of the necessary expense for building the asset to the hoped condition for use. The self-build one includes the material cost, direct labor, direct equipment construction cost, and the expense of building works and erection works in contract engineering, as well as the expense to be apportioned. The borrowing costs with the condition of capitalization shall be handled according to Accounting Standard for Business No. 17 – Borrowing Costs. The construction in process, of which the fixed assets reach to the predicted condition for use, shall carry forward fixed assets on schedule. The one that hasn’t audit the final accounting shall recognize the cost and make depreciation in line with valuation value. The construction in process shall adjust the original valuation value at its historical cost but not adjust the depreciation that has been made after auditing the final accounting. 13. The pricing and amortizing method of intangible assets 1) Pricing of the intangible assets The intangible assets shall be initially measured according to its cost. (1) The cost of outsourcing intangible assets shall include the purchase price, relevant taxes and other necessary expenditure directly attributable to intangible assets for the 55 Changchai Company, Limited Summary of Annual Report 2008 expected purpose. (2) The cost of self-developed intangible assets shall include the total expenditures incurred during the period from the time when it meets the following conditions to the time when the expected purposes of use are realized, except that the expenditures which have already been treated prior to the said period shall not be adjusted. ① It is feasible technically to finish intangible assets for use or sale; ② It is intended to finish and use or sell the intangible assets; ③ The usefulness of methods for intangible assets to generate economic benefits shall be proved, including being able to prove that there is a potential market for the products manufacturing by applying the intangible assets or there is a potential market for the intangible assets itself or the intangible assets will be used internally. ④ It is able to finish the development of the intangible assets, and able to use or sell the intangible assets, with the support of sufficient technologies, financial resources and other resources; ⑤ The development expenditures of the intangible assets can be reliably measured. (3) The cost invested into intangible assets by investors shall be determined according to the conventional value in the investment contract or agreement. (4) The costs of intangible assets acquired from non-monetary assets transaction, debt recombination, government subsides, and merger of enterprises shall be determined respectively according to the Accounting Standard for Business Enterprises No. 7 - Non-monetary Assets, Accounting Standard for Business Enterprises No. 12 – Debt Restructurings, Accounting Standard for Business Enterprises No. 16 – Government Grants and Accounting Standard for Business Enterprises No. 20 – Business Combinations. 2) Amortization of the intangible assets (1) As for the intangible assets with limited service life, which are amortized by straight-line method when it is available for use within the service period, shall be recorded into the current profits and losses. The Company shall, at least at the end of each year, check the service life and the amortization method of intangible assets with limited service life. When the service life and the amortization method of intangible assets are different from those before, the years and method of the amortization shall be changed. (2) Intangible assets with uncertain service life may not be amortized. However, the Company shall check the service life of intangible assets with uncertain service life during each accounting period. Where there are evidences to prove the intangible assets have limited service life, it shall be estimated of its service life, and be amortized according to the above method mentioned in (1). (3) The rights to use land of the Company shall be amortized according to the rest service life. 14. The evidence and recognition method for withdraw the impairment provision of long-term assets (1) At the end of accounting period, the Company shall check the long-term assets. There may be an impairment of assets when the following signs occur. The recoverable amount shall be estimated and the asset impairment loss shall be made in light of the difference 56 Changchai Company, Limited Summary of Annual Report 2008 that the recoverable amount of assets is less than the book value when the impairment happens. The signs are stated as follows: (1) The current market price of assets falls, and its decrease is obviously higher than the expected drop over time or due to the normal use; (2) The economic, technological or legal environment in which the enterprise operates, or the market where the assets is situated will have any significant change in the current period or in the near future, which will cause adverse impact on the enterprise; (3) The market interest rate or any other market investment return rate has risen in the current period, and thus the discount rate of the enterprise for calculating the expected future cash flow of the assets will be affected, which will result in great decline of the recoverable amount of the assets; (4) Any evidence shows that the assets have become obsolete or have been damaged substantially; (5) The assets have been or will be left unused, or terminated for use, of disposed ahead of schedule; (6) Any evidence in the internal report of the enterprise shows that the economic performance of the assets has been or will be lower than the expected performance, for example, the net cash flow created by assets or the operating profit (or loss) realized is lower (higher) than the expected amount; (7) Other evidence indicates that the impairment of assets has probably occurred. 2) The evidences to withdraw the impairment provision of long-term investment, fixed assets, construction in process and intangible asset: at the end of the report period, the Company will withdraw the asset impairment provision according to the difference that the recoverable amount of single asset is less than the book value. The recoverable value shall be recognized according to the high one between the net amount of fair value deducting disposal charge and the current value of the expected future cash flow of assets. If the recoverable amount of the single asset cannot be obtained, the recoverable amount shall be recognized on the basis of the asset group to which the asset belongs. 3) The business reputation formed by merger of enterprises shall be distributed into the related asset group at the end of every year, then the asset group shall have the impairment test to measure the recoverable amount, comparing to the book value, if the recoverable amount of the asset group is less than the book amount, the difference shall first charge against the book value of the business reputation which is apportioned to the asset group; if the book value of the business reputation is not enough to charge against the difference, the uncharged balance shall be distributed by the other assets of the asset group in accordance with the book value. 4) The recognition of the asset group under impairment test: the related minimum of asset groups that can share the synergetic benefit brought from merger through the prediction of the Company. 5) The above impairment losses of assets cannot be reversed as soon as they are 57 Changchai Company, Limited Summary of Annual Report 2008 recognized. 15. The amortization method of long-term deferred expenses The long-term deferred expenses occurred in the Company shall be priced at its historical cost and conducted average amortization at the expected beneficial period. As for the long-term deferred expenses item that cannot bring benefit in the afterward accounting period, the amortized value in the said item shall be recorded into the current profits and losses in total when it is recognized. 16. Measurement method of borrowing costs 1) The borrowing costs of the Company shall include interest on borrowings, amortization of discounts or premiums on borrowings, ancillary expenses, and exchange balance on foreign currency borrowings. 2) Where the borrowing costs incurred to the Company can be directly attributable to the acquisition and construction or production of assets eligible for capitalization, it shall be capitalized and recorded into the costs of relevant assets. Other borrowing costs shall be recognized as expenses on the basis of the actual amount incurred, and shall be recorded into the current profits and losses. 3) The borrowing costs shall be capitalized when the asset disbursements, the borrowing costs and the acquisition and construction or production activities which are necessary to prepare the asset for its intended use or sale have already incurred. Where the acquisition and construction or production of a qualified asset is interrupted abnormally and the interruption period lasts for more than 3 months, the capitalization of the borrowing costs shall be suspended. When the acquisition and construction assets reach the predicted condition for use, the capitalization of the borrowing costs shall be suspended, and the borrowing costs occur afterwards which are used in the current period shall be recognized as profits and losses. 4) The to-be-capitalized amount in each accounting period shall be measured and recognized on the basis of the weighted average amount of the accumulative expenses from acquisition and construction assets and capitalization rate at the end of the current period. As for specifically borrowed loans for the acquisition and construction or production of assets eligible for capitalization, the to-be-capitalized amount of interests shall be determined in light of the actual cost incurred of the specially borrowed loan at the present period minus the income of interests earned on the unused borrowing loans as a deposit in the bank or as a temporary investment. Where a general borrowing is used for the acquisition and construction or production of assets eligible for capitalization, the enterprise shall calculate and determine the to-be-capitalized amount of interests on the general borrowing by multiplying the weighted average asset disbursement of the part of the accumulative asset disbursements minus the general borrowing by the capitalization rate of the general borrowing used. 17. Measurement method of estimated debts The obligation pertinent to Contingencies shall be recognized as estimated debts when the following conditions are satisfied simultaneously: (1) That obligation is a current obligation of the enterprise; 58 Changchai Company, Limited Summary of Annual Report 2008 (2) It is likely to cause any economic benefit to flow out of the enterprise as a result of performance of the obligation; (3) The amount of the obligation can be measured in a reliable way. The Company shall check the book value of the estimated debts on the balance sheet date. If there is any exact evidence indicating that the book value cannot really reflect the current best estimate, the Company will adjust the book value in accordance with the current best estimate. 18. Measurement method of the deferred income tax assets or the deferred income tax liabilities Where there is difference (temporary difference) between the carrying amounts of the assets or liabilities and its tax base, the deferred income tax assets or the deferred income tax liabilities shall be determined. According to tax law, the deductible loss and tax deduction which can deduct the taxable amount in the subsequent years, regarding as temporary difference, shall be recognized as the corresponding deferred income tax assets. As for the temporary difference arising from the initial recognition of the goodwill, the corresponding deferred income tax liabilities. When the temporary difference is arisen from the initial recognition of the assets or liabilities incurring in the transaction which is not business combination and does not affect the accounting profits or the taxable amount (or the deductible loss), the corresponding deferred income tax assets and deferred income tax liabilities shall not recognized. On the balance sheet date, the deferred income tax assets and deferred income tax liabilities shall be measured at the tax rate applicable to the period during which the assets are expected to be recovered or the liabilities are expected to be settled. The Company shall recognize the deferred income tax assets to the extent of the amount of the taxable income which it is likely to obtain and which can be deducted from the deductible temporary difference, deductible loss and tax deduction. The deferred income tax liabilities arising from the temporary differences related to the investments of subsidiary companies, associated enterprises and joint enterprises shall be recognized. However, the deferred tax income assets and deferred income tax liabilities shall not recognized which meet the conditions that the Company can control the time of the reverse of temporary differences which are likely to be reversed in the expected future. 19. Measurement method of revenues 1) The recognition of the revenue from selling goods: the revenue from selling shall be recognized by the following conditions: The significant risks and rewards of ownership of the goods have been transferred to the buyer by the Company; the Company retains neither continuous management right that usually keeps relation with the ownership nor effective control over the sold goods; the relevant amount of revenue can be measured in a reliable way; the relevant revenue and costs of selling goods can be measured in a reliable way. 2) The recognition of the revenue from providing labor services: When the total revenue and costs from providing labor can be measured in a reliable way; the relevant economic benefits are likely to flow into the enterprise; the schedule of completion under the transaction can be measured in a reliable way, the revenue from providing labor shall be 59 Changchai Company, Limited Summary of Annual Report 2008 recognized. 3) The recognition of the revenue from abalienating the right to use assets: When the relevant economic benefits are likely to flow into the enterprises and the amount of revenues can be measured in a reliable way, the revenue from abalienating the right to use assets shall be recognized. 20. The recognition and measurement of the transfer of financial assets 1) The recognition of the transfer of financial assets: Where the Company has transferred nearly all of the risks and rewards related to the ownership of the financial assets to the transferee under the following circumstances, it shall recognize the transfer of the financial assets and stop recognizing the financial asset. (1) The Company shall sell the financial assets without the right of recourse; (2) The Company shall sell the financial assets while signs the agreement with the buyer, and repurchase at the fair value of the intraday financial asset during stipulated time; (3) The Company shall sell the financial assets while signs the put option contract with the buyer, which is regarded as a significant out-of-money option judged by the contract items. 2) The measurement of the transfer of financial assets (1) The measurement of the transfer of the entire financial assets: The difference between the book value of the transferred financial asset and the sum of consideration received from the transfer, and the accumulative amount of the changes of the faire value originally recorded into the owners’ equity, shall be recorded into the profits and losses of the current period. (2) The measurement the transfer of partial financial asset: As for the transfer of partial financial asset, the entire book value of the transferred financial asset shall, between the portion whose recognition has been stopped and the portion whose recognition has not been stopped, be apportioned according to their respective relative fair value, and the difference between the book value of the portion whose recognition has been stopped and the portion of the accumulative amount of changes in the fair value originally recorded in the owners’ equity which corresponds to the portion whose recognition has been stopped, shall be recognized after the apportionment of the accumulative amount according to the relative fair value of the portion of financial asset whose recognition has been stopped the portion of financial asset whose recognition has not been stopped. 21. The accounting treatment of income tax expense The accounting treatment of income tax expense was adopted balance sheet debt method. The income taxes of the current period and deferred income tax of an enterprise shall be treated as income tax expenses or incomes, and shall be excluding the income tax incurred under the following circumstances: 1) The business combination; 2) The transactions or events directly recognized as the owners’ rights and interests. Note 5: Tax and its advantage 60 Changchai Company, Limited Summary of Annual Report 2008 The major tax categories and tax rates applicable to the Company are described as follows: (1) Turnover tax Tax on value added: the tax rate of selling farm diesel engine shall be 13% or 17%, while the tax rate of other sales income shall be 17%. Business tax: the tax rate of the business tax applicable to the common labor and other revenue shall be 5%. (2) Tax on city maintenance and construction and extra-charges for education Tax on city maintenance and construction, extra-charge for education: shall be paid by measuring according to the rules of the tax paying unit which belongs to the Local Taxation Bureau. 3) Income tax: income tax shall be measured at 25% in total. In accordance with Notice of Ministry of Finance, State Administration for Taxation and General Administration of Customs on the Tax Favorable Policies for Western Development, Changchai Wanzhou Diesel Engine Co., Ltd., a subsidiary company of the Company, shall pay corporate income tax at tax rate of 15% from 2001 to 2010. (4) Tax on real estate: the tax rate of the real estate for self-use of which tax is measured at 70% of the original value of the real estate at the end of last year, shall be 1.2%. The tax rate of the real estate for renting, of which tax is measured according to the revenue from leasing real estate, shall be 12%. Note 6: Business merger and consolidated financial statement 1. Shareholding subsidiaries and joint-venture enterprises 1) Three shareholding subsidiaries under the Company as at 31 Dec. 2008: (Unit: RMB ten thousand) Legal Registered Shareholding Name of subsidiaries Registration place Major business representative capital proportion Changchai Wanzhou No. 1101, Xiamen Production and sales of diesel Road, Wanzhou, engine Diesel Engine Co., Yin Lihou 3500 60% Chongqing Ltd. (Changwan) Changzhou Nanguan Village, Production and sales of diesel Changchai Benniu Benniu Town, engine fittings Diesel Engine Wujin Qiang Jinlong 3378.64 75% Fittings Co., Ltd. (Benniu) Nanjing Changli Economy Agricultural mechanization Agricultural Development production, electromechanical Machinery Fittings Zone of Lishui Xue Guojun 500 100% product, spare parts and Co., Ltd. County, Nanjing maintenance service 2) Change in scope of the consolidated statement As at 31 Dec. 2008, the consolidation scope of the subsidiaries and the Company remained unchanged. 3) As at 31 Dec. 2008, there are no joint-venture enterprises in the Company. 2. Measure method of business combination 1) The business combination under the same control: the consideration paid by combining party and the net assets obtained by the combining party shall be measured according to 61 Changchai Company, Limited Summary of Annual Report 2008 the book value. As for the balance between the carrying amount of the net assets obtained by the combining party and the carrying amount of the consideration paid by it and the total par value of the shares issued, the additional paid-in capital shall be adjusted. The direct cost for the business combination of the combining party shall be recorded into the profits and losses at the current period. The bonds issued for a business combination or the handling fees, commissions and other expenses for assuming other liabilities shall be recorded into the amount of initial measurement of the bonds or other debts. 2) The business combination not under the same control: the combination costs of the acquirer and the identifiable net assets obtained by the acquirer shall be measured based on fair value. The acquirer shall recognize the positive balance between the combination costs and the fair value of the identifiable net assets it obtains from the acquiree as business reputation. The combination costs are less than the fair value of the identifiable net assets it obtains from the acquiree, it shall record the balance into the profits and losses of the current period. The direct cost for the business combination of the combining party shall be recorded into costs of business combination. The bonds issued for a business combination or the handling fees, commissions and other expenses for assuming other liabilities shall be recorded into the amount of initial measurement of the bonds or other debts. 3. Method for compiling consolidated financial statements The consolidation scope of the consolidated financial statements includes the Company and its subsidiaries. Since the actual control right of the subsidiary was obtained, the Company has started to bring it into combination, which shall be suspended since the actual control date ends. All the significant current balance, transactions and unrealizable profits of the Group shall be offset when the consolidated financial statements were made. The shareholder’s interest of the subsidiaries which doesn’t belong to the portion that the Company owns shall be represented solely as the minority interest in the shareholders’ interest of the consolidated financial statements. When the accounting policies or accounting period between the Company and its subsidiaries, when the consolidated financial statements are made, the financial statements of the subsidiaries shall be adjusted and combined according to the accounting policies or accounting period of the Company. As for the subsidiaries obtained from business combination not under the same control, when the financial statements are made, the specific financial statements shall be adjusted on the basis of the fair value of identifiable net assts on the acquisition date. As for the subsidiaries obtained from business combination under the same control, when the financial statements are made, the sides anticipated in the combination shall exist at the present situation when the final controller started to implement control. 62 Changchai Company, Limited Summary of Annual Report 2008 Note 7: Notes to major items of the consolidated financial statements (The following amount is expressed in RMB unless otherwise special explanation) 7-01 Monetary funds 1） Items 2008-12-31 2007-12-31 Cash 181,888.70 179,743.66 Bank deposit 402,469,454.96 442,806,667.46 Other 127,623.49 247,623.49 Total 402,778,967.15 443,234,034.61 2） Foreign currency funds in the monetary funds 2008-12-31 2007-12-31 Foreign Original Exchange Converted Original Exchang Converted currency currency rate into RMB currency e rate into RMB USD 1,383,044.95 6.8346 9,452,559.01 23,441.66 7.3046 171,231.95 HKD 174.75 0.9363 163.62 EURO 148,543.65 9.659 1,434,783.12 10,887,342.13 171,395.57 7-02 Tradable financial assets Contents 2008-12-31 2007-12-31 Explanation 4.5 million shares as at 31 Dec. Cost of Foton Motor’s shares 5,204,700.00 5,204,700.00 2008 Change in fair value of Foton Fair value shall be accounted at Motor’s shares 16,440,300.00 53,835,300.00 closing price as at 31 Dec. 2008 Total 21,645,000.00 59,040,000.00 Compared with the period-begin, the closing balance has decrease by 63.34%, which caused by the larger reduction of fair value of Foton Motor’s shares at the end of period. 7-03 Notes receivable 1） Items 2008-12-31 2007-12-31 Bank acceptance bills 27,121,088.60 52,244,643.94 Total 27,121,088.60 52,244,643.94 2）No notes with overdue account that hadn’t received, mortgage or frozen account occurred at the year-end, which would exist significant limitation to cashability. 3) Compared with the period-begin, the closing balance has decrease by 48.09%, which was because that the Company paid payment for goods by adopting bank acceptance bills with the lesser retained notes at the end of reporting period. 7-04 Accounts receivable 63 Changchai Company, Limited Summary of Annual Report 2008 1） Aging 2008-12-31 Withdrawal Net amount of Proportion Bad debt Amount proportion accounts (%) provision (%) receivable Within 1 year 178,103,561.43 37.21 2.24 3,985,046.13 174,118,515.30 1-2 years 6,004,102.65 1.25 31.44 1,887,837.70 4,116,264.95 2-3 years 30,547,662.17 6.38 31.65 9,667,501.77 20,880,160.40 3-4 years 18,843,431.63 3.94 90.84 17,117,093.72 1,726,337.91 4-5 years 11,944,438.32 2.50 71.81 8,577,680.37 3,366,757.95 Over 5 years 233,219,721.86 48.72 100.00 233,219,721.86 Total 478,662,918.06 100.00 274,454,881.55 204,208,036.51 2007-12-31 Withdrawal Net amount of Proportion Bad debt Amount proportion accounts (%) provision (%) receivable Within 1 year 143,667,120.20 27.42 4.03 5,794,040.66 137,873,079.54 1-2 years 74,069,632.56 14.14 19.92 14,757,882.46 59,311,750.10 2-3 years 88.94 18,953,654.93 3.62 16,857,974.33 2,095,680.60 3-4 years 13,955,751.31 2.66 54.63 7,623,976.25 6,331,775.06 4-5 years 32,374,343.77 6.18 63.04 20,409,994.48 11,964,349.29 Over 5 years 240,930,699.19 45.98 99.27 239,180,699.19 1,750,000.00 Total 523,951,201.96 100.00 304,624,567.37 219,326,634.59 2）Classified by account nature 2008-12-31 2007-12-31 Propor Propor Items Bad debt Bad debt Amount tion Amount tion provision provision (%) (%) Significant 359,101,103.23 75.02 231,211,877.02 422,976,431.86 80.73 283,060,265.25 single amount Insignificant 119,561,814.83 24.98 43,243,004.53 100,974,770.10 19.27 21,564,302.12 single amount 478,662,918.06 100.00 274,454,881.55 523,951,201.96 100.00 304,624,567.37 Accounts receivable with significant single amounts (over RMB 1,000,000 Yuan) shall be subject to impairment test separately. There is the objective evidences indicated impairment, thus the Company withdrew reserve for bad debt of RMB 231,211,900 as at 31 Dec. 2008 3）Foreign currency accounts receivable in accounts receivable 2008-12-31 2007-12-31 Currency Original currency RMB converted to Original currency RMB converted to USD 1,909,749.38 13,052,372.86 1,873,414.00 13,684,539.91 Euro 38,730.00 413,129.04 Total 13,052,372.86 14,097,668.95 4）No arrearage from the shareholders holding over 5% (including 5%) of the equity of the Company existed in the balance of accounts receivable. 5）The arrearage total of the first five arrearage entities listed in the closing balance of accounts receivable was RMB 93,689,500, taking up 19.58% of the balance of accounts receivable. 7-05 Prepayment 2008-12-31 2007-12-31 64 Changchai Company, Limited Summary of Annual Report 2008 Proportion 1） Aging Amount Proportion (%) Amount (%) Within 1 year 8,304,653.35 85.76 33,971,239.54 95.98 1-2 years 180,429.32 1.86 383,323.82 1.08 2-3 years 331,740.82 3.43 173,078.18 0.49 3-4 years 4-5 years Over 5 years 866,429.69 8.95 866,429.69 2.45 Total 9,683,253.18 100.00 35,394,071.23 100.00 2） No account from shareholders holding over 5% (including 5%) of the equity of the Company existed in the prepayments at the year-end. 3） The arrearage total of the first five arrearage entities listed in the prepayment at the end of 2008 was RMB 83,595,601,300, taking up 86.33% of the prepayment of the Company at the end of the report period. 4） The main reason for the amount at the year-end decreased 72.64% compared to that at the year-begin was: the price of raw material increased in a relatively large scale, the payment for goods to paid in advance given to suppliers by the Company could ensure the production and reduce the purchase costs. 7-06 Other receivables 1) Aging 2008-12-31 Withdrawal Proportion Bad debt Net amount of Amount proportion (%) provision other receivables (%) Within 1 year 12,429,346.16 16.85 2 248,586.92 12,180,759.24 1-2 years 4,562,462.58 6.19 5 228,123.13 4,334,339.45 2-3 years 251,585.40 0.34 15 37,737.81 213,847.59 3-4 years 203,768.18 0.28 89.46 182,285.18 21,483.00 4-5 years 90,078.12 0.12 63.97 57,619.80 32,458.32 Over 5 years 56,210,878.37 76.22 79.93 44,930,696.59 11,280,181.78 Total 73,748,118.81 100.00 45,685,049.43 28,063,069.38 2007-12-31 Withdrawal Proportion Bad debt Net amount of Amount proportion (%) provision other receivables (%) Within 1 year 15,140,596.93 18.40 2.11 319,237.17 14,821,359.76 1-2 years 543,165.40 0.66 5.00 27,158.27 516,007.13 2-3 years 33,711.66 0.04 26.90 9,067.82 24,643.84 3-4 years 88,258.62 0.11 34.37 30,336.56 57,922.06 4-5 years 15,075,797.60 18.32 61.19 9,225,030.76 5,850,766.84 Over 5 years 51,392,949.26 62.47 75.86 38,986,144.08 12,406,805.18 Total 82,274,479.47 100.00 48,596,974.66 33,677,504.81 1） No arrearage from the shareholders holding over 5% (including 5%) of the equity of the Company existed in other receivables at the end of the report period. 2） The arrearage total from the first five arrearage entities was RMB 38,405,300, taking up 52.08% of other accounts receivable of the Company at the end of report period. 3） Other accounts receivable with large amount were listed as follows: Entity Amount Nature of account Changzhou Vehicle Co., Ltd. 13,064,423.61 Borrowing Changzhou Investment Group Co., Ltd. 10,000,000.00 Borrowing Changchai Combined Harvester Co., Ltd. 7,400,908.91 Borrowing Lanzhou Changchai Northwest Vehicle 5,000,000.00 Borrowing 65 Changchai Company, Limited Summary of Annual Report 2008 Co., Ltd. Changzhou Compressor Co., Ltd. 2,940,000.00 Current payment 7-07 Inventory 1） Items 2008-12-31 Proportion Provision for falling Net amount of Amount (%) price inventory Raw material 105,308,232.52 31.18 13,005,393.08 92,302,839.44 Consigned materials for processing 3,038,765.60 0.90 3,038,765.60 Goods in process 98,818,047.43 29.26 98,818,047.43 Finished products 129,978,563.63 38.48 971,756.37 129,006,807.26 Low-value consumption 611,254.08 0.18 611,254.08 Total 337,754,863.26 100.00 13,977,149.45 323,777,713.81 2007-12-31 Items Proportion Provision for falling Net amount of Amount (%) price inventory Raw material 90,228,217.35 29.32 1,497,268.20 88,730,949.15 Consigned materials for processing 4,464,264.20 1.45 4,464,264.20 Goods in process 56,317,338.23 18.30 496,218.76 55,821,119.47 Finished products 156,166,234.78 50.75 1,117,459.89 155,048,774.89 Low-value consumption 527,082.05 0.18 527,082.05 Total 307,703,136.61 100.00 3,110,946.85 304,592,189.76 2）On balance sheet date, the inventory is measured according to the lower between cost and the net realizable value. The inventory cost which was higher than the net realizable value should be withdrawn falling price reverses. The net realizable value should be recognized in accordance with the predicted price in the process of normal production and operation minus the amount of the cost which was estimated to happen at the time of completion, the estimated sales expenses and related tax expenses. 3）No capitalization amount of borrowing costs existed in the inventory of the Company, neither did such inventory of which right was restricted as mortgage in the inventory at the end of the report period. 7-08 Financial assets available for sale Items 2008-12-31 2007-12-31 Remark Holding 36,125,000 shares as at 31 Cost on Foton Motor Stock 41,784,000.00 41,784,000.00 Dec. 2008 Change in fair value on Foton Fair value is calculated based on the Motor Stock 131,977,250.00 432,176,000.00 closing price as at year-end Holding 50,000 shares as at 31 Dec. Cost on Jiangsu Expressway 90,500.00 90,500.00 2008 Change in fair value on Fair value is calculated based on the Jiangsu Expressway 181,500.00 435,500.00 closing price as at year-end Total 174,033,250.00 474,486,000.00 Main reasons for decrease by 63.32% compared with the balance at the period-begin: During the reporting period, the market price of Foton Motor Stock held by the Company has decreased by a big margin, accordingly, resulting in the larger reduction of the change in fair value. 7-09 Long-term equity investment 66 Changchai Company, Limited Summary of Annual Report 2008 Notes: Others: RMB 20,000 was invested to Changzhou Economic and Technology Development Ratio in Closing Invest the equity Initial Stock Equity in Accumulative balance of Name of investee units ment of the investment dividend 31 Dec. 2008 2008 equity impairment term investee amount received provision units Changzhou Fuji Changchai Robin 1999- 33% 12,294,546.00 242,875.14 5,178,268.30 17,472,814.30 Gasoline Engine Co., 2049 Ltd. Beijing Tsinghua 1999- Industrial Investment 25% 2,500,000.00 -2,500,000.00 0.00 2049 Management Co., Ltd. Shenzhen Drgama 1999- Network System Co., 34% 2,388,157.00 5,048,232.00 7,436,389.00 0.00 2014 Ltd. Jiangsu Bank 38,000,000.00 38,000,000.00 Lanzhou Northwest 5% 5,000,000.00 5,000,000.00 Vehicle Corporation KAMA CO.,LTD. 5.49% 31,706,441.63 31,706,441.63 (Corporate B stock) Yangdong Co., Ltd. 0.43% 1,000,000.00 1,000,000.00 Chengdu Changwan Diesel Engine 510,000.00 510,000.00 0.00 Markeing Corp. Chongqing Wanzhou Changwan Diesel 290,000.00 290,000.00 0.00 Engine Fitting Corp. Other 410,000.00 410,000.00 0.00 Total 94,099,144.63 242,875.14 7,726,500.30 8,646,389.00 93,179,255.93 Company, RMB 100,000 was invested to Changzhou Tractor Plant, RMB 200,000 was invested to Industry Fund Fraternity of Changzhou Economic & Trade Commission, RMB 90,000 was invested to Beijing Project Machine Agricultural Machinery Co., Ltd.. The above four items were hard to take back fully withdrawn impairment provision. Shenzhen Drgama Network System Co., Ltd. failed to do annual inspection for industry and commerce administration for four years. It is in disorganization actually, so the Company withdrawn impairment provision fully. 7-10 Investment properties Name of projects 2007-12-31 Increase in 2008 Decrease in 2008 2008-12-31 Houses and buildings 87,632,571.14 87,632,571.14 Less: accumulative 12,684,814.71 2,208,340.80 14,893,155.51 depreciation Net value of investment 74,947,756.43 72,739,415.63 properties In the reporting year, the investment property is Changchai Mansion, which was used for lease and shall be measured by employing historical cost. 7-11 Fixed assets 1） Increase or decrease change in fixed assets Original value 2007-12-31 Increase in 2008 Decrease in 2008 2008-12-31 Houses and buildings 369,025,956.80 6,601,626.31 3,125,914.12 372,501,668.99 Machinery 422,225,422.01 17,648,237.07 38,867,979.88 401,005,679.20 67 Changchai Company, Limited Summary of Annual Report 2008 equipment Transportation vehicle 25,064,958.24 2,117,223.04 3,995,153.20 23,187,028.08 Other equipment 39,385,447.22 1,462,410.00 1,753,259.87 39,094,597.35 855,701,784.27 27,829,496.42 47,742,307.07 835,788,973.62 Accumulative Increase in 2008 Decrease in 2008 depreciation 2007-12-31 2008-12-31 Houses and buildings 137,260,906.22 13,926,101.59 1,178,779.45 150,008,228.36 Machinery equipment 273,036,716.06 23,163,366.81 32,755,921.23 263,444,161.64 Transportation vehicle 17,751,617.85 1,617,131.45 3,867,957.17 15,500,792.13 Other equipment 26,285,521.28 3,093,771.14 1,641,028.35 27,738,264.07 454,334,761.41 41,800,370.99 39,443,686.20 456,691,446.20 Impairment Increase in 2008 Decrease in 2008 provision 2007-12-31 2008-12-31 Houses and buildings 7,633,328.53 3,711,268.91 11,344,597.44 Machinery equipment 5,422,950.99 94,326.00 1,889,665.49 3,627,611.50 Transportation vehicle Other equipment 13,056,279.52 3,805,594.91 1,889,665.49 14,972,208.94 Net value of fixed 2007-12-31 2008-12-31 assets Houses and buildings 224,131,722.05 211,148,843.19 Machinery equipment 143,765,754.96 133,933,906.06 Transportation vehicle 7,313,340.39 7,686,235.95 Other equipment 13,099,925.94 11,356,333.28 388,310,743.34 364,125,318.48 2） The original value of fixed assets was RMB 25,129,150.00 from the construction in progress in 2008. 3） The increase of fixed assets in 2008 is from the street properties and machinery equipment; while the decrease is caused by the disposal of end-of-life equipment. 4） No capitalization interest amount existed in the increase of the fixed assets. 5） Mortgage of the fixed assets 31 Dec. 2008 Assets Original Net carrying Loan balance carrying value value Houses and Changwan borrowed RMB 8.5 million buildings 12614700 6745000 from Chongqin Sanxia Bank Gaosuntang Machinery Sub-branch equipment 6592900 1796700 Houses and Benniu borrowed RMB 2.5 million from buildings 7664100 3892300 ICBC Changzhou Zhonglou Sub-branch Benniu borrowed RMB 3.2 million from Houses and 6001000 3047700 Jiangsu Wujin Rural Commercial Bank buildings Co., Ltd. Benniu borrowed RMB 10 million from Houses and Agricultural Bank of China Changzhou buildings 14992400 7168700 Wujin Sub-branch 68 Changchai Company, Limited Summary of Annual Report 2008 47865100 22650400 6）The provision for impairment of fixed assets has increase by RMB 3,805,594.91. In accordance with the policies stated in No. 11 of Note 4 to the consolidated financial statement, the provision for impairment of idle houses amounting to 3,711,268.91 is withdrawn, and Changzhou Changchai Benniu Diesel Engine Fitting Co., Ltd. made provision for impairment of machinery equipment by RMB 94,326.00. The Company withdrew the dispose end-of-life machinery equipment, which caused by reduction of provision for impairment of fixed assets by RMB 1,889,665.49. 7-12 Construction in progress 1) Construction projects Transferring-in Opening balance Increase in 2008 fixed assets in Closing balance Sources of capital 2008 Expansion capacity of 11,784,770.08 11,784,770.08 Self-financing multi-cylinder Temporary office room 921,581.80 4,950,509.74 5,872,091.54 Self-financing Experimental workshop 17,129,608.17 17,129,608.17 Self-financing of technology center Renovation of network of 855,000.00 855,000.00 Self-financing pipes Renovation of casting 20,760,295.15 20,760,295.15 Self-financing Other 21,521,217.42 16,911,866.45 19,257,058.46 19,176,025.41 Self-financing Total 22,442,799.22 72,392,049.59 25,129,150.00 69,705,698.81 2) Amount of interest capitalization in the construction in progress is RMB 521,293.50 in the reporting period; 3）At the end of period, the construction in progress is made a overall check, there exists no situation that the recoverable amount is lower than carrying value due to steady declines of market price, technological obsolescence, damage, long-term idling, as a result, the provision for impairment of the construction in progress shall not be withdrawn. 7-13 intangible assets The rest Closing original Opening Increase in Amortization Transferred out Items Closing balance amortization amount balance 2008 in 2008 in 2008 life Land use 35..5-43.8years 131,158,184.40 108,762,672.04 2,703,795.32 106,058,876.72 right Special 1,211,500.00 195,298.00 151,704.00 43,594.00 technology Total 132,369,684.40 108,957,970.04 2,855,499.32 106,102,470.72 Note: At the end of period, there was no provision for impairment that need to be withdrawn. 7-14 Long-term deferred expenses 2008-12-31 2007-12-31 Category Small transformation 171,326.44 Total 171,326.44 7-15 Deferred income tax assets 2008-12-31 2007-12-31 1） Deferred income tax assets recognized Provision for bad debts 620,237.12 701,681.23 Total 620,237.12 701,681.23 2008-12-31 2007-12-31 2） Deductible temporary difference Provision for bad debts 2,480,948.47 2,806,724.93 69 Changchai Company, Limited Summary of Annual Report 2008 Total 2,480,948.47 2,806,724.93 7-16 Short-term borrowing 1）Category 2008-12-31 2007-12-31 Loan on security 14,500,000.00 17,000,000.00 Collateral loan 31,700,000.00 12,700,000.00 Commission loan 5,000,000.00 Total 51,200,000.00 29,700,000.00 2）The reason for the increase of 72.39% compared with last year was due to increase of closing loans for subsidiaries. 3）Breakdown of collateral loan Annual interest Loan bank Loan condition rate Loan term Closing amount Chongqing Sanxia Bank Mortgage and 10.458 2008.4.14-2009.4.13 1,500,000.00 Gaosuntang Sub-branch pledge Chongqing Sanxia Bank Mortgage and 9.711 2008.5.14-2009.5.13 6,000,000.00 Gaosuntang Sub-branch pledge Chongqing Sanxia Bank Mortgage and 9.711 2008.8.7-2009.8.6 8,500,000.00 Gaosuntang Sub-branch pledge Agricultural Bank of China, Changzhou Wujin Mortgage 5.544 2008.12.4-2009.6.3 7,000,000.00 Sub-branch Agricultural Bank of China, Changzhou Wujin Mortgage 6.633 2008.11.17-2009.2.16 3,000,000.00 Sub-branch ICBC Changzhou Mortgage 8.217 2008.6.5-2009.1.4 2,500,000.00 Zhonglou Sub-branch Jiangsu Wujin Rural Mortgage 8.0748 2008.7.23-2009.6.25 3,200,000.00 Commercial Bank Co., Ltd. 31,700,000.00 For details of mortgage, please refer to No. (5) under Note 7 fixed assets. 4 Breakdown of loan on security Annual interest Loan bank Secured entity rate Loan term Closing amount Bank of Changchai Communications Company, Limited 6.5835 2008.10.29-2009.10.29 5,000,000.00 Changzhou Branch Business Department Bank of Changchai Communications Company, Limited 6.5835 2008.10.29-2009.10.29 4,500,000.00 Changzhou Branch Business Department Bank of Changchai Communications Company, Limited 6.327 2008.10.31-2009.10.31 5,000,000.00 Changzhou Branch Business Department 14,500,000.00 5) Breakdown of commission loan Loan bank Entrusted entity Annual Loan term Closing amount 70 Changchai Company, Limited Summary of Annual Report 2008 interest rate Chongqing Chongqing Sanxia Bank Wanzhou District 9.711 2008.9.11-2009.9.10 5,000,000.00 Business Department State-owned Assets Guaranty Co., Ltd. 5,000,000.00 6）There was no overdue loan in the short-term loan as at 31 Dec. 2008. 7-17 Notes payable 1）Category 2008-12-31 2007-12-31 Bank acceptance bills 136,103,600.00 56,300,000.00 Total 136,103,600.00 56,300,000.00 2）The main reason for the increase of closing balance by 141.75% compared to that of year-begin in the notes payable was because the Company paid the supplier for the payment for goods mostly by the means of bank acceptance. 7-18 Accounts payable 2008-12-31 2007-12-31 361,368,076.43 428,095,753.10 361,368,076.43 428,095,753.10 1）Classified by the nature of accounts payable 2008-12-31 2007-12-31 Amount Ratio (%) Amount Ratio (%) Operating accounts payable 357,873,444.40 99.03 416,545,947.86 97.30 Accounts payable for engineering 3,494,632.03 0.97 11,549,805.24 2.70 361,368,076.43 100.00 428,095,753.10 100.00 2）No account which was owed to the shareholders holding over 5% (including 5%) of the Company existed in the accounts payable. 7-19 Account collected in advance 2008-12-31 2007-12-31 24,690,165.89 45,035,644.02 24,690,165.89 45,035,644.02 1）No accounts collected in advance with large amount of which account age was over one year existed in the balance at the period-end 2) No account which was owed to the shareholders holding over 5% (including 5%) of the Company existed in the accounts collected in advance. 3) The closing balance has decease by 45.18% compared with period-begin, which was mainly because that the Company collected the payment for goods in advanced from clients due to rise in price of raw materials in last year, while the less matters happened in this reporting period. 7-20 Payroll payable Items 2007-12-31 Increase in 2008 Decrease in 2008 2008-12-31 71 Changchai Company, Limited Summary of Annual Report 2008 Wages, bonuses, allowance and subsidies for the employees 23,914,647.18 126,780,395.52 131,123,578.67 19,571,464.03 Welfare expenses for the employees 5,325,478.01 5,325,478.01 Trade union funds and staff training expense 6,032,209.20 2,875,128.64 3,281,549.99 5,625,787.85 Social insurances 41,597,275.34 41,424,745.34 172,530.00 Of which: endowment insurance 28,418,324.68 28,418,324.68 Basic medical insurance 8,610,957.68 8,438,427.68 172,530.00 Unemployment insurance 2,907,367.04 2,907,367.04 Work injury insurance 956,750.00 956,750.00 Maternity insurance 703,875.94 703,875.94 Housing accumulation fund 8,669,389.00 8,669,389.00 Compensations for the cancellation of the labor relationship with the employees 12,241,435.50 12,241,435.50 Labor service fee 488,420.15 488,420.15 29,946,856.38 197,977,522.16 202,554,596.66 25,369,781.88 7-21 Taxes and dues payable Items 2008-12-31 Rates of taxation in 2008 2007-12-31 VAT Note 5 under this notes to -32,856,189.17 -22,240,100.22 financial statement Tax for municipal Note 5 under this notes to maintenance and 959,173.65 830,385.67 financial statement construction Corporate income tax Note 5 under this notes to 487,761.58 8,063,609.57 financial statement Housing property tax Note 5 under this notes to 347,813.99 345,780.52 financial statement Individual income tax 14,065.47 Withhold and remit 19,287.00 Educational expenses Note 5 under this notes to 103,088.60 58.19 financial statement Synthesis fee Note 5 under this notes to 1,731,484.26 2,721,705.43 financial statement Total -29,212,801.62 -10,259,273.84 2) The closing balance has decrease by 184.75% over the period-begin, which was mainly because the Company increased stock for the production in midseason, the input tax of tax on value added was increased accordingly 7-22 Other payables 2008-12-31 2007-12-31 88,548,123.52 105,996,952.49 88,548,123.52 105,996,952.49 1）The account over one year with the larger amount mainly was margin for quality and performance guarantees. 2）No account which was owed to the shareholders holding over 5% (including 5%) of the Company existed in the other payables. 7-23 Non-current liabilities due within one year Category 2008-12-31 2007-12-31 Collateral loan 8,500,000.00 72 Changchai Company, Limited Summary of Annual Report 2008 Total 8,500,000.00 7-24 Other current liabilities Category 2008-12-31 2007-12-31 Accrued interest 576,645.48 45,247.50 Charges for disposing pollutants 180,000.00 300,000.00 Dividend on shares 3,898,258.83 3,949,493.87 Total 4,654,904.31 4,294,741.37 7-25Long-term loan 1）Category 2008-12-31 2007-12-31 Credit loan 42,000,000.00 Total 42,000,000.00 2) Breakdown of loan Annual Bank interest Life of loan Closing amount rate Changzhou Branch, 6.669 2008.10.15-2010.12.31 21,000,000.00 Bank of China Changzhou Branch, 6.669 2008.10.15-2011.9.25 21,000,000.00 Bank of China 42,000,000.00 3）The long-term loans for 2008 is a loans borrowed by the Company for technology innovation of experimental workshop of technology center. 7-26 Deferred income tax liabilities 2008-12-31 2007-12-31 1) Deferred income tax liabilities recognized Gains and losses from change in fair value of tradable financial assets 4,110,075.00 13,458,825.00 Gains and losses from change in fair value of financial assets available for sales 33,039,687.50 108,152,875.00 Total 37,149,762.50 121,611,700.00 2008-12-31 2007-12-31 2) Temporary difference taxable Gains and losses from change in fair value of tradable financial assets 16,440,300.00 53,835,300.00 Gains and losses from change in fair value of financial assets available for sales 132,158,750.00 432,611,500.00 Total 148,599,050.00 486,446,800.00 The reason for the decrease of deferred income tax liabilities in the period was because the fair value of shares of Foton Motor and Jiangsu Expressway held by the Company has a decrease by a big margin. 7-27 Share capital Change in share capital in the reporting period (Unit: Share) Items 2007-12-31 Increase in 2008 Decrease in 2008 2008-12-31 1. Shares subject to trading moratorium 98,926,846 18,714,353 80,212,493 2. Listed circulating shares (A-share) 175,322,705 18,714,353 194,037,058 3. Listed circulating shares (B-share) 100,000,000 100,000,000 73 Changchai Company, Limited Summary of Annual Report 2008 Total 374,249,551 18,714,353 18,714,353 374,249,551 7-28 Capital reserve Increase in Decrease in Items 2007-12-31 2008 2008 2008-12-31 Premium on capital stock 153,053,986.32 153,053,986.32 Other 342,618,775.60 2,150,986.84 225,339,562.50 119,430,199.94 Total 495,672,761.92 2,150,986.84 225,339,562.50 272,484,186.26 The capital reserve has increase by RMB 2,150,986.84 in the reporting period, which caused by increase of capital reserve of Benniu Company. The capital reserve has decrease by RMB 225,339,562.50 in the reporting period, which caused by the changed in financial assets available for sales (shares of Foton Motor and Jiangsu Expressway) measured at fair value and net amount of corresponding impact of deferred income tax. 7-29 Surplus reserve Increase in Decrease in Items 2007-12-31 2008 2008 2008-12-31 Statutory surplus reserves 227,212,487.02 227,212,487.02 Discretionary surplus reserve 13,156,857.90 13,156,857.90 Total 240,369,344.92 240,369,344.92 7-30 Retained profit Items 2008-12-31 2007-12-31 Closing balance as at 31 Dec. 2007 372,844,737.18 250,799,809.41 Add: Changes in accounting policies 6,631,927.35 Opening balance as at 1 Jan. 2008 372,844,737.18 257,431,736.76 Add: net profit in 2008 -83,993,014.91 168,116,392.28 Profit available for distribution 288,851,722.27 425,548,129.04 Less: appropriating statutory surplus reserve 16,423,117.03 appropriating discretionary surplus reserve 8,211,558.51 Common stocks dividends payable 28,068,716.33 28,068,716.32 Stock dividend transferred in stock capital Retained profit as at 31 Dec. 2008 260,783,005.94 372,844,737.18 Note: On 5 May 2008, the Company held the Annual Shareholders’ General Meeting 2007, at which the profit distribution plan 2007 was adopted, namely, based on total share capital of 374,249,551 shares as at 31 Dec. 2007, the Company distributed cash dividend of RMB 0.75 (tax included) for every 10 shares to all shareholders, totaling RMB 28,068,716.33 of cash distributed. 7-31 Minority interest 2008-12-31 2007-12-31 Minority interest 7,335,074.29 8,014,967.89 7,335,074.29 8,014,967.89 74 Changchai Company, Limited Summary of Annual Report 2008 7-32 Operating revenue Revenue Cost Items 2008 2007 2008 2007 Diesel engine and fittings 1,872,970,640.16 2,014,175,212.14 1,727,266,410.56 1,791,696,627.05 Subtotal of income and cost from main operations 1,872,970,640.16 2,014,175,212.14 1,727,266,410.56 1,791,696,627.05 Sale of raw materials 32,355,865.81 24,529,577.56 20,728,967.03 16,268,028.89 Rent 2,956,656.00 3,322,261.37 2,372,435.26 2,392,726.31 Subtotal of other operating income and expenses 35,312,521.81 27,851,838.93 23,101,402.29 18,660,755.20 Total 1,908,283,161.97 2,042,027,051.07 1,750,367,812.85 1,810,357,382.25 The total sales income of the first five clients of the Company was RMB 473,091,600, taking up 25.26% of the Company’s income from main operation. 7-33 Business tax and extra charges Items 2008 2007 Paying standard Tax for municipal Note 5 under this notes to financial maintenance and statement construction 350,183.85 1,018,753.63 Note 5 under this notes to financial Educational expenses 280,147.11 475,884.00 statement Total 630,330.96 1,494,637.63 7-34 Financial expense Items 2008 2007 Interest expenses 3,604,241.48 8,018,186.83 Less: interest income 13,021,723.08 3,412,119.30 Exchange gains or losses 1,929,099.51 2,096,226.60 Other -12,851,243.46 -17,164,156.00 Total -20,339,625.55 -10,461,861.87 Compared with the last year, the financial expenses has decrease by 94.42%, which was caused by increase of interest income and decrease of interest expenses. 7-35 Loss on assets impairment Items 2008 2007 Provision for bad debts -8,882,850.19 -1,223,925.60 Provision for falling price of inventory 11,116,202.60 Provision for impairment of fixed assets 3,805,594.91 94,326.00 Total 6,038,947.32 -1,129,599.60 The loss on assets impairment has increase by 634.61% over the last year, which was mainly because the provision for impairment of inventory and fixed assets was withdrawn, some accounts receivable was recalled in the reporting period, as a result, the corresponding provision for bad debts is switched back. 75 Changchai Company, Limited Summary of Annual Report 2008 7-36 Gains and losses on change in fair value Items 2008 2007 Gains and losses on change in fair value of tradable financial assets -37,395,000.00 53,835,300.00 It has decrease by 169.46% than that of last year, which was due to the larger drop of fair value of Foton Motor Stock that is divided into tradable financial assets. 7-37 Investment income Items 2008 2007 Dividend on stock under cost method 14,427,317.06 1,900,000.00 Income measured at equity method 242,875.14 2,582,114.21 Income form shares sold 102,229,275.45 Total 14,670,192.20 106,711,389.66 The investment income has decrease by 86.25% compared with last year, which was because of no income from selling shares. 7-38 Non-operating income Items 2008 2007 Income from disposal of fixed assets 1,501,550.94 51,577,910.17 Insurance indemnity 736,519.46 155,635.69 Penalty Incomes 161,252.85 136,272.03 Subsidize revenue 2,346,889.64 1,994,764.47 Other 1,724,314.31 605,866.88 Total 6,470,527.20 54,470,449.24 1）The non-operating income has decrease by 88.12% compared with the last year, which the main reason was: in the last year, according to city planning, the Company transferred the right to use land and the houses and buildings of the subordinated Changyi Tools Mould Pressing Co., Ltd which was located at No. 65 Garden Road, Changzhou to Changzhou Land Purchase Reserve Center, as well as net revenue from compensation for removal of street buildings of the Company, while there was no such matter in the reporting period. 2）The subsidy income in the reporting period was from appropriation RMB 12,000.00 from China Chamber of Commerce for Import and Export of Machinery and Electronic Products received by parent company, export brand award of RMB 80,000.00, subsidies-in-aid of RMB 160,000.00 from Environmental Protection Agency, subsidies-in-aid of RMB 1,020,700.00 from Bureau of Finance, as well as financial VAT refund of RMB 1,074,189.64 received by Benniu Company in accordance with CZSJT Zi [2008] No. 133 document. 7-39 Non-operating expense Items 2008 2007 Losses on disposal of fixed assets 2,115,022.25 1,411,528.25 Grain risk fund and price subsidy 1,208,675.61 1,870,006.95 Donated payment 600,000.00 22,151.87 Amercement outlay 110,777.22 213,302.57 Losses on debt restructuring 49,689.67 230,347.15 Flood control security funds 1,885,316.69 1,771,060.70 76 Changchai Company, Limited Summary of Annual Report 2008 Other 6,779,713.51 3,846,656.94 Total 12,749,194.95 9,365,054.43 Note: Item “Other” under the non-operating expense, RMB 4,905,161.68 is loss on disposal of current assets. 7-40 Income tax expense Items 2008 2007 Income tax expense of the current period 339,429.10 7,614,195.12 Deferred income tax expense -9,267,305.89 56,713,955.31 Total -8,927,876.79 64,328,150.43 The income tax expenses has decrease by 113.88% over the last year, which was because of the deficit in 2008, and the larger drop of fair value of Foton Motor Stock that is divided into tradable financial assets, as a result, the corresponding deferred income tax expense is switched back. 7-41 Other cash received related to operating activities From Jan. to Dec. 2008, the amount occurred was RMB 16,542,200, of which the items with relatively larger amount were as below: (RMB ten thousand) Items 2008 Interest income 1302.17 Subsidies and appropriation 189.27 7-42 Other cash paid related to operating activities From Jan. to Dec. 2008, the amount occurred was RMB 98,287,600, of which the items with relatively larger amount were as below: (RMB ten thousand) Items 2008 Travel charge 1536.52 Experimental development 1355.79 cost Freight charges and repairs 1119.54 charge Promotional expense and 883.19 guarantee of repair Administrative expense 648.47 7-43 Net increase of cash and cash equivalents Items 2008 2007 Closing monetary fund 402,778,967.15 443,234,034.61 Less: pledged fixed deposit 2,500,000.00 Closing balance of cash 400,278,967.15 443,234,034.61 Opening monetary fund 443,234,034.61 452,747,113.77 Less: pledged f Opening balance of cash 443,234,034.61 452,747,113.77 Net increase of cash and cash equivalents -42,955,067.46 -9,513,079.16 7-44 Supplementary information to consolidated cash flow statement 77 Changchai Company, Limited Summary of Annual Report 2008 Items 2008 2007 1. Adjusting net profit into cash flow arising from operating activities Net profit -85,389,904.12 169,631,492.41 Plus: Provision for assets impairment 6,038,947.32 -1,129,599.60 Depreciation of fixed assets, of oil-gas assets, of 44,008,711.79 38,144,735.92 productive biological assets Amortization of intangible assets 2,855,499.32 3,204,650.99 Amortization of long-term deferred expense 171,326.44 252,474.64 Loss on disposal of fixed assets, intangible assets and 613,471.31 -51,577,910.17 other long-term assets (income is listed as “-”) Loss on retirement of fixed assets (income is listed as 1,411,528.25 “-”) Losses on change in fair value （income is listed as 37,395,000.00 -53,835,300.00 “-”） Financial expense（income is listed as “-”） 3,604,241.48 8,018,186.83 Investment losses（income is listed as “-”） -14,670,192.20 -106,711,389.66 Decrease in deferred income tax assets（increase is 81,444.11 43,255,130.31 listed as “-”） Increase in deferred income tax liabilities（decrease is -9,348,750.00 13,458,825.00 listed as “-”） Decrease of inventories (increase is listed as “-”) -30,051,726.65 -5,283,414.37 Decrease in operating receivables (increase is listed as 64,626,629.69 -12,985,674.65 “-”) Increase in operating payables (decrease is listed as -27,273,271.91 47,405,580.70 “-”) Other Net cash flows arising from operating activities -7,338,573.42 93,259,316.60 2. Investing and financing activities that do not involving cash receipts and payment: Conversion of debt into capital Convertible bond due with one year Fixed assets financed by finance leases 3. Net increase in cash and cash equivalents: Closing balance of cash 400,278,967.15 443,234,034.61 Less: Opening balance of cash 443,234,034.61 452,747,113.77 Add: closing balance of cash equivalents Less: Opening balance of cash equivalents Net increase in cash and cash equivalents -42,955,067.46 -9,513,079.16 78 Changchai Company, Limited Summary of Annual Report 2008 N o t e 8 ： N o t e s t o f i n a n c i a l s t a t e m e n t o f p a re n t c o m p a n y (The following amount is expressed in RMB unless otherwise special explanation) 8-01 Accounts receivable 2008-12-31 1）Aging Withdrawal Net amount of Proportion Bad debt Amount proportion accounts (%) provision (%) receivable Within 1 year 126,565,462.95 29.54 3.15 3,985,046.13 122,580,416.82 1-2 years 5,855,998.83 1.37 32.11 1,880,432.51 3,975,566.32 2-3 years 23,847,353.03 5.57 40.09 9,560,697.80 14,286,655.23 3-4 years 16,957,837.57 3.96 97.60 16,551,415.50 406,422.07 4-5 years 3,398,383.19 0.79 86.02 2,923,434.05 474,949.14 Over 5 years 251,791,898.44 58.77 92.35 232,525,524.28 19,266,374.16 Total 428,416,934.01 100.00 267,426,550.27 160,990,383.74 2007-12-31 Aging Withdrawal Net amount of Proportion Bad debt Amount proportion accounts (%) provision (%) receivable Within 1 year 143,316,189.15 29.85 4.04 5,786,635.47 137,529,553.68 1-2 years 33,285,440.66 6.93 44.20 14,711,423.44 18,574,017.22 2-3 years 17,010,069.13 3.54 96.84 16,472,159.79 537,909.34 3-4 years 5,402,687.92 1.13 76.56 4,136,484.06 1,266,203.86 4-5 years 8,420,292.16 1.75 95.28 8,022,747.99 397,544.17 Over 5 years 272,611,492.38 56.80 92.26 251,509,448.62 21,102,043.76 Total 480,046,171.40 100.00 300,638,899.37 179,407,272.03 2）Classified by account nature 2008-12-31 2007-12-31 Propor Propor Items Bad debt Bad debt Amount tion Amount tion provision provision (%) (%) Significant single 348,050,930.99 81.24 209,049,516.96 397,757,769.53 82.86 236,939,014.68 amount Insignificant single 80,366,003.02 18.76 58,377,033.31 82,288,401.87 17.14 63,699,884.69 amount Total 428,416,934.01 100.00 267,426,550.27 480,046,171.40 100.00 300,638,899.37 Accounts receivable with significant single amounts (over RMB 1,000,000 Yuan) shall be subject to impairment test separately. There is the objective evidences indicated impairment, thus the Company withdrew reserve for bad debt of RMB 209,049,500 as at 31 Dec. 2008. 3）Foreign currency accounts receivable in accounts receivable 2008-12-31 2007-12-31 Currency Original currency RMB converted to Original currency RMB converted to USD 1,909,749.38 13,052,372.86 1,873,414.00 13,684,539.91 EURO 38,730.00 413,129.04 Total 13,052,372.86 14,097,668.95 4）The arrearage total of the first five arrearage entities listed in the closing balance of accounts receivable was RMB 130,722,100, taking up 30.51% of the balance of accounts receivable. 5）No arrearage from the shareholders holding over 5% (including 5%) of the equity of the Company existed in the balance of accounts receivable. 8-02 Other receivables 2008-12-31 79 Changchai Company, Limited Summary of Annual Report 2008 Withdrawal Proportion Bad debt Net amount of 1）Aging Amount proportion (%) provision other receivables (%) Within 1 year 12,316,348.66 17.39 2.00 246,326.97 12,070,021.69 1-2 years 4,529,733.40 6.40 5.00 226,486.67 4,303,246.73 2-3 years 251,585.40 0.36 15.00 37,737.81 213,847.59 3-4 years 175,078.18 0.25 99.20 173,678.18 1,400.00 4-5 years 86,912.32 0.12 64.11 55,720.32 31,192.00 Over 5 years 53,456,037.14 75.48 78.90 42,175,855.36 11,280,181.78 Total 70,815,695.10 100.00 42,915,805.31 27,899,889.79 2007-12-31 Aging Withdrawal Proportion Bad debt Net amount of Amount proportion (%) provision other receivables (%) Within 1 year 14,888,878.24 18.79 2.08 309,777.56 14,579,100.68 1-2 years 543,165.40 0.69 5.00 27,158.27 516,007.13 2-3 years 5,021.66 0.01 72.88 3,659.82 1,361.84 3-4 years 85,092.82 0.11 34.54 29,386.82 55,706.00 4-5 years 14,290,680.49 18.04 61.26 8,753,960.49 5,536,720.00 Over 5 years 49,423,225.14 62.36 74.09 37,016,419.96 12,406,805.18 Total 79,236,063.75 100.00 46,140,362.92 33,095,700.83 2）No arrearage from the shareholders holding over 5% (including 5%) of the equity of the Company existed in other receivables at the end of the report period. 3）The arrearage total from the first five arrearage entities was RMB 38,405,300, taking up 54.23% of other accounts receivable of the Company at the end of report period. 4) Other accounts receivable with large amount were listed as follows Entity Amount Nature of account Changzhou Vehicle Co., Ltd. 13,064,423.61 Borrowing Changzhou Investment Group Co., Ltd. 10,000,000.00 Borrowing Changchai Combined Harvester Co., Ltd. 7,400,908.91 Borrowing Lanzhou Changchai Northwest Vehicle Co., Ltd. 5,000,000.00 Borrowing Changzhou Compressor Co., Ltd. 2,940,000.00 Current payment 8-03 Long-term equity investment Ratio in the Closing Invest Initial Net amount as Net amount as Name of investee equity of Increase in Decrease in balance of ment investment at 31 Dec. at 31 Dec. units the 2008 2008 impairment term amount 2007 2008 investee provision units Changchai Wanzhou 1996- Diesel Engine 60% 21,000,000.00 21,000,000.00 21,000,000.00 2011 Fitting Corp. Changzhou Changchai Benniu 1996- 75% 25,339,800.00 25,339,800.00 25,339,800.00 Diesel Engine 2011 Fittings Co., Ltd. Nanjing Changli Agricultural 2007- 100% 5,000,000.00 5,000,000.00 5,000,000.00 Machinery Fittings 2022 Co., Ltd. Changzhou Fuji 1999- 33% 12,294,546.00 17,229,939.16 242,875.14 17,472,814.30 80 Changchai Company, Limited Summary of Annual Report 2008 Changchai Robin 2049 Gasoline Engine Co., Ltd. Beijing Tsinghua Industrial 1999- Investment 25% 2,500,000.00 2049 Management Co., Ltd. Shenzhen Drgama 1999- Network System 34% 2,388,157.00 7,436,389.00 2014 Co., Ltd. Jiangsu Bank 38,000,000.00 38,000,000.00 38,000,000.00 Lanzhou Northwest 5% 5,000,000.00 5,000,000.00 5,000,000.00 Vehicle Corporation KAMA CO.,LTD. 5.49% 31,706,441.63 31,706,441.63 31,706,441.63 (Corporate B stock) Other 410,000.00 410,000.00 Total 143,638,944.63 143,276,180.79 242,875.14 143,519,055.93 7,846,389.00 ① The reason for increase in the reporting period was because Changzhou Fuji Changchai Robin Gasoline Engine Co., Ltd. measured at equity method, resulting in increase of investment income; ②Others: RMB 20,000 was invested to Changzhou Economic and Technology Development Company, RMB 100,000 was invested to Changzhou Tractor Plant, RMB 200,000 was invested to Industry Fund Fraternity of Changzhou Economic & Trade Commission, RMB 90,000 was invested to Beijing Project Machine Agricultural Machinery Co., Ltd.. The above four items were hard to take back fully withdrawn impairment provision. ③ Net assets of Beijing Tsinghua Industrial Investment Management Co., Ltd. was negative, therefore, its long-term investment measured at equity method is reduced to zero；Shenzhen Drgama Network System Co., Ltd. failed to do annual inspection for industry and commerce administration for four years. It is in disorganization actually, so the Company withdrawn impairment provision fully. 8-04 Operating revenue Operating revenue Operating cost Items 2008 2007 2008 2007 Diesel engine and fittings 1,886,455,641.65 2,020,060,199.09 1,757,084,357.86 1,812,671,639.31 Total of income and cost from main operations 1,886,455,641.65 2,020,060,199.09 1,757,084,357.86 1,812,671,639.31 Sales of raw materials 30,831,019.03 22,258,773.20 18,913,167.71 15,489,176.42 Rent 2,956,656.00 3,322,261.37 2,372,435.26 2,392,726.31 Total of other operating income and expense 33,787,675.03 25,581,034.57 21,285,602.97 17,881,902.73 Total 1,920,243,316.68 2,045,641,233.66 1,778,369,960.83 1,830,553,542.04 The total sales income of the first five clients of the Company was RMB 473,091,600, taking up 25.08% of the Company’s income from main operations in 2008. The total sales income of the first five clients of the Company was RMB 480,036,500, taking up 23.76% of the Company’s income from main operations in 2007. 8-05 Investment income Items 2008 2007 Dividend on stock under cost method 14,427,317.06 1,900,000.00 Income measured at equity method 242,875.14 2,582,114.21 Income form shares sold 102,229,275.45 81 Changchai Company, Limited Summary of Annual Report 2008 Total 14,670,192.20 106,711,389.66 The investment income has decrease by 86.25% compared with last year, which was because of no income from selling shares. 8-06 Supplementary information to consolidated cash flow statement Items 2008 2007 1. Adjusting net profit into cash flow arising from operating activities Net profit -77,799,688.13 164,231,170.27 Plus: Provision for assets impairment -863,875.62 -3,036,453.44 Depreciation of fixed assets, of oil-gas assets, of productive biological assets 38,026,595.26 32,570,802.86 Amortization of intangible assets 2,793,268.64 3,144,855.19 Amortization of long-term deferred expense Loss on disposal of fixed assets, intangible assets and other long-term 988,963.07 -51,489,581.16 assets (income is listed as “-”) Loss on retirement of fixed assets (income is listed as “-”) 1,411,528.25 Losses on change in fair value （income is listed as “-”） 37,395,000.00 -53,835,300.00 Financial expense（income is listed as “-”） 5,567,287.93 Investment losses（income is listed as “-”） -14,670,192.20 -106,711,389.66 Decrease in deferred income tax assets（increase is listed as “-”） 81,444.11 43,255,130.31 Increase in deferred income tax liabilities（decrease is listed as “-”） -9,348,750.00 13,458,825.00 Decrease of inventories (increase is listed as “-”) -39,192,044.46 8,314,277.79 Decrease in operating receivables (increase is listed as “-”) 72,760,118.42 -21,532,419.51 Increase in operating payables (decrease is listed as “-”) -11,415,705.84 40,056,842.98 Other Net cash flows arising from operating activities -1,244,866.75 75,405,576.81 2. Investing and financing activities that do not involving cash receipts and payment: Conversion of debt into capital Convertible bond due with one year Fixed assets financed by finance leases 3. Net increase in cash and cash equivalents: Closing balance of cash 378,820,707.08 417,975,515.87 Less: Opening balance of cash 417,975,515.87 443,546,323.18 Add: closing balance of cash equivalents Less: Opening balance of cash equivalents Net increase in cash and cash equivalents -39,154,808.79 -25,570,807.31 82 Changchai Company, Limited Summary of Annual Report 2008 Note 9: Relationship of related parties and associated transactions (I) Related parties with controlling relationship Code of Name of enterprise Registered Main business Relationship Nature of Legal organization address with the enterprise representative Company No. 1101, Production and sales of Xiamen diesel engine Shareholding Limited Yin Lihou Changchai Wanzhou Diesel Road, subsidiary liabilities 20793370-5 Engine Co., Ltd. (Changwan) Wanzhou, Chongqing Company Changzhou Changchai Benniu Nanguan Production and sales of Diesel Engine Fittings Co., Ltd. Village, diesel engine fittings Shareholding Limited Qiang (Benniu) Benniu 25083232-8 Town, Wujin subsidiary liabilities Jinlong Company Nanjing Changli Agricultural Economy Agricultural Machinery Fittings Co., Ltd. Development mechanization Limited Xue Guojun Zone of production, Wholly-owned liabilities Lishui electromechanical 66065240-X subsidiary County, product, spare parts Nanjing and maintenance Company service State-owned Assets Supervision and Administration Commission Actual of Changzhou Municipal controller Government Note: As at 31 Dec. 2008, State-owned Assets Supervision and Administration Commission of Changzhou Municipal Government holds 31.43% equities of the Company (state-owned equity), which is actual controller. (II) The registered capital of the aforesaid related parties with controlling relationships and its change Increase in Decrease in Name of related parties 2007-12-31 2008 2008 2008-12-31 State-owned Assets Supervision and Administration Commission of Changzhou Municipal Government Changchai Wanzhou Diesel Engine 35,000,000 35,000,000 Co., Ltd. (Changwan) Changzhou Changchai Benniu Diesel 33,786,400 33,786,400 Engine Fittings Co., Ltd. (Benniu) Nanjing Changli Agricultural Machinery Fittings Co., Ltd. 5,000,000 5,000,000 (III) The shares or equity held by the related parties with controlling relationships and its changes 2007-12-31 +/- 2008-12-31 Name of related parties Percen Percent Percenta Amount Amount tage Amount age ％ ge ％ ％ State-owned Assets Supervision and Administration Commission of 117,631,824 31.43 117,631,824 31.43 Changzhou Municipal Government Changchai Wanzhou Diesel Engine 21,000,000 60 21,000,000 60 Co., Ltd. (Changwan) Changzhou Changchai Benniu Diesel Engine Fittings Co., Ltd. (Benniu) 25,339,800 75 25,339,800 75 Nanjing Changli Agricultural 5,000,000 100 5,000,000 100 83 Changchai Company, Limited Summary of Annual Report 2008 Machinery Fittings Co., Ltd. (IV) Nature of related parties without controlling relationships Related parties Relationship with the Company Fuji Changchai Robin Diesel Engine Co., Ltd. Affiliated company of the Company Note 10: Contingent events (I) Lawsuits and arbitration in the reporting period Involved sum Names of defendants Date of accepting & Names of lawsuits & (RMB’0000) Remarks hearing arbitration organs Pending lawsuits carried down to the report period from the previous periods 1.Tongshan County Tengyu Changzhou Intermediate 493.06 Agro-machinery Trade 27 Jun. 2001 People’s Court Settled Center 2.Nanjing Jinwa Changzhou Intermediate 1,419.00 Share-holding Co., Ltd. 9 Jul. 2002 People’s Court During execution 3.Shandong Hongli Group Changzhou Intermediate 1,436.00 Co., Ltd. 27 Jun. 2001 People’s Court During bankruptcy liquidation 4. Shandong Shuangli 2,746.04 Group Co., Ltd. Jan. 2006 The 1st Intermediate People’s Court of Beijing Total 6,094.10 Notes on the progress of the cases: 1. About the lawsuit case of Tongshan County Tengyu Agro-Machinery Trade Center: On 13 Apr. 2002, the Company applied to Changzhou Intermediate People’s Court for compulsory execution. But the defendant still failed to pay RMB 4,930,600 to the Company. Later Xuzhou Railroad Transportation Court was entrusted to perform the execution. On 16 Apr. 2008, due to the lack of property of the defendant to execute upon, Xuzhou Railroad Transportation Court terminated the execution. 2. About the lawsuit case of Nanjing Jinwa Share-holding Co., Ltd.: The Company has signed a settlement agreement where Lishui County Public-owned Assets Operation Co., Ltd. shall pay the debt of RMB 14.19 million owed by Nanjing Jinwa Share-holding Co., Ltd. with 80 mu of land. And the agreement is currently in the course of execution. 3. About the lawsuit case of Shandong Hongli Group Co., Ltd.: The accused company owed accumulatively RMB 14.36 million to the Company. The Company sued to Changzhou Intermediate People’s Court in 2001 and sued for compulsory execution in April, 2002. Currently, the defendant has started the bankruptcy procedure. 4. The lawsuit case on the guarantee loan of Shangdong Shuangli Group Co., Ltd. was disclosed in the 2006 Annual Report of the Company. Owing to the poor management of Shuangli Group, Shangdong Liaocheng Intermediate People’s Court declared that Shuangli Group entered the bankruptcy and debt repayment procedure. The Company applied to the bankruptcy liquidation group of Shuangli Group for its privileged mortgage debt of RMB 27,460,400. The Company actively exercised the land use right involving 93454.43 ㎡ of land provided by Shuangli Group as a counter-guarantee for paying the debt. By the end of 2008, the Company had got in RMB 16 million, with RMB 7 million recovered in the year 2008. And the outstanding debt of RMB 11,460,400 is in recovery. (II) Guarantee In the reporting period, the Company provided a loan guarantee of RMB 14.50 million for its controlling subsidiary—Changchai Benniu Diesel Engine Fittings Co., Ltd.. Of the loan guarantee, RMB 9.50 million belonged to the guarantee for the loan renewal, with a guarantee term from 29 Oct. 2008 to 29 Oct. 2009, while the other amount of RMB 5 million was an add-on guarantee with the guarantee term from 31 Oct. 2008 to 31 Oct. 2008. N o t e 11 ： N o n - a d j u s t i n g e v ent s a f t e r b a l a n c e she e t d a t e As at 13 Apr. 2009, Fotor Motor stock that it is been divided into the tradable financial assets and held 84 Changchai Company, Limited Summary of Annual Report 2008 by the Company, totaling to 4500000 shares, has been sold out at the price of RMB 8.10 per share. N o t e 1 2 c o m m i t m en t e v e n t s As at Dec. 31, 2008, there was no commitment event that needed to make explanation from the Company. N o t e 1 3 R e t u r n o n e q u i t y ( R O E ) a n d e a r n i n g s p e r s h a re ( E P S ) 1）ROE and EPS 2008 2007 Profit as of reporting ROE（%） EPS（RMB Yuan） ROE（%） EPS（RMB Yuan） period Fully Weighted Basic Diluted Fully Weighted Basic Diluted diluted average EPS EPS diluted average EPS EPS Net profit attributed to the ordinary shareholders of -7.32 -6.49 -0.22 -0.22 11.34 11.92 0.45 0.45 the Company Net profit attributed to the ordinary shareholders of the Company after -4.91 -4.35 -0.15 -0.15 -0.40 -0.43 -0.02 -0.02 deducting non-recurring profits and losses (1) The numerator shall be the current net profit attributed to the ordinary shareholders of the Company when calculating earnings per share, 2008 2007 The current net profit attributed to the ordinary -83,993,014.91 168,116,392.28 shareholders Total -83,993,014.91 168,116,392.28 (2) The denominator shall be the weighted average number of common shares outstanding when calculating basic EPS, the process of measurement was as follows: 2008 2007 Number of common shares outstanding at 374,249,551.00 the year-begin 374,249,551.00 Add: weighted average number of common shares issued in the reporting period Less: weighted number of repurchase of common shares in the reporting period Number of common shares outstanding at 374,249,551.00 374,249,551.00 the year-end (3) The denominator shall be the weighted average number of common shares outstanding when calculating diluted EPS, the process of measurement was as follows: 2008 2007 the weighted average number of ordinary shares in calculating the basic earnings per share 374,249,551.00 374,249,551.00 Add: weighted average of common share increasing on supposing that the diluted potential ordinary shares convert into ordinary shares already issued the weighted average number of ordinary shares in calculating the diluted earnings per share Total 374,249,551.00 374,249,551.00 2）Extraordinary gains and losses Items 2008 2007 Gains and losses from disposal of non-current assets -696,556.98 50,141,373.68 85 Changchai Company, Limited Summary of Annual Report 2008 Government subsidies recorded into gains and losses in current period 2,078,342.23 1,523,073.35 Gains and losses from debts restructuring 71,043.26 -169,587.63 Gains and losses from changes of fair value of transaction financial assets and transaction financial liabilities, investment income from disposal of -37,395,000.00 156,064,575.45 transaction financial assets, transaction financial liabilities and financial assets available for sale Switching back impairment reserve of account receivable with single impairment test 7,501,105.20 Switching back balance of welfare payable 3,958,640.89 Net non-operating income and expenses -8,223,380.70 -6,970,393.40 Total -36,664,446.99 204,547,682.34 Less: Impact on income tax -8,975,508.97 30,429,973.36 Total -27,688,938.02 174,117,708.98 (1) The above-mentioned data are extraordinary gains and losses attributable to net profit of parent company. (2) Gains and losses from changes of fair value of transaction financial assets and transaction financial liabilities, investment income from disposal of transaction financial assets, transaction financial liabilities and financial assets available for sale shall recorded in non-recurring gains and losses in accordance with relevant provisions in Information Disclosure Interpretation Public Notice No.1 --- Extraordinary Gains and Losses with CSRC [2008] No. 43 document. Last year amount is made adjustment, as a result, impact on extraordinary gains and losses of last year is RMB 156,064,575.45. 86 Changchai Company, Limited Summary of Annual Report 2008 Ⅺ Documents Available For Reference Documents available for references include the following: 1. Original Copy of the 2008 Annual Report signed by Chairman of the Board. 2. Accounting statements with the signatures and seals of the person-in-charge of the Company, the person-in-charge of accounting affairs and the accounting organ 3. Auditor’s Report with the seal of the CPA firm, as well as the signature and seal of the registered accountant. 4. All the originals of the Company’s documents and public notices disclosed in the reporting period in Securities Times and Ta Kung Pao—the newspapers designated by China Securities Regulatory Commission. 5. Articles of Association of the Company. The aforesaid documents for reference are completely placed in the Secretariat of the Board of Directors. This Annual Report is prepared respectively in Chinese and English. Should there be any difference in interpretation between the two versions, the Chinese version shall prevail. Board of Directors of Changchai Co., Ltd. 15 Apr. 2009 87