鲁泰Ｂ(200726)2008年年度报告（英文版）

LU THAI TEXTILE CO., LTD. ANNUAL REPORT ==2008== Shandong · Zibo 15 Apr. 2009 1 Section I Important Notes and Content Important Notes The Board of Directors, Supervisory Committee as well as directors, supervisors and senior executives of Lu Thai Textile Co., Ltd (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 are authentic, accurate and complete. All directors of the Company attended the Board Meeting. Zhongrui Yuehua Certified Public Accountants issued standard unqualified Auditors’ Report for the Company. Mr. Liu Shizhen, Chairman of the Board of the Company, Ms. Zhang Hongmei, Principal of accounting work and person in charge of accounting firm hereby confirm that the Financial Report enclosed in the Annual Report is true and complete. 2 Content Section I Important Notes……………………………………………………..………2 Section II Company Profile……………………………………………………..….….4 Section III Summary of Financial Data and Business Data………………………...…5 Section IV Changes in Share Capital and Particulars about Shareholders……...…......8 Section V Directors, Supervisors Senior Executives and Employees..……..………11 Section VI Corporate Governance Structure……………………………..………..…15 Section VII Brief to Shareholders’ General Meeting…………………………......….17 Section VIII Report of the Board of Directors……………………………………….18 Section IX Report of the Supervisory Committee……………..…………………….29 Section X Significant Events…………………………………………………………30 Section XI Financial Report………………………………………………………….35 (I) Audit Report…………………………………………………………35 (II) Financial Statements……………………………...……..……………...36 (III) Notes to Financial Statements…………………………..……………..47 Section XII Documents Available for Reference……………..…………………….104 3 Section II Company Profile I. Legal Name of the Company: In Chinese: 鲁泰纺织股份有限公司 In English: LU THAI TEXTILE CO., LTD II. Legal Representative: Liu Shizhen III. Contact Methods of Secretary to the Board of Directors and Securities Affairs Representative: Secretary to the Board of Directors Securities Affairs Representative Name Qin Guiling Zheng Weiyin Address No. 81, Songling East Road, Zichuan District, Zibo No. 81, Songling East Road, Zichuan District, Zibo Telephone 0533-5285166 5418361 0533-5285166 5418361 Fax 0533-5418833 5282188 0533-5418833 5282188 E-mail qinguiling@lttc.com.cn wyzheng@lttc.com.cn IV. Registered Address: No. 11, Mingbo Road, High-tech Industry Development Zone, Zibo, Shandong Post Code: 255086 Office Address: No. 81, Songling East Road, Zichuan District, Zibo No. 11, Mingbo Road, High-tech Industry Development Zone, Zibo, Shandong Post Code: 255100 E-mail: lttc@public.zbptt.sd.cn Internet Website: www.lttc.com.cn V. Newspapers Designated for Disclosing Information of the Company: Securities Times, Shanghai Securities News and Ta Kung Pao Internet Website Designated by CSRC for Publishing the Annual Report: www.cninfo.com.cn The Place Where the Annual Report is Prepared and Placed: Securities Department of the Company VI. Stock Exchange Listed with: Shenzhen Stock Exchange Short Form of the Stock: LUTHAI A, LUTHAI B Stock Code: 000726, 200726 VII. Other Relevant Information The Changed Registration Date: 13 Aug. 2007 The Registered Institution with: Zibo Municipal Administration Bureau for Industry and Commerce Registered No. of Business License: QGLZZ Zi No.: 000066 Registered No. of Taxation: 370302613281175 Organization Code: 61328117-5 Certified Public Accountants engaged by the Company: Auditing Institution: Zhongrui Yuehua Certified Public Accountants Office Address: 8/F, Tower A, International Corporation Mansion, 35 Finance Street, Xicheng District, Beijing 4 Section III Summary of Financial Data and Business Data I. Accounting data of this fiscal year Unit: RMB Yuan Operating profit 559,464,817.62 Total profit 608,620,277.89 Net profit attributable to shareholders of listed companies 512,944,678.08 Net profit attributable to shareholders of listed companies after deducting non-current gains and losses 492,350,002.83 Net cash flow arising from operating activities 781,995,946.74 Notes: Impact of non-recurring gains and losses on net profit was RMB 20,954,675.25, and composing was as follows: Unit: RMB Yuan Items 2008 2007 Gains and losses from disposal of non-recurring asset, including offset recorded as impairment reserve 230,788.78 -1,642,916.15 Government subsidy recognized in current period, Government subsidies recorded into current gains and losses, excluding government subsidies with close relationship with the Company’s business and 26,417,148.02 2,095,588.47 rationed government grants in line with unified standard Gains and losses from changes in fair value of transaction financial assets and transaction financial responsibilities, and investment income from disposal of transaction financial assets/responsibilities and -21,172,829.90 15,294,664.78 financial assets available for sale, excluding valid hedging business relating to normal operation. Other non-operating income/expenses 22,507,523.47 16,962,062.53 Subtotal 27,982,630.37 32,709,399.63 Less: impact on income tax 10,388.048.63 5,639,576.35 Net non-current gains and losses 17,594,581.74 27,069,823.28 Net non-current gains and losses attributable to minority -3,000,093.51 2,058,641.15 Net non-current gains and losses attributable to common shareholders of listed companies 20,594,675.25 25,011,182.13 Net profit attributable to common shareholders of listed companies after deducting non-current gains 492,350,002.83 434,713,964.48 and losses Impact of non-current gains and losses on net profit 3.42% 5.60% Explanation on difference in net profit and net assets under CAS and IFRSs Unit: RMB’000 Yuan Adjusted items Net profit of 2008 Net assets as of 31 Dec. 2008 Data under PRC GAAP 514,815 3,780,990 Increase of fixed assets arising from translating the USD statements into RMB -3,230 statements in 1996 not recognized under IFRSs Switching back of evaluation increment of Luqun, which recognized as effect of 531 -6,800 current period Tax deduction due to the domestically-manufactured equipment purchased by the 1,718 -15,254 parent company recognized as deferred income Data under IFRS 517,064 3,755,706 5 II. Main accounting data and financial indices of the last three years Unit: RMB Yuan 2008 2007 2006 Before adjustment After adjustment Operating income 3,921,837,350.82 3,810,671,282.58 3,003,380,089.18 3,003,380,089.18 Total profit 608,620,277.89 524,343,726.84 392,868,262.63 395,914,725.51 Net profit attributable to shareholders of listed companies 512,944,678.08 459,725,146.61 334,225,389.63 340,019,432.14 Net profit attributable to shareholders of listed companies 492,350,002.83 434,713,964.48 306,249,048.88 319,599,991.04 after deducting non-current profit and loss Total assets 7,091,853,104.80 5,869,633,008.49 4,991,136,215.80 5,006,902,842.45 Owners’ equity 3,541,234,661.44 2,266,024,205.19 1,949,694,516.00 1,966,510,032.48 Net cash flow from operating activities 781,995,946.74 495,126,608.03 609,192,793.51 609,192,793.51 Net cash flow per share arising from operating activities 0.79 0.59 1.44 1.44 Net assets per share attributable to shareholders of listed 3.56 2.68 4.62 4.66 companies Return on equity (%) 14.48 20.29 17.14 17.29 Earnings per share 0.60 0.54 0.40 0.40 III. Main financial indices Increase/decrease compared 2008 2007 2006 with the last year (%) Basic earnings per share (Yuan/share) 0.60 0.54 11.11% 0.40 Diluted earnings per share (Yuan/share) 0.60 0.54 11.11% 0.40 Basis earnings per share after deducting non-recurring gains and 0.58 0.51 13.73% 0.38 losses (Yuan/share) Fully diluted return on equity 14.48% 20.29% -5.81% 17.29% Weighted average return on equity 20.80% 21.71% -0.91% 18.33% Fully diluted return on equity after deducting non-recurring gains and 13.90% 19.18% -5.28% 16.25% losses Weighted average return on equity after deducting non-recurring gains 19.97% 20.53% -0.56% 17.23% and losses Net cash flow per share arising from operating activities (Yuan/share) 0.79 0.59 33.90% 1.44 At the end At the end Increase/decrease compared At the end of 2008 of 2007 with the end of the last year(%) of 2006 Net assets per share attributable to shareholders of listed companies 3.56 2.68 32.84% 4.66 IV. Statement on changes in owners’ equity during the report period Owners’ equity attributable to parent company Total of Less: Minority Items Surplus public shareholders’ share capital Capital reserve treasury Retained profits Others equity reserve equity stock I. Balance at 844,864,800.00 327,320,708.88 - 281,647,264.07 814,815,210.77 -2,623,778.53 238,797,699.02 2,504,821,904.21 the end of 6 last year Add: change of - - - - - - - - accounting policy Correction of errors in - - - - - - - - previous period II. Balance at the 844,864,800.00 327,320,708.88 - 281,647,264.07 814,815,210.77 -2,623,778.53 238,797,699.02 2,504,821,904.21 beginning of this year III. Increase/ decrease of 150,000,000.00 800,815,004.89 - 49,015,271.13 276,175,102.45 -794,922.22 958,088.06 1,276,168,544.31 amount in this year (I) Net profit - - - - 512,944,678.08 - 1,869,905.17 514,814,583.25 (II)Gain/loss listed to owners’ - - - - - -794,922.22 - -794,922.22 equity directly 1. Net amount on changes in fair value of - - - - - - - - financial assets available for sale 2. Effect on changes in other shareholders’ equity of - - - - - - - - invested units under equity method 3. Effect on income tax - - - - - - - - related to items listed 7 to owners’ equity 4. Others - - - - - -794,922.22 - -794,922.22 Subtotal of - - - - 512,944,678.08 -794,922.22 1,869,905.17 514,019,661.03 (I) and (II) (III) Input an reduced 150,000,000.00 800,815,004.89 - - - - 950,815,004.89 capital of - shareholders 1. Input capital of 150,000,000.00 800,814,500.00 - - - - - 950,814,500.00 shareholders 2. Amount of shares - - - - - - - - included in shareholders’ equity 3. Others - 504.89 - - - - - 504.89 (IV) Profit - - - 49,015,271.13 -236,769,575.63 - -911,817.11 -188,666,121.61 distribution 1. Withdrawing surplus - - - 49,015,271.13 -49,015,271.13 - - public reserve 2. Distribution - - - - -187,754,304.50 - -911,817.11 -188,666,121.61 to shareholders 3. Others - - - - - - - - (V) Internal carrying forward of - - - - - - - - shareholders’ equity 1. New increase of share capital - - - - - - - - from capital reserves 2. Convert surplus - - - - - - - - reserves to 8 share capital 3. Surplus reserves - - - - - - - - make up losses 4. Others - - - - - - - - IV. Balance at the end of 994,864,800.00 1,128,135,713.77 - 330,662,535.20 1,090,990,313.22 -3,418,700.75 239,755,787.08 3,780,990,448.52 this period Section IV Changes in Share Capital and Particulars about Shareholders I. Statement on changes in share capital Unit: Share Before the change Increase/decrease (+/-) After the change Issuance Capitalization Proportio Bonus Amount of new of public Others Subtotal Amount Proportion n shares share reserve I. Shares subject to trading moratorium 217,695,310 25.77% 15,279 388,820 404,099 218,099,409 21.92% 1. Shares held by state 2. Shares held by state-owned corporation 3. Shares held by domestic investors 98,358,000 11.64% 98,358,000 9.89% Including: shares held by domestic 98,358,000 11.64% 98,358,000 9.89% non-state-owned corporation Shares held by domestic natural person 4. Shares held by foreign investors 118,232,400 13.99% 118,232,400 11.88% Including: shares held by foreign corporation 118,232,400 13.99% 118,232,400 11.88% Shares held by foreign natural person 5. Shares held by senior executives 1,104,910 0.13% 15,279 388,820 404,099 1,509,009 0.15% 149,984, -388,82 149,595, II. Shares not subject to trading moratorium 627,169,490 74.23% 776,765,391 78.08% 721 0 901 149,984, 149,920, 1. RMB ordinary shares 302,855,490 35.84% -64,000 452,776,211 45.51% 721 721 -324,82 2. Domestically listed foreign shares 324,314,000 38.39% -324,820 323,989,180 32.57% 0 3. Overseas listed foreign shares 4. Others 150,000, 150,000, III. Total shares 844,864,800 100.00% 0 994,864,800 100.00% 000 000 Note: The changing number in the Others Column of present period in the chart means the amount of the thaw shares held by senior managers in present period and 9 the summary amount of thaw shares held by new senior managers. Change in shares subject to moratorium Shares subject to Shares Shares Shares subject Name of shareholder moratorium at the released in increased in to moratorium Reason Date of release year-begin current year current year at the year-end Zibo Lucheng Textile Commitment in share merger 98,358,000 0 0 98,358,000 12 Jun. 2011 Investment Co., Ltd reform 25% of shares held was released 25% of current Directors/supervisors from frozen according to regulations 1,104,910 29,665 433,764 1,509,009 shares released /senior executives of Stock Exchange, and increased from froze shares was shares released. Total 99,462,910 29,665 433,764 99,867,009 － － Notes: number of shares subject to trading moratorium decreased in this year was shares released from frozen held by senior executives, number of shares increased because shares from the secondary market purchased and allotment shares held by senior executives. II. Issuance and listing of shares 1. Issuance of shares in the recent three years During the report period, the Company executed plan on increased of shares which openly issued 150 million A-share with price of RMB 6.49 yuan/share. The Company raised capital RMB 973.5 million, and net raised capital was RMB 950,814,500 after deducting issuance expense. Share capital of the Company increased to 994,864,800 shares. 2. Changes in total capital of the Company and structure in the report period In the report period, the total shares of the company have increased to 994,864,800 because the Company executed plan on public issuance of 150 million A shares. Tradable A-share increased to 453,794,400, taking up 45.61% of total share capital, and other proportion of shares relatively decreased. III. About shareholders and actual controllers at the end of report period 1. As at the end of the report period, the Company had 150,259 shareholders in total. 2. Particulars about shares held by the ten top shareholders of the Company Shares subject Shares Total shares to trading Name of shareholders Nature Proportion pledged or held moratorium frozen held Domestic non-state-owned Zibo Lucheng Textile Investment Co., Ltd 12.40% 123,314,700 98,358,000 0 corporation Tailun (Thailand) Textile Co., Ltd Foreign corporation 11.88% 118,232,400 118,232,400 0 DBS VICKBRS(HONG KONG)LTD A/C CLIENTS Foreign corporation 4.18% 41,536,268 0 0 Tianrui Favorable Regions Selected Mixed Open-ended Domestic non-state-owned 1.84% 18,291,480 0 0 10 Securities Investment Fund corporation Domestic non-state-owned Zhongrong Construction Bank Wealth No. 4-001 1.05% 10,409,912 0 0 corporation GUOTAI JUNAN SECURIES HONG KONG LIMITED Foreign corporation 0.83% 8,300,230 0 0 First-trust Advanced Strategy Open-ended Securities Domestic non-state-owned 0.76% 7,556,437 0 0 Investment Fund corporation Wang Xing Foreign natural person 0.63% 6,300,000 0 0 DAIWA SECS EMBC AC ITOCHU HONG KONG LTD Foreign corporation 0.60% 6,000,000 0 0 Domestic non-state-owned Industrial Trend Investment Mixed Type Fund 0.56% 5,542,625 0 0 corporation Notes: (1) Shares held by Zibo Lucheng Textile Investment Co., Ltd are tradable A shares and B shares subject to trading moratorium, and changes in shares was because the Company participated in part subscription when executed public offering A share and increase to held tradable A shares in the secondary market; Tailun Co., Ltd is a foreign sponsor shareholder, and the shares held by it are foreign sponsor shares, which will circulate with B shares after application. (2) Shares held by the third to the tenth shareholders are tradable A shares or tradable B shares, and changes of shares was caused by trading in the report period. 3. Brief introduction to the controlling shareholder or shareholders holding over 10% of the total shares (1) Zibo Lucheng Textile Investment Co., Ltd Zibo Lucheng Textile Investment Co., Ltd is the first principal shareholder as well as the actual controller of the Company. Legal representative: Liu Shizhen Registered capital: RMB 63.26 million Business scope: Zibo Lucheng Textile Investment Co., Ltd. (hereinafter referred to as Lucheng Investment) was engaged in investment textile, electric power and pharmacy; knitwear and the relevant import and export business; retail of lubricating oil, gas oil and diesel oil; Chinese meal and wholesale and retail of general merchandise and etc. The original name of Lucheng Investment is Zibo Lucheng Textile Co., Ltd., which was founded on 25 Sep. 1998 based on Zibo No. 7th Cotton Textile Plant, sponsor of the Company. It is a Limited Company whose shares held by natural persons. Mr. Liu Shizhen held 21% equity of Lucheng Investment, and is the first principal shareholder of Lucheng Investment as well as the actual controller of Lucheng Investment. Basic information of Liu Shizhen: Chinese nationality, he has not enjoy the residence permit in other countries or regions; he has been taking the post as Chairman of the Board of the Company since 1990. As at the beginning of the report period, Lucheng Investment held 120.8627 million shares of the Company, taking up 14.31% of total share capital of the Company. During the report period, Lucheng Investment subscribed additional A shares, thus, as at the end of the report period, shares held by Lucheng Investment increased to 123.3147 million, taking up 12.40% of total share capital of the Company, of which 98.3580 million are tradable A shares subject to trading moratorium. 11 At the end of the report period, shares held by Lucheng Investment have not been frozen and pledged. The controlling relationship of the Company is as follows: Liu Shizhen 21% Zibo Lucheng Textile Investment Co., Ltd. 12.41% Lu Thai Textile Co., Ltd. (2) Tailun (Thailand) Textile Co., Ltd Legal representative: Xu Zhinan Registered capital: 0.6 billion baht Business scope: Yarn spinning Date of foundation: 29 Jan. 1985 Registration place: No. 20, Wannahejiluo, Bangkok, Thailand Tailun (Thailand) Textile Co., Ltd is the foreign sponsor of the Company as well as the second principal shareholder. At end of the report period, Tailun (Thailand) Textile Co., Ltd held 118.2324 million shares of the Company, taking up 11.88% of total share capital of the Company. The shares was foreign sponsor’ shares as well as non-tradable B shares, which has not been pledged or frozen. 4. Particulars about shares held by the top ten shareholders of tradable share Shares not subject to Name of shareholders Type of shares trading moratorium held Zibo Lucheng Textile Investment Co., Ltd 24,956,700 RMB ordinary shares DBS VICKBRS(HONG KONG)LTD A/C CLIENTS 41,536,268 Domestically listed foreign shares Tianrui Favorable Regions Selected Mixed Open-ended Securities 18,291,480 RMB ordinary shares Investment Fund Zhongrong Construction Bank Wealth No. 4-001 10,409,912 RMB ordinary shares GUOTAI JUNAN SECURIES HONG KONG LIMITED 8,300,230 Domestically listed foreign shares First-trust Advanced Strategy Open-ended Securities Investment Fund 7,556,437 RMB ordinary shares Wang Xing 6,300,000 Domestically listed foreign shares DAIWA SECS EMBC AC ITOCHU HONG KONG LTD 6,000,000 Domestically listed foreign shares Industrial Trend Investment Mixed Type Fund 5,542,625 RMB ordinary shares Huaxia Advantage Growth Stock Securities Investment Fund 4,006,379 RMB ordinary shares Notes: It is unknown whether there is any associated relationship or acting-in-concert among the top ten shareholders of tradable share. 5. Trading moratorium of shares held by original shareholders of non-tradable shares in the top ten shareholders. No. Name of holder Shares subject to Date of Additional Trading moratorium 12 of shares subject to trading moratorium listing for shares available trading moratorium held trade for list and trade No shares shall be traded through listing at the Stock Exchange within 60 months after accomplishment of share merger reform; after this, within 24 months, the price of the shares sold at the Stock Exchange shall not be lower than Zibo Lucheng RMB 15 per share, and, when the Company capitalizes 1 Textile Investment 98,358,000 12 Jun. 2011 0 public reserves, distributes bonus shares, issues new shares Co., Ltd or rationed shares or distributes dividends, etc, this price shall undergo ex right and ex dividend. If shareholders go against such commitments, then funds obtained would be transferred into the Company’s account to all shareholders. Tailun (Thailand) Foreign sponsor’ shares available for trade in B share 2 118,232,400 -- 0 Textile Co., Ltd market, but have not proposed application yet.。 Section V Directors, Supervisors, Senior Executives and Employees I. Basic information of directors, supervisor, senior executives and employees Starting Ending Shares held Shares held Name Title Sex Age date of date of at the at the Reason of change office term office term year-begin year-end Liu Shizhen Chairman of the Board Male 69 6 Jun. 2007 5 Jun. 2010 514,360 583,060 Increased from secondary market Xu Zhinan Vice Chairman of the Board Male 79 6 Jun. 2007 5 Jun. 2010 0 0 Decrease of shares released from Liu Zibin Director/General Manager Male 44 6 Jun. 2007 5 Jun. 2010 121,050 100,987 frozen Tengyuan Yingli Director/Senior Consultant Male 69 6 Jun. 2007 5 Jun. 2010 0 0 Chen Ruimou Director Male 65 6 Jun. 2007 5 Jun. 2010 0 0 Zeng Facheng Director Male 58 6 Jun. 2007 5 Jun. 2010 0 0 Wang Fangshui Director/Chief engineer Male 48 6 Jun. 2007 5 Jun. 2010 67,538 123,238 Increased from secondary market Decrease of shares released from Sun Zhigang Director Male 47 6 Jun. 2007 5 Jun. 2010 38,408 28,806 frozen Qin Guiling Director Female 43 6 Jun. 2007 5 Jun. 2010 62,652 124,452 Increased from secondary market Wang Yonggui Independent director Male 40 6 Jun. 2007 5 Jun. 2009 0 0 Hong Xiaobin Independent director Male 36 6 Jun. 2007 5 Jun. 2009 0 7,864 Increased from secondary market You Shisong Independent director Male 72 6 Jun. 2007 5 Jun. 2009 0 0 Qi Haodong Independent director Male 49 6 Jun. 2008 5 Jun. 2010 0 0 Bi Xiuli Independent director Female 42 6 Jun. 2008 5 Jun. 2010 0 0 Chairman of the Supervisory Zhu Lingwen Male 55 6 Jun. 2007 5 Jun. 2010 91,138 91,438 Increased from secondary market Committee Liu Zilong Supervisor Male 41 6 Jun. 2007 5 Jun. 2010 0 0 Dong Shibing Supervisor Male 40 6 Jun. 2007 5 Jun. 2010 5,000 5,000 Li Tongmin Deputy General Manager Male 53 6 Jun. 2007 5 Jun. 2010 42,964 106,164 Increased from secondary market Zhang Hongmei Chief Accountant Female 39 6 Jun. 2007 5 Jun. 2010 4,400 18,100 Increased from secondary market 13 Zhang Keming Manager of Financial Dep. Male 41 6 Jun. 2007 5 Jun. 2010 10,000 17,800 Increased from secondary market Manager of Human Wu Yanzhen Male 42 6 Jun. 2007 5 Jun. 2010 0 10,000 Increased from secondary market Resource Dep. Qu Qingfeng Chief Auditor of Audit Dep. Male 46 6 Jun. 2007 5 Jun. 2010 120,000 136,300 Increased from secondary market Assistant to General Zhang Jianxiang Male 41 6 Jun. 2007 5 Jun. 2010 0 18,400 Increased from secondary market Manager Manager of International Pan Pingli Male 41 6 Jun. 2007 5 Jun. 2010 27,400 48,000 Increased from secondary market Business Dep. Manager of Basic Bai Nianyue Male 43 6 Jun. 2007 5 Jun. 2010 0 10,000 Increased from secondary market Construction Dep. Manager of Energy Business Yu Shouzheng Male 41 6 Jun. 2007 5 Jun. 2010 0 13,100 Increased from secondary market Dep. Deputy Manager of Lv Yongchen Male 41 6 Jun. 2007 5 Jun. 2010 0 17,900 Increased from secondary market International Business Dep. Zhang Manager of Quality Control Male 39 6 Jun. 2007 5 Jun. 2010 0 13,100 Increased from secondary market Shougang Dep. Deputy Manager of Wang Jiabin Male 46 6 Jun. 2007 5 Jun. 2010 0 10,000 Increased from secondary market Production Dep. Yu Yongbin Manager of Finishing Dep. Male 43 6 Jun. 2007 5 Jun. 2010 0 15,000 Increased from secondary market Deputy General Manager of Zhang Zhanqi Male 37 6 Jun. 2007 5 Jun. 2010 0 10,300 Increased from secondary market Lufeng Textile and Dye Total - - - - - 1,104,910 1,509,009 - II. Main working experience of directors, supervisors and senior executives, and their holding post and concurrent post in other companies except for Shareholding Company in last five years. 1. Mr. Liu Shizhen: Chairman of the Board. He was born in 1940, graduated from technical secondary school. From Oct. 1993 to Jun. 2007, he was Chairman of the Board and General Manager of the Company; since Jun. 2007, he is Chairman of the Board of the Company, and concurrently took the following positions: Director of Lucheng Company, General Manager of Beijing Luthai, Chairman of the Board of Lufeng Textile and Dye, Chairman of the Board of Luqun Textile, Chairman of the Board of Beijing Innovative, Chairman of the Board of Luthai Huanzhong, Director of Dongying Luxin, Chairman of the Board of Stanluian, Chairman of the Board of Xinjiang Luthai and Chairman of the Board of Taimei Tie Company. 2. Mr. Xu Zhinan: Vice Chairman of the Board of the Company. He was born in 1930, Thailand Nationality. Since 2004, He has been acting as director and Vice Chairman of the Board of the Company, and Chairman of the Board and General Manager of Tailun (Thailand) Textile Co., Ltd. 3. Mr. Liu Zibin: Director and concurrently General Manager of the Company. He was born in 1965, and is the holder of MBA degree of Cheung Kong Graduate School of Business. From Oct. 2004 to Jun. 2007 , he acted as Chairman of the Board of Zibo Lucheng Textile Investment Co., Ltd, now concurrently was director of Luqun Textile. 14 4. Mr. Tengyuan Yingli: Director of the Company. He was born in 1940, Japanese Nationality. Since 1998, he has been holding post of director and senior consultant of Luthai Company, and concurrently was director of Lufeng Textile and Dye and Director of Luqun Textile. 5. Mr. Chen Ruimou: Director of the Company. He was born in 1944, and holer of bachelor degree. From 1998 to now, he is director of the Company. 6. Mr. Wang Fangshui: Director and Chief Engineer of the Company. He was born in 1961, holder of MBA degree. Since 1998, he has been director and Chief Engineer of the Company, and concurrently is director and General Manager of Lufeng Textile and Dye, director of Xinjiang Luthai and director of Luqun Textile. 7. Mr. Sun Zhigang: Director of the Company. He was born in 1962, MBA of Cheung Kong Graduate School of Business. From Jul. 1999 to now, he took the post as director of Beijing Luthai Shirt Co., Ltd.; from Jul. 2000 to now, he occupied the post as director of Beijing Innovative Garment Co., Ltd.; from May 2001 to now, he acted as director of Luthai Textile Co., Ltd. and concurrently director of Luqun Textile. 8. Ms. Qin Guiling: Director and Secretary to the Board of the Company. She was born in 1966, holder of MBA degree. Since 1998, she is director and Secretary to the Board of the Company, and concurrently director of Luthai Huanzhong, director of Beijing Luthai, supervisor of Xinjiang Luthai and director of Luqun Textile. 9. Mr. Wang Yonggui: Independent director of the Company. He was born in 1970, Doctor of Economics. From Jan. 2001 to Jun. 2004, he was Chairman of the Board of Shandong Deqin Bidding Evaluation Company; since Jun. 2004, he has been superintendent of Shandong Tianpingxin Affairs. 10. Mr. Hong Xiaobin: Independent Director of the Company. He was born in 1973, Master Degree. From Jan. 2004 to Mar. 2006, he took the post as General Manager of Financial Advising Department in Everbright Financial Research Limited Liability Company; Since Mar. 2006, he has been General Manager of Financing & Consultant Dept. of Everbright Financing Research Co., Ltd. 11. Mr. You Shisong: Independent Director of the Company. He was born in 1937, holder of associate degree. Since Jan. 1985, he has been Deputy Secretary General of Military Planning Association. 12. Mr. Qi Haodong: Independent Director of the Company. He was born in 1960 and is a holder of doctor degree. From 1983 to 1999, he successively served as teaching assistant, assistant professor, professor and Dean in Shangdong Agricultural University. From 2000 to present, he successively acted as professor, superintendent of Research Restitute, Dean and Vice President in Shangdong University of Finance. 13. Ms. Bi Xiuli, Independent Director of the Company, She was born in 1967 and master degree holder. From 1990 to 1996, she was judge of The Middling People’s Court of Zibo from Shandong; from 2002 to 2003, she was lawyer of Beijing Jingwei Law firm; from 2004 to present, she was partner of Jun Ze Jun of Beijing law firm. 14. Mr. Li Tongmin, Supervisor and concurrently Manager of Production Dept. of the Company. He was born in 1956, graduated from technical secondary school. 15 From Oct. 1993 to present, he concurrently held the post of Manager of the Company. 15. Mr. Zhu Lingwen: Supervisor and concurrently Manager of Layout Dept. of the Company. He was born in 1954, associate degree holder. From Oct. 1993 to Jan. 2002, he once acted as Manager of International Business Dept. in Luthai Textile Co., Ltd. 16. Mr. Liu Zilong: Supervisor of the Company. He was born in 1968. From 2002 to present, he was director of the Company Shenzhen Office and concurrently General Manager of Lu Thai (HongKong). 17. Mr. Dong Shibing: Supervisor of the Company. He was born in 1969, graduated from technical secondary school. He took the post of Deputy Director of the General Manager Office of the Company. 18. Ms. Zhang Hongmei: Chief Accountant. She was born in 1970, holder of MBA degree and accountant. From 2001 to Apr. 2006, she held the post of the Deputy Chief Accountant of the Company. 19. Mr. Zhang Keming: Manager of Financial Department of the Company. He was born in 1968, MBA. From 2002 to 2006, he held the post of Deputy Manager of Financial Department; from Apr. 2006 to present, he acts as General Manager of Financial Department. 20. Ms. Wu Yanzhen: Manager of Human Resources Department of the Company. She was born in 1967, MBA and an engineer. From 2002 to 2004, she held the posts as Manager Representative of the Company, Director of the Office of International Standards Management System and Director of General Manager office. From 2004 to 2006, she acted as Assistant of Manager, Manager Representative, Director of General Manager Office, Manager of Human Resource Department and director of the Office of International standards Management System. From 2006 to present, she acts as Manager Representative of the Company, Manager of Human Resource Department and Director of the Office of International Standards Management System. 21. Ms. Qu Qingfeng: Chief Auditor of the Auditing Department. She was born in 1963, an accountant. From 2006 to present, she acts as Chief Auditor of the Auditing Department. 22. Mr. Zhang Jiangxiang: Director of Technical Research & Development Center. He was born in 1968, and MBA degree holder. He once worked as Manager of Quality Management Department and Director of Fabric Finishing Plant. 23. Mr. Yu Shouzheng: Energy Business Manager of the Company. He was born in 1968, and MBA degree holder. He once worked as Director of Dynamic Department in the Company. From 2007 to present, he acts as Manager of Energy Business Department in the Company. 24. Mr. Pan Pingli: General Manager of International Business Department. He was born in 1968 and MBA degree holder. From 2002 to present, he acts as General Manager of International Business Department. 25. Mr. Lv Yongchen: Deputy Manager of International Business Department. He was born in 1968 and MBA degree holder. From 2002 to present, he acts as Deputy 16 Manager of International Business Department in the Company. 26. Mr. Zhang Shougang: Manager of Quality Control Department of the Company. He was born in 1970, MBA, once was director of Weaving Factory of the Company. From 2005 to 2008, He worked as Manager of Weaving Business Department in company. From 2008 to present, he acts as Manager of Quality Controller Department in the Company. 27. Mr. Wang Jiabing: Deputy Manager of Production Department of the Company. He was born in 1963, MBA and once acted as Manager of Dyeing Business Department. 28. Mr. Bai Nianyue: Manager of Basic Construction Department. He was born in 1965, MBA degree holder and engineer. He once worked as Director of Chief Engineer Office and Deputy Manager of Basic Construction Department. From Sep. 2006 to present, he acts as Director of Chief Engineer Office and Manager of Basic Construction Department. 29. Mr. Yu Yongbin: Manager of Fabric Finishing Department of the Company. He was born in 1966, MBA, once worked as Director of the Spinning Plant of the Company and Manager of Yarn Business Department. From 2005 to present, he acts as Manager of Fabric Finishing Business Department in the Company. 30. Mr. Zhang Zhanqi: Deputy General Manager in Lufeng Textile and Dye. He was born in 1972, MBA, once worked as Director of Fabric Finishing Plant and Manager of Quality Control Department. III. Particulars about annual remuneration received by directors, supervisors and senior executives 1. For directors, supervisors and senior executives, the Company determined their remuneration and bonus based on their office title, contribution and Plan on Invigoration and Obligation for Senior Executive of the Company, and checked by the Remuneration Committee and approved by the Board of Directors for implementation. 2. Remuneration drawn from the Company by directors, supervisors and senior executives in the report period Payment in the Payment in the Name Title report period Name Title report period (RMB’0000/year) (RMB’0000/year) Tengyuan Director, senior 526.54 Liu Zilong Supervisor 19.40 Yingli consultant Liu Deputy General Manager/ Chairman of the Board 189.99 Li Tongmin 53.46 Shizhen Manager of Production Dep. Vice Chairman of the Zhang Xu Zhinan 9.80 Chief Accountant 20.98 Board Hongmei Director/General Liu Zibin 53.83 Zhang Keming Manager of Financial Dep. 21.14 Manager Chen Director 9.80 Wu Yanzhen Manager of HR Dep. 20.86 Ruimou 17 Zeng Director 0.00 Qu Qingfeng Chief Auditor of Audit Dep. 21.09 Facheng Wang Zhang Director of Technology Research Director/Chief engineer 54.70 22.62 Fangshui Jianxiang & Development Center Sun Manager of International Director 33.00 Pan Pingli 22.94 Zhigang Business Dep. Manager of Basic Construction Qin Guilin Director 48.33 Bai Nianyue 21.51 Dep. Qi Manager of Energy Business Independent director 4.80 Yu Shouzheng 22.92 Haodong Dep. Wang Deputy Manager of International Independent director 4.80 Lv Yongchen 23.08 Yonggui Business Dep. Hong Zhang Independent director 4.80 Manager of Quality Control Dep. 24.01 Xiaobin Shougang You Deputy Manager of Production Independent director 4.80 Wang Jiabin 22.61 Shisong Dep. Bi Xiuli Independent director 4.80 Yu Yongbin Manager of Finishing Dep. 23.37 Zhu Supervisor/Manager of Deputy General Manager of 48.33 Zhang Zhanqi 22.51 Lingwen Layout Department Lufeng Textile and Dye Dong Supervisor 19.22 Shibing Total payment drawn form the Company by directors, supervisor and senior executives was RMB 13,800,500 (including tax). IV. Changes of directors, supervisor and senior executives 1. About changes of directors, supervisor and senior executives The Company held the 1st Extraordinary Shareholders’ General Meeting on 6 Jun. 2008, at which elected Qi Haodong and Bi Xiuli as independent directors of the 5th Board of Directors. In accordance with regulations, former independent directors Wu Yuhua and Zhou Zhiji acted as independent directors no long due to expiration of office term being six years. 2. Changes of senior executives During the report period, senior executives of the Company remained unchanged. V. About employees By the end of the report period, the Company had totally 16,755 employees at their posts. Of which 12,508 production personnel, 553 sales personnel, 3,128 technicians, 76 financial personnel and 340 administration personnel. 3546 persons are associate degree and bachelor degree or above. At present, the Company has 60 retirees, which joined the Social Insurance. Section VI Corporate Governance Structure 18 I. Corporate governance of the Company The Company continued to perfect corporate governance structure, set up modern enterprise system and standardized the Company’s operation strictly according to Company Law, Securities Law and normative documents related to administration of listed companies. The Company formulated such normative documents as Articles of Association, Rules for Procedure of Shareholders’ General Meeting and Rules for Procedure of the Board of Directors; established Management System of Guarantee, Management System of External Investment, Management System of Related Transactions, Management System of Raised Proceeds, Work System of Independent Directors and Management System on Relationship of Investors; constituted detailed work rules for nomination committee, auditing committee, remuneration committee and strategy committee of the Board, which made corporate governance of the Company be systemization and standardization. In the report period, the Company revised parts clauses of Articles of Association, Rules for Procedure of Shareholders’ General Meeting, Rules for Procedure of the Board of Directors, Management System of Related Transactions ,Work System of Independent Directors, Work System of Disclosure of information and Management System on Relationship of Investors in accordance with relevant regulations, Formulated and perfected Management System of Internal Control, which ensured the unification of relevant laws and regulations and normative documents of the Company. During the report period, according to requirements of Notice on Printing and issuing Implementation Plan on Prevention of Capital Occupation of Listed Companies by Principal Shareholders and Related Parties in Shandong Province with document No. LZJGS Zi [2008] 42, the Company carried out self-examination and self-rectification, then prepared self-examination report on prevention of capital occupation by principal shareholders and related parties. In accordance with document on public notice No. [2008] 27 of CSRC and complied to Rectification Report on Strengthen Corporate Governance reviewed and approved by the 8th Meeting of the 5th Board of Directors dated 31 Oct. 2007, the Company carefully examined rectification on events listed as of 30 Jun. 2008, and worked out Rectification Report on Corporate Governance of the Company, which was reviewed and approved by the 21st Meeting of the 5th Board of Directors and published in website for information disclosure designated by CSRC on 19 Jul. 2008. II. Performance of duties of independent directors 1. Presence of directors at the Board Meeting Times should be present Times of personal Times present at the Board Meeting Name Title at the Board meeting presence through communication Liu Shizhen Chairman of the Board 17 17 0 Xu Zhinan Vice Chairman of the Board 17 4 13 Liu Zibin Director/General Manager 17 17 0 Tengyuan Yingli Director/Senior Consultant 17 17 0 Chen Ruimou Director 17 4 13 19 Zeng Facheng Director 17 2 15 Wang Fangshui Director/Chief engineer 17 17 0 Sun Zhigang Director 17 3 14 Qin Guilin Director/Secretary to the Board 17 17 0 Wang Yonggui Independent director 17 2 15 Hong Xiaobin Independent director 17 2 15 You Shisong Independent director 17 3 14 Qi Haodong Independent director 8 1 7 Bi Xiuli Independent director 8 1 7 During the report period, no directors and independent directors absent from the Board Meeting for successive two times. 2. Dissidence on relevant events put forward by independent directors During the report period, no independent directors dissented proposals at the Board Meeting and proposals at other meetings in current year. III. Independence in business, personnel, assets, organization, finance and so on from controlling shareholder 1. In aspect of business: the Company is completely independent from its controlling shareholder in business and has complete and independent production, supply and sales system and independent operating capability. 2. In aspect of personnel: the Company was independent from its controlling shareholders in human resources such as labor, personnel and wage and has independent and complete capability. 3. In aspect of assets: the Company has complete and independent corporate property right, has independent and integrated production system, accessory production system and fitting facilities and has independent ownership of industrial property, trademark and non-patent technology etc. 4. In the aspect of organization: organization of the Company is independent and perfect, and there is no such situation that the Company shares the same office with its controlling shareholder. 5. In aspect of financing: the Company has independent financial department, standardized financial calculating system, financial management system and internal control system and individual bank account. IV. Establishment and perfect of internal control system of the Company During the report period, the Company revised and perfected internal control system for the first time. Revised draft was reviewed and approved by the 15th Meeting of the 5th Board of Directors, and was published in website for information disclosure designated by CSRC on 7 Mar. Zhongrui Yuehua Certified Public Accountants, which was audit institution of the Company, issued Verification Report on Internal Control with document No. ZRYHZS Zi [2009] 0804, which was published in www.cninfo.com.cn on 15 Apr. 2009. 20 V. Establishment and Execution on appraisal & incentive mechanism, related incentive system for senior executives During the report period, Remuneration Committee of the Board of Directors appraised operating achievements of the Company for the year 2007 according to Incentive and Restricted Proposal for Senior Executives of Lu Thai Textile Co., Ltd, and drew up incentive proposal for senior executives, which will be executed after review and approval by the 13th Meeting of the 5th Board of Directors dated 27 Feb. 2008. Section VII Brief to Shareholders’ General Meeting During the report period, the Company totally held three shareholders’ general meetings, namely the Shareholders’ Annual General Meeting 2007, the 1st Extraordinary Shareholders’ General Meeting 2008 and the 2nd Extraordinary Shareholders’ General Meeting 2008. the three meetings witnessed by lawyer of Shandong Deheng Lawyer Firm, who issued legal opinions respectively. Brief to the meetings are as follows: I. Shareholders’ Annual General Meeting 2007 The Board of Directors of the Company had proposed and convened this Shareholders’ General Meeting, and the public notice on holding the meeting was published in Securities Times, Shanghai Securities News and Ta Kung Pao as well as website www.cninfo.com.cn designated by CSRC on 7 Mar. 2008. The meeting was held in Banyang villa meeting room of the Company on 28 Mar. 2008, at which seven proposals on annual report 2007, the work report of the Board of Director of 2007 and so on were examined and approved. Public notice on resolutions of the meeting was published in Securities Times, Shanghai Securities News and Ta Kung Pao as well as website www.cninfo.com.cn designated by CSRC on 29 Mar. 2009. II. The 1st Extraordinary Shareholders’ General Meeting 2008 The Board of Directors of the Company had proposed and convened the 1st Extraordinary Shareholders’ General Meeting 2008, and public notice on holding the meeting was published in Securities Times, Shanghai Securities News and Ta Kung Pao as well as website www.cninfo.com.cn designated by CSRC on 16 May 2008. The meeting was held in Banyang villa meeting room of the Company on 6 Jun. 2008, at which reviewed and approved resolutions on election of independent directors of the Board of Directors and resolution concerning guarantee on credit line for subsidiary company Xinjiang Lu Thai Textile Co., Ltd. Public notice on resolutions of the meeting was published in Securities Times, Shanghai Securities News and Ta Kung Pao as well as website www.cninfo.com.cn designated by CSRC on 7 Jun. 2008. III. The 2nd Extraordinary Shareholders’ General Meeting 2008 The Board of Directors of the Company had proposed and convened the 2nd 21 Extraordinary Shareholders’ General Meeting 2008, and public notice on holding the meeting was published in Securities Times, Shanghai Securities News and Ta Kung Pao as well as website www.cninfo.com.cn designated by CSRC on 26 Sep. 2008. The meeting was held in Banyang villa meeting room of the Company on 15 Oct. 2008, at which reviewed and approved resolution on Consigning China Minsheng Bank Corp. Ltd Ji’nan Branch to Issue Short-term Financing Bonds no more than RMB 1 billion. Public notice on resolution of the meeting was published in Securities Times, Shanghai Securities News and Ta Kung Pao as well as website www.cninfo.com.cn designated by CSRC on 16 Oct. 2008. Section VIII Report of the Board of Directors I. Operation status in the reporting period (I) Overall operation In the report period, the Company realized operating income amounting to RMB 3,921.8374 million, export for foreign exchange amounting to USD 459.030 million, operating profit amounting to RMB 559.4648 million, and the net profit attributable to the ordinary shareholders totaled RMB 512.9447 million, respectively up by 2.92%, 18.81%, 10.36% and 11.58%. In the report period, the main businesses, source and composing of main profit remained unchanged. During the report period, further appreciation of RMB influenced gross profit on sales of products, but the Company relatively offset part influence of RMB appreciation by hedging of USD. Rising of export rebate of part textile by the country increased part income of the Company. In the report period, subprime mortgage crisis with influence on global broke out in the USA, which caused downturn of market demand and influenced export of the Company, especially influenced operating achievements of the 4th quarter of the year. The Company passed certification of hi-tech enterprise, therefore, income tax of the Company decreased to 15% from 25%, and the tax policy was from 2008 and with valid period being three years. At present, global financial crisis caused by the USA subprime mortgage crisis has not ended yet, global economic is still depressed, which will successively influence on export and operating results of the Company in the future. During the report period, the Company make great progress in scientific research. In 2008, the Company obtained 21 patents, with 6 patents for invention and 15 for utility model. Also in the same year, the Company accomplished 341 projects of technical innovation, the Company also completed 341 technical innovation projects, of which 56 projects involving research breakthroughs and 8 projects involving new product development. Among them, two technologies of “Key Technical and Industrialization of Processing on Super Count Pure Cotton Fabric” and “Large Aperture Membrane Disposal and Sewage Refining Project from Dying and Printing” won the 2nd prize of national scientific and technological progress for the year 2008, Research and Promotion on Half-vat Dyeing Energy-saving Technology 22 won the 1st prize of Excellent Technical Innovation Achievement on Energy-saving and Emission Reduction of Textile and Printing & Dyeing industry in the country. At occasion on assessment of scientific and technological achievements 2008, “Research on Technology of Pure Cotton Single-side sweat Transmitted Comfortable Fabric” of the Company was recognized as international advanced level, “Development and Research on Iron-free and Low-emission of carbon Fabric without formaldehyde” and “Cotton Stretch Iron-free Dyed Fabric” were recognized as international advanced level. In 2008, the Company awarded hi-tech enterprise and became “Development Base of the National Dyed Fabric” and “Application Base for Industrialization of New Materials of the USA Dow Chemical Textile”. At present, the Company generalized concept of circular economy and clean production, reduced consumption of resources and the produce of waste systematically from the source as to realize comprehensive utilization of all kinds of resources. In progress of production, we constantly improve the producing process and optimized the technology in order to reduce the consumption of material and energy as well as to strengthen the research and use of environment-protective and energy-saving new technology ceaselessly. We guarantee the aspect of saving energy and protecting environment on purchasing raw material, thus the dye for flowers, chemical material and assistant additives all accord with the European OEKO-TEX Standard, which ensures good image on market of high quality of Company’s products. The Company will further enhanced investment in research, sufficiently take advantage of technology research & development of the Company in industry, continuously developed healthy, environment-protected and comfortable colored woven fabrics with high technology, successively promote innovation of fabric of shirts. (II) Main business and operation status 1. Business scope: The Company is a textile enterprise that has integrated spinning, blanching and dyeing, weaving, after-finishing and clothes making as one comprehensive production. The leading products are the shirt-use colored woven cloth and shirts. Over 80 percent of the products produced by the parent company are for export, and their markets covering more than thirty countries and districts, including Japan, South Korea, America, Britain, Italy, etc. It is the largest production base of colored woven cloth in Asia. 2. Operation classified according to products Unit: RMB’0000 Operating income Operating cost Operating gross profit Product 2008 2007 2008 2007 2008 2007 Shirt colored woven cloth 256,711.85 240,436.42 190,281.56 178,014.54 66,430.28 62,421.88 Shirt 101,867.30 86,112.08 74,594.56 61,936.60 27,272.74 24,175.48 Ginned cotton 3,562.37 3,847.76 3,229.29 3,511.11 333.08 336.65 Chinese patented medicines 1,799.11 1,973.68 1,465.05 1,509.16 334.06 464.52 Power and steam 4,575.10 5,763.70 6,269.71 5,022.02 -1,694.61 741.68 Others 23,668.01 42,933.49 1,668.02 32,507.20 1,143.04 10,426.29 23 Total 392,183.74 381,067.13 277,508.21 282,500.63 93,818.59 98,566.50 3. Market distribution of products Unit: RMB’0000 Area 2008 Proportion (%) 2007 Proportion (%) Japan and South Korea 49,817.89 12.70 48,333.49 12.69 Hong Kong 41,784.56 10.65 46,998.47 12.33 Southeast Asia 81,455.46 20.77 71,660.16 18.81 Europe and America 95,544.75 24.36 88,380.70 23.19 Other 46,330.16 11.81 30,341.78 7.96 Domestic 77,250.92 19.70 95,352.53 25.02 Total 392,183.74 100.00 381,067.13 100.00 4. Principal suppliers and clients During the report period, purchasing amount the top five suppliers totaled RMB 779.3012 million, taking up 24.58% of total purchase amount of the year. During the report period, sales amount if the top five clients totaled RMB 1,319.2905 million, taking up 33.64% of total sales amount of the year. (III) Assets composing of the Company Unit: RMB’0000 Amount of current Proportion in total Amount of the same Proportion in Items period assets period in last year total assets Accounts receivable 13,427.26 1.89% 12,164.39 2.07% Inventories 137,005.81 19.32% 99,703.10 17.00% Fixed assets 372,866.24 52.58% 348,858.21 59.45% Projects in construction 16,179.84 2.28% 35,113.92 5.99% Short-term borrowings 197,433.39 27.84% 212,893.27 36.29% Long-term borrowings 29,851.06 4.21% 34,478.42 5.88% (1) Proportion of fixed assets decreased by 6.87%, mainly because additional issuance of A-share caused radix of total shares increased. (2) Proportion of projects in construction decreased by 3.71%, which was mainly due to decrease of construction projects. (3) Short-term borrowings decreased by 8.45%,which was mainly because raised capital used to repay short-term loans after making up current assets. (IV) Sales expense, administrative expense and financial expense of the Company in the report period Unit: RMB’0000 Items Amount of this period Amount of the same period in last year Increase/decrease Sales expense 12,365.46 11,731.75 5.40% Administrative expense 23,154.94 24,300.58 -4.71% Financial expense 3,910.51 10,981.61 -64.39% (1) Sales expense of the report period increased by 6.87% year-on-year, which was mainly 24 because of increase of income from the main business. (2) Administrative expense of the report period decreased by 4.71% year-on-year, which was mainly because performance of senior executives and withdrawal of year-end bonus decreased. (3) Financial expense of the report period decreased 64.39% year-on-year, which was mainly because of increase of exchange income. (V) Analysis on relevant data in cash flow statement Unit: RMB’0000 Amount of this Amount of the same Items Increase/decrease period period in last year Net cash flow arising from operating activities 78,199.59 49,512.66 57.94% Net cash flow arising from investing activities -41,597.32 -87,973.28 52.72% Net cash flow arising from financing activities 31,595.99 37,566.27 -15.89% (1) Net cash flow arising from operating activities in the report period increased by 57.94% year-on-year, which was mainly because cash from sales of goods and offering labor service increased. (2) Net cash flow arising from investing activities in the report period increased by 52.72% year-on-year, which was mainly because investment on acquisition of fixed assets decreased. (3) Net cash flow arising from financing activities in the report period decreased by 15.89% year-on-year, which was mainly because cash to repay debts increased. (VI) Discussion and analysis on important information relating to operation of the Company In the report period, the utilization rate of the equipments and installations reached 100 percent, with part of the products commissioned for third party processing. The main products like the colored woven cloth and shirts were produced according to the orders. Main technicians were stable, and there wasn’t any loss of main technicians. Although production orders are saturated, price of some orders dropped, quantity decreased, batches increased and delivery date shortened, which was obvious characteristic in the near term. Global financial crisis has not ended, revival of economy need a long time, which will influence future operating achievements of the Company. (VII) Operation and achievement of the controlling companies and shareholding companies Unit: RMB’0000 Proportion Product or Registered Total Net Name Business nature of equity service capital assets profit held Beijing Luthai Shirt Co., Ltd Production enterprise Shirt 560 1,334.59 12.01 60% Beijing Sichuang Adornments Co., Ltd Production and sales Clothes, finery USD 200 11,070.82 60% 2.10 25 Xinjiang Luthai Harvest Cotton Co., Ltd Production and sales Ginned cotton 8946.30 63,252.83 528.26 57.01% Luthai (Hong Kong) Co., Ltd Import and export trade Market service HKD 600 2,602.59 259.62 100% Shandong Luthai Huanzhong Chinese patented Production and sales 8000 7,351.77 -808.64 75% Pharmaceutical Co., Ltd medicines Lufeng Weaving & Dyeing Co., Ltd Production and sales Piece-dyed cloth 48616 83,158.60 625.76 75% Spinning, Zibo Luqun Textile Co., Ltd Production and sales 16822 68,836.99 6,090.12 100% twining Zibo Xinsheng Thermal Power Co., Ltd Production and sales Power, stream 16243.56 26,788.51 -230.85 100% Note: During the reporting period, deficit of Luthai Huanzhong was because of the higher production cost; loss of Xinsheng Power was due to high price of coal in the reporting period. Ⅱ. Future development of the Company (Ⅰ) Development trend of the industry where the Company is engaged Engaged in the cotton textile industry, the Company mainly produces and sells the yarn dyed fabric used for shirts and shirt products, with the sales of the yarn dyed fabric taking up 80% of the Company’s total sales. Currently, the yarn dyed fabric falls into three categories, i.e. the top, the high-end, and the middle and low end, which have formed a triangular structure. To be specific, the top-grade yarn dyed fabric is mainly produced by the few manufacturers in Italy, France, Germany, Japan, etc., with the combined production capacity not exceeding 50 million meters per year. And it mainly targets at the fashion and top-brand shirt market. The high-end yarn dyed fabric was characterized of high-density and high-counts, and delicateness after-finishing. Though inferior to the top-grade yarn dyed fabric in terms of the pattern design and fashionability, it requires an advanced manufacturing technology and a high product quality, which does not differ much from the former. At present, its global production capacity is about 0.7 billion meters per year, with the Company taking up approximately 18%. The high-end yarn dyed fabric is mainly used in the production of middle and high-grade brand shirts and enjoys an enormous market demand. The present production capacity of the yarn dyed fabric in China is about 2.8 billion meters, with 90% being the middle and low-end products, excluding the capacity of the household production. As the people’s living standards improve increasingly, the yarn dyed fabric used for shirts would surely undergo an industrial upgrade process, i.e. the capacity of the middle and low-end yarn dyed fabric would be upgraded or eliminated, and the production capacity of the yarn dyed fabric would go to the high-end products, and the consumption structure of the yarn dyed fabric would shift from the original triangular structure (middle and low-end products taking up the largest proportion) into a diamond structure (middle and high-end products in the middle of the structure increasing obviously in proportion). China’s textile industry is highly competitive in terms of technology, personnel, resources, industrial technical accumulation, etc.. Therefore, the said shift of the industrial structure would surely provide a great market space for the development of 26 China’s yarn dyed fabric industry. (Ⅱ) Opportunities and challenges in future development China’s textile industry enjoys outstanding advantages in the world. Currently, due to the impact of the global financial crisis, some small and medium-sized enterprises are forced to diminish or stop their production, or even shut down the plants, which leads to a reduced production of yarn dyed fabrics in China. However, the comprehensive advantage of China’s textile industry remains unchanged. As a large textile enterprise with a complete industrial chain integrating the cotton planting, spinning, blanching and dyeing, weaving, after-finishing and clothes making, the Company enjoys lots of advantages such as having the largest production scale in the world, the advantage of new products development and research, long-term technological accumulation, diversified research organizations, good market credit, long-term and stable customer sources, stable technical and management teams, and ample and stable funds. All these advantages would help the Company through the economic difficulties and promote the steady and sustainable development of the Company. The global financial turbulence would cause a reshuffle in the industry and the market, which would consequently provide a new opportunity of development for those competitive enterprises. (Ⅲ) Capital needs, sources and use plans The proposal on the public listing of additional A-shares was reviewed and approved in the 1st Provisional General Meeting of Shareholders in 2007, which planned to raise RMB 1,122 million. Focusing on the Company’s main businesses of yarn dyed fabrics and shirts, the raised funds would be used for perfecting the supporting supply ability before and after the production chain, so as to strengthen the competitiveness of the Company’s products. On Dec. 2008, the listing of additional A-shares was implemented, with the issued A-shares amounting to 150 million shares and the net raised amount of RMB 950,814,500. And the raised capital was planned to support the Company’s projects (the Production Project for 150 Thousand Ingot Top-grade Fine Combed Yarns, the Production Line Project for 50 Thousand Ingot Top-grade Ply Yarns, the Production Line Project for 10-million-meter Top-grade Jacquard Fabrics for Women’s Wear, and the Project of Brand and Marketing Network Promotion), as well as to increase the working capital. (Ⅳ) Risks to the realization of development strategies and operating objectives, as well as the countermeasures Resulted from the American subprime mortgage crisis, the global financial crisis had an increasingly adverse impact on the international economy over time, which also seriously affected the consumer market in Europe and America. Despite the fact that China raised the export refund ratio of some textile products twice in a roll during 27 the reporting period, there was still a considerable decrease in the export of textile products as a whole. Although the Company obtained ample and stable orders through its own advantages, the orders were different from before in terms of sizes, batches, delivery time and added value, which created certain difficulties in the production scheduling and cost controlling. In view of the special economic situation, the Company organized, at the very beginning of the financial crisis, lots of lectures for its employees to understand the background of the crisis, its damage to the world economy, etc.. Also, the Company conducted trainings according to the actual situation of its export, so that all the staff could focus on their appointed tasks, effectively control the cost, and build up full confidence to take on the challenge of the crisis, as well as to seize opportunities in the challenge. Meanwhile, as for some downstream long-standing customers seriously affected in the financial crisis, the Company took the initiative to partially cut the prices of its products sold to them, so as to get through the difficulties with the customers and lay a foundation for the Company’s long-term development. With the raised capital, the Company would also keep improving the domestic marketing network and strengthening its brand promotion, so that the Company could enjoy rapid progress in both the domestic and foreign markets. Ⅲ Investment in the reporting period (Ⅰ) Use of raised capital in the reporting period In the reporting period, the Company raised RMB 973.50 million through the public listing of additional 150 million A-shares. And the actual net amount of the raised capital after deducting all the issuance expenses stood at RMB 950,814,500, of which the use in the reporting period was detailed as follows: (1) About the Production Project for 150-thousand Ingot Top-grade Fine Combed Yarns: By 31 Dec. 2008, the Company’s self-collected funds of RMB 243,332,400 were invested into the project for building the factory and purchasing equipments. After the arrival of the raised capital in Dec. 2008, an equal amount of the previously invested self-collected funds was taken out of the raised capital, which were examined and approved at the 27th Meeting of the 5th Board of Directors. The original planned investment amount was RMB 334,609,300 by the raised capital and was later adjusted to RMB 264,609,300 due to the insufficient raised capital. By now, 91.96% of the investment has been accomplished. And the project basically came to the production phase in Aug. 2008. (2) About the Two-for-one Twisting Production Line Project: By 31 Dec. 2008, the Company’s self-collected funds of RMB 16,604,700 were invested into the project for building the factory and purchasing equipments. After the arrival of the raised capital in Dec. 2008, an equal amount of the previously invested self-collected funds 28 was taken out of the raised capital, which were examined and approved at the 27th Meeting of the 5th Board of Directors. The original planned investment amount was RMB 142,518,700 by the raised capital and was later adjusted to RMB 40,868,300 due to the insufficient raised capital. By now, 40.63% of the investment has been accomplished. (3) About the Project for Brand and Marketing Network Development: By 31 Dec. 2008, the Company’s self-collected funds of RMB 4,924,500 were invested into the project for building shirt shops in the domestic major cities such as Beijing, Shanghai, Chengdu, Kunming and Jinan. After the arrival of the raised capital in Dec. 2008, an equal amount of the previously invested self-collected funds was taken out of the raised capital, which were examined and approved at the 27th Meeting of the 5th Board of Directors. The raised capital of RMB 200,000,000 was planned to be put into the project and 2.46% of the investment has been accomplished by now. And the 20 shirt shops in the said major cities were already open for business. (4) About the Project for Supplementing the Working Capital: After the arrival of the raised capital in Dec. 2008, RMB 300,000,000 was used for supplementing the working capital. (5) About the Production Line Project for 10-million-meter Top-grade Jacquard Fabrics for Women’s Wear: RMB 145,336,900 was originally planned to be put into the project. Due to influence of the global financial crisis, the Company would determine the special time of implementation in light of the change of market situation. 2. Investment with non-raised capital in the reporting period In the reporting period, the Company’s total project investment amounted to RMB 57,472,800. And the main projects invested were detailed as follows: (1) About the 50-million-meter Yarn Dyed Fabrics Project: RMB 46,461,100 was invested in the reporting period, with an accumulative investment amounting to RMB 787,984,300, which meant that 95.00% of the planned investment was accomplished. A production line of 10-million-meter yarn dyed fabrics went into commercial production in Jul. 2006, and a production line of 20-million-meter yarn dyed fabrics in Oct. 2007. Also, another production line of 20-million-meter yarn dyed fabrics was put into operation in the first quarter of the year 2008. (2) About the Project of 5-million Pieces of Shirts: RMB 11,011,700 was invested in the reporting period, with an accumulative investment amounting to RMB 97,706,100, which meant that 99.00% of the planned investment was accomplished. A production line with an annual capacity of 1.5-million pieces of shirts went into commercial production in Oct. 2005, and a production line with an annual capacity 29 of 2-million pieces of shirts in Jan. 2007. And the other production lines were also put into operation in Jun. 2008. Ⅳ Zhongrui Yuehua Certified Public Accountants Co., Ltd. issued the standard unqualified auditors’ report for the Company. Ⅴ. Routine work of Board of Directors (Ⅰ) Meetings held and the resolutions made in the reporting period During the reporting period, the Company’s Board of Directors convened 17 meetings, which were detailed as follows: 1. The 10th Meeting of the 5th Board of Directors was convened on 5 Jan. 2008, where a lecture was given concerning the guidelines of the Conference on Listed Companies’ Financial Work (a video conference) held by the CSRC and the CSRC Shandong Bureau on 18 Dec. 2007 to promote a better understanding of the relevant regulations. The board meeting took the form of a lecture, and thus no resolutions or public notices were made. 2. The 11th Meeting of the 5th Board of Directors was convened on 25 Jan. 2008, where the Proposal on Providing Guarantees for Holding Subsidiaries and Wholly-owned Subsidiaries was reviewed and approved. And the resolutions of the meeting were published on Securities Times, Shanghai Securities News, Ta Kung Pao and http://www.cninfo.com.cn dated 30 Jan. 2008. 3. The 12th Meeting of the 5th Board of Directors was convened on 16 Feb. 2008, where the Proposal on Rules for Independent Directors Concerning Annual Reports, as well as the Proposal on Rules of Procedure for Audit Committee of the Board Concerning Annual Reports was reviewed and approved. And the resolutions of the meeting were published on Securities Times, Shanghai Securities News, Ta Kung Pao and http://www.cninfo.com.cn dated 19 Feb. 2008. 4. The 13th Meeting of the 5th Board of Directors was convened on 27 Feb. 2008, where 9 proposals (including the Proposal on the 2007 Annual Report) was reviewed and approved. And the resolutions of the meeting were published on Securities Times, Shanghai Securities News, Ta Kung Pao and http://www.cninfo.com.cn dated 29 Feb. 2008. 5. The 14th Meeting of the 5th Board of Directors was convened on 5 Mar. 2008, where the Proposal on Providing Loan Guarantees for Holding Subsidiaries was reviewed and approved. And the resolutions of the meeting were published on Securities Times, Shanghai Securities News, Ta Kung Pao and http://www.cninfo.com.cn dated 6 Mar. 2008. 30 6. The 15th Meeting of the 5th Board of Directors was convened on 6 Mar. 2008, where 4 proposals (including the Proposal on Convening 2007 Shareholders’ General Meeting) was reviewed and approved. And the resolutions of the meeting were published on Securities Times, Shanghai Securities News, Ta Kung Pao and http://www.cninfo.com.cn dated 7 Mar. 2008. 7. The 16th Meeting of the 5th Board of Directors was convened on 28 Mar. 2008, where the Proposal on Applying to Zichuan Sub-branch of Bank of China for a Credit Line of RMB 800 million was reviewed and approved. And the resolutions of the meeting were published on Securities Times, Shanghai Securities News, Ta Kung Pao and http://www.cninfo.com.cn dated 29 Mar. 2008. 8. The 17th Meeting of the 5th Board of Directors was convened on 23 Apr. 2008, where 2 proposals (including the Proposal on the 1st Quarterly Report of 2008) was reviewed and approved. And the resolutions of the meeting were published on Securities Times, Shanghai Securities News, Ta Kung Pao and http://www.cninfo.com.cn dated 24 Apr. 2008. 9. The 18th Meeting of the 5th Board of Directors was convened on 15 May 2008, where 6 proposals (including the Proposal on Electing Independent Directors for the 5th Board of Directors) was reviewed and approved. And the resolutions of the meeting were published on Securities Times, Shanghai Securities News, Ta Kung Pao and http://www.cninfo.com.cn dated 16 May 2008. 10. The 19th Meeting of the 5th Board of Directors was convened on 6 Jun. 2008, where the Proposal on Members Chosen for Special Committees of the Board was reviewed and approved. And the resolutions of the meeting were published on Securities Times, Shanghai Securities News, Ta Kung Pao and http://www.cninfo.com.cn dated 7 Jun. 2008. 11. The 20th Meeting of the 5th Board of Directors was convened on 30 Jun. 2008, where 2 proposals (including the Proposal on Applying to Zibo Sub-branch of China Citic Bank for a Loan of RMB 100 Million) was reviewed and approved. And the resolutions of the meeting were published on Securities Times, Shanghai Securities News, Ta Kung Pao and http://www.cninfo.com.cn dated 2 Jul. 2008. 12. The 21st Meeting of the 5th Board of Directors was convened on 18 Jul. 2008, where two proposals (including the Report on Special Campaigns for Corporate Governance Rectification) was reviewed and approved. And the resolutions of the meeting were published on Securities Times, Shanghai Securities News, Ta Kung Pao and http://www.cninfo.com.cn dated 19 Jul. 2008. 13. The 22nd Meeting of the 5th Board of Directors was convened on 18 Aug. 2008, 31 where 5 proposals (including the 2008 Semi-yearly Report) was reviewed and approved. And the resolutions of the meeting were published on Securities Times, Shanghai Securities News, Ta Kung Pao and http://www.cninfo.com.cn dated 15 Aug. 2008. 14. The 23rd Meeting of the 5th Board of Directors was convened on 1 Sept. 2008, where 5 proposals (including the Proposal on Applying to Jinan Sub-branch of Pudong Development Bank for a Credit Line of RMB 100 Million) was reviewed and approved. And the resolutions of the meeting were published on Securities Times, Shanghai Securities News, Ta Kung Pao and http://www.cninfo.com.cn dated 2 Sept. 2008. 15. The 24th Meeting of the 5th Board of Directors was convened on 25 Sept. 2008, where 3 proposals (including the Proposal on Convening the 2nd Provisional Shareholders’ General Meeting) was reviewed and approved. And the resolutions of the meeting were published on Securities Times, Shanghai Securities News, Ta Kung Pao and http://www.cninfo.com.cn dated 26 Sept. 2008. 16. The 25th Meeting of the 5th Board of Directors was convened on 26 Oct. 2008, where 7 proposals (including the 3rd Quarterly Report of 2008) was reviewed and approved. And the resolutions of the meeting were published on Securities Times, Shanghai Securities News, Ta Kung Pao and http://www.cninfo.com.cn dated 28 Oct. 2008. 17. The 26th Meeting of the 5th Board of Directors was convened on 11 Nov. 2008, where 3 proposals (including the Proposal on Applying to Jinan Sub-branch of China Merchants Bank for a Credit Line of RMB 200 Million) was reviewed and approved. And the resolutions of the meeting were published on Securities Times, Shanghai Securities News, Ta Kung Pao and http://www.cninfo.com.cn dated 12 Nov. 2008. (Ⅱ) Execution of resolutions made at Shareholders’ General Meeting by the Board of Directors In the reporting period, according to the Company Law and the Articles of Association, the Board faithfully performed its rights and duties endowed by Shareholders’ General Meeting, and effectively executed the resolutions made at the Shareholders’ General Meeting. And it carried out the 2007 profit distribution plan, as well as the public listing of additional 150 million A-shares according to the resolution made at the 1st Provisional Shareholders’ General Meeting in 2007. (Ⅲ) Summary report on duty fulfillment of Audit Committee of the Board 1. Particulars about the work of Audit Committee subordinate to the Board 32 In strict accordance with the Specific Rules for Audit Committee, the Audit Committee conscientiously performed their responsibilities, which mainly included conducting communication, supervision and checks in the Company’s internal and external auditing. According to the Document ZJGS Zi 【2007】No. 235, the Rules for Audit Committee Concerning Annual Reports was examined and approved at the 12th Meeting of the 5th Board of Directors. In strict compliance with the approved Rules, the Audit Committee performed its duty of supervision in the annual report preparation and maintained the audit independence in the process of auditing the 2008 financial report. And the work of the Audit Committee in the preparation of the 2008 Annual Report were mainly detailed as follows: (1) The Audit Committee held a meeting on the spot on 11 Nov. 2008, where the Committee and the Project Manager of the Company’s 2008 financial audit from Zhongrui Yuehua Certified Public Accountants Co., Ltd., through consultation, decided the overall plan for the Company’s 2008 financial audit. And Chief Accountant, Secretary of the Board of Directors, and Chief Auditor of the Audit Committee of the Company attended the meeting. (2) The Committee reviewed the Company’s 2008 financial statements prepared by the Company’s Financial Department, and issued a written opinion. (3) In the audit process, the Committee kept in contact with the project manager from Zhongrui Yuehua Certified Public Accountants Co., Ltd. by phone, email, etc.., and urged the manager to submit the auditor’s report within the set time. (4) The 2nd Meeting on 2008 Annual Audit was held by the Committee on 16 Jan. 2009, where the Committee reviewed the Company’s financial statements and issued a written opinion. (5) The 3rd Meeting on 2008 Annual Audit, as well as the 2008 Annual Work Conference, were convened by the Committee on 12 Apr. 2009, where the following proposals were approved as resolutions, namely, the audited 2008 Financial Report of the Company, the Summary Report on the Audit Conducted by Zhongrui Yuehua Certified Public Accountants Co., Ltd. on the Company’s 2008 Financial Report, and the Proposal on Renewing Employment of Zhongrui Yuehua Certified Public Accountants Co., Ltd. as the Company’s audit agency for 2009. 2. Written opinions, summary report of the annual audit, and resolutions of 2008 Work Conference on Annual Report by Audit Committee (1) Audit Committee’s written opinion on the 2008 financial and accounting statements prepared by the Company’s Financial Department before the presence of the registered accountants for the annual audit: 33 According to the Rules for Audit Committee of the Board Concerning Annual Reports of Lu Thai Textile Co., Ltd., the Audit Committee shall perform its duties of conducting supervision and checks in the Company’s preparation and disclosure of its annual reports. The Committee reviewed the 2008 financial and accounting statements prepared by the Company’s Financial Department before the presence of the registered accountants for the annual audit, and expressed its opinion as follows: The financial and accounting statements were prepared in accordance with the Company’s accounting policy with proper application of the accounting policy and reasonable accounting estimates, which were in line with the New Accounting Standards for Business Enterprises, the Accounting System for Business Enterprises, and the relevant regulations issued by the Ministry of Finance of PRC; The subsidiary statements included in the Company’s consolidated statements were complete in terms of contents, providing an accurate basis for the statement combination; The Company’s financial statements were found objective, factual and accurate with no major misstatements or information omission. Since there is still a certain period of time from the review of the financial statements to the formal issuance of the auditor’s report and the financial statements, the Company’s Financial Department is advised to pay close attention to and carefully handle the matters after the balance sheet date, so as to ensure the fairness, factuality and completeness of the financial statements. The Audit Committee is of the opinion that the financial and accounting statements are ready to be submitted to the registered accountants for audit. Audit Committee of the Board of Directors 16 Jan. 2009 (2) Audit Committee’s written opinion on the Company’s financial statements after the preliminary audit opinion was issued by Zhongrui Yuehua Certified Public Accountants Co., Ltd. According to the Rules for Audit Committee of the Board Concerning Annual Reports of Lu Thai Textile Co., Ltd., the Audit Committee shall perform its duties of conducting supervision and checks in the Company’s preparation and disclosure of its annual reports. We effectively communicated with the said CPA firm at the beginning of the audit. And we once again reviewed the Company’s 2008 financial and accounting statements following the preliminary audit opinion issued by the CPA firm, and expressed our opinions as follows: In accordance with the New Accounting Standards for Business Enterprises and the 34 Company’s relevant financial systems, the financial statements were prepared in a rational and standardized way, which fairly, factually, accurately and completely presented the Company’s assets, liabilities, shareholders’ equity and operation results by 31 Dec. 2008. The Audit Committee is of the opinion that the Company’s 2008 financial and accounting statements preliminarily audited by Zhongrui Yuehua Certified Public Accountants Co., Ltd. are ready to be submitted to the Audit Committee for review and approval. Audit Committee of the Board of Directors 12 Apr. 2009 (3) Resolutions made at 2008 Annual Work Conference of Audit Committee of the Board The Audit Committee of the Board of Lu Thai Textile Co., Ltd. held its 2008 Annual Work Conference at Banyang Villa Meeting Room of the Company on 12 Apr. 2009. Three persons were supposed to attend the meeting, and all three of them were in fact present at the meeting. Mr. Qi Haodong, Chairman of the Audit Committee, presided over the meeting, with the attendances of Chief Accountant and Chief Auditor of the Audit Department. The meeting was convened in accordance with the Company Law and the Articles of Association. And the following proposals were passed by vote at the meeting: With 3 favourable votes, 0 negative votes and no abstentions, the 2008 Annual Financial Report of the Company Audited by CPA Firm was passed; With 3 favourable votes, 0 negative votes and no abstentions, the Summary Report on the Audit Conducted by Zhongrui Yuehua Certified Public Accountants Co., Ltd. on the Company’s 2008 Financial Report was passed; With 3 favourable votes, 0 negative votes and no abstentions, the Proposal on Renewing Employment of Zhongrui Yuehua Certified Public Accountants Co., Ltd. as the Company’s audit agency for 2009 was passed with a valid term of 1 year. The Committee agrees to submit the above-mentioned proposals to the Board of Directors for examination. Audit Committee of the Board of Directors 12 Apr. 2009 (Ⅳ) Duty fulfillment of Remuneration Committee subordinate to the Board (1) On 26 Feb. 2008, the Remuneration Committee convened the 1st meeting in the 35 year 2008, where the Proposal on 2007 Appraisal Results of Senior Management Personnel of Lu Thai Textile Co., Ltd. was put forward according to the Incentive and Disciplinary Mechanism for Senior Management Personnel of Lu Thai Textile Co., Ltd.. And the proposal was submitted to and passed by the 13th meeting of the 5th Board on 27 Feb. 2008. (2) On 6 Jun. 2008, according to the Incentive and Disciplinary Mechanism for Senior Management Personnel of Lu Thai Textile Co., Ltd., as well as the resolution of the 13th meeting of the 5th Board, the Remuneration Committee convened its 2nd meeting in the year 2008, where the Resolution on Withdrawing Risk Funds in 2007 was made. (Ⅴ) Duty fulfillment of Nomination Committee subordinate to the Board On 6 Jun. 2008, the 5th Board of the Company convened its 19th meeting, where the Nomination Committee put forward the following nomination letter concerning the personnel adjustment of the special committees of the Board: With the expiration of the term of Independent Director Zhou Zhiji and Wu Yuhua, Qi Haodong and Bi Xiuli were elected as the independent directors of the 5th Board at the 1st Provisional Shareholders’ General Meeting. Therefore, a re-election became necessary in the Audit Committee, Strategic Dicision Committee, Remuneration Committee and Nomination Committee of the 5th Board. Accoding to regulations of the Articles of Association, the Nomination Committee convened a meeting, where the following nominations were put forward: The original members of the Nomination Committee were Liu Shizhen, Wu Yuhua and Zhou Zhiji, with Zhou Zhiji as Chairman. Upon the expiration of the term of Zhou Zhiji and Wu Yuhua, Qi Haodong and Bi Xiuli were nominated as the candidate members of the Nomination Committee, with Qi Haodong as the chairman candidate. The original members of the Remuneration Committee were Liu Shizhen, Liu Zibin, Hong Xiaobin, Zhou Zhiji and Wu Yuhua, with Hong Xiaobin as Chairman. Upon the expiration of the term of Zhou Zhiji and Wu Yuhua, Qi Haodong and Bi Xiuli were nominated as the candidate members of the Remuneration Committee. The original members of the Audit Committee were Liu Zibin, Zhou Zhiji and Wang Yonggui, with Zhou Zhiji as Chairman. Upon the expiration of the term of Zhou Zhiji and the resignition of Liu Zibin from the post of Member of the Audit Committee, Qi Haodong and Qin Guilin were nominated as candidate members of the Audit Committee, with Qi Haodong as the president candidate. 36 The original members of the Strategic Decision Committee were Liu Shizhen, Xu Zhinan, Chen Ruimo, Tengyuan Yingli, Liu Zibin, Wang Fangshui, Sun Zhigang, Qin Guilin, Wu Yuhua, Zhou Zhiji, Wang Yonggui, Hong Xiaobin, Liu Shisong and Zeng Facheng, with Liu Shizhen as Chairman. Upon the expiration of the term of Zhou Zhiji and Wu Yuhua, Qi Haodong and Bi Xiuli were nominated as the candidate members of the Strategic Decision Committee. The above-mentioned nominations were reviewed and approved at the 19th meeting of the 5th Board. VI. Profit Distribution Preplan and Preplan of turning Capital Reserve into Share Capital 1、The profit distribution preplan 2008 was approved at the 29th meeting of the 5th Board of Directors: Based on total share capital of 994,864,800 shares as at 31 Dec. 2008, the cash dividend of RMB 2.00 (tax included) shall be distributed for every 10 shares. After the implementation of distribution proposal, the distributed cash dividend will be RMB 198,972,960.00. The remaining profit available for distribution amounting to RMB 784,290,796.75 shall be transferred to the next accounting year for distribution. Of which, The cash dividend to shareholders of B share shall be converted into HK dollars by the middle price between RMB and HKD declared by the Bank of China on the first working day after adopting resolution of the Shareholders’ General Meeting. The aforesaid profit distribution proposal shall be implemented after submitting to the Shareholders’ General Meeting 2008 for approval. 2、Cash dividend in the last three years of the Company Unit: RMB Yuan Amount of cash dividend Net profit attributable to owner of parent Ration of net profit attributable to owner of (before tax) company in consolidated statement parent company in consolidated statement 2007 187,754,304.50 459,725,146.61 40.84% 2006 157,060,366.32 340,019,432.40 46.19% 2005 126,729,720.00 311,450,124.76 40.69% VII. Other Events Shall be disclosed The newspapers for information disclosure designated by the Company are Securities Times, Shanghai Securities News and Ta Kung Pao. 37 SECTION IX REPORT OF SUPERVISORY COMMITTEE I. The Work of the Supervisory Committee in the reporting period In the reporting period, the Supervisory Committee held 4 meetings, and attended some of the 17 Board meetings of the Company. The 3rd meeting of the 5th Board meeting was held on Feb. 27, 2008, which deliberated and approved the Annual Report on the Work of the Supervisory Committee 2007, Annual Report of the Company 2007 and its Summery. The 4th meeting of the 5th Board meeting was held on Apr. 23, 2008, which deliberated and approved the First Quarterly Report of the Company and issued written opinion. The 5th meeting of the 5th Board meeting was held on Aug. 13, 2008, which deliberated and approved the Semi-Annual Report of the Company and issued written opinion. The 6th meeting of the 5th Board meeting was held on Oct 26, 2008, which deliberated and approved the Third Quarterly Report of the Company and issued written opinion. II. Independent Opinions Expressed by the Supervisory Committee 1. Particulars about Operation According to the Laws In the reporting period, the Supervisory Committee of the Company got to know and conducted overall and careful examination on the decision-making procedure of the Company, implementation of internal control system as well as duty performance of Directors and Senior Executives. It believed that the internal control system of the Company was sound and the decision-making procedure was normative, and that no breach of the laws, regulations and the Articles of Association was found, neither were the behaviors damaging the interest of the Company. 2. Inspection of the Company’s finance The Supervisory Committee carefully checked the Auditors’ Reports produced for the Company, and agreed that the financial report had authentically and accurately reflected the Company’s financial status and business achievement. 3. The Company’s latest raised proceeds were RMB 973,500,000 raised by the additional issuance of 150,000,000 A shares. After deduction of issue expense, the net 38 amount of raised proceeds was RMB 950,814,500. The use of raised proceeds was in accordance with relevant provisions and rules for raised proceeds management. 4. Whether the transaction price of purchasing and selling assets of the Company was reasonable or not In the reporting period, no purchase and sale of the Company’s assets occurred. 5. Whether the affiliated transactions were fair or not, whether they did harm to the interests of listed companies or not In opinion of the Supervisory Committee, the affiliated transactions of the Company occurred in the reporting period were in compliance with the relevant regulations and the principle of “Fair, Just and Open”, and did no harm to the interests of listed companies. 6. The Company didn’t make profit forecast. Zhongrui Yuehua Certified Public Accountants issued the standard unqualified Auditors’ Report for the Company in this year. 39 SECTION X. SIGNIFICANT EVENTS I. .During the reporting period, the Company had no significant lawsuits and arbitrations. II. During the reporting period, the Company had no relevant event about bankruptcy and reorganization. III. During the reporting period, the Company had no such investment behavior as holding equity of other listed companies, or involving in equity participation in financial enterprises like commercial banks, securities companies, insurance companies, trust companies and futures companies etc.. IV. Brief Information about Assets Purchase and Sales as well as Enterprise Merger In the reporting period, the Company input another RMB 100,000,000 to the wholly-owned subsidiary Zibo Xinsheng Thermal Power Co., Ltd. Apart from this, there was no assets purchase and sale as well as enterprise merger in the period. V. The Company had not formulated and implemented the share incentive plan VI. Significant Affiliated Transaction Events of the Company in the Reporting Period 1. Affiliated Transactions Related with Daily Operation Activities For details, please refer to Notes to Financial Statement “IX. Relationship of affiliated parties and their transactions” enclosed in the Annual Report. 2. In the reporting period, the Company had no such affiliated transaction as assets and equity transfer. 3. In the reporting period, the Company had no such affiliated transaction as external investment jointly with affiliated parties. 4. Particulars about Creditor’s Right, Debt and Guarantees between the Company and affiliated parties In the reporting period, the Company only provided loan guarantee and guarantee with Letters of Credit for controlling subsidiaries. The total guarantee amount was RMB 106,644,500 in the period and the balance RMB 102,060,800 at the period-end, accounting for 2.88% of the shareholder’s equity which belonged to the parent company. For details about guarantees, please refer to Notes to Financial Statement “X. Contingencies”. 5. Other Significant Affiliated Transactions 40 In the reporting period, the Company leased land, houses and gas station from the big shareholder Zibo Lucheng Co., Ltd, with the leasing charge aggregating RMB 5,879,400. Meanwhile, the wholly owned subsidiary Luqun Textile leased equipments from the big shareholder Zibo Lucheng Co. Ltd, with the leasing charge aggregating RMB 4,155,000 and the Company leased cotton storage location from Luqun Zhiye Co., Ltd, with the leasing charge aggregating RMB 567,600. The Company planed to purchase 300 tons of ginned cotton from Lucheng Co., Ltd at the price of RMB 3,600,000, and pay RMB 4,950,000 to Limin Water Purification Co. Ltd as sewage treatment fees. VII. Significant Contracts of the Company and Their Implementation 1. Trusteeship, Contract and Lease of Other Companies’ Assets in the Reporting Period In the reporting period, the Company leased land, houses and gas station from the big shareholder Zibo Lucheng Co., Ltd, with the leasing charge aggregating RMB 5,879,400. Meanwhile, the wholly owned subsidiary Luqun Textile leased equipments from the big shareholder Zibo Lucheng Co. Ltd, with the leasing charge aggregating RMB 4,155,000 and the Company leased cotton storage location from Luqun Land Co., Ltd, with the leasing charge aggregating RMB 567,600. 2. Significant Guarantee In the reporting period, the Company only provided loan guarantee and guarantee with Letters of Credit for controlling subsidiaries. The total guarantee amount was RMB 106,644,500 in the period and the balance RMB 102,060,800 at the period-end, accounting for 2.88% of the shareholder’s equity which belonged to the parent company. The Company did not provide guarantee for shareholders, actual controllers, its affiliated parties as well as companies with leverage ratio above 70%. 3. The Company did not entrust others to take charge of cash assets management in the reporting period and the previous periods. 4. Other Significant Contracts As of Dec. 31, 2008, details about significant contracts on capital expenditure which have been signed yet not implemented by the Company are as follows: Projects Amount (RMB’0,000) The 50-million-meter colored woven 988 cloth project Purchase of equipments for bleaching, 622 dyeing and weaving Expansion project of “one power generation set supplied by two 345 boilers” of Xinsheng Power Xinshenf Desulfurization Project 648 Total 2,603 41 VIII. Fulfillment of Commitment made by the Company or Shareholders with more than 5% shares 1. Fulfillment of Commitment Made by the Company The Profit Distribution Plan 2008 promised by the Company in this year has been fulfilled in Apr. 2008; the proposal of public additional offering A shares approved by the first Extraordinary Shareholders’ General Meeting in 2007 has been fulfilled in the reporting period. It totally increased public issues of 150 million A shares, with the net amount of raised proceeds as RMB 950,814,500. 2. Fulfillment of Commitment Made by Shareholders with more than 5% Shares (1) The Commitments Made by the Shareholders Holding Original Non-Tradable Shares during the Share Merger Reform and their Implementation Name of shareholders Commitment Fulfillment of Remarks commitments Zibo Lucheng Textile The Company will not reduce the holding shares within In progress The increase of shares Investment Co., Ltd. 60 months after share merger reform and, within 24 with dividends in 2005 months after that, the price of selling holding shares and 2006 has been shall not be lower than RMB 15 per share (if the share finished. capital changes, ex-rights will be conducted); it The total profit in 2008 proposed and voted for a cash distribution not lower has increased 58.6% than 50% of the profit available for distribution in the compared with that in year at the 2006 Shareholders’ General Meeting and 2005. 2007 Shareholders’ General Meeting; it will increase holding Lutai A shares through trading at the secondary market with the dividends received in 2005 and 2006, and the increase of the Luthai A shares held shall be accomplished within 12 months after the dividend is transferred to its account. In 2008, the total profit increased by not less than 30% compared with that in 2005. (2) The Quantity of Shares not Subject to Moratorium, Held by Shareholders of Original Non-Tradable Shares, who Held more than 5% of Total Shares at the End of the Reporting Period Name of Amount of circulating shares Amount of Reason for change Amount of shares not shareholders not subject to moratorium Increase/decrease subject to moratorium held on the date when shares (share unit: 0,000) held at the end of the subject to moratorium were reporting period (share listed (share unit: 0,000) unit: 0,000) Zibo Additional issuance 2,495.67 Lucheng 2,250.47 245.20 of A shares and Textile increase of shares 42 Investment through secondary Co., Ltd. market IX. Particulars about Appointment and Dismissal of Certified Public Accountants by the Company In the report period, the Company reappointed Zhongrui Yuehua Certified Public Accountants as the Company’s financial auditor and the annual audit fee was RMB 850,000. X. In the reporting period, the Company, the Board and Directors of the Company did not received any inspection, administrative penalties, circulating notice of criticism from CSRC, as well as public condemnation from Stock Exchange. In the reporting period, the Company followed the spirit of Notice on Carrying out a Special Campaign of Corporate Governance released by China Securities Regulatory Commission and Shandong Securities Regulatory Commission, rectified the corporate governance of the Company and drew out a rectification plan as well as a Report on Special Campaign of Corporate Governance, which was published perspectively on Securities Times, Shanghai Securities News ,Ta Kong Pao and http://www.cninfo.com.cn/ on Jul. 19, 2008. During the reporting period, the Company had conducted self-check activities and prepared the Self-Check Report on the Special Campaign of Preventing Big Shareholders and Affiliated Parties Appropriating Capital of Listed Companies, based on requirement of the Implementation Plan for Preventing Big Shareholders and Affiliated Parties Appropriating Capital of Listed Companies in Shandong, Promulgated by LZJGS Zi [2008] 42. The Report was published on http://www.cninfo.com.cn/ on Jul. 19, 2008. X. Reception of Survey and Interview, as well as Communication in the Reporting Period Time Place Manner Visitor Topic discussed and material provided Reception Basic information of the Company; Jan. 17, Researcher of Guoyuan room of the Field research visited production scene of the 2008 Securities — Shi Xueqing Company Company Apr. 10, Telephone Fund Manager of Value Office Basic information of the Company 2008 conference Partners—Wang Yandong Reception Researcher of Donghai Basic information of the Company; Apr. 15, room of the Field research Securities — Zhang visited production scene of the 2008 Company Xianpping Company Reception Basic information of the Company; Researcher of CITIC Jun.5, 2008 room of the Field research visited the research & development Securities — Li Xin Company center of the Company Reception Basic information of the Company; Jun. 5, Researcher of Orient room of the Field research visited the research & development 2008 Securities — Shi Hongmei Company center of the Company Jun. 5, Reception Researcher of Changjiang Basic information of the Company; Field research 2008 room of the Securities — Cheng Xueting visited the research & development 43 Company center of the Company Reception Basic information of the Company; Researcher of Guotai Junan Jun.6, 2008 room of the Field research visited the research & development Securities — Li Zhixian Company center of the Company Reception Basic information of the Company; Researcher of Sinolink Jun.6, 2008 room of the Field research visited the research & development Securities — Zhang Bin Company center of the Company Reception Basic information of the Company; Researcher of Guosen Jun.6, 2008 room of the Field research visited the research & development Securities — Gao Fangmin Company center of the Company Reception Shanghai Chongyang Basic information of the Company; Jul. 8, 2008 room of the Field research Investment Co., Ltd.— Guo visited production scene of the Company Xiaoyan Company Investment manager of Reception Basic information of the Company; Jul. 16, American G Lion Fund room of the Field research visited production scene of the 2008 Management Co., Ltd. — Company Company Wang Jian Assistant to Fund Manager of Reception Basic information of the Company; Jul. 16, Shenzhen Mingda Capital room of the Field research visited production scene of the 2008 Management Co., Ltd. — Guo Company Company Dawei Reception Basic information of the Company; Jul. 16, Researcher of GF Securities room of the Field research visited production scene of the 2008 Co., Ltd. — Liu Weijun Company Company Reception Analyst of SYWG BNP Basic information of the Company; Jul. 16, room of the Field research Paribas Asset Management visited production scene of the 2008 Company Co., Ltd — Yu Lei Company Reception Researcher of Everbright Basic information of the Company; Jul. 16, room of the Field research Pramerica Fund Management visited production scene of the 2008 Company Co., Ltd —Jia Rendong Company Assistant to Research Reception Supervisor of Basic information of the Company; Jul. 16, room of the Field research CITIC-Prudential Fund visited production scene of the 2008 Company Management Co., Ltd — Gai Company Tingting Vice President of Bank of Reception Basic information of the Company; Jul. 16, China Investment room of the Field research visited production scene of the 2008 Management Co., Ltd. — Qu Company Company Xia Reception Researcher of Chang Xin Basic information of the Company; Jul. 16, room of the Field research Asset Management Co., Ltd. visited production scene of the 2008 Company — Zhang Chaochuan Company Jul. 16, Reception Deputy Chief Supervisor in Basic information of the Company; Field research 2008 room of the R&D department of Guotai visited production scene of the 44 Company AMC — Li Jie Company Chairman of the Board of Reception Basic information of the Company; Jul. 16, Yushi Investment room of the Field research visited production scene of the 2008 Development Co., Ltd. — Wei Company Company Yehua Reception Researcher of Fortis Haitong Basic information of the Company; Aug. 20, room of the Field research Investment Management Co., visited production scene of the 2008 Company Ltd — Tong Dongcai Company Reception Basic information of the Company; Aug. 28, Researcher of Donghai room of the Field research visited production scene of the 2008 Securities — Zhang Xianping Company Company Reception Basic information of the Company; Aug. 28, Researcher of Guoyuan room of the Field research visited production scene of the 2008 Securities —Shi Xueqing Company Company Fund Manager of Reception Basic information of the Company; Nov. 5, AEGON-INDUSTRIAL Fund room of the Field research visited production scene of the 2008 Management Co., Ltd – Dong Company Company Chengfei Reception Researcher of China Basic information of the Company; Nov. 12, room of the Field research Merchants securities Co., Ltd visited production scene of the 2008 Company –Ma Li Company Reception Research Department of Basic information of the Company; Nov. 12, room of the Field research Galaxy Asset Management visited production scene of the 2008 Company Co., Ltd –Lu Yiqiao Company Analyst of Bank of Reception Basic information of the Company; Nov. 12, Communications Schroders room of the Field research visited production scene of the 2008 Fund Management Co., Company Company Ltd—Li Wenlong Reception Researcher of Shenyin Basic information of the Company; Nov. 12, room of the Field research Wanguo Securities Co., Ltd– visited production scene of the 2008 Company Cha Wenshun Company Reception Researcher of Dacheng Fund Basic information of the Company; Dec. 11, room of the Field research Management Co., Ltd—Xu visited production scene of the 2008 Company Xionghui Company Reception Researcher of Ping An Basic information of the Company; Dec. 11, room of the Field research Securities Co., Ltd—Ou visited production scene of the 2008 Company Zhihang Company Reception Researcher of China Southern Basic information of the Company; Dec. 11, room of the Field research Fund Management Co., visited production scene of the 2008 Company Ltd—Pan Hongxing Company Reception Researcher of Rongtong Fund Basic information of the Company; Dec. 11, room of the Field research Management Co., Ltd—Guan visited production scene of the 2008 Company Shan Company Dec. 12, Reception Field research Researcher of China Jianyin Basic information of the Company; 45 2008 room of the Investment Securities Co., visited production scene of the Company Ltd—Kong Jun Company Reception Basic information of the Company; Dec. 16, Chief Analyst of Guosen room of the Field research visited production scene of the 2008 Securities — Gao Fangmin Company Company Reception Analyst of Zhonghai Fund Basic information of the Company; Dec. 16, room of the Field research Management Co., Ltd—Chen visited production scene of the 2008 Company Zhong Company Reception Researcher of Guotai Junan Basic information of the Company; Dec. 24, room of the Field research Research institute — Li visited production scene of the 2008 Company Zhixian Company Reception Researcher of Guotai Junan Basic information of the Company; Dec. 24, room of the Field research Research institute —Zhang visited production scene of the 2008 Company Wei Company Researcher of Securities and Reception Basic information of the Company; Dec. 24, Derivatives Investments room of the Field research visited production scene of the 2008 Department of Guotai Company Company Junan—Dong Wenjing Reception Analyst of Fullgoal Fund Basic information of the Company; Dec. 24, room of the Field research Management Co., Ltd—Shen visited production scene of the 2008 Company Weilun Company Planning Manager of Orient Reception Basic information of the Company; Dec. 24, Asset Management room of the Field research visited production scene of the 2008 Corporation Headquarter—Li Company Company Jing Research and Development Reception Basic information of the Company; Dec. 24, Department of Yimin Asset room of the Field research visited production scene of the 2008 Management Co., Ltd—Wang Company Company Ran Reception Investment Manager of Basic information of the Company; Dec. 24, room of the Field research Zhejiang Weike Venturing visited production scene of the 2008 Company Capital Co., Ltd Company XII. Significant Events listed in Article 62 of Securities Law and Article 17 of Implementation Measures on Information Disclosure of the Companies Publicly Issuing Shares which occurred in the Company during the Reporting Period In the reporting period, the Company had no significant events listed in the above regulations. 46 Section XI. Financial Report (I) AUDIT REPORT Auditor’s Report ZRYHS Zi [2009] No. 03551 TO THE SHAREHOLDERS OF LU THAI TEXTILE CO., LTD. We have audited the accompanying consolidated financial statements of Luthai Textile Company Limited (the “Company”) and its subsidiaries (together, the “Group”) which comprise the consolidated balance sheet as of 31 December 2008 and the consolidated income statement, consolidated statement of changes in equity and consolidated cash flow statement for the year then ended and a summary of significant accounting policies and other explanatory notes. Management’s responsibility for the financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditor’s responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the accompanying consolidated financial statements give a true and fair view of the financial position of the Group as of 31 December 2007, and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards. Zhongrui Yuehua Certified Public Accountants Co., Ltd. Certified Public Accountant of China CPA He Feng Certified Public Accountant of China CPA Luo Jun China · Beijing 13 Apr. 2009 47 (II) Financial Statement Consolidated Balance Sheet Prepared by Lu Thai Textile Co., Ltd 31 Dec. 2008 Unit: RMB Items Closing amount Opening amount Note Consolidation Parent company Consolidation Parent company Current Assets: Monetary funds VII.1 1,141,056,407.10 884,493,526.89 330,766,143.96 177,334,931.66 Tradable financial assets VII.2 9,415,140.72 Notes receivable VII.3 115,766,743.82 88,437,756.14 140,565,746.06 130,710,763.67 Account receivable VII.4 134,272,568.99 137,704,448.03 121,643,877.74 114,228,214.68 Account paid in advance VII.5 86,680,244.30 442,840,255.08 131,948,932.79 393,687,957.92 Interest receivable Dividend receivable 552,121.45 Other account receivable VII.6 66,112,475.26 57,153,026.22 86,391,537.76 68,629,603.59 Inventory VII.7 1,370,058,113.59 966,434,830.65 997,031,013.18 631,123,339.57 Non-current assets due within 1 year Other current assets Total current assets 2,913,946,553.06 2,577,615,964.46 1,817,762,392.21 1,515,714,811.09 Non-current assets: Financial assets available for sales Held to maturity investments Long-term account receivable Long-term equity investment VII.8 840,477,933.96 740,477,933.96 Investing property Fixed asset VII.9 3,728,662,446.22 2,137,168,614.91 3,488,582,109.42 2,080,817,902.49 Construction in progress VII.10 161,798,386.96 152,673,189.70 351,139,156.73 262,232,298.50 Engineering material VII.11 5,976,824.75 5,976,824.75 22,862,470.70 22,862,470.70 Fixed asset disposal Productive biological assets Oil assets Intangible assets VII.12 227,300,618.82 120,808,081.41 139,371,823.41 37,984,605.86 Development expense Goodwill VII.13 20,563,803.29 20,563,803.29 Long-term expense to be apportioned Deferred income tax assets VII.14 33,604,471.70 9,343,313.86 29,351,252.73 14,637,212.37 Other non-current assets Total of non-current assets 4,177,906,551.74 3,266,447,958.59 4,051,870,616.28 3,159,012,423.88 Total assets 7,091,853,104.80 5,844,063,923.05 5,869,633,008.49 4,674,727,234.97 Legal representative: Liu Shizhen Chief Financial Officer: Zhang Hongmei Financial principal: Zhang Hongmei 48 Consolidated Balance Sheet (Con.) Prepared by Lu Thai Textile Co., Ltd 31 Dec. 2008 Unit: RMB Items Closing amount Opening amount Note Consolidation Parent company Consolidation Parent company Current liabilities: Short-term borrowings VII.16 1,974,333,875.02 924,333,875.02 2,128,932,672.76 1,313,218,172.76 Tradable financial liabilities VII.17 19,175,600.00 5,840,400.00 Notes payable VII.18 326,906,148.43 764,122,919.05 152,571,291.75 290,507,629.63 Account payable VII.19 309,404,705.97 177,966,339.10 227,916,861.67 231,539,054.45 Account collected in advance VII.20 31,742,845.89 14,267,650.87 44,327,253.22 22,554,875.64 Employee’s compensation payable VII.21 225,950,673.18 193,302,167.29 226,069,584.89 198,265,282.06 Tax payable VII.22 -26,278,169.38 -37,631,581.33 24,101,813.27 18,172,764.28 Interest payable 84,631.63 84,631.63 2,092,879.68 2,092,879.68 Dividend payable 442,844.04 Other account payable VII.23 86,031,960.95 16,327,454.16 101,342,319.98 24,248,754.90 Non-current liabilities due within 1 year VII.24 52,183,370.00 52,183,370.00 99,243,790.00 99,243,790.00 Other current liabilities Total current liabilities 2,999,535,641.69 2,111,240,069.83 3,006,598,467.22 2,199,843,203.40 Non-current liabilities: Long-term borrowings VII.25 298,510,560.00 298,510,560.00 344,784,150.00 293,784,150.00 Bonds payable Long-term payables 9,735,560.00 9,815,560.00 Specific purpose account payables Projected financial statement Deferred income tax liabilities VII.26 407,449.26 939,481.73 Other non-current liabilities 2,673,445.33 2,673,445.33 Total non-current liabilities 311,327,014.59 298,510,560.00 358,212,637.06 293,784,150.00 Total liabilities 3,310,862,656.28 2,409,750,629.83 3,364,811,104.28 2,493,627,353.40 Owner’s equity (or shareholders’ equity) Paid-in capital (or share capital) VII.27 994,864,800.00 994,864,800.00 844,864,800.00 844,864,800.00 Capital reserve VII.28 1,128,135,713.77 1,125,522,201.27 327,320,708.88 324,707,196.38 Less: Treasury Stock Surplus reserve VII.29 330,662,535.20 330,662,535.20 281,647,264.07 281,647,264.07 General risk provision Retained earnings VII.30 1,090,990,313.22 983,263,756.75 814,815,210.77 729,880,621.12 Foreign exchange difference -3,418,700.75 -2,623,778.53 Total owners' equity attributable to 3,541,234,661.44 3,434,313,293.22 2,266,024,205.19 2,181,099,881.57 holding company Minority interest 239,755,787.08 238,797,699.02 Total owner’s equity 3,780,990,448.52 3,434,313,293.22 2,504,821,904.21 2,181,099,881.57 Total liabilities and owner’s equity 7,091,853,104.80 5,844,063,923.05 5,869,633,008.49 4,674,727,234.97 Legal representative: Liu Shizhen Chief Financial Officer: Zhang Hongmei Financial principal: Zhang Hongmei 49 Consolidated Income Statement Prepared by Lu Thai Textile Co., Ltd Year 2008 Unit: RMB Items 2008 2007 Note Consolidation Parent company Consolidation Parent company I. Total operating revenues 3,921,837,350.82 3,274,317,195.87 3,810,671,282.58 3,123,590,221.20 Of which: Operating income VII.31 3,921,837,350.82 3,274,317,195.87 3,810,671,282.58 3,123,590,221.20 II. Total cost of sales 3,341,199,703.30 2,729,723,994.77 3,319,036,955.37 2,700,466,435.56 Of which: Operating cost VII.31 2,917,876,267.49 2,533,676,587.86 2,825,006,357.80 2,401,798,194.13 Sales tax and extra charges 3,579,036.64 2,819,568.70 22.01 Selling cost VII.32 123,654,578.28 39,460,211.19 117,317,505.82 51,862,234.65 Administrative expense VII.33 231,549,384.65 154,916,635.09 243,005,795.97 178,724,915.56 Financial expenses VII.34 39,105,097.09 -2,363,428.25 109,816,050.47 56,011,083.12 Loss on assets impairment VII.35 25,435,339.15 4,033,988.88 21,071,676.61 12,069,986.09 Add: Gains of change in fair value VII.36 -25,871,562.74 -5,840,400.00 6,695,962.74 Investment income (“-” means loss) VII.37 4,698,732.84 552,121.45 8,598,702.04 5,494,191.72 Of which: income form investment on affiliated enterprise and jointly enterprise III. Operating profit (“-” means loss) 559,464,817.62 539,304,922.55 506,928,991.99 428,617,977.36 Add: Non-operating income VII.38 59,101,864.46 32,999,079.61 24,858,927.03 22,072,179.01 Less: Non-operating expense VII.39 9,946,404.19 5,755,764.81 7,444,192.18 4,310,401.31 Of which: Loss on non-current asset 4,774,678.31 3,602,526.06 1,763,536.40 disposal IV. Total profit (“-” means loss) 608,620,277.89 566,548,237.35 524,343,726.84 446,379,755.06 Less: Income tax expense VII.40 93,805,694.64 76,395,526.09 40,620,632.37 40,771,539.82 V. Net profit (“-” means loss) 514,814,583.25 490,152,711.26 483,723,094.47 405,608,215.24 Net profit attributable to owner of 512,944,678.08 459,725,146.61 parent company Minority interest 1,869,905.17 23,997,947.86 VI. Earnings per share (I) EPS-basis VII.41 0.60 0.54 (II) EPS-dilution VII.41 0.60 0.54 Legal representative: Liu Shizhen Chief Financial Officer: Zhang Hongmei Financial principal: Zhang Hongmei 50 Consolidated Cash Flow Prepared by Lu Thai Textile Co., Ltd Year 2008 Unit: RMB Items 2008 2007 Note Consolidation Parent company Consolidation Parent company I. Cash flows for operating activities: Cash received from sales of goods or rending 4,358,790,079.03 3,366,845,209.47 3,229,477,000.37 2,892,225,753.94 of services Refund of tax and fare received 80,834,274.58 56,620,291.03 68,331,390.26 37,661,063.16 Other cash received relating to operating VII.42 98,856,496.46 27,745,534.23 98,942,009.41 58,581,230.31 activities Sub-total of cash inflows 4,538,480,850.07 3,451,211,034.73 3,396,750,400.04 2,988,468,047.41 Cash paid for goods and services 2,833,679,384.39 2,106,255,670.32 2,200,662,817.39 2,073,131,560.02 Cash paid to and on behalf of employees 564,801,682.70 440,656,075.87 459,608,077.34 358,279,133.85 Tax and fare paid 195,174,534.98 121,792,931.73 120,105,950.38 64,022,983.15 Other cash paid relating to operating activities VII.43 162,829,301.26 20,489,928.48 121,246,946.90 20,200,565.14 Sub-total of cash outflows 3,756,484,903.33 2,689,194,606.40 2,901,623,792.01 2,515,634,242.16 Net cash flow from investing activities 781,995,946.74 762,016,428.33 495,126,608.03 472,833,805.25 Ⅱ.Net cash flow from Investment activities Cash received from return of investments 2,286,635.84 117,099,285.50 117,099,285.50 Cash received from absorbing investment 133,719.95 29,065.33 Net cash received from disposal of fixed assets, intangible assets and other long-term 299,578.56 297,578.56 171,461.69 112,400.00 assets Proceeds from sale of subsidiaries and other operating units Other cash received relating to investment VII.44 10,519,649.27 3,791,697.46 3,524,051.38 86,985,271.04 activities Sub-total of cash inflows 13,105,863.67 4,089,276.02 120,928,518.52 204,226,021.87 Cash paid for acquiring fixed assets, 429,079,023.47 215,751,764.09 1,000,261,363.00 599,732,978.09 intangible assets and other long-term assets Cash paid for investments 100,000,000.00 94,806,600.00 Net cash used in acquiring subsidiaries and other operating units Other cash paid relating to investment 9,000,000.00 400,000.00 100,400,000.00 activities Sub-total of cash outflows 429,079,023.47 324,751,764.09 1,000,661,363.00 794,939,578.09 Net cash flow from investing activities -415,973,159.80 -320,662,488.07 -879,732,844.48 -590,713,556.22 III. Cash Flows from Financing Activities: Cash received from absorbing investment 951,790,000.00 951,790,000.00 40,000,000.00 Including: Cash received from increase in 40,000,000.00 minority interest Cash received from borrowings 3,495,923,666.81 2,196,485,266.81 3,111,264,228.19 1,946,012,832.19 51 Other proceeds relating to financing activities 1,750,000.00 50,000,000.00 3,906,718.24 718,614.24 Sub-total of cash inflows 4,449,463,666.81 3,198,275,266.81 3,155,170,946.43 1,946,731,446.43 Cash paid for settling debt 3,810,236,743.21 2,770,498,933.21 2,518,997,352.43 1,657,711,064.43 Cash paid for distribution of dividends or 323,267,027.52 277,446,420.34 255,109,314.19 214,387,760.93 profit or reimbursing interest Including: dividends or profit paid to minority interest Other cash payments relating to financing 5,401,533.50 activities Sub-total of cash outflows 4,133,503,770.73 3,047,945,353.55 2,779,508,200.12 1,872,098,825.36 Net cash flow from financing activities 315,959,896.08 150,329,913.26 375,662,746.31 74,632,621.07 IV. Effect of foreign exchange rate changes 128,307,580.12 115,474,741.71 15,370,471.81 10,399,139.85 V. Increase in cash and cash equivalents 810,290,263.14 707,158,595.23 6,426,981.67 -32,847,990.05 Add: Opening balance of cash and cash 330,766,143.96 177,334,931.66 324,339,162.29 210,182,921.71 equivalents VI. Closing balance of cash and cash 1,141,056,407.10 884,493,526.89 330,766,143.96 177,334,931.66 equivalents Legal representative: Liu Shizhen Chief Financial Officer: Zhang Hongmei Financial principal: Zhang Hongmei 52 Statement of Change in Owners’ Equity (Consolidation) Prepared by Lu Thai Textile Co., Ltd 31 Dec. 2008 2008 Owner’s equity attributable to parent company Items Lessen: General risk Share capital Capital reserve treasury Surplus reserve Retained profits preparation stock I. Balance as at 31 Dec. 2007 844,864,800.00 327,320,708.88 281,647,264.07 814,815,210.77 Add: Change in accounting policy Correction of previous accounting errors II. Balance as at 1 Jan. 2008 844,864,800.00 327,320,708.88 281,647,264.07 814,815,210.77 II. Increase/decrease in 2008 (“-” means loss) 150,000,000.00 800,815,004.89 49,015,271.13 276,175,102.45 （I）Net profit 512,944,678.08 （II）Gain/loss recorded in owners’ equity directly 1. Net amount on changes in fair value of financial assets available for sale 2. Effect on changes in other owners’ equity of invested units under equity method 3. Effect of income tax recorded in owners’ equity 4. Other Subtotal of (I) and (II) 512,944,678.08 （III）Input and reduced capital of owners 150,000,000.00 800,815,004.89 1. Capital input by owners 150,000,000.00 800,814,500.00 2. Amount of shares-based payment recorded in owner’s equity 3. Other 504.89 （IV）Profit distribution 49,015,271.13 -236,769,575.63 1. Appropriating surplus reserve 49,015,271.13 -49,015,271.13 53 2. Appropriating general risk reserve 3. Distribution to owners (shareholders) -187,754,304.50 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 IV. Balance as at 31 Dec. 2008 994,864,800.00 1,128,135,713.77 330,662,535.20 1,090,990,313.22 Statement of Change in Owners’ Equity (Consolidation) Prepared by Lu Thai Textile Co., Ltd 31 Dec. 2008 2007 Owner’s equity attributable to parent company Items Lessen: General risk Share capital Capital reserve treasury Surplus reserve Retained profits preparation stock I. Balance as at 31 Dec. 2007 422,432,400.00 756,587,873.71 242,685,515.58 528,880,131.12 Add: Change in accounting policy -1,599,073.03 18,414,589.51 Correction of previous accounting errors Other II. Balance as at 1 Jan. 2008 422,432,400.00 756,587,873.71 241,086,442.55 547,294,720.63 II. Increase/decrease in 2008 (“-” means loss) 422,432,400.00 -429,267,164.83 40,560,821.52 267,520,490.14 （I）Net profit 459,725,146.61 （II）Gain/loss recorded in owners’ equity directly 1. Net amount on changes in fair value of financial assets available for sale 54 2. Effect on changes in other owners’ equity of invested units under equity method 3. Effect of income tax recorded in owners’ equity 4. Other Subtotal of (I) and (II) 459,725,146.61 （III）Input and reduced capital of owners -6,834,764.83 5,416,531.37 1. Capital input by owners 2. Amount of shares-based payment recorded in owner’s equity 3. Other -6,834,764.83 5,416,531.37 （IV）Profit distribution 40,560,821.52 -197,621,187.84 1. Appropriating surplus reserve 40,560,821.52 -40,560,821.52 2. Appropriating general risk reserve 3. Distribution to owners (shareholders) -157,060,366.32 4. Other （V）Internal carry-over of owner’s equity 422,432,400.00 -422,432,400.00 1. Transferring capital reserve into capital (share capital) 422,432,400.00 -422,432,400.00 2. Transferring surplus reserve into capital (share capital) 3. Making up losses with surplus reserve 4. Other IV. Balance as at 31 Dec. 2008 844,864,800.00 327,320,708.88 281,647,264.07 814,815,210.77 Legal representative: Liu Shizhen Chief Financial Officer: Zhang Hongmei Financial principal: Zhang Hongmei 55 Statement of Change in Owners’ Equity (Parent Company) Prepared by Lu Thai Textile Co., Ltd 31 Dec. 2008 2008 Items Lessen: Share capital Capital reserve Surplus reserve treasury stock I. Balance as at 31 Dec. 2007 844,864,800.00 324,707,196.38 - 281,647,264.07 Add: Change in accounting policy - - - - Correction of previous accounting errors - - - - II. Balance as at 1 Jan. 2008 844,864,800.00 324,707,196.38 - 281,647,264.07 II. Increase/decrease in 2008 (“-” means loss) 150,000,000.00 800,815,004.89 - 49,015,271.13 （I）Net profit - - - - （II）Gain/loss recorded in owners’ equity directly - - 1. Net amount on changes in fair value of financial - - - assets available for sale 2. Effect on changes in other owners’ equity of - - invested units under equity method 3. Effect of income tax recorded in owners’ equity - 4. Other - - Subtotal of (I) and (II) - - （III）Input and reduced capital of owners 150,000,000.00 800,815,004.89 - 1. Capital input by owners 150,000,000.00 800,814,500.00 - - 2. Amount of shares-based payment recorded in - - - owner’s equity 3. Other - 504.89 - - （IV）Profit distribution 49,015,271.13 1. Appropriating surplus reserve 49,015,271.13 2. Distribution to shareholders 3. Other 56 （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 IV. Balance as at 31 Dec. 2008 994,864,800.00 1,125,522,201.27 - 330,662,535.20 Statement of Change in Owners’ Equity (Parent Company) Prepared by Lu Thai Textile Co., Ltd 31 Dec. 2008 2007 Items Lessen: Share capital Capital reserve Surplus reserve treasury stock I. Balance as at 31 Dec. 2007 422,432,400.00 756,587,873.71 241,086,442.55 Add: Change in accounting policy -4,817,381.25 Correction of previous accounting errors II. Balance as at 1 Jan. 2008 422,432,400.00 751,770,492.46 241,086,442.55 II. Increase/decrease in 2008 (“-” means loss) 422,432,400.00 -427,063,296.08 - 40,560,821.52 （I）Net profit （II）Gain/loss recorded in owners’ equity directly 1. Net amount on changes in fair value of financial assets available for sale 2. Effect on changes in other owners’ equity of invested units under equity method 3. Effect of income tax recorded in owners’ equity 57 4. Other Subtotal of (I) and (II) （III）Input and reduced capital of owners -4,630,896.08 1. Capital input by owners 2. Amount of shares-based payment recorded in owner’s equity 3. Other -4,630,896.08 （IV）Profit distribution 40,560,821.52 1. Appropriating surplus reserve 40,560,821.52 2. Distribution to shareholders 3. Other （V）Internal carry-over of owner’s equity 422,432,400.00 -422,432,400.00 1. Transferring capital reserve into capital (share 422,432,400.00 -422,432,400.00 capital) 2. Transferring surplus reserve into capital (share capital) 3. Making up losses with surplus reserve 4. Other IV. Balance as at 31 Dec. 2008 844,864,800.00 324,707,196.38 - 281,647,264.07 Legal representative: Liu Shizhen Chief Financial Officer: Zhang Hongmei Financial principal: Zhang Hongmei 58 (III) Notes to Financial Statement (The following amount is expressed in RMB unless otherwise special explanation) Lu Thai Textile Co., Ltd. Notes to Financial Statement As of the year 2008 （The following amount is expressed in RMB unless otherwise special explanation） I. Company Profile Lu Thai Textile Co., Ltd. (hereinafter referred to as the Company) is a joint venture invested by Zibo Lucheng Textile Investment Co., Ltd (originally named Zibo Lucheng Textile Co., Ltd, hereinafter referred to as Lucheng Textile) and Thailand Tailun Textile Co., Ltd. On Feb. 3, 1993, the Company is approved by the former Ministry of Foreign Trade and Economy of the State (1993) in WJMZEHZ No. 59 to convert into a joint-stock enterprise. Zibo Administration for Industry and Commerce issued the Company corporate business license with the registration No. of QGLZZZ No. 000066. In July 1997, the Company is approved by the Securities Committee of the Department of the State in the ZWF (1997) No. 47 to issue 80 million shares of domestically listed foreign share( B-shares) at the price of RMB 1.00 per share. Upon approved by Shenzhen Stock Exchange with No. (1997) 296 Listing Notice, the Company is listed on the Shenzhen Stock Exchange on August 19, 1997 with B-shares stock code of 200726. On November 24, 2000, approved by ZJGSZ [2000] No.199 by CSRC, the Company increased publication of 50 million shares of general share (A-shares) at the book value of RMB 1.00, which are listed on the Shenzhen Stock Exchange on December 25, 2000 with A-shares stock code of 000726 through approval by Shenzhen Stock Exchange with No. (2000) 162 Listing Notice. As approved by 2000 Shareholders’ General Meeting in May, 2001, the Company carried out the distribution plan that 10 shares of capital public reserve are converted to 3 more shares for each 10 shares. As approved by Resolutions of 2001 Shareholders’ General Meeting in June 2002, the Company implemented the distribution plan that 10 shares of capital public reserve are converted 3 more shares for each 10 shares again. As approved by 2002 Shareholders’ General Meeting in May 2003, the Company implemented the distribution plan that 10 shares of capital public reserve are 2 more shares for each 10 shares, and inner employees’ shared increased to 40.56 million shares. As examined and approved by ZJGSZ No. [2000] 199 of CSRC, the inner employees’ shares will start circulation 3 years later since listing on the A-share market. On Dec. 25, 2003, the inner employees’ shares reach 3 years since listing on the A-share stock market, and they set out circulation on Dec.26, 2003. As approved by the Shareholders’ General Meeting 2006 held in June 2007, the Company implemented the plan on converting 10 shares to all its shareholders with capital reserves for every 10 shares. After capitalization, the registered capital of the Company was RMB 844.8648 million. The Company, in accordance with the official reply on approving Lu Thai Textile Co., Ltd. to issue additional shares (ZJXK [2008] No. 890 document) from CSRC, issued the Renminbi common shares (A shares) amounting to 150 million shares on 8 Dec. 2008. As at 31 December 2008, the Company’s registered capital was RMB 994.8648 million. The Company’s registered address: No. 11, Mingbo Road, Hi-tech Development Zone, Zibo, Shandong The Company’s legal representative: Liu Shizhen The Company’s business scope includes production and sales of cotton yarn, yarn dyed fabrics, shirts, fashion accessories, health underwear and other textile products and their supporting series products. The Company’s financial statement has been approved by the Board of Directors of the Company on 13 April 2009. 59 II. Statement for complying with the accounting standard for business enterprise The financial statements prepared by the Company are in compliance with the requirements of the accounting standard for business enterprise-basic standard and other accounting standards promulgated by the Ministry of Finance of PRC, and have reflected the Company’s financial status, operating results and cash flows in an accurate and complete way. III. Preparation basis of financial statement 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-basic standard and other accounting standards promulgated by the Ministry of Finance of PRC. IV. Major accounting policies and accounting estimates 1. Fiscal period The Company’s fiscal year is from Jan. 1 to Dec. 31 the Gregorian calendar. 2. Bookkeeping base currency The Company adopts Renminbi as a bookkeeping base currency. But Lu Thai (Hong Kong) Co., Ltd. (hereinafter referred to as “Lu Thai Hong Kong”), a subsidiary company of the Company, adopts Hong Kong dollars as a bookkeeping base currency. Such HKD shall be translated into Renminbi according to accounting policies related to foreign currency translation when consolidating financial statement. 3. Accounting basis and pricing principles. Accrual basis shall be adopted by the Company as accounting basis when accounting. Generally, historical cost shall be adopted as measurement attributes. Replacement cost, net realizable value, present value and fair value shall be adopted when the identified accounting elements are in line with the requirements of the accounting standard for business enterprise and can be reliably measured. 4. Recognition standard for cash equivalents Cash equivalents are short-term (usually due within 3 months since the day of purchase) and high circulating investments, which are easily convertible into known amount of cash and whose risks in change of value are minimal. 5. Accounting methods for foreign currency (1) Translation methods of foreign currency transaction At the time of initial recognition of a foreign currency transaction, the Company shall convert the amount in a foreign currency into amount in its Renminbi at the spot exchange rate (generally refer to the middle price of market exchange rate published by the People’s Bank of China, the same below) on the day the transaction is occurred. Of which, as for such transactions as foreign exchange or involving in foreign exchange, the Company shall converted into amount in the Renminbi at actual exchange rate the transaction is occurred. (2) On the balance sheet date, treatment method for the foreign currency monetary items and foreign currency non-monetary items: 60 The Company shall, on the balance sheet date, converted the account balance of foreign currency monetary items into amount in its bookkeeping base currency at the spot exchange rate on the balance sheet date, from which the exchange differences shall be recorded into the profits and losses at the current period except such exchange differences arising from foreign currency loans for the purchase and construction or production of qualified assets shall be capitalized in accordance with the regulation of the Accounting Standards for Business Enterprises No. 17 - Borrowing Costs. The foreign currency non-monetary items measured at the historical cost shall still be translated at the spot exchange rate on the transaction date, of which the amount of functional currency shall not be changed. The foreign currency non-monetary items measured at the fair value shall be translated at the spot exchange rate on the fair value confirming date, from which the exchange difference shall be recorded in the profit and loss of the current period or capital reserve. (3) Translation of Foreign Currency Financial Statements The Company shall, on the basis of the following provisions, translate its foreign currency financial statements into RMB financial statements. The assets and liabilities in the balance sheets shall be translated at a spot exchange rate on the balance sheet date. Among the owner's equity items, except for the ones as "retained profits", others shall be translated at the spot exchange rate at the time when they are incurred. The income and expense in the income statements shall be translated at the average exchange rate of current period on the transaction date. The balance arisen from the translation of foreign currency financial statements in compliance with the aforesaid two items shall be presented separately under the owner's equity item of the balance sheets. Cash flow statement expressed by foreign currency shall be translated at the average exchange rate of current period on the cash flow date. The influence on cash due to change of exchange rate shall be presented separately under the cash flow statement. 6. Financial assets and financial liabilities (1) Classification of Financial assets and financial liabilities Financial assets acquired by or financial liabilities undertaken by the Company shall, combining its business characteristic and risk management, be classified into the following four categories when they are initially recognized: (a) the financial assets which are measured at their fair values and the variation of which is recorded into the profits and losses of the current period, including transactional financial assets and the financial assets which are measured at their fair values and of which the variation is included in the current profits and losses; (b) the investments which will be held to their maturity; (c) loans and the account receivables; and (d)financial assets available for sale; (e) other financial liabilities. (2) Recognition basis of financial instruments and measurement When the Company becomes a party to a financial instrument, it shall recognize a financial asset or financial liability. The financial assets and financial liabilities initially recognized by the Company shall be measured at their fair values. The financial assets and financial liabilities initially recognized by the Company shall be measured at their fair values. For the financial assets and liabilities measured at their fair values and of which the variation is recorded into the profits and losses of the current period, the transaction expenses thereof shall be directly recorded into the profits and losses of the current period; for other categories of financial assets and financial liabilities, the 61 transaction expenses thereof shall be included into the initially recognized amount. Subsequent measurement to financial asset and financial liability: ① For the financial assets and financial liabilities measured at their fair values and of which the variation is recorded into the profits and losses of the current period, they shall be measured at their fair values, all realized and unrealized gains and losses shall be measured into the profits and losses of the current period. ② The investments held until their maturity and accounts receivable shall be measured on the basis of the post-amortization costs by adopting the effective interest method. Gains and losses arising from termination from recognition, impairment or amortization shall be recorded into the profits and losses of the current period. ③ Financial assets available for sale shall be measured at their fair values, the profits and losses arising from the change in the fair value of a sellable financial asset shall be included directly in the owner’s equity with the exception of impairment losses and the gap arising from foreign exchange conversion of cash financial assets in any foreign currency, and when the said financial asset is stopped from recognition and is transferred out, it shall be recorded into the profits and losses of the current period. The gap arising from the foreign exchange conversion of a sellable cash financial asset in any foreign currency shall be recorded into the profits and losses of the current period. The interests of the sellable financial assets calculated according to the actual interest rate method shall be recorded into the profits and losses of the current period. The cash dividends of the sellable equity instrument investments shall be recorded into the profits and losses of the current period when the investee announces the distribution of dividends. ④ The derivative financial assets which are connected with the equity instrument investments for which there is no quoted price in the active market, whose fair value cannot be reliably measured, and which shall be settled by delivering the said equity instruments, shall be measured at their costs. ⑤ Other financial liabilities shall be made the subsequent measurement on the basis of their costs. But except for the following situations: A. The equity instrument investments for which there is no quotation in the active market and whose fair value cannot be measured reliably, and the derivative financial assets which are connected with the said equity instrument and must be settled by delivering the said equity instrument shall be measured on the basis of their costs. B. For the financial guarantee contracts which are not designated as a financial liability measured at its fair value and the variation thereof is recorded into the profits and losses of the current period, and for the commitments to grant loans which are not designated to be measured at the fair value and of which the variation is recorded into the profits and losses of the current period and which will enjoy an interest rate lower than that of the market, a subsequent measurement shall be made after they are initially recognized according to the higher one of the following: a. The amount as determined according to the Accounting Standards for Enterprises No. 13 - Contingencies; or b. The surplus after accumulative amortization as determined according to the principles of the Accounting Standards for Enterprises No. 14 - Revenues is subtracted from the initially recognized amount. (3) Determination of the fair value of financial assets and financial liabilities i. As for the financial assets or financial liabilities for which there is an active market, the quoted prices in the active market shall be used to determine the fair values thereof. ii. Where there is no active market for a financial assets and financial liabilities, the Company concerned shall adopt value appraisal techniques to determine its fair value. 62 (4) Recognition of transfer of financial assets Where the Company has transferred nearly all of the risks and rewards related to the ownership of the financial asset to the transferee, the financial assets shall be terminated from recognizing. If the Company retained nearly all of the risks and rewards related to the ownership of the financial asset, it shall continue to recognize transferred financial assets, and the consideration received shall be recognized as a financial liabilities. Where the Company does not transfer or retain nearly all of the risks and rewards related to the ownership of a financial asset, it shall deal with it according to the circumstances as follows, respectively: (a) If the Company gives up its control over the financial asset, the financial assets shall be terminated from recognizing; (b) If the Company does not give up its control over the financial asset, the financial assets shall, according to the extent of its continuous involvement in the transferred financial asset, be recognized, and relevant liabilities shall be recognized. If the transfer of an entire financial asset satisfies the conditions for stopping recognition, the difference between the amounts of the following two items shall be recorded in the profits and losses of the current period: (a)The book value of the transferred financial asset; (b) The sum of consideration received from the transfer, and the accumulative amount of the changes of the fair value originally recorded in the owner's equities. If the transfer of partial financial asset satisfies the conditions to stop the recognition, the entire book value of the transferred financial asset shall, between the portion whose recognition has been stopped and the portion whose recognition has not been stopped, be apportioned according to their respective relative fair value, and the difference between the amounts of the following two items shall be included into the profits and losses of the current period: (a) The book value of the portion whose recognition has been stopped; (b) The sum of consideration of the portion whose recognition has been stopped, and the portion of the accumulative amount of the changes in the fair value originally recorded in the owner's equities which are corresponding to the portion whose recognition has been stopped. (5) Testing method and withdrawal methods of financial assets impairment ① The scope of impairment of financial assets and objective evidence 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 expression "objective evidence proving that the financial asset has been impaired" refers to the actually incurred events which, after the financial asset is initially recognized, have an impact on the predicted future cash flow of the said financial asset that can be reliably measured by the enterprise. ② Testing method and withdrawal methods of impairment of financial assets A. Financial asset measured on the basis of post-amortization costs 63 Where a financial asset measured on the basis of post-amortization costs is impaired, the carrying amount of the said financial asset shall be written down to the current value of the predicted future cash flow (excluding the loss of future credits not yet occurred), and the amount as written down shall be recognized as loss of the impairment of the asset and shall be recorded into the profits and losses of the current period. The current value of the predicted future cash flow shall be determined according to the capitalization of the original actual interest rate of the said financial asset, taking into account the value of the relevant guarantee. An impairment test shall be made on the financial assets with significant single amounts. If any objective evidence shows that it has been impaired, the impairment-related losses shall be recognized and shall be recorded into the profits and losses of the current period. With regard to the financial assets with insignificant single amounts, an independent impairment test shall be included in a combination of financial assets with similar credit risk features so as to carry out an impairment-related test. Where, upon independent test, the financial asset (including those financial assets with significant single amounts and those with insignificant amounts) has not been impaired, it shall be included in a combination of financial assets with similar risk features so as to conduct another impairment test. The financial assets which have suffered from an impairment loss in any single amount shall not be included in any combination of financial assets with similar risk features for any impairment test. Where any financial asset measured on the basis of post-amortization costs is recognized as having suffered from any impairment loss, if there is any objective evidence proving that the value of the said financial asset has been restored, and it is objectively related to the events that occur after such loss is recognized (e.g., the credit rating of the debtor has been elevated, etc.), the impairment-related losses as originally recognized shall be reversed and be recorded into the profits and losses of the current period. However, the reversed carrying amount shall not be any more than the post-amortization costs of the said financial asset on the day of reverse under the assumption that no provision is made for the impairment. With regard to impairment testing and withdrawal method for accounts receivable, please see Note IV. Account receivable. B. Financial asset measured on the basis of cost If any objective evidence shows that the financial assets has been impaired, the gap between the carrying amount of financial asset and the current value of the future cash flow of similar financial assets capitalized according to the returns ratio of the market at the same time shall be recognized as impairment-related losses and be recorded into the profits and losses of the current period. Once impairment-related losses incurred to financial assets is recognized, it shall not be reversed. Where long-term equity investment measured at cost method in line with the Accounting Standard for Business Enterprise No. 2 – Long-term Equity Investment, for which there is no quoted price in the active market, and whose fair value cannot be reliably measured, shall be treated on the basis of the above-mentioned principle. C. Financial assets available for sales If any objective evidence shows that the financial assets available for sales has been impaired, the accumulative losses arising from the decrease of the fair value of the capital reserve which was directly included shall be transferred out and recorded into the profits and losses of the current period. The accumulative losses that are transferred out shall be the balance obtained from the initially obtained costs of the sold financial asset after deducting the principals as taken back, the current fair value and the impairment-related losses as was recorded into the profits and losses of the current period. D. As for the sellable debt instruments whose impairment-related losses have been recognized, if, within the accounting period thereafter, the fair value has risen and are objectively related to the subsequent events that 64 occur after the originally impairment-related losses were recognized, the originally recognized impairment-related losses shall be reversed and be recorded into the profits and losses of the current period. The impairment-related losses incurred to a sellable equity instrument investment shall not be reversed through profits and losses. 7. Accounts receivable (1) Recognition of provision for bad debts: The Company shall test the book value of accounts receivable on the balance sheet date. Where there is any objective evidence proving that such accounts receivable has been impaired, an impairment provision shall be made. ① debtor has serious financial difficult; ② debtor goes against the contract clause (for instance, breach of faith or overdue paying interests or principal); ③ debtors has a great probability of bankruptcy or other financial reorganization; ④ other objective evidence proving such accounts receivable has been impaired; (2) Withdrawal method of provision for bad debt On the balance sheet date, an independent impairment test shall be carried out on the accounts receivable with significant single amounts (the balance over RMB 5 million) and accounts receivable with insignificant single amounts but with high credit risk Group. If any objective evidence shows that the accounts receivable has been impaired, impairment loss shall be recognized on the basis of the gap between the current values of the future cash flow lower than its carrying value so as to withdraw provision for bad debts. Accounts receivable with insignificant single amounts and ones that has not be impaired through independent impairment test shall be divided into several combinations in the light of aging, and then the impairment loss shall be recognized on the basis of a certain proportion of closing balance of accounts receivable combination so as to withdraw provision for bad debts. If there is small difference between predicted future cash flow of short-term accounts receivable and its current value, the predicted future cash flow shall not be discounted when confirming relevant impairment loss Withdrawing proportion of bad debts are as below: Aging Proportion Within 1 year (including 1 year, the same below) 5% 1-2 years 10% 2-3 years 20% Over 3 years 30% 8. Inventory (1) Category of inventory The inventories of the Company include raw materials, turnover materials, goods in process, consigned processing products, merchandise on hand, etc. (2) Pricing method of outgoing and obtaining inventories The inventories shall be measured in light of their cost when obtained. The cost of inventory consists of purchase costs, processing costs and other costs. A raw material is accounted as per the planned cost. The difference between a raw material’s planned cost and actual cost is accounted through the cost variance item, and the planned cost is adjusted to the actual cost according to the cost difference which the carryover and given-out inventory should shoulder in the period. Other inventories shall be measured in line with weighted average 65 method when obtained and outgone. (3) Amortization method of the easily consumed products of low value and packing articles The Company shall amortize the easily consumed products of low value and packing the one-off amortization method. (4) Inventory system for inventories: Perpetual inventory system is adopted. (5) Recognition standard and withdrawal method of depreciation reserves for inventories On the date of balance sheet, the inventories shall be measured whichever is lower in accordance with the cost and the net realizable value. The net realizable value refers to in the daily business activity the amount after deducting the estimated cost of completion, estimated sale expense and relevant taxes from the estimated sale price of inventories. Of which, ① the inventories for sale directly such as finished goods, commodities and materials for sale, in the course of normal production and operation, the net realizable value of such inventories is an amount after deducting estimated sale expense and relevant taxes from the estimated sale price of inventories; ② materials inventory that need to go through processing, in the course of normal production and operation, the net realizable value of such inventories is an amount after deducting the estimated cost of completion, estimated sale expense and relevant taxes from the estimated sale price of products manufactured by the Company; ③As for an inventory held for execution of a sales contract or a service contract, its net realizable value should be accounted based on the contract price; when the Company holds number of inventories more than number of subscription of sales contracts, the net realizable values of the exceeding part of inventories should be accounted based on general sales prices. Provision for falling price of inventories shall be withdrawn in light of single inventory item. If the cost of inventories is higher than the net realizable value, the provision for the loss on decline in value of inventories shall be made and be included in the current profits and losses. If the factors causing any write-down of the inventories have disappeared, the amount of write-down shall be resumed and be reversed from the provision for the loss on decline in value of inventories that has been made. The reverse amount shall be included in the current profits and losses. 9. Long-term equity investment (1) Initial measurement of long-term equity investment With regard to long-term equity investment formed in the merger of enterprise under the same control, its initial investment cost shall be regard as the share of the carrying value of the owner's equity of the merged enterprise; With regard to long-term equity investment formed in the merger of enterprise under the different control, the Company shall regard the merger costs as the initial cost of the long-term equity investment. The initial cost of a long-term equity investment obtained by other means shall be ascertained in light of different mode of acquisition, for instance, by actual cash payments, fair value of the equity securities issued or the value stipulated in the investment contract or agreement. The initial cost consists of the expenses directly relevant to the obtainment of the long-term equity investment, taxes and other necessary expenses. With regard to long-term equity investment formed in the merger of enterprise under the same control, its initial investment cost shall, be regard as the share of the carrying value of the owner's equity of the merged enterprise on the date of merger; With regard to long-term equity investment formed in the merger of enterprise under the 66 different control, the Company shall regard the merger costs as the initial cost of the long-term equity investment. The difference between the initial cost of long-term equity investment and carrying value of merger consideration paid (the total par value of shares issued) shall offset against the capital reserve. If the capital reserve is insufficient to dilute, the retained earnings shall be adjusted. The direct cost for the business combination of the merging enterprise shall be recorded into the profits and losses at the current period when happening. 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. The handling fees, commissions and other expenses for the issuance of equity securities for the business combination shall be credited against the surplus of equity securities; if the surplus is not sufficient, the retained earnings shall be offset. With regard to long-term equity investment formed in the merger of enterprise under the different control, its initial investment cost shall be regard as the combined costs determined on the acquisition date. Combined cost shall be the fair values, on the acquisition date, of the assets paid, the liabilities incurred or assumed and the equity securities issued by the acquirer in exchange for the control on the acquiree, and all relevant direct costs incurred to the acquirer for the merger of enterprise. For a business combination realized by two or more transactions of exchange, the combination costs shall be the summation of the costs of all separate transactions. Where any future event that is likely to affect the combination costs is stipulated in the combination contract or agreement, if it is likely to occur and its effects on the combination costs can be measured reliably, the Company shall record the said amount into the combination costs. 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. The handling fees, commissions and other expenses for the issuance of equity securities for the business combination shall be credited against the surplus of equity securities; if the surplus is not sufficient, the retained earnings shall be offset. The initial cost of a long-term equity investment obtained by making payment in cash shall be the purchase cost which is actually paid. The initial cost consists of the expenses directly relevant to the obtainment of the long-term equity investment, taxes and other necessary expenses. The initial cost of a long-term equity investment obtained on the basis of issuing equity securities shall be the fair value of the equity securities issued. The initial cost of a long-term equity investment of an investor shall be the value stipulated in the investment contract or agreement except the unfair value stipulated in the contract or agreement. The initial cost of a long-term investment obtained by the exchange of non-monetary assets shall be ascertained in accordance with the Accounting Standards for Enterprises No. 7 - Exchange of Non-monetary Assets. The initial cost of a long-term equity investment obtained by recombination of liabilities shall be ascertained in accordance with Accounting Standards for Enterprises No. 12 - Debt Restructuring. Where the Company adjusts carrying values of assets and liabilities in light of appraisal value for corporate reconstruction, the initial investment cost of long-term equity investment shall be recognized at the appraisal value. Besides the long-term equity investments formed by the merger of enterprises, the initial investment cost of a long-term equity investment obtained by other means consists of the expenses directly relevant to the obtainment of the long-term equity investment, taxes and other necessary expenses. When it obtains the investment, if the consideration paid consists of cash dividend or profit that has been declared but not yet paid, such consideration shall be recognized as receivables, do not constitute the initial cost of long-term equity investment. 67 (2) Subsequent measurement of long-term equity investment and recognized method of investment income ① The following long-term equity investment shall be measured by employing the cost method: a. a long-term equity investment of the Company that is able to control the invested entity; and b. a long-term equity investment of investment of the Company that does not do joint control or does not have significant influences on the invested entity, and entity, and has no offer in the active market and its fair value cannot be reliably measured. The price of a long-term equity investment measured by employing the cost method shall be included at its initial investment cost. If there are additional investments or disinvestments, the cost of the long-term equity investment shall be adjusted. The dividends or profits declared to distribute by the invested entity shall be recognized as the current investment income. The investment income recognized by the Company shall be limited to the amount received from the accumulative net profits that arise after the invested entity has accepted the investment. Where the amount of profits or cash dividends obtained by the investing entity exceeds the aforesaid amount, it shall be regarded as recovery of initial investment cost. ② A long-term equity investment of the Company that does joint control or significant influences over the invested entity shall be measured by employing the equity method. If the initial cost of a long-term equity investment is more than the Company's attributable share of the fair value of the invested entity's identifiable net assets for the investment, the initial cost of the long-term equity investment may not be adjusted. If the initial cost of a long-term equity investment is less than the Company's 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 cost of the long-term equity investment shall be adjusted simultaneously. By employing equity method, after the Company obtains a long-term equity investment, it shall, in accordance with the attributable share of the net profits or losses of the invested entity, recognize the investment profits or losses and adjust the book value of the long-term equity investment. The Company shall, on the ground of the fair value of all identifiable assets of the invested entity when it obtains the investment, recognize the attributable share of the net profits and losses of the invested entity after it adjusts the net profits of the invested entity in accordance with accounting policies and accounting period of the Company, and offsetting the gains and losses attributable to the investment enterprise arising from internal transaction between the Company and affiliated enterprises and joint-venture enterprises calculated at shareholding proportion (however losses on internal transaction is part of loss on assets impairment, it shall be recognized fully). As for a long-term equity investment of affiliated enterprises and joint-venture enterprise held by the Company before date of first time adoption, if there is debit balance of equity investment related with such investment, gains and losses of investment shall be recognized after deducting debit balance of equity investment amortized at straight-line method in light of original remaining period. 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. 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, unless the Company has the obligation to undertake extra losses. Where any change is made to the owner's equity other than the net profits and losses of the invested entity, the book value of the long-term equity investment shall be adjusted and be included in the owner's equity, be transferred to the current profits and losses according to a certain proportion. (3) Recognition basis of joint control and significant influences ①Recognition basis of joint control: any a joint venture party can not individually control production and 68 operation activities of the joint venture enterprise. The decision-making involved in basic operation activities of the joint venture enterprise shall be needed to make consensus of opinion by each joint venture party. ② Recognition basis of significant influences: where the Company directly or indirectly through subsidiary company holds over 20% (including 20%) but no more than 50% of voting shares of invested enterprise shall be confirmed the significant influence on the invested enterprise except that there is any evidence proving that the Company can not enjoy the production and operation decision-making of invested enterprise under such situation. Where the Company holds no more than 20% (excluding 20%) of voting shares of invested enterprise shall be confirmed the no significant influence on invested enterprise. But the Company shall be confirmed as significant influence on invested enterprise when the following situations are accorded with: A. appointed representative in the Board of Directors and power department; B. participated in the course of policies establishment of invested enterprise; C. the material transaction occurred between the Company and invested enterprise; D. appointed management person to invested enterprise; E. provided the key technology information to invested enterprise. 10. Investment properties The Company’s investment properties consist of the right to use any land which has already been rented; the right to use any land which is held and prepared for transfer after appreciation; and the right to use any building which has already been rented. The Company shall make a follow-up measurement to the investment properties through the cost pattern. As for investment properties that its follow-up measurement shall be made by employing the cost pattern, its depreciation policy and amortization shall be the same as ones of same or similar fixed assets and intangible assets. For the basis and method of impairment reserve, please refer to “Note IV. Assets impairment”. 11. Fixed assets (1)Recognized standard of fixed assets The term "fixed assets" refers to the tangible assets that simultaneously possess the features as follows: they are held for the sake of producing commodities, rendering labor service, renting or business management; and their useful life is in excess of one fiscal year. No fixed asset may be recognized unless it simultaneously meets the conditions as follows: ① The economic benefits pertinent to the fixed asset are likely to flow into the enterprise; and ② The cost of the fixed asset can be measured reliably. (2) Category of fixed assets and depreciation The Company shall withdraw the depreciation of fixed assets by adopting the straight-line method. Useful life, expected net salvage value and annual depreciation rate of each fixed assets are as below: Category of fixed assets Useful life (Y) Expected net salvage value（%） Annual deprecation rate（%） Housing and building 5-20 5-10% 19.00-4.50 Machinery equipments 10-13 5-10% 6.92-9.50 Transportation vehicle 5 5-10% 19.00-18.00 Electronic equipments and other 5 5-10% 19.00-18.00 As for the fixed assets, the provision for depreciation has been made, its withdrawal method of depreciation: For a fixed asset, the provision for depreciation has been made, it shall be withdrawn depreciation in the light of the amount after deducting expected net salvage value, depreciation withdrawn and impairment provision from original value of such fixed assets and the remained useful life. As for the fixed assets, its expected conditions for 69 use has been reached but not handle completion settlement, its cost shall be confirmed in the light of estimated value and withdrew depreciation; after completion settlement, the original estimated value shall be adjusted in line with the actual cost, but original depreciation withdrawn shall not be adjusted. At least, the Company shall make recheck to useful life, expected net salvage value and depreciation method of the fixed assets when the end of each accounting year, if necessary, the Company shall make adjustment. (3) Fixed assets by financing leased For recognized basis, pricing method and depreciation method of fixed assets by financing lease, please refer to “Note IV. Lease”. 12. Constructions in progress The Company’s constructions in progress include the preliminary works, constructional engineering, erection works and technical innovation projects, as well as major repair works etc., which shall be priced in the light of the actual cost. Constructions in progress are carried down to fixed assets according to their actual costs when completing and achieving estimated usable status. The fixed assets that have been completed and reached estimated usable status but have not yet been through completion and settlement procedures are charged to an account according to their estimate values; adjustment will be conducted upon confirmation of their actual values. 13. Intangible assets (1) Initial measurement of intangible assets The intangible assets shall be initially measured according to its cost. (2) Subsequent measurement of intangible assets ① The estimation about the service life of intangible asset Being derived from any contractual right or other statutory rights, the useful life of intangible assets can not exceed the time limit regulated by contractual right or other statutory rights. If useful life is not be regulated by contractual right or other statutory rights, the Company shall synthesize each factors to determine term of economic benefit is expected to be brought by some intangible assets to the Company. If term of economic benefit is expected to be brought by some intangible assets to the Company is still not be confirmed according to the above method, such intangible assets shall be regarded as intangible asset with uncertain useful life. ② Recheck of service life of intangible assets At least, the Company shall make recheck to useful life and amortization method of the fixed assets when the end of each accounting year, if necessary, the Company shall make adjustment. ③ Amortization of intangible assets Intangible assets with limited service life shall be amortized at the straight-line method within its expected service life since the current period as obtained. Intangible assets with uncertain service life may not be amortized, but shall be made an impairment testing at the end of every accounting year. 14. Research and development expenditures The expenditures for its internal research and development projects of the Company shall be classified into research expenditures and development expenditures. The term "research expenditures" refers to an expense incurred that the creative and planned investigation to acquire and understand new scientific or technological knowledge. The research expenditures for its internal research and development projects of the Company shall be recorded into the profit or loss for the current period. The term "development expenditures" refers to an expense incurred that the application of research achievements 70 and other knowledge to a certain plan or design, prior to the commercial production or use, so as to produce any new material, device or product, or substantially improved material, device and product. The development expenditures for its internal research and development projects of the Company may be confirmed as intangible assets when they satisfy the following conditions simultaneously: (1) It is feasible technically to finish intangible assets for use or sale; (2) It is intended to finish and use or sell the intangible assets; (3) The usefulness of methods for intangible assets to generate economic benefits shall be proved, including being able to prove that there is a potential market for the products manufactured by applying the intangible assets or there is a potential market for the intangible assets itself or the intangible assets will be used internally; (4) It is able to finish the development of the intangible assets, and able to use or sell the intangible assets, with the support of sufficient technologies, financial resources and other resources; and (5) The development expenditures of the intangible assets can be reliably measured. If development expenditures fail to meet the above-mentioned conditions, such development expenditures shall be measured into the gains and losses of the current period as happened. 15. Long-term deferred expenses Long-term deferred expenses refer to general expenses with the apportioned period over one year (one year excluded) that have occurred but attributable to the current and future periods. Long-term deferred expense shall be recoded into book in the light of the actual expenditure, and amortized averagely within benefit period. 16. Assets impairment (1) Scope of application Impairment of assets mentioned in this Note shall include long-term equity investment (excluding such long-term equity investment without jointly control or impose significant influence on invested enterprises, without quotation in the active market, whose fair values cannot be reliably measured.), investment real estate (excluding such investment real estate measured in the light of fair value pattern), fixed assets, construction in progress, engineering materials, intangible assets (including capitalization development expenditure), goodwill, group assets and combination of assets and etc. (2) Recognition of impairment of assets The Company shall, on the balance sheet date, make a judgment on whether there is any sign of possible assets impairment. No matter whether there is any sign of possible assets impairment, the business reputation formed by the merger of enterprises and intangible assets with uncertain service lives shall be subject to impairment test every year. There may be an impairment of assets when one of the following signs occurs: 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 Company 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 Company; 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 Company 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, or disposed ahead of schedule; ⑥ Any evidence in the internal report of the Company shows that the economic performance of the assets have 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 excepted amount, etc.; and ⑦ Other evidence indicates that the impairment of assets has probably occurred. (3) Measurement of Recoverable Amount of Assets Where any evidence shows that there is possible assets impairment, the recoverable amount of the assets shall be estimated. The recoverable amount shall be determined in light of the higher one of the net amount of the fair value of the assets minus the disposal expenses and the current value of the expected future cash flow of the 71 assets. (4) Determination of Losses of Asset Impairment Where the measurement result of the recoverable amount indicates that an asset's recoverable amount is lower than its carrying value, the carrying value of the asset shall be recorded down to the recoverable amount, and the reduced amount shall be recognized as the loss of asset impairment and be recorded as the profit or loss for the current period. Simultaneously, a provision for the asset impairment shall be made accordingly. After the loss of asset impairment has been recognized, the depreciation or amortization expenses of the impaired asset shall be adjusted accordingly in the future periods so as to amortize the post-adjustment carrying value of the asset systematically (deducting the expected net salvage value) within the residual service life of the asset. Once any loss of asset impairment is recognized, it shall not be switched back in the future accounting periods. (5) Recognition of group assets and treatments of impairment Where there is any evidence indicating a possible impairment of assets, the Company shall, on the basis of single item assets, estimate the recoverable amount. Where it is difficult to do so, it shall determine the recoverable amount of the group assets on the basis of the asset group to which the asset belongs. The recognition of an asset group shall base on whether the main cash inflow generated by the asset group is independent of those generated by other assets or other group assets. Where the recoverable amount of an asset group or a combination of asset groups is lower than its carrying value (where the headquarter' assets and business reputation are apportioned to a certain asset group or a combination of asset groups, the carrying value of the asset group or the combination of asset groups shall include the amount of the relevant assets of the headquarter and business reputation that have been apportioned to), it shall be recognized as the corresponding impairment loss. The amount of the impairment loss shall first charge against the carrying value of the headquarter' assets and business reputation which are apportioned to the asset group or combination of asset groups, then charge it against the carrying value of other assets in proportion to the weight of other assets in the asset group or combination of asset groups with the business reputation excluded. (6) Goodwill impairment Goodwill formed by merger of enterprise shall be subject to an impairment test at least at the end of each year. When the Company makes an impairment test of assets, it shall, as of the purchasing day, apportion the carrying value of the business reputation formed by merger of enterprises to the relevant asset groups by a reasonable method. Where it is difficult to do so, it shall be apportioned to the relevant combinations of asset groups. The related asset group or combination of asset groups shall be the asset group or combination of asset groups that can benefit from the synergy effect of enterprise merger, and shall be smaller than the reporting segments as determined by the Company. When making an impairment test on the relevant asset groups or combination of asset groups containing business reputation, if any evidence shows that the impairment of asset groups or combinations of asset groups is possible, the enterprise shall first make an impairment test on the asset groups or combinations of asset groups not containing business reputation, calculate the recoverable amount, compare it with the relevant carrying value and recognize the corresponding impairment loss. Then the enterprise shall make an impairment test of the asset groups or combinations of asset groups containing business reputation, and compare the carrying value of these asset groups or combinations of asset groups (including the carrying value of the business reputation apportioned thereto) with the recoverable amount. Where the recoverable amount of the relevant assets or combinations of the asset groups is lower than the carrying value thereof, it shall recognize the impairment loss of the business reputation, and treat them according to the provisions of impairment of assets mentioned in this Note. 17. Borrowing costs (1) Recognized principles of capitalization of borrowing costs The borrowing costs shall include interest on borrowings, amortization of discounts or premiums on borrowings, ancillary expenses, and exchange balance on foreign currency borrowings. Where the borrowing costs incurred to an enterprise can be directly attributable to the acquisition and construction or production of assets eligible for capitalization, it shall be capitalized and recorded into the costs of relevant assets. Other borrowing costs shall be recognized as expenses on the basis of the actual amount incurred, and shall be recorded into the current profits and losses. The borrowing costs shall not be capitalized unless they simultaneously meet the following requirements:(1)The 72 asset disbursements have already incurred, which shall include the cash, transferred non-cash assets or interest bearing debts paid for the acquisition and construction or production activities for preparing assets eligible for capitalization;(2)The borrowing costs has already incurred; and(3)The acquisition and construction or production activities which are necessary to prepare the asset for its intended use or sale have already started. (2) Period of capitalization The borrowing costs incurred before the qualified asset under acquisition and construction or production is ready for the intended use or sale shall be cost of such assets. The borrowing costs incurred after the qualified asset under acquisition and construction or production is ready for the intended use or sale shall be recognized as expenses at the incurred amount when they are incurred, and shall be recorded into the profits and losses of the current period. 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, excluding the period of suspension of capitalization of the borrowing costs. (3) Measurement of capitalization of borrowing costs During the period of capitalization, the to-be-capitalized amount of interests (including the amortization of discounts or premiums) in each accounting period shall be determined according to the following provisions: ① 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. ② 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. 18. Share-based payment (1) Category of share-based payment The share-based payments shall consist of equity-settled share-based payments and cash-settled share-based payments. (2) Recognition of the fair value of the equity instruments The equity-settled share-based payment in return for employee services shall be measured at the fair value of the equity instruments granted to the employees. ① The fair value of equity instruments for which there is an active market shall be recognized at quotation in the active market; ② Where there is no active market for a equity instruments, the Company shall adopt value appraisal techniques to determined its fair value. The value appraisal techniques mainly include the prices adopted by the parties, who are familiar with the condition, in the latest market transaction upon their own free will, the current fair value obtained by referring to other financial instruments of the same essential nature, the cash flow capitalization method and the option pricing model, etc. 19. Estimated debts 73 (1) Recognition principle of estimated debts The obligation such as external guaranty, pending litigation or arbitration, product quality assurance, layoff plan, loss contract, restructuring and disposal of fixed assets, pertinent to a contingencies shall be recognized as an estimated debts when the following conditions are satisfied simultaneously: (a) That obligation is a current obligation of the enterprise; (b) It is likely to cause any economic benefit to flow out of the enterprise as a result of performance of the obligation; and (c) The amount of the obligation can be measured in a reliable way. (2) Measurement method of estimated debts The estimated debts shall be initially measured in accordance with the best estimate of the necessary expenses for the performance of the current obligation. To determine the best estimate, the Company shall take into full consideration of the risks, uncertainty, time value of money, and other factors pertinent to the Contingencies. 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 shall adjust the book value in accordance with the current best estimate. 20. Revenue (1) Recognition method of revenue from selling goods No revenue from selling goods may be recognized unless the following conditions are met simultaneously:(1)The significant risks and rewards of ownership of the goods have been transferred to the buyer by the enterprise;(2)The enterprise retains neither continuous management right that usually keeps relation with the ownership nor effective control over the sold goods;(3)The relevant amount of revenue can be measured in a reliable way;(4)The relevant economic benefits may flow into the enterprise; and(5)The relevant costs incurred or to be incurred can be measured in a reliable way. (2) Recognition method of revenue from providing labor services The Company can, on the date of the balance sheet, reliably estimate the outcome of a transaction concerning the labor services it provides, it shall recognize the revenue from providing services by employing the percentage-of-completion method. The schedule of completion under the transaction concerning the providing of labor services shall be recognized in the light of the proportion of the costs incurred against the estimated total costs. If the Company can not, on the date of the balance sheet, measure the result of a transaction concerning the providing of labor services in a reliable way, it shall be conducted in accordance with the following circumstances, respectively: ① If the cost of labor services incurred is expected to be compensated, the revenue from the providing of labor services shall be recognized in accordance with the amount of the cost of labor services incurred, and the cost of labor services shall be carried forward at the same amount; or ② If the cost of labor services incurred is not expected to compensate, the cost incurred should be included in the current profits and losses, and no revenue from the providing of labor services may be recognized. (3) Recognition method of revenue from abalienating the right to use assets ① Recognition principle of revenue from abalienating the right to use assets 74 The revenue from abalienating of right to use assets consists of interest revenue and royalty revenue. No revenue from abalienating of right to use assets may be recognized unless the following conditions are met simultaneously: A. The relevant economic benefits are likely to flow into the enterprise; and B.The amount of revenues can be measured in a reliable way. ② Recognition method A. The amount of interest revenue should be measured and confirmed in accordance with the length of time for which the enterprise's cash is used by others and the actual interest rate; or B. The amount of royalty revenue should be measured and confirmed in accordance with the period and method of charging as stipulated in the relevant contract or agreement. 21. Leases (1) Category of leases The Company shall classify a lease as a financing lease or an operating lease on the lease beginning date. (2) Recognition standard of financing leases and operating leases Where a lease satisfies one or more of the following criteria, it shall be recognized as a finance lease: ① The ownership of the leased asset is transferred to the lessee when the term of lease expires; ② The lessee has the option to buy the leased asset at a price which is expected to be far lower than the fair value of the leased asset at the date when the option becomes exercisable. Thus, on the lease beginning date, it can be reasonably determined that the option will be exercised; ③Even if the ownership of the asset is not transferred, the lease term covers the major part of the use life (generally refer to 75% or over 75%) of the leased asset; ④ In the case of the lessee, the present value of the minimum lease payments on the lease beginning date amounts to substantially all of the fair value of the leased asset on the lease beginning date (generally refer to 90% or over 90%); in the case of the lessor, the present value of the minimum lease receipts on the lease beginning date amounts to substantially all of the fair value of the leased asset on the lease beginning date; and ⑤ The leased assets are of a specialized nature that only the Company (the lessee) can use them without making major modifications. The term "operating lease" shall refer to a lease other than a financing lease. (3) Accounting treatment of financing leases ① Accounting treatment of lessee of financing leases On the lease beginning date, the Company shall record the lower one of the fair value of the leased asset and the present value of the minimum lease payments on the lease beginning date as the entering value in an account, recognize the amount of the minimum lease payments as the entering value in an account of long-term account payable, and treat the balance between the recorded amount of the leased asset and the long-term account payable as unrecognized financing charges. The initial direct costs such as commissions, attorney's fees and traveling expenses, stamp duties directly attributable to the leased item incurred during the process of lease negotiating and signing the leasing agreement shall be recorded in the asset value of the current period. When the Copany calculates the present value of the minimum lease payments, it shall adopt the interest rate implicit in the lease as the discount rate. As for the unrecognized financing charge, the Company shall adopt the effective interest rate method to calculate and recognize the financing charge in the current period. 75 In calculating the depreciation of a leased asset, the Company should adopt a depreciation policy for leased assets consistent with that for depreciable assets which are owned by the Company. If it is reasonable to be certain that the Company will obtain the ownership of the leased asset when the lease term expires, the leased asset shall be fully depreciated over its useful life. If it is not reasonable to be certain that the Company will obtain the ownership of the leased asset at the expiry of the lease term, the leased asset shall be fully depreciated over the shorter one of the lease term or its useful life. Contingent rents shall be recognized as a profits and losses of the current period in which they are actually incurred. ② Accounting treatments of lessors in financing leases On the beginning date of the lease term, a lessor shall recognize the sum of the minimum lease receipts on the lease beginning date and the initial direct costs as the entering value in an account of the financing lease values receivable, and record the unguaranteed residual value at the same time. The balance between the sums of the minimum lease receipts, the initial direct costs and the unguaranteed residual value, and the sum of their present values shall be recognized as unrealized financing income. As for the unrealized financing income, the Company shall calculate the financing income at the current period by adopting the effective interest rate method. Contingent rents shall be recorded into the profits and losses of the period in which they actually arise. (4) Accounting treatment of lessees in operating leases The rents from operating leases shall be recorded by the lessor or lessee in the profits and losses of the current period by using the straight-line method. The initial direct costs incurred by the lessor or lessee shall be recognized as the profits and losses of the current period. The contingent rents shall be recorded into the profits and losses of the current period in which they actually arise. 22. Government grants (1) Recognized conditions of government grants No government grant may be recognized unless the following conditions are met simultaneously as follows: ① The Company can meet the conditions for the government grants; and ② The Company can obtain the government grants. (2) Measurement of government grants ① If a government grant is a monetary asset, it shall be measured in the light of the received or receivable amount. If a government grant is a non-monetary asset, it shall be measured at its fair value. If its fair value cannot be obtained in a reliable way, it shall be measured at its nominal amount (RMB 1). ② The government subsidies pertinent to assets shall be recognized as deferred income, equally distributed within the useful lives of the relevant assets, and included in the current profits and losses. But the government subsidies measured at their nominal amounts shall be directly included in the current profits and losses. The government subsidies pertinent to incomes shall be treated respectively in accordance with the circumstances as follows: Those subsidies used for compensating the related future expenses or losses of the enterprise shall be recognized as deferred income and shall included in the current profits and losses during the period when the relevant expenses are recognized; or Those subsidies used for compensating the related expenses or losses incurred to the enterprise shall be directly included in the current profits and losses. ③ If it is necessary to refund any government subsidy which has been recognized, it shall be treated respectively in accordance with the circumstances as follows: If there is the deferred income concerned, the book balance of the deferred income shall be offset against, but the excessive part shall be included in the current profits and losses; and If there is no deferred income concerned to the government subsidy, it shall be directly included in 76 the current profits and losses. 23. Income tax (1) Measurement method of income tax The Company shall calculate income taxes by balance sheet liability method. (2) Temporary differences The "temporary difference" shall refer to the difference between the carrying amount of an asset or liability and its tax base. As for an item that has not been recognized as an asset or liability, if its tax base can be determined in light of the tax law, the difference between the tax base and its carrying amount shall also be a temporary difference. Temporary difference can be classified into taxable temporary differences and deductible temporary differences. (3) Recognition of deferred income tax assets As for the deductible temporary difference, any deductible loss or tax deduction that can be carried forward to the next year, the Company shall recognize the deferred income tax assets arising from a deductible temporary difference, any deductible loss or tax deduction to the extent of the amount of the taxable income, otherwise, the deductible temporary difference occurred in the following transactions: ①This transaction is not business combination, and at the time of transaction, the accounting profits will not be affected, nor will the taxable amount be affected. ②Where the deductible temporary difference related to the investments of the subsidiary companies, associated enterprises and joint enterprises can meet the following requirements simultaneously, the enterprise shall recognize the corresponding deferred income tax assets: A. The temporary differences are likely to be reversed in the expected future; and B. It is likely to acquire any amount of taxable income tax that may be used for making up the deductible temporary differences. (4) Recognition of deferred income tax liabilities Except for the deferred income tax liabilities arising from the following transactions, an enterprise shall recognize the deferred income tax liabilities arising from all taxable temporary differences: ① the initial recognition of business reputation, and the initial recognition of assets or liabilities arising from the following transactions which are simultaneously featured by the following: (a) The transaction is not business combination; (b) At the time of transaction, the accounting profits will not be affected, nor will the taxable amount be affected. ② The taxable temporary differences related to the investments of subsidiary companies, associated enterprises and joint enterprises shall recognize corresponding deferred income tax liabilities. However, those that can simultaneously meet the following conditions shall be excluded: (a) The investing enterprise can control the time of the reverse of temporary differences; and (b) The temporary differences are unlikely to be reversed in the excepted future. (5) Impairment of deferred income tax assets The carrying amount of deferred income tax assets shall be reexamined on balance sheet day. If it is unlikely to obtain sufficient taxable income taxes to offset the benefit of the deferred income tax assets, the carrying amount of the deferred income tax assets shall be written down. The income taxes of the current period and deferred income tax related to the transactions or events directly recorded in the owner's rights and interests shall be recorded into the owner's rights and interests. When it is probable to obtain sufficient taxable income taxes, such write-down amount shall be subsequently reversed. 77 24. Segment reporting The Company shall take business segment reporting as a main report form. 25. Business combinations and consolidated financial statement For major accounting policies of business combinations and consolidated financial statement, please see Note VI. 26. Explanation on change in major accounting policies and accounting estimates There is no matter related to change in accounting policies and accounting estimates. 27. Prior-period errors The Company has no matter related to correction of prior-period errors. V. Taxes 1. Value-added tax (VAT) The Company is a VAT General Taxpayer. VAT payable shall be the balance that the output tax of the current period set off against input tax that can be offset. As for products to be sold in China, such as yarn-dyed fabric cloth and garments, their output VAT rate shall be 17%, while such as cotton and steam, their output VAT rate shall be 13%. As for the export products, the Company shall, in accordance with the provision of CS [2007] No. 7 document, perform “tax exemption, deduction and rebate”. With regard to garment material and garment exported by the Company, their export rebate rate shall be 11%. In light of the Circular of Ministry of Finance and State Administration of Taxation on Adjusting Export Rebate Rate of Some Commodities such as Textiles and Garments promulgated on 30 July 2008, the export rebate rate of such products shall be increased to 13% from 11% since 1 Aug. 2008. As for fabric and garments exported by the Company, their export rebate rate shall be, in accordance with the Circular of Ministry of Finance and State Administration of Taxation on Raising Export Rebate Rate of Some Commodities (CS [2008] No. 138 document) approved by the state council, raised to 14% since 1 Nov. 2008. 2. Business tax Business tax shall be paid at applicable tax rate in light of taxable income of object of taxation. 3. Tax for municipal maintenance and construction and educational surtax The said two taxes shall be paid at circulating tax and applicable tax rates of each region regulated in the National Laws and Regulations on Taxation. 4. Enterprise income tax (1) The Company, in accordance with the Notice on Recognition of the First Batch of New High-tech Enterprise for the Year 2008 (LJGZ [2009] No. 12 document) from Department of Science & Technology of Shandong Province, Finance Bureau of Shandong Province, National Taxation Bureau of Shandong and Local Taxation Bureau of Shandong Province, was recognized as a New High-tech Enterprise and obtained the Certificate of New High-tech Enterprise on 5 Dec. 2008. The Company shall, in line with the Article 28 of Enterprise Income 78 Tax Law of the People’s Republic of China and Notice of the State Administration of Taxation on the Issues concerning the Administration of Enterprise Income Tax Deduction and Exemption (GSF [2008] No. 111 document), enjoy a 15-percent rate for enterprise income tax. (2) The shareholding subsidiaries included in the consolidated financial statement shall, when they enjoy preferential income tax deduction and exemption, pay enterprise income tax at effective tax rate authorized by the local tax authorities. Of which: ① Beijing Sichuang Apparel Co., Ltd. (hereinafter called “Beijing Sichuang”), in accordance with Notice of the State Council on Carrying out the Transitional Preferential Policies on Enterprise Income Tax (GF [2007] No. 39 document) and the Reply of Problems on Beijing Sichuang Apparel Co., Ltd’s Applying for Enterprise Income Tax deduction and Exemption of Production Enterprises with Foreign Investment (DGSPF (2004) 60050 document) issued by the State Administrative of Taxation of Dongcheng District, Beijing, shall be levied at a reduced rate of 24-percent rate for enterprise income tax since 2004. The enterprise income tax was exempted during 2004 and 2005 and was paid half from 2006 to 2008. The local income tax was exempted between 2004 and 2008 and shall be paid half from 2009 to 2013. In accordance with the provisions of the Notice of the State Council on Carrying out the Transitional Preferential Policies on Enterprise Income Tax (GF [2007] No. 39 document), Beijing Sichuang paid the enterprise income tax at tax rate of 12.5% in 2008. ② Lufeng Weaving & Dyeing Co., Ltd. (hereinafter called “Lufeng Weaving & Dyeing”) is productive foreign funded enterprise, therefore, it shall enjoy a preferential enterprise income tax policy of “Two plus three” (Exemption of enterprise income tax for the first two years of making profit, and 50% tax reduction for following three years). Between 2006 and 2007, Lufeng Weaving & Dyeing enjoyed exemption from the enterprise income tax, and shall pay half of the enterprise income tax from 2008 to 2010. In accordance with the provisions of the Notice of the State Council on Carrying out the Transitional Preferential Policies on Enterprise Income Tax (GF [2007] No. 39 document), Lufeng Weaving & Dyeing paid the enterprise income tax at tax rate of 12.5% in 2008. ③ Luthai (Hong Kong) shall pay the profit tax at tax rate of 16.5%. 5. Other taxes At relevant State stipulations VI. Business combination and consolidated financial statement 1. Business combinations (1) Business combinations under the same control ① Definition of business combinations under the same control Judgment basis of business combinations under the same control: ①A business combination under the same control is a business combination in which all of the combining enterprises are ultimately controlled by the Group both before and after the business combination; ② Before the combinations, the time that all of the combining enterprises are controlled by the Group is over one year (including one year) generally. Moreover, after combinations, the time that the reporting entity formed is controlled by the Group is also over one year (including one year). The above-mentioned two conditions are only met simultaneously, the Company shall 79 definite the business combinations under the same control. ②Recognized gist of combining date The "combining date" refers to the date on which the combining party actually obtains control on the combined party, that date on which the control right related to the combined party’s net assets or production and operation decision-making is transferred to the Company. Determination basis of acquisition date is the same as one of combining date. The following conditions are only met simultaneously, the Company shall determine the transfer of the control right. A. Business Combination Agreement has been approved by the Shareholders’ General Meeting; B. Business combination matters that need to make substantive review and approval by relevant State department has obtained the approval from relevant State department; C. all the combining parties has handled necessary property transfer procedures; D. the Company has paid the most of merger payments (generally shall be over 50%), and the Company with the ability to pay the remaining payments; E. actually, the Company has controlled the finance and operation policies of the combined party, and enjoyed the corresponding interests and undertook the risk. ③The assets and liabilities that the combining party obtains in a business combination shall be measured on the basis of their carrying amount in the combined party on the combining date. 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 (or the total par value of the shares issued), the additional paid-in capital shall be adjusted. If the additional paid-in capital is not sufficient to be offset, the retained earnings shall be adjusted. ④ Disposal of combination cost The direct cost for the business combination of the combining party shall, including the expenses for audit, assessment and legal services, 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. The handling fees, commissions and other expenses for the issuance of equity securities for the business combination shall be credited against the surplus of equity securities; if the surplus is not sufficient, the retained earnings shall be offset. ⑤ Actual control of the same control For details of the actual control of the same control, please refer to Note VI. 2 (1). (2) Business combination not under the same control ① A business combination not under the same control is a business combination in which the combining enterprises are not ultimately controlled by the same party or the same parties both before and after the business combination. In a business combination not under the same control, the party which obtains the control on other combining enterprise(s) on the purchase date is the acquirer (the Company), and other combining enterprise(s) is (are) the acquiree. ② The "acquisition date" refers to the date on which the acquirer actually obtains the control on the acquiree, also that date on which the control right related to the acquirer’s net assets or production and operation decision-making is transferred to the Company. Determination basis of acquisition date is the same as one of combining date. ③ Recognition of the combination costs 80 The combination costs shall be the fair values, on the acquisition date, of the assets paid, the liabilities incurred or assumed and the equity securities issued by the acquirer in exchange for the control on the acquiree and all relevant direct costs incurred to the acquirer for the business combination. For a business combination realized by two or more transactions of exchange, the combination costs shall be the summation of the costs of all separate transactions. Where any future event that is likely to affect the combination costs is stipulated in the combination contract or agreement, if it is likely to occur and its effects on the combination costs can be measured reliably, the Company shall record the said amount into the combination costs. On the acquisition date, the identifiable assets, liabilities and contingent liabilities acquired in the combination not under the same control shall be measured at their fair values. 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 goodwill. The acquirer shall, pursuant to the following provisions, treat the balance between the combination costs and the fair value of the identifiable net assets it obtains from the acquiree: at first, it shall reexamine the measurement of the fair values of the identifiable assets, liabilities and contingent liabilities it obtains from the acquiree as well as the combination costs; If, after the reexamination, the combination costs are still 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. ④ Treatment method of combination expense The direct cost for the business combination of the Company shall, including the expenses for audit, assessment and legal services, be recorded into the cost 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. The handling fees, commissions and other expenses for the issuance of equity securities for the business combination shall be credited against the surplus of equity securities; if the surplus is not sufficient, the retained earnings shall be offset. ⑤ Amount of good will recognition method Goodwill is the positive balance between the combination costs and the fair value of the identifiable net assets it obtains from the acquire. After the reexamination, the combination costs are still 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. 2. Consolidated financial statement (1) Consolidation scope ① Recognition principle The consolidated scope of consolidated financial statement shall be recognized on the basis of control. The term "control" means having the power to decide an enterprise's financial and operating policy and obtains benefits from its business activities. The Company shall bring the investing enterprise (the Company’s investment takes over 50% of voting total capital of the investing enterprise or no more than 50% but the Company has the actual control right) into the consolidated scope. ② Major subsidiaries and consolidated scope in 2008 81 Registered Natural of Registered Legal Organization Name of company Business scope address business capital representative code I. Subsidiaries obtained through combination under the same control II. Subsidiaries obtained through combination not under the same control III. Subsidiaries obtained through other ways Beijing Luthai Shirt Tian Cheng 70022622-X Limited RMB Design and manufacturing Co., Limited (“Beijing Beijing Company 5600000 and sale of garment Luthai”) Limited USD 2000000 Liu Shizhen 71774843-8 Company Design and manufacturing Beijing Sichuang Beijing （Chinese- and sale of garment foreign joint venture） Hong Kong HKD 6000000 Import & export trade, Liu Shizhen Limited collection of market Luthai (Hongkong) company information, information consultation RMB Production and sale of Liu Shizhen 75353600-2 8,0000000 tablet 、 granule, capsule, oral liquid, syrup, Shandong Luthai suppository, mixture, bolus Huanzhong Pharmacy Limited and lotion; retail of Chinese Zi bo Co., Ltd. (Lutai company Traditional Patent Medicine, Huanzhong) Chemical preparations, antibiotic, Biochemical Pharmaceutics (excluding bacterin, blood products) Xinjiang Luthai RMB Planting, processing and sale Liu Shizhen 75165238-4 Fengshou Cotton Co., Limited 89463000 of Economic Crops, cooking Xinjiang Ltd. (“Xinjiang company oil crops; purchase, Luthai”) processing and sale of cotton 82 and cotton-by products; production and sale of cotton textile products Limited RMB Liu Shizhen 76001835-0 Lufeng Weaving & company (Joint 486160000 Production and sale of textile Dyeing Co., Ltd. Ventures Funded Zibo and printing and dyeing (Lufeng Weaving & by Hongkong products Dyeing) Macao and Taiwan) Zibo Luqun Textile Limited RMB Liu Shizhen 76870633-4 Co., Ltd. (Luqun Zibo company (sole 168220000 Sale of cotton yarn Textile) corporation) Zibo Xinsheng Power Limited RMB Liu Shizhen 61329023-1 Co., Ltd. (Xinsheng Zibo company (sole 162435600 Power, steam and hot water Power) corporation) （Con.） Proportion Actual amount Balance of net Proportion Merger of shares Name of company invested by the investment for of voting (Yes held by the Company subsidiaries in fact right or Not) Company I. Subsidiaries obtained through combination under the same control II. Subsidiaries obtained through combination not under the same control III. Subsidiaries obtained through other ways Beijing Luthai RMB 3360000 RMB 3360000 60% 60% Y Beijing Sichuang USD 1200000 USD 1200000 60% 60% Y Luthai (Hong kong) HKD 6000000 HKD 6000000 100% 100% Y Luthai Huanzhong RMB 60000000 RMB 60000000 75% 75% Y Luthai Xinjiang RMB 51006900 RMB 51006900 57.01% 57.01% Y Lufeng Weaving & Dyeing RMB 364620000 RMB 364620000 75% 75% Y Luqun Textile RMB 168220000 RMB 168220000 100% 100% Y Xinsheng Power RMB 162435600 RMB 162435600 100% 100% Y (2) Preparing methods of consolidated financial statement ① General preparing methods of consolidated financial statement 83 The consolidated financial statements shall, on the basis of the financial statements of the parent company and its subsidiaries incorporated into the consolidation scope, be prepared after the long term equity investments in the subsidiaries are adjusted through the equity method, the equity capital investments of a parent company in its subsidiaries shall be offset against its portion of owner’s equities in the subsidiaries, and significant transactions and internal come-and-go within the Company are offset. Minority interests shall be presented in the sub-item of “Minority interests” under the item of the owner’s equities in the consolidated balance sheets, while gains and losses of minority shareholders shall be presented in the sub-item of “Minority shareholders’ gains” under the item of the net profit in the consolidated income statement. ② Treatment method to increase or disposal subsidiaries in the reporting period If the parent company has a new subsidiary due to business combination under a same control during a reporting period, it shall adjust the beginning balance in the consolidated balance sheets when preparing consolidated balance sheets. If it is not for the reason of business combination under a same control that the parent company has a new subsidiary, it shall not adjust the beginning balance in the consolidated balance sheets when preparing consolidated balance sheets. If the parent company disposes of a subsidiary within a reporting period, when it prepares consolidated balance sheets, it shall adjust the beginning balance in the consolidated balance sheets. If the parent company has a new subsidiary due to business combination under a same control during a reporting period, the parent company shall consolidate the said subsidiary’s revenue, expense and profit as of the current period into the consolidated income statement. If it is not for the reason of business combination under a same control that the parent company has a new subsidiary, the parent company shall consolidate the said subsidiary’s revenue, expense and profit from the acquisition date to the end of period into the consolidated income statement. If the parent company disposes of a subsidiary within a reporting period, the parent company shall incorporate the said subsidiary’s revenue, expense and profit from the beginning of period to the disposal date into the consolidated income statement. If the parent company has a new subsidiary due to business combination under a same control during a reporting period, the parent company shall consolidate the said subsidiary’s cash flow as of the current period into the consolidated cash flow statement. If it is not for the reason of business combination under a same control that the parent company has a new subsidiary, the parent company shall consolidate the said subsidiary’s cash flow from the acquisition date to the end of period into the consolidated cash flow statement. If the parent company disposes of a subsidiary within a reporting period, the parent company shall incorporate the said subsidiary’s cash flow from the beginning of period to the disposal date into the consolidated cash flow statement. ③ Accounting treatment of different in accounting policies and accounting period between parent company and its subsidiaries If the accounting policies and accounting period adopted by a subsidiary are different from those adopted by the parent company when preparing consolidated financial statement, the subsidiary shall be required to re-prepare financial statements under the accounting policies and accounting period adopted by the parent company. ④ Translation of foreign currency financial statements The Company shall, in accordance with the following provisions, convert the financial statement in foreign currency into the financial statement in Renminbi. When the consolidated financial statement includes foreign business entity, for translation of foreign currency financial statements, please refer to Note IV. 5. (3) Minority interests ① Minority interests of each subsidiary company 84 Name of subsidiaries Closing amount Opening amount Beijing Luthai 3,288,670.14 3,240,433.40 Beijing Sichuang 13,360,422.16 13,432,130.54 Xinjiang Luthai 71,066,232.08 69,627,480.24 Lufeng Weaving & Dyeing 142,502,089.85 140,937,687.85 Lutai Huanzhong 9,538,372.85 11,559,966.99 Total 239,755,787.08 238,797,699.02 VII. Notes to consolidated financial statement Unless otherwise noted in the following items (including notes to the financial statement of parent company), the year-begin refers to 31 Dec. 2007, and the year-end refers to 31 Dec. 2008. The last year refers to the Year 2007, this year refers to the year 2008. 1. Monetary fund (1) Breakdown of monetary fund Closing balance Opening balance Amount of Items conversion Converted in Amount of conversion Converted in original rate RMB original currency rate RMB currency Cash-RMB 1,450,297.02 1.0000 1,450,297.02 1,695,135.49 1.0000 1,695,134.52 -USD 25,534.48 6.8346 174,517.96 2,270.19 7.3046 16,582.82 -EURO 1,400.03 9.6590 13,522.89 7,450.00 10.6669 79,468.41 -JPY 90,503.00 0.0757 6,851.08 3,265.00 0.0641 209.29 -HKD 2,286.60 0.8819 2,016.54 4.00 0.9364 3.75 -THB 120.19 0.1955 23.50 120.19 0.2250 27.04 - SGD 0.20 4.7530 0.95 0.20 5.0500 1.01 Subtotal 1,647,229.94 1,791,426.84 Bank deposit-RMB 911,030,094.89 1.0000 911,030,094.89 204,256,841.42 1.0000 204,256,841.42 -USD 21,102,470.11 6.8346 144,227,096.03 14,949,717.95 7.3046 109,205,543.11 -EURO 1,519,641.15 9.6590 14,678,213.87 107,782.47 10.6669 1,149,704.83 -JPY 12,182,826.00 0.0757 922,239.93 34,998,059.92 0.0641 2,243,375.64 -HKD 17,837,032.14 0.8819 15,730,478.64 11,980,605.22 0.9364 11,218,399.12 -SF 297,587.42 6.4624 1,923,128.94 138,902.63 6.4855 900,853.00 Subtotal 1,088,511,252.30 328,974,717.12 Other-RMB 34,000,000.00 1.0000 34,000,000.00 -USD 2,472,406.62 6.8346 16,897,910.27 -EURO 1.51 9.6590 14.59 Subtotal 50,897,924.86 Total 1,141,056,407.10 330,766,143.96 (2) Closing amount of monetary fund has increase by 244.97% compared with the year-begin, which was because the company additionally issued RMB common shares (A shares) amounting to 150,000,000 shares on 8 Dec. 2008, of which, raised proceeds of RMB 65,081.45 failed to use. 85 (3) Item “Other” under the monetary fund amounting to RMB 34 million is margin deposits for acceptance bill, amount of USD is foreign currency deposit being in verification stage in accordance with the state provisions for foreign exchange control. 2. Tradable financial assets (1) Breakdown of tradable financial assets Items Closing balance Opening balance Investment of tradable equity instruments 5,191,290.72 Derivative Financial assets 4,223,850.00 Total 9,415,140.72 (2) Opening balance and Closing balance refer to Opening fair value and Closing fair value both investment of tradable equity instruments and derivative Financial assets. Closing balance has decrease by 100% compared with the Opening balance, which caused by the full transfer of securities investment and derivative financial assets 3. Notes receivable (1) Breakdown of notes receivable Category of notes receivable Closing balance Opening balance Bank acceptance bill 18,285,935.20 5,849,840.00 Letter of credit 97,480,808.62 134,715,906.06 Total 115,766,743.82 140,565,746.06 (2) No mortgaged note exists in the reporting period. (3) Endorsed notes receivable but not yet due Day of maturity Amount Remark Jan. 2009 2,303,838.00 Bank acceptance bill Feb. 2009 3,128,831.60 Bank acceptance bill Mar. 2009 5,579,766.90 Bank acceptance bill Apr. 2009 3,229,316.00 Bank acceptance bill May 2009 2,217,786.28 Bank acceptance bill Jun. 2009 1,620,000.00 Bank acceptance bill Total 18,079,538.78 4. Accounts receivable (1) Breakdown of accounts receivable listed by category Closing balance Proportion of Withdrawal Items Provision for Carrying balance total accounts Carrying value proportion bad debts receivable of bad debt Significant 55,187,878.31 38.92% 2,759,393.92 52,428,484.39 5% single amount Insignificant 86,602,994.03 61.08% 4,758,909.43 81,844,084.60 5%-30% single amount Total 141,790,872.34 100.00% 7,518,303.35 134,272,568.99 （Con.） 86 Opening balance Proportion of Withdrawal Items Provision for Carrying balance total accounts Carrying value proportion bad debts receivable of bad debt Significant 16,528,831.12 12.88% 826,442.00 15,702,389.12 5% single amount Insignificant 111,842,856.62 87.12% 5,901,368.00 105,941,488.62 5%-30% single amount Total 128,371,687.74 100.00% 6,727,810.00 121,643,877.74 Accounts receivable with significant single amount refer to accounts receivable that the Closing balance is over RMB 5 million. (2) Breakdown of accounts receivable listed by aging Closing balance Opening balance Proportion Proportion Aging of total Provision for of total Provision for Book balance Book balance accounts bad debts accounts bad debts receivable receivable Within 1 year 139,824,419.83 98.61% 6,991,221.00 126,153,689.50 98.27% 6,307,685.00 1–2 years 175,169.47 0.12% 17,516.95 450,336.84 0.35% 45,034.00 2 -3years 278,195.14 0.20% 55,639.03 1,552,070.49 1.21% 310,414.00 Over 3 years 1,513,087.90 1.07% 453,926.37 215,590.91 0.17% 64,677.00 Total 141,790,872.34 100.00% 7,518,303.35 128,371,687.74 100.00% 6,727,810.00 (3) The top five units in the Closing balance of accounts receivable Proportion of total Debtors Amount Term in arrearage accounts receivable OXFORD 23,991,502.05 16.92% Within 1 year TAL 14,966,751.00 10.55% Within 1 year Chenfeng Group Co., Ltd. 10,493,446.03 7.40% Within 1 year QINGDAO NEW STAR-TEX 5,736,179.23 4.05% Within 1 year PVH 4,567,294.38 3.22% Within 1 year Total 59,755,172.69 42.14% (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. Prepayment (1) Breakdown of prepayment Closing balance Opening balance Aging Amount Proportion Amount Proportion Within 1 year 85,191,947.94 98.28% 126,278,042.57 95.70% 1–2 years 820,617.31 0.95% 5,114,938.47 3.88% 2 -3years 644,626.14 0.74% 555,951.75 0.42% Over 3 years 23,052.91 0.03% Total 86,680,244.30 100.00% 131,948,932.79 100.00% 87 (2) Prepayment with aging over 1 year is mainly payment for agricultural materials of RMB 1,044,700.49 paid in advance by Xinjiang Luthai. (3) Prepayment has decrease by 34.31% compared with the year-begin, which was due to reduction of payment for material paid in advance by the end of year. (4) No arrearage from the shareholders holding over 5% (including 5%) of the equity of the Company existed in the balance of prepayment. 6. Other receivable (1) Breakdown of other receivable listed by category Closing balance Proportion of Withdrawal Items Provision for Carrying Carrying balance total other proportion bad debts value receivables of bad debt Significant single amount 40,347,449.55 52.94% 5,984,364.11 34,363,085.44 5%-30% Insignificant 35,866,522.38 47.06% 4,117,132.56 31,749,389.82 5%-30% single amount Total 76,213,971.93 100.00% 10,101,496.67 66,112,475.26 （Con.） Opening balance Proportion of Withdrawal Items Provision for Carrying Carrying balance total other proportion bad debts value receivables of bad debt Significant single amount 60,754,164.08 60.92% 7,748,106.00 53,006,058.08 5%-30% Insignificant 38,971,831.68 39.08% 5,586,352.00 33,385,479.68 5%-30% single amount Total 99,725,995.76 100.00% 13,334,458.00 86,391,537.76 Other receivables with significant single amount refer to other receivables that the Closing balance is over RMB 5 million. (2) Breakdown of other receivables listed by aging Closing balance Opening balance Proportion Proportion Aging of total Provision for of total Provision for Book balance Book balance other bad debts other bad debts receivables receivables Within 1 year 40,767,466.83 53.49% 2,038,373.35 27,696,348.57 27.77% 1,384,817.00 1–2 years 9,055,596.62 11.88% 905,559.66 46,323,321.51 46.45% 4,632,332.00 2 -3years 7,597,088.67 9.97% 1,519,417.72 3,945,895.35 3.96% 789,179.00 Over 3 years 18,793,819.81 24.66% 5,638,145.94 21,760,430.33 21.82% 6,528,130.00 Total 76,213,971.93 100.00% 10,101,496.67 99,725,995.76 100.00% 13,334,458.00 (3) The top five units in the Closing balance of other receivables 88 Proportion of Debtors Amount total accounts Term in arrearage receivable Export rebates receivable 23,320,815.15 30.60% Within 1 year Awat County Tian Hong State-owned Assets Investment 17,026,634.40 22.34% 1-3 years Operation Co., Ltd Bureau of Finance of Zichuan 2,665,685.60 3.50% 1-2 years District of Zibo Zibo Industry Development Co., 1,834,529.68 2.41% Within 1 year Ltd. Zibo Customs 1,456,574.54 1.91% Within 1 year Total 46,304,239.37 60.76% (4) No arrearage from the shareholders holding over 5% (including 5%) of the equity of the Company existed in the balance of other receivable. 7. Inventory (1) Breakdown of inventory Closing balance Including: Provision for Items capitalization Carrying balance falling price of Carrying value of borrowing inventory costs Raw material 675,901,000.82 61,545.96 675,839,454.86 Goods in process 318,305,947.57 3,524,867.49 314,781,080.08 merchandise 432,291,978.43 68,472,475.52 363,819,502.91 inventory Consigned materials for 15,618,075.74 15,618,075.74 processing Total 1,442,117,002.56 72,058,888.97 1,370,058,113.59 （Con.） Opening balance Including: Provision for Items capitalization Carrying balance falling price of Carrying value of borrowing inventory costs Raw material 419,658,931.49 61,545.96 419,597,385.53 Goods in process 312,398,401.54 2,970,518.79 309,427,882.75 merchandise 293,286,331.38 43,264,963.79 250,021,367.59 inventory Consigned materials for 17,984,377.31 17,984,377.31 processing 89 Total 1,043,328,041.72 46,297,028.54 997,031,013.18 (2) Provision for falling price of inventory Decrease in 2008 Opening Withdrawal in Closing Items Switching balance 2008 Writing-off Total balance back Raw material 61,545.96 61,545.96 Goods in process 2,970,518.79 554,348.70 3,524,867.49 Merchandise 43,264,963.79 25,207,511.73 68,472,475.52 inventory Total 46,297,028.54 25,761,860.43 72,058,888.97 (3) Basis of withdrawal of provision for falling price of inventory On the balance sheet date, the provision for falling price of inventory shall be withdrawn at cost and net realizable value. Where the cost of inventory is higher than its net realizable value, the inventory shall be measured at the net realizable value, meanwhile, the provision for falling price of inventory shall be withdrawn at the balance of the cost higher than the net realizable value. The net realizable value shall be recognized as below: ① the inventories for sale directly such as finished goods, commodities and materials for sale, in the course of normal production and operation, the net realizable value of such inventories is an amount after deducting estimated sale expense and relevant taxes from the estimated sale price of inventories; ② materials inventory that need to go through processing, in the course of normal production and operation, the net realizable value of such inventories is an amount after deducting the estimated cost of completion, estimated sale expense and relevant taxes from the estimated sale price of products manufactured by the Company. (4) Inventories used for debt guarantee at the year-end Items Carrying value Remark Raw material 123,950,000.00 Mortgage Merchandise 78,625,400.00 Mortgage inventory Total 202,575,400.00 The lint cotton and seed cotton are used for mortgage by Xinjiang Luthai for short-term bank loans of RMB 116 million. Please see “Note X. 2” for details. (5) Inventory at the end of period has increase over the beginning of period, which was mainly because of increase of raw materials reserve at the end of period. 8. Long-term equity investment (1) Breakdown of long-term equity investment Opening Increase in Decrease in Items Closing balance balance 2008 2008 Investment in joint 800,000.00 800,000.00 venture enterprises Investment in affiliated enterprises Less: provision for impairment of 800,000.00 800,000.00 long-term equity investment Total 90 (2) Provision for impairment of long-term equity investment Decrease in 2008 Name of invested Opening Withdrawal Closing Switching Writing entities balance in 2008 Total balance back off 阿瓦提丝路伽什 800,000.00 800,000.00 瓜果有限公司 Total 800,000.00 800,000.00 9. Fixed assets (1) Breakdown of fixed assets Items Opening balance Increase in 2008 Decrease in 2008 Closing balance Original price House and building 1,219,416,180.38 159,653,535.16 8,686,950.78 1,370,382,764.76 Machinery equipment 3,456,496,291.11 406,343,146.23 18,599,570.50 3,844,239,866.84 Transportation vehicles 42,595,444.35 4,202,121.50 1,940,242.88 44,857,322.97 Electronic equipment and 58,706,914.44 9,878,653.94 3,191,858.59 65,393,709.79 other Total 4,777,214,830.28 580,077,456.83 32,418,622.75 5,324,873,664.36 Accumulative depreciation House and building 214,129,906.41 58,572,993.47 2,722,897.46 269,980,002.42 Machinery equipment 999,246,476.18 256,495,619.87 8,019,434.15 1,247,722,661.90 Transportation vehicles 27,982,213.95 4,806,790.52 1,674,748.73 31,114,255.74 Electronic equipment and 35,042,959.10 8,068,606.03 2,221,114.13 40,890,451.00 other Total 1,276,401,555.64 327,944,009.89 14,638,194.47 1,589,707,371.06 Provision for impairment House and building Machinery equipment 12,036,025.97 494,171.69 6,151,115.41 6,379,082.25 Transportation vehicles 167,185.92 60,094.42 107,091.50 Electronic equipment and 27,953.33 10,280.00 17,673.33 other Total 12,231,165.22 494,171.69 6,221,489.83 6,503,847.08 Carrying value House and building 1,005,286,273.97 1,100,402,762.34 Machinery equipment 2,445,213,788.96 2,590,138,122.69 Transportation vehicles 14,446,044.48 13,635,975.73 Electronic equipment and 23,636,002.01 24,485,585.46 other Total 3,488,582,109.42 3,728,662,446.22 (2) Fixed assets transferred from construction in progress 91 Items Time Amount Lu Thai Industry Park Apr. 2008 585,269.23 After-finishing expansion Dec. 2008 1,402,588.67 Other small projects Apr. and Dec. 2008 16,627,971.38 50 million-meter yarn-dyed Apr., Nov. and Dec. 2008 111,255,756.75 fabric 5 million shirts project Apr. and Nov. 2008 11,314,787.52 Piece dyeing project Mar.-Oct. 2008 39,951,788.06 Spinning project of Xinjiang Jun. – Dec. 2008 8,144,464.58 Lu Thai Extension of power plant Dec. 2008 11,221,508.58 Desulfurization project Dec. 2008 22,574,224.40 Renovation project of May – Dec. 2008 35,596,255.64 Two-for-one twister plant 150000-ingot high-grade Nov. – Dec. 2008 203,962,536.78 heckling yarn project Total 462,637,151.59 (3) Fixed assets used for mortgage Original value of Accumulative Provision for Item Carrying value the book depreciation impairment Machinery equipment 39,001,889.15 13,967,116.22 25,034,772.93 Total 39,001,889.15 13,967,116.22 25,034,772.93 Xinjiang Luthai mortgaged the machinery equipment and land use right with original book value of RMB 39,001,889.15 and net value of RMB 25,034,772.93 for short-term bank loans of RMB 96.7 million. Please see “Note X. 2” for details. (4) Provision for impairment of fixed assets Decrease in 2008 Opening Withdrawal in Item Switching Closing balance balance 2008 Writing off Total back Machinery 12,036,025.97 494,171.69 6,151,115.41 6,151,115.41 6,379,082.25 equipment Transportation 167,185.92 60,094.42 60,094.42 107,091.50 vehicles Electronic equipment 27,953.33 10,280.00 10,280.00 17,673.33 and other Total 12,231,165.22 494,171.69 6,221,489.83 6,221,489.83 6,503,847.08 10. Construction in progress a) Breakdown of construction in progress 92 % of Budget Transferring Resource Opening Increase in budget by Name of project (RMB ten into fixed Other decrease Closing balance of balance 2008 project thousand) assets capital input Lu Thai Industry Park 850 2,699,789.40 5,528,288.09 585,269.23 7,642,808.26 Other 95.00% After-finishing 156 1,402,588.67 1,402,588.67 Other 100.00% expansion Other small projects 2,900 20,419,948.60 5,834,265.88 16,627,971.38 9,626,243.10 Other 90.00% Loan 50 million-meter 27,007 170,429,411.88 46,461,110.94 111,255,756.75 78,928,943.60 26,705,822.47 and 95.00% yarn-dyed fabric other 5 million shirts 1,200 493,072.34 11,011,715.18 11,314,787.52 190,000.00 Other 99.00% project Doubling plant 11,921 66,787,487.61 17,812.49 9,894,733.45 56,910,566.65 Other 95.00% project Piece dyeing project 29,187 28,668,448.96 14,036,357.74 39,951,788.06 2,753,018.64 Other 98.00% Spinning project of 1,565 2,361,060.73 9,901,673.71 8,144,464.58 4,118,269.86 Other 95.00% Xinjiang Lu thai Extension of power 9,249 2,951,330.15 8,270,178.43 11,221,508.58 Other 100.00% plant Desulfurization 9,816 22,574,224.40 22,574,224.40 Other 100.00% project Renovation project of Two-for-one twister 6,300 54,926,018.39 7,064,802.08 35,596,255.64 24,678,918.07 1,715,646.76 Other 98.00% plant 150000-ingot Raised high-grade heckling 26,461 241,373,940.36 203,962,536.78 37,411,403.58 fund 92.00% yarn project 50000-ingot Raised two-for-one twister 4,086 15,583,145.95 858,538.31 14,724,607.64 fund 38.00% project Total 130,698 351,139,156.73 387,657,515.25 462,637,151.59 114,361,133.43 161,798,386.96 (2) Other decrease under the construction in progress is mainly from transfer-in land use right. (3) Capitalization amount of borrowing costs Capitalization Opening Increase in Transferred into Other Closing Name of projects rate balance 2008 fixed assets decrease balance 50 million-meter 5.93% 10,136,201.55 1,457,599.83 11,593,801.38 yarn-dyed fabric Total 10,136,201.55 1,457,599.83 11,593,801.38 (4) At the end of year, the construction in progress has decrease by 53.92% over the beginning of the year, which was caused by completion of construction in the current period transferred into fixed assets. (5) Ended 31 Dec. 2008, there was no situation that carrying value of the construction in progress is higher than 93 its recoverable amount. 11. Engineering material (11) Breakdown of engineering material Closing balance Opening balance Items Provision for Provision for Balance Net value Balance Net value impairment impairment Engineering 5,976,824.75 5,976,824.75 22,862,470.70 22,862,470.70 material Total 5,976,824.75 5,976,824.75 22,862,470.70 22,862,470.70 (2) Engineering material at the year-end has decrease by 73.86% compared with the beginning of period, which was due to recipient equipment for engineering. (3) Ended 31 Dec. 2008, there was no situation that carrying value of the engineering material is higher than its recoverable amount. 12. Intangible assets (1) Breakdown of intangible assets Opening Increase in Transfer-out Amortization Accumulative Closing Items Initial cost balance 2008 in 2008 in 2008 amortization balance Land use right 173,828,868.33 80,339,565.06 89,682,215.36 8,388,786.50 12,195,874.41 161,632,993.92 Land use right of 12,137,593.14 11,236,373.48 507,343.32 1,408,562.98 10,729,030.16 Xinsheng Power Water use right 280,000.04 280,000.04 280,000.04 Drugs royalty 5,599,999.96 5,599,999.96 5,599,999.96 Nonpatented technology of 996,333.26 996,333.26 996,333.26 Luthai Huanzhong Land use right of Lufeng Weaving 12,204,217.94 11,957,614.07 256,238.32 502,842.19 11,701,375.75 & Dyeing Land use right of 29,990,861.00 21,196,200.00 8,460,581.00 762,950.53 1,097,030.53 28,893,830.47 Luqun Textile Land use right of Luthai 8,064,419.82 7,765,737.54 298,682.28 597,364.56 7,467,055.26 Huanzhong Total 243,102,293.49 139,371,823.41 98,142,796.36 10,214,000.95 15,801,674.67 227,300,618.82 (2) Closing amount of intangible assets has increase by 63.09% compared with the year-begin, which was due to transfer-in from the construction in progress. (3) Ended 31 Dec. 2008, there was no situation that carrying value of the intangible assets is higher than its recoverable amount. (4) Land use right and equipment with book net value worth of RMB 35,509,527.41 are mortgaged by Xinjiang Luthai for a short-term bank loan of RMB 131.7 million. Please refer to “Note X. 2” for details. 13. Goodwill (1) Breakdown of goodwill 94 Closing balance Opening balance Items Balance Net value Balance Net value Combination goodwill 20,563,803.29 20,563,803.29 20,563,803.29 20,563,803.29 Total 20,563,803.29 20,563,803.29 20,563,803.29 20,563,803.29 (2) Goodwill of the Company refers to the balance of initial investment cost higher fair value of realizable net assets of investing enterprise enjoyed by the Company when invested. 14. Deferred income tax assets (1) Breakdown of deferred income tax assets Items Closing balance Opening balance Deferred income tax assets formed arising from the difference between carrying value of assets 31,061,511.70 29,351,252.73 and tax basis Deferred income tax assets formed arising from the difference between carrying value of 2,542,960.00 liabilities and tax basis Total 33,604,471.70 29,351,252.73 (2) Breakdown of temporary difference Items Closing balance Opening balance Accumulative depreciation 2,060,495.67 2,884,016.25 Accounts receivable 8,685,893.29 4,725,210.31 Other receivables 13,200,901.40 11,952,068.99 Inventory 174,952,950.66 109,835,129.81 Fixed assets 6,229,718.16 11,957,036.30 Long-term equity investment 800,000.00 800,000.00 Tradable financial liabilities 19,175,600.00 Total 225,105,559.18 142,153,461.66 15. Breakdown of assets impairment Decrease in 2008 Opening Withdrawal in Items Switching Closing balance balance 2008 Writing off Total back I. Total provision for bad debts 20,062,268.00 1,024,747.26 1,845,440.23 1,621,775.01 3,467,215.24 17,619,800.02 Of which: accounts 6,727,810.00 1,024,747.26 234,253.91 234,253.91 7,518,303.35 receivable Other receivables 13,334,458.00 1,845,440.23 1,387,521.10 3,232,961.33 10,101,496.67 II. Total of provision for falling 46,297,028.54 25,761,860.43 72,058,888.97 price of inventory Of which: Goods in stock 43,264,963.79 25,207,511.73 68,472,475.52 Raw materials 61,545.96 61,545.96 Goods in process 2,970,518.79 554,348.70 3,524,867.49 III. Provision for impairment of 800,000.00 800,000.00 95 Decrease in 2008 Opening Withdrawal in Items Switching Closing balance balance 2008 Writing off Total back long-term equity investment IV. Total of provision for 12,231,165.22 494,171.69 6,221,489.83 6,221,489.83 6,503,847.08 impairment of fixed assets House and building Machinery equipment 12,036,025.97 494,171.69 6,151,115.41 6,151,115.41 6,379,082.25 Transportation vehicles 167,185.92 60,094.42 60,094.42 107,091.50 Electronic equipment and other 27,953.33 10,280.00 10,280.00 17,673.33 Total 79,390,461.76 27,280,779.38 1,845,440.23 7,843,264.84 9,688,705.07 96,982,536.07 16. Short-term loan (1) Breakdown of short-term loan Category Closing balance Opening balance Credit loan 1,631,633,875.02 1,575,421,972.76 Guaranteed loan 95,000,000.00 340,870,700.00 Mortgage loan 247,700,000.00 212,640,000.00 Total 1,974,333,875.02 2,128,932,672.76 (2) At the year-end, credit loan includes foreign currency loan of USD 16,728,685.66, converting into RMB 114,333,875.01. (3) At the year-end, all guaranteed loan is the one that the Company provide guarantee for subsidiary company, Lufeng Weaving & Dyeing. (4) Guarantee loan, guaranty and mortgage of mortgage loan, please refer to “Note X. 1 and 2”. 17. Tradable financial liabilities (1) Breakdown of tradable financial liabilities Items Closing balance Opening balance Derivative 19,175,600.00 financial liabilities Total 19,175,600.00 (2) Closing amount of tradable financial liabilities has increase by RMB 19,175,600.00 compared with the year-begin, which was caused by the change in fair value of derivative financial liabilities. 18. Notes payable (1) Breakdown of notes payable Maturing amount in the Category Closing balance Opening balance next accounting year Bank acceptance bill 209,536,950.08 101,520,029.63 209,536,950.08 Trade acceptance bill 117,369,198.35 51,051,262.12 117,369,198.35 Total 326,906,148.43 152,571,291.75 326,906,148.43 (2) Closing amount of notes payable has increase by 114.26% compared with the year-begin, which was due to the increase of settlement through notes. 19. Accounts payable (1) Breakdown of accounts payable 96 Closing balance Opening balance Aging Amount Proportion Amount Proportion Within 1 year 298,837,036.64 96.58% 215,132,015.61 94.39% 1–2 years 5,770,986.63 1.87% 8,618,691.85 3.78% 2 -3years 1,948,313.29 0.63% 2,159,518.29 0.95% Over 3 years 2,848,369.41 0.92% 2,006,635.92 0.88% Total 309,404,705.97 100.00% 227,916,861.67 100.00% (2) Closing balance of accounts payable has increase by 35.75% over the period-begin, which was because of increase of payment for raw materials from foreign purchase. (3) No arrearage from the shareholders holding over 5% (including 5%) of the equity of the Company existed in the balance of accounts payable. 20. Accounts collected in advance (1) Breakdown of accounts collected in advance Closing balance Opening balance Aging Amount Proportion Amount Proportion Within 1 year 30,495,414.75 96.07% 41,546,702.86 93.73% 1–2 years 495,573.10 1.56% 2,225,321.31 5.02% 2 -3years 532,219.81 1.68% 155,560.84 0.35% Over 3 years 219,638.23 0.69% 399,668.21 0.90% Total 31,742,845.89 100.00% 44,327,253.22 100.00% (2) No arrearage from the shareholders holding over 5% (including 5%) of the equity of the Company existed in the balance of accounts collected in advance. 21. Payable for employee Opening Increase in Payment in Closing Items balance 2008 2008 balance Wages and bonuses 188,972,053.62 505,528,170.86 494,130,939.58 200,369,284.90 for the employees Welfare expenses for 60,395,830.12 60,395,830.12 the employees Social insurances 23,343,803.35 105,533,957.83 115,317,523.24 13,560,237.94 Housing 5,896,273.50 14,028,375.80 17,446,840.20 2,477,809.10 accumulation fund Labor union expense and 7,857,454.42 11,815,831.61 10,129,944.79 9,543,341.24 educational appropriations Total 226,069,584.89 697,302,166.22 697,421,077.93 225,950,673.18 22. Due taxes and fees (1) Breakdown of due taxes and fees 97 Items Tax rate Closing balance Opening balance VAT 17%、13%、7% -7,857,803.72 -3,354,886.72 Business tax 3%、5% 877,355.26 1,852,939.52 Tax for municipal maintenance and 5%、7% 668,544.78 212,517.90 construction Corporate income tax 25%、12.5%、15%、16.5% -26,038,039.27 21,036,486.81 Individual income tax 506,086.06 2,153,768.49 Stamp tax 2,141,475.87 814,891.33 Housing property tax 1.2% 1,181,060.04 11,181.90 2 Land holding tax RMB 6, RMB 7 and RMB 8/M 1,740,022.41 1,231,710.99 Educational surtax 3% 391,760.03 67,281.02 Local educational surcharge 1% 111,369.16 75,922.03 Total -26,278,169.38 24,101,813.27 (2) Closing balance of due taxes and fees has decrease by 209.03% compared with the year-begin, which was because that the Company pay the enterprise income tax at 25% before it is recognized as the New High-tech Enterprise. 23. Other payables (1) Breakdown of other payable Closing balance Opening balance Aging Amount Proportion Amount Proportion Within 1 year 45,989,259.21 53.46% 54,424,675.36 53.71% 1–2 years 14,376,874.42 16.71% 12,282,645.18 12.12% 2 -3years 9,393,487.77 10.92% 20,453,202.89 20.18% Over 3 years 16,272,339.55 18.91% 14,181,796.55 13.99% Total 86,031,960.95 100.00% 101,342,319.98 100.00% (2) No arrearage from the shareholders holding over 5% (including 5%) of the equity of the Company existed in the balance of accounts collected in advance. 24. Non-current liabilities due within one year (1) Breakdown of non-current liabilities due within one year Items Closing balance Opening balance Long-term loan due within one year 52,183,370.00 99,243,790.00 Total 52,183,370.00 99,243,790.00 (2) Of which: Long-term loan in foreign currency due within one year Items Condition of loan Closing balance Opening balance Loan-USD Credit 33,831,270.00 82,176,750.00 Loan-EURO credit 18,352,100.00 17,067,040.00 Total 52,183,370.00 99,243,790.00 25. Long-term loan 98 Closing balance Opening balance Amount in foreign Amount in foreign Items Exchange Exchange currency (USD, RMB Yuan currency (USD, RMB Yuan rate rate EURO, SF) EURO, SF) Credit loan-USD 36,600,000.00 6.8346 250,146,360.00 30,400,000.00 7.3046 222,059,840.00 Guaranteed 51,000,000.00 loan-RMB Credit loan-EURO 3,000,000.00 9.659 28,977,000.00 4,900,000.00 10.6669 52,267,810.00 Credit loan-SF 3,000,000.00 6.4624 19,387,200.00 3,000,000.00 6.4855 19,456,500.00 Total 298,510,560.00 344,784,150.00 26. Deferred income tax liabilities (1) Breakdown of deferred income tax liabilities Items Closing balance Opening balance Deferred income tax liabilities due to the difference 407,449.26 939,481.73 between book value of assets and tax basis Total 407,449.26 939,481.73 (2) Breakdown of temporary difference Items Closing balance Opening balance Tradable financial assets 6,695,962.74 Accumulative depreciation 2,469,389.45 Total 2,469,389.45 6,695,962.74 27. Share capital (1) Breakdown of share capital Before the change Increase/decrease（+，-） After the change Capitalization Issuance of Number Ratio Bonus of capital Other Sub-total Number Ratio new shares reserve I. Shares subject to 217,695,310 25.77% 15,279 388,820 404,099 218,099,409 21.92% trading moratorium 1. Shares held by the State 2. Share held by state-owned corporation 3. Shares held by other 98,358,000 11.64% 98,358,000 9.89% domestic investors Among which: Shares held by domestic 98,358,000 11.64% 98,358,000 9.89% non-state-owned corporation Shares held by domestic natural persons 4. Shares held by 118,232,400 13.99% 118,232,400 11.88% foreign investors 99 Among which: Shares held by foreign 118,232,400 13.99% 118,232,400 11.88% corporation Shares held by foreign natural persons 5. Shares held by senior 1,104,910 0.13% 15,279 388,820 404,099 1,509,009 0.15% management II. Shares not subject to 627,169,490 74.23% 149,984,721 -388,820 149,595,901 776,765,391 78.08% moratorium 1. RMB ordinary shares 302,855,490 35.84% 149,984,721 -64,000 149,920,721 452,776,211 45.51% 2. Domestically listed 324,314,000 38.39% -324,820 -324,820 323,989,180 32.57% foreign shares 3. Overseas listed foreign shares 4. Others III. Total shares 844,864,800 100.00% 150,000,000 0 150,000,000 994,864,800 100.00% (2) As approved by CSRC with the Reply on Approval of Issuance additional Stock of Lu Thai Textile Co., Ltd. (ZJXK [2008] No. 890), the Company additionally issued RMB common shares (A shares) amounting to 150,000,000 shares at issue price of RMB 6.49 per share on 8 Dec. 2008. the change in shares has been reviewed and verified by the Zhongrui Yuehua Certified Public Accountants Co., Ltd. with the Capital Verification Report (ZRYHY Zi [2008] No. 2251). 28. Capital reserve (1) Breakdown of capital reserve Items Opening balance Increase in 2008 Decrease in 2008 Closing balance Premium on share capital 264,350,374.44 800,814,500.00 1,065,164,874.44 Other 62,970,334.44 504.89 62,970,839.33 Total 327,320,708.88 800,815,004.89 1,128,135,713.77 (2) Closing number of capital reserve has increase by 244.66% compared with the year-begin, which was because the Company issued RMB common shares on 8 Dec. 2008, resulting in premium on share capital of RMB 800,814,500.00. 29. Surplus reserve (1) Breakdown of surplus reserve Items Opening balance Increase in 2008 Decrease in 2008 Closing balance Statutory surplus reserve 278,305,691.49 49,015,271.13 327,320,962.62 Discretionary surplus reserve 3,341,572.58 3,341,572.58 Total 281,647,264.07 49,015,271.13 330,662,535.20 (2) Appropriating statutory surplus reserve at 10% profit after tax. 30. Retained profit (1) Change in retained profit 100 Items 2008 2007 Balance as at 31 Dec. 2007 814,815,210.77 528,880,131.12 Add: change in accounting policies 18,414,589.51 Balance as at 1 Jan. 2008 814,815,210.77 547,294,720.63 Add: consolidated net profit 514,814,583.25 483,723,094.47 Other transfer-in 5,416,531.37 Less: appropriating statutory surplus reserve 49,015,271.13 40,560,821.52 Distribution to shareholders 187,754,304.50 157,060,366.32 Gains and losses of minority shareholders 1,869,905.17 23,997,947.86 Balance as at 31 Dec. 2008 1,090,990,313.22 814,815,210.77 (2) Appropriating statutory surplus reserve at 10% profit after tax. (3) 28 Mar. 2008, the Company published the profit distribution plan 2007: the Company distributed cash dividend of RMB 2.2223 (tax included) for every 10 shares. (4) Appropriating surplus reserve by subsidiaries in 2008 Name of subsidiaries Appropriating in 2008 Amount attributable to parent company Beijing Luthai 245,143.82 147,086.29 Beijing Sichuang 27,245.75 17,028.59 Luthai (Hong Kong) 1,925,255.07 1,925,255.07 Xinjiang Luthai 2,491,308.95 1,420,295.23 Lufeng Weaving & Dyeing 8,383,592.06 6,287,694.05 Luqun Textile 8,362,825.51 8,362,825.51 Total 21,435,371.16 18,160,184.74 31. Operating income and operating cost a) Income from main operation and other operation income Items 2008 2007 Income from main operation 3,713,267,976.09 3,465,350,509.21 Other operating income 208,569,374.73 345,320,773.37 Total operating income 3,921,837,350.82 3,810,671,282.58 Cost of main operation 2,775,082,081.41 2,551,112,582.55 Other operating cost 142,794,186.08 273,893,775.25 Total operating cost 2,917,876,267.49 2,825,006,357.80 (2) Main operation income, main operation cost and main operation profit of segment 2008 Business segment Main operation income Main operation cost Main operation profit Yarn-dyed fabric 2,567,118,497.80 1,935,817,510.17 631,300,987.63 Shirt 1,018,673,011.96 728,945,592.44 289,727,419.52 Cotton 35,623,745.59 30,290,870.88 5,332,874.71 Drugs 17,991,108.96 14,650,545.73 3,340,563.23 Power and steam 45,750,979.49 48,697,342.57 -2,946,363.08 Other 28,110,632.29 16,680,219.62 11,430,412.67 Total 3,713,267,976.09 2,775,082,081.41 938,185,894.68 101 （con.） 2007 Business segment Main operation income Main operation cost Main operation profit Yarn-dyed fabric 2,404,364,279.34 1,780,145,491.06 624,218,788.28 Shirt 861,120,817.48 619,365,977.53 241,754,839.95 Cotton 38,477,561.29 35,111,095.04 3,366,466.25 Drugs 19,736,781.52 15,091,588.94 4,645,192.58 Power and steam 57,636,961.25 50,220,242.99 7,416,718.26 Other 84,014,108.33 51,178,186.99 32,835,921.34 Total 3,465,350,509.21 2,551,112,582.55 914,237,926.66 (3) Item “Other” under the main operation income is revenue from boiled oil, cotton seed, cotton piece goods and cotton dregs sold by Xinjiang Luthai. (4) In 2008, the sales revenue from the top five clients amounted to RMB 1,319,290,468.26, taking up 33.64% of the Company’s total sales revenue. 32. Sales expense Items 2008 2007 Sales expense 123,654,578.28 117,317,505.82 Sales expense for the year 2008 has increase by 5.40% over the year 2007 33. Administrative expense Items 2008 2007 Administrative expense 231,549,384.65 243,005,795.97 Administrative expense for the year 2008 has decrease by 4.71% over the year 2007 34. Financial expense (1) Breakdown of financial expense Items 2008 2007 Interest expenditure 177,805,342.44 129,136,669.80 Less: interest income 5,407,149.27 4,640,548.65 Exchange loss 50,336,506.72 34,029,740.43 Less: Exchange gain 194,120,407.20 59,947,038.27 Service charge 10,490,804.40 11,237,227.16 Total 39,105,097.09 109,816,050.47 (2) Financial expense for the year 2008 has decrease by 64.39% over the year 2007, which was due to increase of exchange gain. 35. Loss on assets impairment (1) Breakdown of assets impairment Items 2008 2007 Loss on bad debts -820,692.97 6,742,108.57 Loss on falling price of inventory 25,761,860.43 12,883,388.20 Loss on impairment of fixed assets 494,171.69 1,446,179.84 Total 25,435,339.15 21,071,676.61 102 36. Gain from change in fair value (1) Breakdown of gain from change in fair value Items 2008 2007 Tradable financial assets -6,695,962.74 6,695,962.74 Tradable financial liabilities -19,175,600.00 Total -25,871,562.74 6,695,962.74 (2) Gain from change in fair value for the year 2008 has decrease by RMB 32,567,525.48 over the year 2007, which was due to change of fair value of tradable financial liabilities. 37. Investment income (1) Breakdown of investment income Items 2008 2007 Income from tradable equity instruments -413,767.16 3,104,510.32 investment Income from derivative financial assets 5,112,500.00 5,494,191.72 Total 4,698,732.84 8,598,702.04 (2) Investment income for the year 2008 has decrease by 45.36% over the year 2007, which was due to increase of loss on tradable equity instruments investment. (3) There exists no major limitation to repatriation of investment income. 38. Non-operating income (1) Breakdown of non-operating income Items 2008 2007 Profit from disposal of non-current assets 5,005,467.09 120,620.25 Of which: Profit from disposal of fixed 5,005,467.09 120,620.25 assets Income from claim for compensation 3,782,736.04 2,939,337.68 Income from penalty 1,085,966.27 1,235,254.21 Government grants 26,417,148.02 2,095,588.47 Other 22,810,547.04 18,468,126.42 Total 59,101,864.46 24,858,927.03 (2) Non-operating income for the year 2008 has increase by 137.75% over the year 2007, which was due to increase of government grants received by the Company. (3) Government grants 2008 2007 Of which: amount Of which: amount Items calculated into profit calculated into Amount Amount and loss of current profit and loss of period current period Financial appropriations 25,972,797.02 25,972,797.02 Financial discount 444,351.00 444,351.00 1,063,400.00 1,063,400.00 Tax revenue return 1,032,188.47 1,032,188.47 Total 26,417,148.02 26,417,148.02 2,095,588.47 2,095,588.47 (4) Explanation on government grants received by the Company in the reporting period: 103 Items 2008 Document Notice of Zibo Municipal Bureau of Finance and Zibo Municipal Subsidies for demonstration Economic and Trade Commission on Appropriating Budget projects of recycle of wastewater 2,000,000.00 Indicators of Special Capital to Promote Transformation of Growth of printing and dyeing Model of Foreign Trade to Textile Industry (ZCQZ [2006] No. 48 document) Notice of Shandong Provincial Department of Finance on Issuing Special fund for key 2,000,000.00 Special Capital for Key Technological Center Construction for the technological center construction Year 2006 (LCJZ [2006] No. 71 document) Circular of Zibo Municipal People's Governments on Commending Reward for national and Rewarding Engineering Research Centers of National 2,000,000.00 technological centers Technological Centers and Provincial Technological Centers in the Whole City for the Year 2007 (ZZZi [2008] No. 31 document) Notice of Shandong Provincial Department of Finance and Fund for agro-light and textile Department of Foreign Trade & Economic Cooperation of industry products trade 1,360,000.00 Shandong Province on Works Related to Check and Acceptance of promotion Trade Promotion Fund for Agro-Light and Textile Industry Products (LWJMFZi [2007] No. 646 document) Fund for energy-saving and Agreement on Energy-saving and Emission-reduction of Gaoqing 12,000,000.00 emission-reduction Economic Development Zone Management Committee Circular of Zibo Municipal People's Governments on Commending Reward for national and Rewarding Engineering Research Centers of National 1,000,000.00 technological centers Technological Centers and Provincial Technological Centers in the Whole City for the Year 2007 (ZZZi [2008] No. 31 document) Circular of the General Office of the People's Government of Zibo Reward for cleaner production 250,000.00 Municipality on Publishing Zibo Municipal “30-Project with Three Energy-saving ” (the First Batch) (ZZBZi [2008] No. 19 document) Notice of the People’s Government of Gaoqing County on Printing Governmental reward fund 4,006,197.02 and Issuing the Administrative Measures of Gaoqing County for Key Economic Park (GZF [2002] No. 28 document) 39. Non-operating expense (1) Breakdown of non-operating expense Items 2008 2007 Loss from disposal of non-current 4,774,678.31 1,763,536.40 assets Of which: Loss from disposal of fixed 4,774,678.31 1,763,536.40 assets Expenditure for penalty 262,572.94 93,086.14 Expenditure for compensation 4,251,269.01 3,110,632.19 Expenditure for donation 445,978.47 2,469,652.63 Other 211,905.46 7,284.82 Total 9,946,404.19 7,444,192.18 (2) Non-operating expense for the year 2008 has increase by 33.61% over the year 2007, which was due to 104 increase of loss from disposal of fixed assets. 40. Income tax expense (1) Composing of income tax expense (income) Items 2008 2007 Income tax expense of the current period 98,565,775.61 56,583,705.41 Deferred income tax expense -4,760,080.97 -15,963,073.04 Total 93,805,694.64 40,620,632.37 (2) Income tax expense for the year 2008 has increase by 130.93% over the year 2007, which was because the tax rate of enterprise income tax is raised to 15% form 12% in 2007, and total profit as of the year 2008 has increase over the year 2007. (3) Relationship between income tax expense (income) and accounting profit Items 2008 2007 Total accounting profit 608,620,277.89 524,343,726.84 Add: adjustment of taxable income 8,947,612.85 -30,877,923.11 Taxable income 617,567,890.74 493,465,803.73 Income tax expense of current period 98,565,775.61 56,583,705.41 Deferred income tax expense -4,760,080.97 -15,963,073.04 Of which: increase or decrease of deferred income tax assets in 2008 (excluding change of owners’ -4,253,218.97 -16,536,074.77 equity calculated directly) Increase or decrease of deferred income tax liabilities in 2008 (excluding change of owners’ -506,862.00 573,001.73 equity calculated directly) Total 93,805,694.64 40,620,632.37 41. Basic earnings per share and diluted earnings per share Items 2008 2007 Basic EPS 0.60 0.54 Diluted EPS 0.60 0.54 Note: Calculation method for earnings per share-basis EPS-basis = net profit attributable to shareholders holding ordinary shares/weighted average amount of ordinary shares issued out Weighted average amount of ordinary shares issued = S0＋S1＋Si×Mi÷M0-Sj×Mj÷M0-Sk Of which: S0 refers to total number of shares at the period-begin; S1 refers to the number of shares increased due to transferring capital reserve into share capital or dividend distribution of shares during the report period; Si refers to the number of shares increased due to issuance of new shares or debt for equity swap during the report period; Sj refers to the number of shares decreased due to stock repurchase during the report period; Sk refers to the number of split-share during the report period; M0 refers to the number of months during the report period; Mi refers to the number of months from the next month to the end of the report period for increase of shares; Mj refers to the number of months from the next month to the end of the report period for decrease of shares. Calculation method for earnings per share-diluted EPS-diluted = [net profit attributable to shareholders holding ordinary shares +(potential diluted interests of ordinary shares recognized as expense－transfer fee)×(1-income tax rate)]/(S0＋S1＋Si×Mi÷M0-Sj×Mj÷M0-Sk + weighted average amount of ordinary shares increased due to warrant, share options、convertible bond) 105 Of which: S0 refers to total number of shares at the period-begin; S1 refers to the number of shares increased due to transferring capital reserve into share capital or dividend distribution of shares during the report period; Si refers to the number of shares increased due to issuance of new shares or debt for equity swap during the report period; Sj refers to the number of shares decreased due to stock repurchase during the report period; Sk refers to the number of split-share during the report period; M0 refers to the number of months during the report period; Mi refers to the number of months from the next month to the end of the report period for increase of shares; Mj refers to the number of months from the next month to the end of the report period for decrease of shares. 42. Other cash received related with operating activities The bigger amount in other cash received related with operating activities: Items 2008 2007 Claim income 3,782,736.04 1,587,162.13 Custom’s deposit returned 3,735,028.81 Collection of employee’s payment 11,746,075.97 1,222,136.64 Income from penalty 1,085,966.27 60,230.00 Rewards for Chinese famous brand 665,000.00 1,600,000.00 Encouragement from local government 26,417,148.02 9,847,650.00 Taking back employee’s borrowing and 6,012,878.53 13,947,215.96 reserve Quota fee received 2,875,947.13 3,282,482.11 Additional A shares issuing expenses 1,590,000.00 Total 54,175,751.96 35,281,905.65 43. Other cash paid related with operating activities: The bigger amount in other cash received related with operating activities: Items 2008 2007 freight and miscellaneous charges 34,142,512.88 28,201,305.46 Bank discount service charges 2,812,843.35 3,934,574.37 advertising expenses 919,517.80 Fees for business trip and office 2,627,971.24 2,109,075.52 Disclosure fees for auditing 1,830,662.48 2,236,117.67 consulting Sales commission 1,285,482.41 2,937,452.45 Fee for R&D 339,896.04 256,542.91 Custom’s deposit paid 2,124,988.00 5,878,236.12 Insurance premium 6,898,064.86 1,788,324.39 inspection fee 3,270,031.00 2,373,583.00 charge for water and power 104,225.33 fixture and fitting fare 4,509,877.85 lease fees 3,821,729.60 Compensation for disaster cotton 2,296,964.00 fields Total 65,961,023.71 50,738,955.02 106 44. Other cash received related with investing activities The bigger amount in other cash received related with investing activities Items 2008 2007 Interest income 5,407,149.27 2,934,513.77 Investment income from 5,112,500.00 tradable financial assets Total 10,519,649.27 2,934,513.77 45. Supplementary information to consolidated cash flow statement 1) Adjusting net profit into cash flow arising from operating activities Items 2008 2007 1. Adjusting net profit into cash flow arising from operating activities Net profit 514,814,583.25 483,723,094.47 Plus: Provision for assets impairment 25,435,339.15 21,071,676.61 Depreciation of fixed assets 327,944,009.89 276,386,340.67 Amortization of intangible assets 10,214,000.95 6,273,949.55 Amortization of long-term deferred expense Loss on disposal of fixed assets, intangible assets -5,005,467.09 1,177,901.61 and other long-term assets (income is listed as “-”) Loss on retirement of fixed assets (income is 4,774,678.31 465,014.54 listed as “-”) Losses on change in fair value （income is listed 25,871,562.74 -6,695,962.74 as “-”） Financial expense（income is listed as “-”） 12,077,809.77 104,679,301.44 Investment losses（income is listed as “-”） -4,698,732.84 -8,598,702.04 Decrease in deferred income tax assets（increase -4,253,218.97 -16,536,074.77 is listed as “-”） Increase in deferred income tax liabilities -506,862.00 573,001.73 （decrease is listed as “-”） Decrease of inventories (increase is listed as “-”) -399,077,579.13 -165,139,218.79 Decrease in operating receivables (increase is 331,001,365.89 -28,866,842.12 listed as “-”) Increase in operating payables (decrease is listed -56,595,543.18 -173,386,872.13 as “-”) Other Net cash flows arising from operating activities 781,995,946.74 495,126,608.03 2. Net increase in cash and cash equivalents: Closing balance of cash 1,141,056,407.10 330,766,143.96 107 Items 2008 2007 Less: Opening balance of cash 330,766,143.96 324,339,162.29 Add: closing balance of cash equivalents Less: Opening balance of cash equivalents Net increase in cash and cash equivalents 810,290,263.14 6,426,981.67 2) Cash and cash equivalents Items 2008 2007 1. Cash 1,141,056,407.10 330,766,143.96 Of which: Cash in hand 1,647,229.94 1,791,426.84 Callable bank deposit 1,088,511,252.30 328,974,717.12 Callable other monetary 50,897,924.86 2. Cash equivalents Of which: bond investment due within three months 3. Balance of cash and cash equivalents as at 31 Dec. 1,141,056,407.10 330,766,143.96 2008 Of which: restricted cash and cash equivalent used by parent company or subsidiaries under the Group VIII. Notes to the parent company 1. Accounts receivable (1) Breakdown of accounts receivable listed by category Closing balance Proportion of Withdrawal Items Provision for Carrying balance total accounts Carrying value proportion bad debts receivable of bad debt Significant single amount 77,173,554.17 53.24% 3,858,677.71 73,314,876.46 5% Insignificant 67,778,496.39 46.76% 3,388,924.82 64,389,571.57 5% single amount Total 144,952,050.56 100.00% 7,247,602.53 137,704,448.03 （Con.） Opening balance Proportion of Withdrawal Items Provision for Carrying balance total accounts Carrying value proportion bad debts receivable of bad debt Significant single amount 5,126,866.66 4.26% 256,343.00 4,870,523.66 5% Insignificant 115,113,359.02 95.74% 5,755,668.00 109,357,691.02 5% single amount Total 120,240,225.68 100.00% 6,012,011.00 114,228,214.68 108 Accounts receivable with significant single amount refer to accounts receivable that the Closing balance is over RMB 5 million. (2) Breakdown of accounts receivable listed by aging Closing balance Opening balance Proportion Proportion Aging of total Provision for of total Provision for Book balance Book balance accounts bad debts accounts bad debts receivable receivable Within 1 year 144,952,050.56 100.00% 7,247,602.53 120,240,225.68 100.00% 6,012,011.00 Total 144,952,050.56 100.00% 7,247,602.53 120,240,225.68 100.00% 6,012,011.00 (3) The top five units in the Closing balance of accounts receivable Proportion of total Debtors Amount Term in arrearage accounts receivable OXFORD 23,991,502.05 16.55% Within 1 year Beijing Sichuang 21,985,675.86 15.17% Within 1 year TAL 14,966,751.00 10.32% Within 1 year Chenfeng Group Co., Ltd. 10,493,446.03 7.24% Within 1 year QINGDAO NEW STAR-TEX 5,736,179.23 3.96% Within 1 year Total 77,173,554.17 53.24% (4) No arrearage from the shareholders holding over 5% (including 5%) of the equity of the Company existed in the balance of accounts receivable. 2. Other receivable (1) Breakdown of other receivable listed by category Closing balance Proportion of Withdrawal Items Provision for Carrying balance total other Carrying value proportion bad debts receivables of bad debt Significant single amount 46,538,501.01 74.15% 4,169,950.28 42,368,550.73 5%-20% Insignificant single amount 16,223,991.04 25.85% 1,439,515.55 14,784,475.49 5%-30% Total 62,762,492.05 100.00% 5,609,465.83 57,153,026.22 （Con.） Opening balance Proportion of Withdrawal Items Provision for Carrying balance total other Carrying value proportion bad debts receivables of bad debt Significant single amount 34,157,000.00 45.53% 2,641,850.00 31,515,150.00 5%-10% Insignificant single amount 40,871,230.59 54.47% 3,756,777.00 37,114,453.59 5%-30% Total 75,028,230.59 100.00% 6,398,627.00 68,629,603.59 109 Other receivables with significant single amount refer to other receivables that the Closing balance is over RMB 5 million. (2) Breakdown of other receivables listed by aging Closing balance Opening balance Proportion Proportion Aging of total Provision for of total Provision for Book balance Book balance other bad debts other bad debts receivables receivables Within 1 year 38,792,887.95 61.81% 1,939,644.40 32,551,459.61 43.38% 1,627,573.00 1–2 years 12,190,751.64 19.43% 1,219,075.16 38,338,125.47 51.10% 3,833,813.00 2 -3years 10,829,094.66 17.25% 2,165,818.93 3,043,529.80 4.06% 608,706.00 Over 3 years 949,757.80 1.51% 284,927.34 1,095,115.71 1.46% 328,535.00 Total 62,762,492.05 100.00% 5,609,465.83 75,028,230.59 100.00% 6,398,627.00 (3) The top five units in the Closing balance of other receivables Proportion of Debtors Amount total accounts Term in arrearage receivable Luthai Huanzhong 24,239,746.95 38.62% 1-3 years Export rebates receivable 22,298,754.06 35.53% Within 1 year Zibo Customs 1,456,574.54 2.32% Within 1 year Advance reserve funds for business to 356,709.39 0.57% 2-3 years international business department. Zibo Power Bureau 306,311.56 0.49% 2-3 years, over 3 years 48,658,096.50 77.53% (4) Breakdown of other receivables with the larger amount Proportion of Debtors Amount total other Nature of money receivables Luthai Huanzhong 24,239,746.95 38.62% Come-and-go payment Export rebates receivable 22,298,754.06 35.53% Export rebates VAT Total 46,538,501.01 74.15% (5) No arrearage from the shareholders holding over 5% (including 5%) of the equity of the Company existed in the balance of other receivable. 3. Long-term equity investment (1) Breakdown of long-term equity investment Items Opening balance Increase in 2008 Decrease in 2008 Closing balance Investment in subsidiaries 740,477,933.96 100,000,000.00 840,477,933.96 Investment in joint venture enterprises Investment in affiliated enterprises Total 740,477,933.96 100,000,000.00 840,477,933.96 110 (2) Long-term equity investment measured at cost method Name of invested Initial investment Opening Decrease in Increase in 2008 Closing balance entities amount balance 2008 Beijing Luthai 3,360,000.00 3,360,000.00 3,360,000.00 Beijing Sichuang 9,934,085.00 9,934,085.00 9,934,085.00 Xinjiang Luthai 48,071,961.03 48,071,961.03 48,071,961.03 Xinsheng Power 176,340,737.93 76,340,737.93 100,000,000.00 176,340,737.93 Lufeng Weaving & 364,620,000.00 364,620,000.00 364,620,000.00 Dyeing Luqun Textile 171,784,550.00 171,784,550.00 171,784,550.00 Luthai Huanzhong 60,000,000.00 60,000,000.00 60,000,000.00 Luthai Hong Kong 6,366,600.00 6,366,600.00 6,366,600.00 Total 840,477,933.96 740,477,933.96 100,000,000.00 840,477,933.96 (3) Ended 31 Dec. 2008, there was no situation that carrying value of the long-term equity investment is higher than its recoverable amount. 4. Operating income and operating cost (1) Income from main operation and other operation income Items 2008 2007 Income from main operation 3,056,990,890.08 2,825,277,316.88 Other operating income 217,326,305.79 298,312,904.32 Total operating income 3,274,317,195.87 3,123,590,221.20 Cost of main operation 2,350,648,192.28 2,138,951,143.41 Other operating cost 183,028,395.58 262,847,050.72 Total operating cost 2,533,676,587.86 2,401,798,194.13 (2) Main operation income, main operation cost and main operation profit of segment 2008 Business segment Main operation income Main operation cost Main operation profit Yarn-dyed fabric 2,229,548,931.89 1,730,686,565.07 498,862,366.82 Shirt 827,441,958.19 619,961,627.21 207,480,330.98 Total 3,056,990,890.08 2,350,648,192.28 706,342,697.80 （Con.） 2007 Business segment Main operation income Main operation cost Main operation profit Yarn-dyed fabric 2,102,945,273.96 1,596,277,123.86 506,668,150.10 Shirt 722,332,042.92 542,674,019.55 179,658,023.37 Total 2,825,277,316.88 2,138,951,143.41 686,326,173.47 (3) In 2008, the sales revenue from the top five clients amounted to RMB 1,117,839,955.92, taking up 34.14% of the Company’s total sales revenue. 5. Investment income (1) Breakdown of investment income 111 Name of invested unit 2008 2007 Income from derivative financial assets 5,494,191.72 Beijing Sichuang 552,121.45 Total 552,121.45 5,494,191.72 (2) Investment income for the year 2008 has decrease by 89.95% over the year 2007, which was due to decrease of investment income of derivative financial assets. (3) There exists no major limitation to repatriation of investment income. 6. Breakdown of assets impairment Decrease in 2008 Opening Withdrawal in Closing Items Switching balance 2008 Writing off Total balance back I. Total provision for bad debts 12,410,638.00 1,235,591.53 729,159.10 60,002.07 789,161.17 12,857,068.36 Of which: accounts receivable 6,012,011.00 1,235,591.53 7,247,602.53 Other receivables 6,398,627.00 729,159.10 60,002.07 789,161.17 5,609,465.83 II. Total of provision for falling price 32,267,692.14 3,033,384.76 35,301,076.90 of inventory Of which: Goods in stock 29,297,173.35 3,033,384.76 32,330,558.11 Raw materials Goods in process 2,970,518.79 2,970,518.79 III. Total of provision for impairment 11,957,036.30 494,171.69 6,221,489.83 6,221,489.83 6,229,718.16 of fixed assets Of which: House and building Machinery equipment 11,776,861.34 494,171.69 6,151,115.41 6,151,115.41 6,119,917.62 Transportation vehicles 167,185.92 60,094.42 60,094.42 107,091.50 Electronic equipment and 12,989.04 10,280.00 10,280.00 2,709.04 other Total 56,635,366.44 4,763,147.98 729,159.10 6,281,491.90 7,010,651.00 54,387,863.42 7. Supplementary information to consolidated cash flow statement (1) Adjusting net profit into cash flow arising from operating activities Items 2008 2007 1. Adjusting net profit into cash flow arising from operating activities Net profit 490,152,711.26 405,608,215.24 Plus: Provision for assets impairment 4,033,988.88 12,069,986.09 Depreciation of fixed assets 182,077,272.23 162,132,771.92 Amortization of intangible assets 6,858,739.81 2,904,491.68 Amortization of long-term deferred expense Loss on disposal of fixed assets, intangible assets and -4,876,795.57 -7,794,782.74 other long-term assets (income is listed as “-”) Loss on retirement of fixed assets (income is listed as 3,602,526.06 “-”) 112 Items 2008 2007 Losses on change in fair value （income is listed as “-”） 5,840,400.00 Financial expense（income is listed as “-”） -27,429,900.51 52,911,959.15 Investment losses（income is listed as “-”） -552,121.45 -5,494,191.72 Decrease in deferred income tax assets（increase is listed 5,293,898.51 -8,536,569.09 as “-”） Increase in deferred income tax liabilities（decrease is -366,480.00 listed as “-”） Decrease of inventories (increase is listed as “-”) -338,345,874.34 -184,513,551.44 Decrease in operating receivables (increase is listed as 155,496,625.71 -171,094,835.27 “-”) Increase in operating payables (decrease is listed as “-”) 279,864,957.74 215,006,791.43 Other Net cash flows arising from operating activities 762,016,428.33 472,833,805.25 2. Net increase in cash and cash equivalents: Closing balance of cash 884,493,526.89 177,334,931.66 Less: Opening balance of cash 177,334,931.66 210,182,921.71 Add: closing balance of cash equivalents Less: Opening balance of cash equivalents Net increase in cash and cash equivalents 707,158,595.23 -32,847,990.05 (2) Cash and cash equivalents Items 2008 2007 1. Cash 884,493,526.89 177,334,931.66 Of which: Cash in hand 1,026,779.98 1,317,017.69 Callable bank deposit 868,352,961.87 176,017,913.97 Callable other monetary 15,113,785.04 2. Cash equivalents Of which: bond investment due within three months 3. Balance of cash and cash equivalents as at 31 Dec. 2008 884,493,526.89 177,334,931.66 IX. Relationship of related parties and their related transactions (I) Relationship of related parties 1. Recognized standard of related party When a party controls, jointly controls or exercises significant influence over another party, or when two or more parties are under the control, joint control or significant influence of the same party, the affiliated party relationships are constituted. 2. Parent company of the Company Proportion of Proportion of Registered Registered Name Code Nature of business share of the voting right to address capital Company held the Company Investment of textile, Lucheng Textile 16420039-1 Zibo RMB 63260000 12.4% 12.4% power and pharmacy 113 The actual controller: Mr. Liu Shizhen is the principal shareholder of Lucheng Textile, as well as the actual controller of the Company. 3. Subsidiaries of the Company For information related to subsidiaries of the Company, please see Note VI. 2. (1). 4. Related parties without controlling relationship Relationship with the Name of related parties Organization Code Company Shareholding subsidiary Zibo Stanluian Cosmetics Co., Ltd. 61329036-2 controlled by Parent (hereinafter called “Stanluian”) company Shareholding subsidiary Zibo Taimei Ties Co., Ltd. (hereinafter 61329035-4 controlled by Parent called Taimei Ties) company Shareholding subsidiary Zibo Limin Purified Water Co., Ltd. 76575998-3 controlled by Parent (hereinafter called Limin Purified Water) company Shareholding subsidiary Zibo Luqun Land Co., Ltd (hereinafter 77630667-2 controlled by Parent Luqun Land) company (II) Pricing policy 1. Related transactions of purchasing commodity and receiving labor service, as well as related transactions of selling commodity and providing labor service are priced at the market price. 2. Related transactions of selling equities and purchasing equities are priced at the appraisal value of equity. 3. As for related transaction of proving capital, its transaction price of interest payment is recognized according to the benchmark interest rate of bank loans for the same term. (III) Related transaction 1. Purchasing goods commodity 2008 2007 Related Proportion of the Proportion of the Related party transaction Amount same transaction Amount same transaction amount (%) amount (%) Purchasing Lucheng Textile 2,979,846.88 0.37% 2,261,955.09 0.52% cotton Purchasing Lucheng Textile towel, oil and 2,423,091.06 100.00% 1,459,184.10 100.00% socks Purchasing Stanluian Company cleanser 1,077,914.02 100.00% 758,555.91 100.00% essence Total 6,480,851.96 4,479,695.10 2. Receiving labor service 114 2008 2007 Proportion of Related Proportion of the Related party the same transaction Amount same transaction Amount transaction amount (%) amount (%) Processing charges for Lucheng Textile 44,448.80 0.02% 9,660.73 8.10% socking and embroidery Processing Taimei Ties charges for 676,249.45 0.37% 939,063.43 2.19% commodity Sewage Limin Purified Water 4,859,791.15 100.00% 4,935,054.86 100.00% disposal Total 5,580,489.40 5,883,779.02 3. Related transaction for selling goods 2008 2007 Proportion of Proportion of Related Related party the same the same transaction Amount Amount transaction transaction amount (%) amount (%) Sales of Lucheng Textile material, 193,632.21 0.59% 445,037.40 2.19% power and gas Sales of colored yarn, Lucheng Textile 308,280.58 0.01% fabrics and garment Sales of Taimei Ties material, 11,148.05 0.05% 11,218.32 0.11% power and gas Sales of Stanluian Company material and 9,027.02 0.03% 7,551.04 0.08% gas Sales of Limin Purified Water material and 181,609.76 0.02% 68,541.65 0.45% garment Sales of Luqun Land material, 58,140.83 0.29% power and gas Total 761,838.45 532,348.41 4. Other significant related transaction 115 2008 2007 Proportion of Proportion of Related Related party the same the same transaction Amount Amount transaction transaction amount (%) amount (%) Lease of Land Lucheng Textile (lessor) 3,823,814.62 100.00% 3,779,658.14 100.00% and house Lease of Lucheng Textile (lessor) 4,155,036.48 100.00% 4,155,036.48 100.00% equipment Lucheng Textile（leaseholder） house rent 76,818.00 100.00% Leasing of Luqun Land (lessor) 739,840.80 100.00% venue Total 8,795,509.90 7,934,694.62 5. Compensation of key management personnel 2008 2007 Items Number of Number of Amount Amount person person Below RMB 100000 7 436,060.00 9 543,230.61 RMB 100000-RMB 200000 2 386,186.05 4 781,987.13 RMB 200000-RMB 300000 13 2,896,431.97 10 2,245,319.42 RMB 300000-RMB 400000 1 330,045.00 RMB 400000-RMB 500000 2 966,663.60 5 2,240,360.46 RMB 500000-RMB 600000 3 1,619,829.40 Over 1 million 2 7,165,295.01 2 5,460,527.67 Total 30 13,800,511.03 30 11,271,425.29 6. Balance of account receivable and payable of related party Guarantee Clause and Items Closing balance Opening balance obtained condition (Yes or No) Other payables Lucheng Textile 1,319,646.60 Credit No Total 1,319,646.60 7. Major associated contracts and agreements Major associated agreements signed between the Company and each related party for the year 2008 as below: (1) The Agreement on Disposing Production Waste of Lu Thai Textile Co., Ltd. by Zibo Limin Purified Water Co., Ltd. was signed between the Company and Limin Purified Water, in which Limin Purified Water expects to dispose effluent sewage of 4.95 million tons for the Company in 2008. Limin Purified Water collects the charges for sewage treatment in line with the Pricing Standards for Sewage Treatment of the State, namely, RMB 1 Yuan/ton. It is estimated that the Company pays the charges for sewage treatment of RMB 4.95 million to Limin Purified Water. (2) The Agreement on Leasing Some Production Equipments of Zibo Lucheng Textile Investment Co., Ltd. by 116 Zibo Luqun Textile Co., Ltd. was signed between Luqun Textile and Lucheng Textile, both wholly-owned subsidiaries of the Company, in which Luqun Textile hires the 27-set idle textile equipments such as full automaticity roller grinding machine of Lucheng Textile with the rent of RMB 346,253.04 per month and leasing period from 1 Jan. 2008 to 31 Dec. 2008. Within leasing period, Luqun paid RMB 4,155,036.48 to Lucheng Textile in total as lease rentals. (3) The Asset Lease Agreement was signed between the Company and Lucheng Textile, in which the Company hires a gas station of Lucheng Textile, including land of 8.7 mu, house and building, oiling machine, office equipment and oil storage tank, with the leasing period from 1 Aug. 2008 to 31 Dec. 2013. Within leasing period, the total rent is RMB 2,613,845. (4) The Asset Lease Agreement was signed between the Company and Lucheng Textile, in which the Company hires land of 6 mu and house for Business of 2900 M2, with the leasing period from 1 Jan. 2008 to 31 Dec. 2013. Within leasing period, the total rent is RMB 2,420,640. (5) The Contract on Purchase and Sales of Cotton was signed between the Company and Lucheng Textile, in which the Company intends to purchase 300-ton lint cotton from Lucheng Textile worth of RMB 3.6 million. (6) The Rental Agreement of Houses was signed between the Company and Lucheng Textile, in which Lucheng Textile hires the house of 2065 M2 of the Company from 1 Jul. 2008 to 31 Dec. 2013. Within leasing period, the total rent is RMB 844,998. (7) The Rental Agreement of Venue was signed between the Company and Luqun Land, in which the Company hires place of 11,000 M2 of Luqun Land from 1 Jan. 2008 to 31 Dec. 2008. 13. Within leasing period, the total rent is RMB 567,600. The above-mentioned agreements of related transactions has been examined and approved at the 13th meeting of the 5th Board of Directors held on 27 Feb. 2008 and at the 25th meeting of the 5th Board of Directors held on 26 Oct. 2008. X. Contingent Events 1. As at 31 Dec. 2008, credit guarantees that the Company provides the joint responsibility for the loan obtained by its shareholding subsidiaries are as follows: Occurred Guarantee Beginning Maturity amount of balance Date of Guaranteed party date of date of Type of guarantee guarantee (RMB’ guarantee guarantee guarantee (RMB’0000) 0000) Lufeng Weaving & Dyeing 3,000 3,000 2008.10.17 2008.10.17 2009.10.16 Short-term guarantee loan Lufeng Weaving & Dyeing 1,500 1,500 2008.3.14 2008.3.14 2009.3.13 Short-term guarantee loan Lufeng Weaving & Dyeing 1,500 1,500 2008.3.18 2008.3.18 2009.3.14 Short-term guarantee loan Lufeng Weaving & Dyeing 2,500 2,500 2008.6.29 2008.6.29 2009.6.28 Short-term guarantee loan Lufeng Weaving & Dyeing 1,000 1,000 2008.9.4 2008.9.4 2009.7.3 Short-term guarantee loan Subtotal of short-term 9,500 9,500 guarantee loan 2. As at 31 Dec. 2008, matters that of shareholding subsidiaries of the Company makes mortgage by physical assets for bank loan. 117 Accumulative depreciation Obtaining Mortgage Article Original value of Net value of or loan Loan term units deposited assets assets accumulative (RMB’0000) amortization Xinjiang Land 12,826,051.90 2,358,684.09 10,467,367.81 3,500.00 2008.9.28-2009.9.27 Luthai Machinery Xinjiang equipment 70,088,707.85 20,011,775.32 50,076,932.53 9,670.00 2008.10.15-2009.8.13 Luthai and Land Xinjiang Inventories 123,950,000.00 123,950,000.00 7,000.00 2008.12.25-2009.10.24 Luthai Xinjiang Inventories 78,625,400.00 78,625,400.00 4,600.00 2008.12.12-2009.12.11 Luthai Total 285,490,159.75 22,370,459.41 263,119,700.34 24,770.00 3. As at 31 Dec. 2008, credit guarantees that the Company provides the joint responsibility for the letter of credit obtained by shareholding subsidiaries are as follows: Beginning Maturity Guarantee Guarantee Date of Type of Guaranteed party date of date of amount balance guarantee guarantee guarantee guarantee Lufeng Weaving & Dyeing SF 408000 SF 20400 2008.6.20 2008.6.20 2009.3.2 Guarantee L/C Lufeng Weaving & Dyeing SF 563600 SF 241930 2008.9.22 2008.9.22 2009.7.15 Guarantee L/C Lufeng Weaving & Dyeing EURO 555500 EURO 555500 2008.9.16 2008.9.16 2009.1.15 Guarantee L/C XI. Commitment Events As at 31 Dec. 2008, significant contracts that are signed by the Company but failed to implement are as follows: Contract amount Item (RMB’0000) Fundamental construction project of 50 million-meter yarn-dyed fabric 988 Purchase of bleaching and dyeing and weaving equipment 622 Extension project of machine I of stove II in Xinsheng Power 345 Desulfurization project of Xinsheng Power 648 Total 2,603 XII. Events after balance sheet date (1) At the 27th meeting of the 5th Board of Directors held on 11 Jan. 2009, the proposal on the Company providing the joint liability guarantee of maximum amount for line of credit of floating capital loan of RMB 120 million applied by its shareholding subsidiary company, Lufeng Weaving & Dyeing, from Zichuan District Sub-branch of Zibo, Agricultural Bank of China. The guaranty term is from 1 Jan. 2009 to 31 Dec. 2009. (2) Luthai Textile Co., Ltd. passed the profit distribution preplan 2008 at the 29th Meeting of the 5th Board of Directors: based on net profit for the year 2008 after audit, after appropriating 10% of net profit as statutory 118 surplus reserve, the Company shall distribute cash dividend of RMB 2.00 (tax included) for every 10 shares based on the total share capital of 994,864,800 shares as at 31 Dec. 2008. After distribution, cash dividend of RMB 198,972,960.00 shall be distributed. The aforesaid profit distribution plan shall be implemented after submitting to the Shareholders’ General Meeting 2008 for approval. 119 Supplemental Information I. Extraordinary gains and losses 1. In accordance with the provisions of Explanatory Notice for Information Disclosure by Companies Offering Securities to the Public No. 1— Extraordinary Gains and Losses (2008) promulgated by CSRC, the amount of extraordinary gains and losses occurred in 2008 as below: Unit: RMB Items 2008 2007 Gains and losses on disposal of non-current assets, including partial write-offs 230,788.78 -1,642,916.15 of the provision for assets impairment withdrawn Tax revenue return and tax deduction and exemption by examination and approval beyond the authorities, or without official approval document, or with sporadic Government grant included into the profits and losses of the current period, excluding those government grants closely related to the Company’s business 26,417,148.02 2,095,588.47 that the Company enjoyed continually at the certain standard rating and in conformity with provisions of policies of the State Fees for possession of funds received from non-financing enterprises recorded into the profits and losses of the current period Income from investment cost that the Company acquires subsidiaries, affiliated enterprises and joint venture enterprises less than a share in the fair value of net identifiable assets of invested units when obtaining investment Gains and losses from exchange of non-monetary assets Gains and losses from entrusted investment and assets management Provision for impairment of each asset withdrawn due to force majeure such as natural disaster Gains and losses from debts restructuring Cost of enterprise restructuring, such as expenditure for settling employees and integration Gains and losses arising from the amount of transactions with obviously unfair price exceeding the fair value Net gains and losses of the current period of subsidiaries formed due to the business combination under the same control from the beginning period to combination date Gains and losses arising from contingencies nonrelated to normal operation business Gains and losses on change in fair value of tradable financial asses and tradable financial liabilities except for effective hedging business related with normal operation and business of the Company, and investment income from -21,172,829.90 15,294,664.78 disposal of tradable financial asses and tradable financial liabilities and available-for-sale financial assets Switching back of provision for impairment of accounts receivable that separate impairment test is made Gains and losses from external entrusted loans 120 Gains and losses from change in fair value of investment properties that the subsequent measurement is made by employing fair value model Influence on profits and losses of the current period after one-time adjustment to the profits and losses of the current period in accordance with the requirement of laws and regulations related with tax and accounting Income from trustee fees Other non-operating income and expense 22,507,523.47 16,962,062.53 Other items being in conformity with the definition of extraordinary gains and losses Subtotal 27,982,630.37 32,709,399.63 Less: Impact on income tax 10,388,048.63 5,639,576.35 Net amount of extraordinary gains and losses 17,594,581.74 27,069,823.28 Net amount of extraordinary Gains and Losses attributable to minority -3,000,093.51 2,058,641.15 shareholders Net amount of extraordinary Gains and Losses attributable to common 20,594,675.25 25,011,182.13 shareholders of the Company Net profit attributable to common shareholders of the Company after 492,350,002.83 434,713,964.48 deducting extraordinary gains and losses Influence on net profit for net amount of extraordinary gains and losses 3.42% 5.60% Note: Date mentioned above table, “+” shows profit or income, “-” shows loss or expenditure 2. In accordance with the provisions of Explanatory Notice for Information Disclosure by Companies Offering Securities to the Public No. 1— Extraordinary Gains and Losses (2008) promulgated by CSRC, the Company makes the retroactive adjustment to the extraordinary gains and losses for the year 2007: Unit: RMB Amount for the Retroactive Amount for the year Items year 2007 adjustment after adjustment Gains and losses on disposal of non-current assets, including partial write-offs of the provision for assets -1,642,916.15 -1,642,916.15 impairment withdrawn Government grant included into the profits and losses of the current period, excluding those government grants closely related to the Company’s business that the 2,095,588.47 2,095,588.47 Company enjoyed continually at the certain standard rating and in conformity with provisions of policies of the State Gains and losses on change in fair value of tradable financial asses and tradable financial liabilities except for effective hedging business related with normal operation 15,294,664.78 15,294,664.78 and business of the Company, and investment income from disposal of tradable financial asses and tradable financial liabilities and available-for-sale financial assets Other non-operating income and expense 16,962,062.53 16,962,062.53 Subtotal 17,414,734.85 15,294,664.78 32,709,399.63 121 Less: Impact on income tax 4,436,984.04 1,202,592.31 5,639,576.35 Net amount of extraordinary gains and losses 12,977,750.81 14,092,072.47 27,069,823.28 Net amount of extraordinary Gains and Losses 1,002,678.65 1,055,962.50 2,058,641.15 attributable to minority shareholders Net amount of extraordinary Gains and Losses 11,975,072.16 13,036,109.97 25,011,182.13 attributable to common shareholders of the Company Net profit attributable to common shareholders of the 447,750,074.45 434,713,964.48 Company after deducting extraordinary gains and losses Proportion of influence on net profit for net amount of 2.68% 5.60% extraordinary gains and losses Note: Date mentioned above table, “+” shows profit or income, “-” shows loss or expenditure II. The relevant financial indexes In accordance with the requirements of the Compilation Rules for Information Disclosure by Companies Offering Securities to the Public No. 9----Calculation and Disclosure of Return on Equity and Earnings Per Share promulgated by CSRC, the return on equity and earnings per share for the year 2008 calculated by the Company as below: Return on equity Earnings per share (RMB/share) Profit as of reporting period Reporting period Fully diluted Weighted average Basic EPS Diluted EPS Net profit attributable to 2008 14.48% 20.80% 0.60 0.60 common shareholders of the Company 2007 20.29% 21.71% 0.54 0.54 Net profit attributable to 2008 13.90% 19.97% 0.58 0.58 common shareholders of the After adjustment in 2007 19.18% 20.53% 0.51 0.51 Company after deducting non-recurring gains and losses Before adjustment in 2007 19.76% 21.14% 0.53 0.53 III. Difference in net assets and net profit under IAS and PRC GAAP Unit: RMB’000 Net assets Net profit Items 31 Dec. 2008 31 Dec. 2007 2008 2007 Data under PRC GAAP 3,780,990 2,504,822 514,815 483,723 Increase of fixed assets arising from translating the USD statements into RMB statements in 1996 not -3,230 -3,230 recognized under IFRSs Switching back of evaluation increment of Luqun, -6,800 -7,331 531 531 which recognized as effect of current period Tax deduction due to the domestically-manufactured equipment purchased by the parent company -15,254 -13,360 1,718 -1,894 recognized as deferred income Data under IAS 3,755,706 2,480,901 517,064 482,360 122 SECTION XII. DOCUMENTS AVAILABLE FOR REFERENCE 1. Accounting statements carried with personal signatures and seals of legal representative, Chief Financial Officer and Financial Principal. 2. Original of Auditors’ Report carried with the seal of Certified Public Accountants as well as personal signatures of certified public accountants. 3. Originals of all documents and manuscripts of Public Notices of the Company disclosed publicly on Securities Times, Shanghai Securities News and Ta Kung Pao. Board of Directors of Lu Thai Textile Co., Ltd. 15 Apr. 2009 Chairman of the Board: ------------------ 123