张裕Ｂ(200869)2008年年度报告（英文版）

YANTAI CHANGYU PIONEER WINE COMPANY LIMITED 2008 Annual Report 2009.04.10 Content I. IMPORTANT……………………………………………………………………………… 4 II. KEY COMPANY DATA OF RECORD …………………..……………………..…. .. 5 III. SUMMARY OF ACCOUNTING AND FINANCIAL INFORMATION…….…… 6 1. Summary of Financial Information for the Report Period……………………........ ……………. 6 Differences and Explanation in Net Profit and Net Asset under the PRC Accounting Standards 2. 6 and International Accounting Standards…………………………………………………………. Principal Accounting and Financial Information for the Preceding Three Years of the Report 3. 6 Period…………………………………………………………….……..……..…………………. IV. CHANGES IN SHARE CAPITAL AND SHAREHOLDERS ………………...... . 7 1. Changes in Share Capital………………………………………………………………………… 7 2 Changes in Limited Shares………………………………………………………………………… 7 3. Information about Issuing and Listing of Stocks………………………………………. ……… 7 4. Shareholders Introduction………………. ……………………………………………………… 8 V. DIRECTORS, SUPERVISORS, SENIOR MANAGEMENT AND STAFF….. … 10 1. The Basic Information of Directors, Supervisors and Senior Management……………………… 10 Principal Working Experiences of Incumbent Directors, Supervisors and Senior 2. 12 Managers………………………………………………………………………………………… 3. Change of Directors, Supervisors and Senior Management …………………………………… 13 4. Staff of the Company………………………………………………….........................……. …. 14 VI. CORPORATE GOVERNANCE STRUCTURE…………………..…….……..…. …. 14 1. Current Corporate Governance Situation of the Company …….……….......... …….………....... 14 2. The Duty Performance of the Independent Directors……………………..……….. ……..……… 14 Information for Personnel, Assets, Finance, Department and Business Associated with Holding 3. 15 Shareholders……………………………………………..……..….. ………………..……..…. ... 4 Formulation and Improvement of Internal Control Rules..……..….. ………………..……..…. . 15 5. Performance Evaluation and Incentives to Senior Management…………………. ……………… 15 VII. BRIEF SUMMARY OF THE SHAREHOLDERS’ MEETING………….….….. … 16 VIII BOARD OF DIRECTIORS’ REPORT……………….…………………………….. .. 16 1. Discussion and Analysis of Management Team……………………………………………. …… 16 2. Investment of the Company……………………………………………………………………… 21 3. Audits and Changes of Accounting Policies……………………………………………………… 22 4. Information of the Routine Work of Board of Directors………………………………. ………… 22 5. Preliminary Plan for Profit Distribution…………………………………………………………… 24 6. Other Disclosed Information……………………………………………………………………… 25 IX. BOARD OF SUPERVISORS’ REPORT……………………..………….………….. 25 2 1. Meetings of the Board of Supervisors………………………….………………………………. … 25 2. Independent Comments of the Board of Supervisors for Relative Issues in 2008………………. 25 X. MATERIAL EVENTS…………………………………………………………..……….. 26 1. Major Lawsuit and Arbitration…………… 26 2. Relative Issues about Bankruptcy and Reform 26 3. Information about Holding Share Equity of Other Listed Company or Financial Enterprise 26 4. Important Merger and Acquisition, Sales of Assets…………………....….…………. ….………. 26 5. Performance on Share Equity Incentive Scheme………………....….…………. ….………. 26 6. Significant Interrelated Deals………………….……...…………………….………………….. … 26 7. Major and Important Contracts and Execution Results………………………………. ………… 27 8. Issues Promised by the Company……….………...……………………….................. …............. 27 9. Appointing and Dismissing Certified Public Accountants Firm…………….................. ….......... 27 Records of Punishments, Criticism in the Form of Circular or Open Reprimands Made by the 10. 27 Competent Authorities…………………. ……...…………………….………………….. …….. .. Infraction on Stock Trading for Directors, Supervisors, Senior Management and the Shareholders 11. 27 Holding over 5% Stock of the Company…………………………………….. 12. The Company’s Receptions, Studies and Visits……………………………………………. ……. 28 13. Index for Information Disclosure of the Company………………………………………………... 30 14. Other Major Issues……...…………………….………………….. ………………………….…… 30 XI. FINANCIAL REPORT………………..………………………..…………………….. .. 31 XII. REFERENCE DOCUMENTS……………………………….. ..…………………….. .. 121 3 I. Important The Board of Directors，the Board of Supervisors, directors, supervisors and senior management of the Company collectively and individually accept full responsibility for the truthfulness, accuracy and completeness of the information contained in this report and confirm that to the best of their knowledge and belief there are no unfaithful facts, significant omissions or misleading statements. No director, supervisors or senior managers declares to have dissidence or to be unable to guarantee the truthfulness, accuracy and completeness of the information contained in this report. Total 13 directors should attend the meeting to deliberate the annual report , while actual attendees were 12 directors, among which Mr. Augusto Reina was absent for the meeting due to personal reason and entrusted Mr. Aldino Marzorati on his behalf to vote for proposals. Ernst & Young Hua Ming provides the audit report with standard and unreserved audit advice. Mr. Sun Liqiang (Chairman of the Company), Mr. Leng Bin (Chief Accountant) and Mr. Jiang Jianxun (Chief of Account Department) assure the truthfulness and completeness of the financial report in the annual report. The reader is advised that this report has been prepared originally in Chinese. In the event of a conflict between this report and the original Chinese version or difference in interpretation between the versions of the report, the Chinese language report shall prevail. 4 II. KEY COMPANY DATA OF RECORD 1. Legal Name in Chinese: 烟台张裕葡萄酿酒股份有限公司 Legal Name in English: Yantai Changyu Pioneer Wine Company Limited 2. Legal Representative: Sun Liqiang 3. Secretary to the Board of Directors: Qu Weimin Contact Address: 56 Dama Road, Yantai City, Shandong Province, the PRC Telephone: 0086-535-6633658 Facsimile: 0086-535-6633639 E-Mail: quwm@changyu.com.cn Authorized Representative of the Securities Affairs: Li Tingguo Contact Address: 56 Dama Road, Yantai City, Shandong Province, the PRC Telephone: 0086-535-6633656 Facsimile: 0086-535-6633639 E-Mail: stock@changyu.com.cn 4. Registered Address: 56 Dama Road, Yantai City, Shandong Province, the PRC Office Address: 56 Dama Road, Yantai City, Shandong Province, the PRC Postal Code: 264000 Web Site: http://www.changyu.com.cn 5. Publications: The newspapers in which the Company’s information is disclosed: “China Securities Newspaper” and “Securities Times” in the PRC “Hong Kong Commercial Daily” outside the PRC Web Site for carrying the report: http://www.cninfo.com.cn Annual Report kept at: BOD Office of the Company 6. Place of listing of the Shares: Shenzhen Stock Exchange Abbreviation of the Shares: Changyu A, Changyu B Code Number of the Shares: 000869, 200869 7. Other information of the Company: • The first registration date: September 18th, 1997 • The original place of registration: the Business Administration Bureau of Shandong Province • The registration amendment date: June 23rd , 2006 • The registration amendment place: the Business Administration Bureau of Shandong Province • The business license number: 3700001806012 • The registration number of revenue: 37060216500338-1 in State Taxation Bureau 370601267100035 in Local Taxation Bureau • The organization code: 26710003-5 • The accountant appointed by the Company: Ernst & Young Hua Ming Certified Public Accounts Co. Ltd. The office address of the Chinese accountant appointed by the Company: Level 17, Ernst & Young Tower, Oriental Plaza, Beijing 5 III. SUMMARY OF ACCOUNTING AND FINANCIAL INFORMATION 1. Summary of Financial Information for the Report Period Unit：CNY Item Amount Business profit 1,176,456,406 Total profit 1,183,248,986 Net profit attributed to the shareholders of the Company 894,620,794 Net profit attributed to the shareholders of the Company 887,340,775 after deducting the irregular profit and loss Net cash flows from the operating activities 1,251,046,530 Note: The item and involved amount after deducting the irregular profit and loss Unit: CNY Item 2008 2007 Net profit attributed to common shareholders of the Company 894,620,794 635,627,764 Add (less): item of irregular profit and loss - Profit and loss on disposal of non-liquid assets (14,336) 1,993,241 Investment income (2,936,502) (209,856) Net income from other non-business activities (6,778,244) (3,155,353) Effect index for the income tax of irregular profit and loss 2,432,270 (404,297) Net profit after deducting the irregular profit and loss 887,323,982 633,851,499 Subtract : effect index for irregular profit and loss attributed to minority shareholders 16,793 468,048 Net profit attributed to common shareholders of the Company after deducting irregular profit and loss 887,340,775 634,319,547 2. Differences in Net Profit and Net Asset under the PRC Accounting Standards and International Accounting Standards The net profit and net asset of the Company in 2008 was respectively CNY894,506,460 and CNY2,629,027,530 according to the PRC Accounting Standards by Ernst & Young Hua Ming.During the report period, there was no difference between the PRC Accounting Standards and the International Accounting Standards, so there were no differences for the net profit and the net asset confirmed according to the PRC Accounting Standards and the International Accounting Standards. 3.Principal Accounting and Financial Information for the Preceding Three Years of the Report Period Unit：CNY More or less Item 2008 2007 2006 than last year(%) Business revenue 3,453,442,314 2,730,166,091 26.49 2,167,274,933 Total profit 1,183,248,986 949,443,426 24.63 565,023,227 Net profit attributed to the shareholders of the listed 894,620,794 635,627,764 40.75 394,517,034 company Net profit attributed to the shareholders of the 887,340,775 634,319,547 39.89 394,773,012 listed company after deducting the irregular profit and loss Basic earnings per share 1.70 1.21 40.50 0.75 Diluted earnings per share 1.70 1.21 40.50 0.75 6 Basic earnings per share after deducting the irregular 1.68 1.20 40.00 0.75 profit and loss Overall sharing for the return rate of net assets (%) 35.17 28.52 6.65 19.58 Weighted average for the return rate of net assets (%) 38.26 30.98 7.28 20.97 Overall sharing for the return rate of net assets (%) 34.88 28.46 6.42 19.59 after deducting the irregular profit and loss Weighted average for the return rate of net assets (%) 37.95 30.92 7.03 20.98 after deducting the irregular profit and loss Net cash flows from the operating activities 1,251,046,530 816,161,158 53.28 398,074,447 Net cash flows per Share from the operating activities 2.37 1.55 52.90 0.98 More or less End of 2008 End of 2007 End of 2006 than last year(%) Total assets 4,060,932,580 3,251,224,474 24.91 2,811,556,581 Total shareholders’ equity (minor shareholders’ equity 2,543,633,170 2,229,020,376 14.11 2,015,216,612 excluded) Net assets per share attributed to the shareholders of 4.82 4.23 13.95 4.97 the listed company IV. CHANGES IN SHARE CAPITAL AND SUBSTANTIAL SHAREHOLDERS 1. Changes in Share Capital Unit: share’0000 Amount before this change Change Amount after this (+ -) change Allot Distribute Transfer other Percentage Sub Percentage Amount new bonus capital to share others Amount % total % share share capital 1. Limited shares 26,575 50.40 26,575 50.40 (1)State Shares (2) State legal person share (3)Other domestic corporate share 26,575 50.40 26,575 50.40 --domestic legal person share 26,575 50.40 26,575 50.40 --domestic natural person share (4) foreign held share --overseas legal person share -overseas natural person share 2. Unlimited shares 26,153 49.60 26,153 49.60 (1)CNY common share 8,307 15.75 8,307 15.75 (2)Foreign share listed in PRC 17,846 33.85 17,846 33.85 (3) Foreign share listed overseas (4) Others Total shares 52,728 100 52,728 100 2. Changes in Limited Shares Unit: share’0000 Shareholder’s Numbers for the Releasing numbers Increasing numbers Numbers for the Reasons for Releasing date for Name limited shares on of limited shares in of Limited shares limited shares on limiting the shares the limited shares Jan.1st, 2008 2008 In 2008 Dec.31st,2008 on Dec.31st,2008 Yantai Changyu 26,575 0 0 26,575 Share structure March 21st, 2009 Group Co Ltd. reform Total 26,575 0 0 26,575 - 3. Information about the Issuing and Listing of Stocks 7 (1) The Company did not issue new stocks within preceding three years by the end of report period. (2) During the report period, the Company’s total shares, the structure of shares and the structure of assets and liabilities were not changed because of distribution of dividends in the form of shares, increase of capital stock, allocation, re-issuance of stocks, disclosed issuance of stocks, enforcement of title warrants, implementation of stock equity incentive plan, business merger, transfer of company’s transferable debentures to stocks, decrease of registered capital, listing of internal shares, issuance of bonds or other causes. (3) The Company didn’t issue any internal stocks. 4. Shareholders’ Introduction (1) The total number and top 10 shareholders at the end of report period Total amount of Shareholders 12,749 Shareholders including 7,603 shareholders with A shares, 5,146 shareholders with B shares The top 10 shareholders Name of Shareholders The character of the Percentage Number of Number of Lien or shareholders (%) shares hold limited listing frozen shares shares YANTAI CHANGYU GROUP CO.LTD. Other 50.40 265,749,120 265,749,120 0 HTHK/CMG FSGUFP-CMG FIRST STATE CHINA GROWTH FD Foreign shareholder 3.02 15,936,685 0 0 HUITIANFU VALUE-ADDED SECURITIES- ORIENTED 0 0 Other 1.39 7,310,987 CAPITAL FUND GAO-LING FUND, L.P. Foreign shareholder 1.28 6,767,160 0 0 HUITIANFU GROWTH FOCUS SECURITIES- ORIENTED 0 0 Other 1.25 6,250,987 CAPITAL FUND GOVERNMENT OF SINGAPORE INV. CORP. –A/C “C” Foreign shareholder 1.19 6,587,938 0 0 JF ASIA DOMESTIC OPPORTUNITIES FUND Foreign shareholder 1.08 5,699,983 0 0 BBH BOS S/A FIDELITY FD-CHINA FOCUS FD Foreign shareholder 0.98 5,184,844 0 0 JP MORGAN FUNDS Foreign shareholder 0.81 4,284,323 0 0 DRAGON BILLION GREATER CHINA MASTER FUND Foreign shareholder 0.77 4,063,197 0 0 The top 10 Shareholders of unlimited shares Name of Shareholders Number of unlimited shares held Type of Shares HTHK/CMG FSGUFP-CMG FIRST STATE CHINA GROWTH FD 15,936,685 B Shares HUITIANFU VALUE-ADDED SECURITIES-ORIENTED CAPITAL FUND 7,310,987 A Shares GAO-LING FUND, L.P. 6,767,160 B Shares HUITIANFU GROWTH FOCUS SECURITIES-ORIENTED CAPITAL FUND 6,250,987 A Shares GOVERNMENT OF SINGAPORE INV. CORP. –A/C “C” 6,587,938 B Shares JF ASIA DOMESTIC OPPORTUNITIES FUND 5,699,983 B Shares BBH BOS S/A FIDELITY FD-CHINA FOCUS FD 5,184,844 B Shares JP MORGAN FUNDS 4,284,323 B Shares DRAGON BILLION GREATER CHINA MASTER FUND 4,063,197 B Shares BOSERA NEW GROWTH SECURITIES-ORIENTED CAPITAL FUND A Shares 4,049,809 The explanation for the relationship and In the top 10 shareholders, Yantai Changyu Group Company Limited has no accordant action of the top 10 associated relationship with the other 9 listed shareholders, and the relationship shareholders between the other shareholders is unknown. (2) Introduction for the holding shareholders and the actual controllers 1) Legal holding shareholder Name of the legal holding shareholder: Yantai Changyu Group Company Limited (hereafter called Changyu Group). Legal representative: Mr. Sun Liqiang Registered capital: CNY 50 million Establishment date: April 27th, 1997 Business scope: wine, healthy liquor, distillating liquor, drinks, production, distribution, the plant of primary products and the import & export business under permission. 2) Legal actual controllers The company is actually controlled by four parties: Yantai Yuhua Investment & Development Co., Ltd, ILLVA Saronno Investment Italy, International Finance Corporation and State-owned Assets Supervision and Administration Commission of Yantai Municipal Government (hereafter called SASAC Yantai). The situation of the four parties is as following: 8 ① Name of the legal holding shareholder: Yantai Yuhua Investment & Development Co. Ltd Legal representative: Mr. Jiang Yongsheng Registered capital: CNY 387,995,100 Establishment date: October 28th, 2004 Business scope: Under state permission, property investment, tenancy of machine and facility, wholesale and retail of construction material, chemical products (chemical hazard products excluded), hardware, and electronical products , grape plant. The holding shareholder of Yantai Yuhua Investment & Development Co. Ltd. is Yantai Yusheng Investment & Development Co. Ltd., which was established on October 27th 2004 with legal representative Mr. Li Jianjun, registered capital CNY 67.333 million and business scope of property investment under the state permission. ② Name of the legal holding shareholder: ILLVA Saronno Investment Italy Legal representative: Mr. Augusto Reina Registered capital: EUR 5,160,000 Establishment date: January 24th, 2005 (its name is changed from ARCHIMEDE SRL) Business scope: The company’s operating scope includes receiving the investments and dividends that Italian or overseas businesses provide or distributed to other companies; controlling the use of and dealing with and buying or selling and disposing the corporate stocks, public stocks and individual stocks; providing capital and technical coordination to the company’s joint ventures and performing the duties of a controlling party; engaging in the activities in terms of providing financial assistance, technical and R&D and occupational training, shareholding affairs, organizing the storage of raw materials and warehousing of final products upon the precondition that it is helpful for the joint ventures and in order to realize the final operation goals; production and sales of food products, alcoholic and nonalcoholic products as well as any other related industrial, commercial, financial and tertiary activities via subsidiary companies and joint ventures or directly by itself; conducting business activities in the fields of acid food and agriculture. ③ Name of the legal holding shareholder: International Finance Corporation Registered address: 2121 Pennsyvania Avenue, N.W. Washington DC 20433, USA Registered capital: USD 2.36 billion Registered date: 1956 Business scope: International Finance Corporation is one of the members of World Bank, mainly dedicated to investing in private sectors of developing countries while providing technical support and consultation service. The corporation is a multilateral financial institution that ranks first in the world in terms of providing capital stock and loans to developing countries. Its purpose is to promote sustainable investments of private sectors of developing countries in order to alleviate poverty and improve people’s life. ④State-owned Assets Supervision and Administration Commission of Yantai Municipal Government 3) The change for the holding shareholders and the actual controllers During the report period, there is no any change for the holding shareholders and the actual controllers. 9 4) Introduction for property right and control relations between the Company and its actual controllers middle management of Changyu Group 12 persons top management of Changyu Group 14 persons 64% 36% Yantai Yusheng Investment & Development Co., Ltd. staff of Changyu Group 46 persons 62.22% 37.78% IFC Yantai Yuhua Investment & Development Co., LTD. SASAC Yantai Illva Saronno Investment Co., LTD. 10% 45% 12% 33% current shareholders for A share Changyu Group current shareholders for B share 15.75% 50.40% 33.85% the Company （3） The other legal shareholders holding over 10% of the Company’s share Except Yantai Changyu Group Company Limited, there are no any other legal shareholders holding 10% or over of the Company’s share. （4） Share holding of top 10 limited stockholders and limitation conditions Unit: share No. Limited Limited shares Listing date Newly added Limitation conditions Shareholders’ held by them tradable shares name 1 Yantai Changyu 265,749,120 March 21s 26,364,000 1. From the day of being granted the right of circulation on stock Group Co., Ltd 2009 market as March 21st,2006, Changyu Group will not transact March 21st 26,364,000 or transfer its shareholding in the Company within 36 months 2010 2. Within 12 months as from the day of the expiry of the afore-said March 21 213,021,120 promising period, the amount of the former non-circulating 2011 stock that Changyu Group may list for transaction at Stock Exchange can’t be over 5% of its total and within 24 months after that, can’t be over 10% of its total. 3. Changyu Group also promised to propose over the shareholders’ meetings 2005, 2006 and 2007 to distribute the Company’s profit in cash no less than 65% of the distributable profit realized in the same year and ensure to vote for aye for this proposal. V. DIRECTORS, SUPERVISORS, SENIOR MANAGEMENT AND STAFF 1. The basic information of directors, supervisors and senior management (1)Information for the change of share holding and salary of directors, supervisors and senior management The salary for the independent directors is paid according to the resolution of Shareholder’s 10 meeting. The salary for the Chairman, directors with administration duty, supervisors, managers and other senior management should be paid on basis of the evaluation result according to the Evaluation and Incentives Scheme for Senior Managemen of the Company which is passed during the Board of Director’s meeting. Total Salary drew Whether or not draw the Shares hold Shares hold Reason from the company salary from NAME POST SEX AGE Term at the at the ends for during the report shareholder’s company and other related for Post beginning of the year change period(unit: company CNY’000) (before of the year tax ) Sun Liqiang Chairman to the M 61 2006.12.07— 0 0 --- 87.47 NO 2009.12.06 Board of Directors Zhou Vice-chairman to the M 44 2006.12.07— 0 0 --- NO 2009.12.06 Hongjiang Board of Directors and 87.47 general manager Leng Bin Director and M 46 2006.12.07— 0 0 --- NO 2009.12.06 61.12 vice-general manager Qu Weimin Director, M 51 2006.12.07— 0 0 --- NO 2009.12.06 Vice-general manager 59.02 and Secretary to the Board of Directors Jiang Jinqiang Director M 36 2006.12.07— 0 0 --- 0 NO 2009.12.06 Augusto Reina Director M 68 2006.12.07— 0 0 --- NO 2009.12.06 0 Aldino Director M 56 2006.12.07— 0 0 --- NO 2009.12.06 0 Marzorati Antonio Director M 70 2006.12.07— 0 0 --- NO 2009.12.06 0 Appignani Jean Paul Director M 59 2006.12.07— 0 0 --- NO 2009.12.06 0 Pinard Geng Zhaolin Independent M 66 2006.12.07— 0 0 --- NO 2009.12.06 5 Director Ju Guoyu Independent M 62 2006.12.07— 0 0 ----- NO 2009.12.06 5 Director Wang Shigang Independent M 43 2006.12.07— 0 0 --- NO 2009.12.06 5 Director Wang Zhuquan Independent M 44 2007.09.07— 0 0 -- 2009.12.06 5 Director Fu Mingzhi Chairman for the M 55 2006.04.27— 0 0 --- NO Board of 2009.04.28 61.28 supervisors Zhang Hongxia supervisor F 52 2006.04.27— 0 0 --- NO 2009.04.28 44.25 Lian Zhendian Supervisor M 40 2006.04.27— 0 0 --- 0 NO 2009.04.28 Yang Ming Vice-general M 50 --- 0 0 --- 57.29 NO manager --- 45.2 M 42 --- 0 0 58.03 NO Jiang Hua Vice-general M 45 --- 0 0 --- 62.38 NO manager Sun Jian Vice-general M 42 --- 0 0 --- 60.00 NO manager Jiang Jianxun Treasurer M 42 --- 0 0 --- 43.78 NO Wang Counselor M 69 --- 0 0 --- 3.50 NO Gongtang Total 0 0 --- 705.59 --- 11 (2) Information of directors, supervisors who hold posts in shareholder’ s Company Name Name of shareholder Post in shareholder’s company Term for the post Paid by shareholder’s company or not Sun Liqiang Yantai Changyu Group Chairman of the Board of 2005.10.26—2009.10.27 No Company LTD Directors and general manager Zhong Hongjiang Yantai Changyu Group Vice chairman of the Board of 2005.10.26—2009.10.27 No Company LTD Directors Fu Mingzhi Yantai Changyu Group Director and vice general 2005.10.26—2009.10.27 No Company LTD manager Leng Bin Yantai Changyu Group Director 2005.10.26—2009.10.27 No Company LTD Jiang Jinqiang Yantai Changyu Group Director 2005.10.26—2009.10.27 No Company LTD Augusto Reina Yantai Changyu Group Director 2005.10.26—2009.10.27 No Company LTD Aldino Marzorati Yantai Changyu Group Director 2005.10.26—2009.10.27 No Company LTD Antonio Appignani Yantai Changyu Group Director 2005.10.26—2009.10.27 No Company LTD Jean Paul Pinard Yantai Changyu Group Director 2005.10.26—2009.10.27 No Company LTD Zhang Hongxia Yantai Changyu Group Chief of audit department - No Company LTD 2. Principal Working Experiences of Incumbent Directors, Supervisors and Senior Managers (1) Members of the Board of Directors Mr. Sun Liqiang, Chairman, is a college graduate and senior economist. Now he is the representative of Eleventh National People’s Congress, Chairman and General manager of Changyu Group. He began serving as chairman of the Company on September 18, 1997 and has held the position ever since. Mr. Zhou Hongjiang, is a mastership graduate and senior engineer. He began serving as general manager of the Company on December 28, 2001 and as Director, Vice Chairman and General Manager of the Company on May 20, 2002. Mr. Leng Bin, Director, is a postgraduate and senior accountant and now is the Director of Changyu Group. He began serving as a director of the Company on June 15, 2000. Mr. Qu Weimin, holds a bachelor of engineering and is a senior economist. He began serving as Director, Deputy General Manager and concurrently as Secretary of the board of directors of the Company on September 18, 1997. Mr. Jiang Jinqiang, is a university graduate, holds the qualifications of registered accountant and valuator, now is the full-time supervisor of SASAC Yantai and the director of Changyu Group. He began serving as a director of the Company on April 27, 2006. Mr. Augusto Reina is serving as chief executive officer of several companies including Illva Saronno Holding SpA and Illva Saronno Investment SRL, member of the board of directors of Barberini Spa, director of Federvini (Italian Alcohols Production and Export Association), director of Istituto Del Liquore (Wine Research Institute) , director of Assovini (Sicily Viniculture and Wine Production Association) and director of Changyu Group. He has been director of this company since April 27th , 2006. Mr. Aldino Marzorati, a university graduate, is general manager of Illva Saronno Holding SpA and director of the board of directors of some branches under the group company and the director of Changyu Group. He has been director of this company since April 27th , 2006. Mr. Antonio Appignani, a university graduate, is vice chairman of Italian Business Consultation Committee, chief of Professional Ethics Committee, teacher of vocational 12 training course of Industrial and Commercial Consultation Committee, member of Economic and Commercial Committee of the public university “G. D Annunzio” and concurrently serving as member of the board of directors of different companies and member of the board of directors of several companies under Illva Group and the director of Changyu Group. He has been director of this company since April 27th, 2006. Mr. Jean-Paul Pinard, a doctor in economics and finance, began to serve as director of the Bureau of Agriculture of International Finance Corporation under World Bank from 2001, and retired in 2007, now is the director of Changyu Group. He has been director of this company since December 7th, 2006. Mr. Geng Zhaolin, is a postgraduate and senior engineer. He previously served as Vice Director of the China Foods Standardization Technology Committee, executive director of China Foods Technology Institute, counselor of China Association of Wine Industry. He began serving as an independent director of the Company on May 20, 2002. Mr. Ju Guoyu, is a professor and doctorate tutor. He previously served as President of Economic Institute of Peking University and Vice President of the Economic Society of Beijing Municipality, independent director of Tibet Jin Zhu Co., Ltd and Guangdong Guanhao Scientific Technology Co., Ltd. He began serving as independent director of the Company on September 24, 2003. Mr. Wang Shigang, holds an MBA and is a Senior Accountant. He previously served as director of Shandong Branch of Zhongxing Certified Public Accountants Firm, independent director of Shandong Jinling Chemical Industry Co.,Ltd. He began serving as independent director of the Company on May 20, 2002. Mr. Wang Zhuquan, is the doctor for administration (accountancy), holds the qualifications of registered accountant and valuator, now is the professor, master and Phd Supervisor, vice dean of Administration Institute, dean of Accountancy Department under Ocean University of China. He began serving as independent director of the Company on September 7, 2007. (2) Members of the Board of Supervisors Mr. Fu Mingzhi, is a university graduate and senior economist. Currently he is the Director and Deputy General Manager of Changyu Group. He began serving as a Chairman to Board of Supervisors of the Company on April 27th, 2006. Ms. Zhang Hongxia, is a college graduate and senior accountant. She is presently Director of the Auditing Office of Changyu Group. She began serving as supervisor of the Company on September 18, 1997. Mr. Lian Zhendian, a postgraduate and senior accountant, is section chief of the Developing and Planning Commission of Yantai City, supervisor of the board of supervisors of Yantai Non-ferrous Metal Group Co., Ltd., Yantai Administrative and Institutional Affairs Company and Yantai Commercial Materials Holding Co., Ltd.. He has been supervisor of this company since April 27th , 2006. (3) Other senior managers Mr. Yang Ming, is a university graduate and applied researcher. He began serving as Deputy General Manager of the Company on August 12, 1998. Mr. Li Jiming, is a doctoratoral graduate and applied researcher. He began serving as Chief Engineer of the Company on September 14, 2001. Mr. Jiang Hua, is a postgraduate and engineer. He began serving as Deputy General Manager of the Company on September 14, 2001. Mr. Sun Jian, holds an MBA and is an assistant engineer. He began serving as Deputy General Manager of the Company on March 22, 2006. Mr. Jiang Jianxun, holds an MBA and is an accredited accountant. He began serving as Financial Supervisor of the Company on May 20, 2002. Mr. Wang Gongtang, is a postgraduate and senior engineer. He began serving as consultant of the Company on September 18, 1997. 3.Change of Directors, Supervisors and Senior Management During the report period, there is no any change for the directors, supervisors and senior management. 13 4. Staff of the Company As to December 31st , 2008, the total registered staff number of the Company (including the headquarter and main controlling subsidiary company) was3,503, including 990 production workers, 2,007 sales persons, 92 technicians, 74 financial members, 178 administrative persons. Among the staff members, 984 persons were university graduates, which is 28.09% of the total employees, 1,408 persons were college graduates, which is 40.19% of the total employees, 371 persons were Senior middle school graduates, which is 10.59% of the total employees, and 740 persons were graduated below senior middle school, which is 21.12% of the total employees. The Company is carrying out the social security system of Yantai city. All the retired staff’s expenses were paid by social security system, not by the Company. VI. CORPORATE GOVERNANCE STRUCTURE 1. Current Corporate Governance Situation of the Company (1) Establishment and improvement of legal entity structure The Company has, according to relevant national laws and rules including the “Company Law of the People’s Republic of China”, “Securities Law of the People’s Republic of China” and “Guidelines on Listed Companies Internal Control”, established and improved its legal entity structure and legally conducted its activities within the scope of that structure. During the report period, the Company received the itinerant mission of China Securities Regulatory Commission Shandong Supervisory Bureau and made improvement one by one for the problems found in the itinerant mission on the basis of Improvement Notice. Additionally, the Company further stepped up and perfected the functions of the Board of Supervisors and the Auditing Committee and Emolument Committee under the Board of Directors, and strengthened its internal supervision and restriction mechanism. On the whole, there is almost no difference between the corporate governance of the Company and the normative documents about the governance of the listed company issued by China Securities Regulatory Commission, which could better meet the development requirement. 2. The Duty Performance of the Independent Directors During the report period, all independent directors of the Company performed their duties conscientiously and in accordance with the law, attended all the Board of Directors’ meetings or came to the meetings as non-voting attendees in person, regularly inquired into the Company’s operations and listened to relevant reports, expressed their professional opinions on the major decisions so as to ensure the scientific desion-making capability. During the report period, independent directors investigated on the spot the investment projects and its operations in Ningxia and Beijing. Meanwhile, in the light of independent, external and fair policy, participated in examination of and declared themselves on the significant issues such as interrelated dealings, compensation assessment, re-appointment of certified public accountants and audit plan for 2008 finance report, put forward the suggestions for further improvement, expressed the independent opinion on external guarantee, securities investment and internal management, played appropriate roles in terms of improving internal supervisory mechanisms and safeguarding the legal rights and interests of the Company and all its shareholders’. During the report period, none of the independent directors raised any objection to the Company’s activities. The following are the independent opinions on relevant issues by independent directors in 2008: (1) During the report period, there was no any unfinished guarantee of the Company, or any guarantee undertaken by the Company to any units (including the subsidiaries controlled by the Company) or any individual. (2) During the report period, the Company launched the securities investment in accord with the limit for capital amount and investment scope granted by the Board of Directors. And in the course of subscribing for new stock, the Company conscientiously fulfilled their duties, strictly controlled the crisis, monthly reported Baord of Directors of subscribing details and profits, thus ensure the safe capital and gained certain profits. 14 (3) The self assessment report on the Company’s internal control impersonally and truly reflected the current situation about internal control of the Company,. After the improvement for so many years, the Company has set up perfect self-control system adapting to its own operation peculiarity which is effective and be able to ensure the success performance of strategy and policy, the normative operation and sustainable & healthy development, protect the investors’ legal rights and interests. According to the examining and assessing, there was no major discrepancy between the self assessment report on the Company’s internal control and the examining result made by the dependant directors. 3. Information for Personnel, Assets, Finance, Institution and Business Associated with Holding Shareholders (1) Personnel arrangement: the Company’s general manager, deputy general managers and other senior officers, all of whom were paid by the Company did not hold any post in the controlling parties. The Company was entirely independent in personnel arrangement, conclusion and adjustment of labor contracts thanks to its sound system in this regard. (2) Assets: intangible assets including trademark, industrial property right and non-patent technologies were all clearly divided between the Company and the controlling shareholder. Most assets belonging to the Company have been transferred and finished the relative procedures. The Company being a legal independent entity consistently conducted business activities legally and provided no guarantee in any form with its assets for its shareholders or individuals’ liabilities or any other legal persons or natural persons. However, due to some issues from the past, transfer of the Company assets are as yet incomplete. The intangible assets such as trademark ownership and land title still held by the controlling shareholders, will be actively negotiated with the controlling shareholder to rectify those long-standing problems step by step upon the precondition of no infringement on the Company and shareholders’ interests. (3) Finance: the Company has independent finance department, chief account and financial staff, and also standardized accounting system. The Company has also established own bank accounts, duly and legally paying taxes, workers insurance fund. No one of the financial department staff holds concurrent posts in associated companies. (4) Offices: the Company has set up a sound organizational framework, in which the Board of Directors and Board of Supervisors operate independently. No superior and subordinate relationship exists between the Company and the functional departments of the controlling shareholder. (5) Operations : the operations of the Company are independent of the controlling shareholder, the Company itself owns completely independent systems covering research and development, accounting, workforce and labor, quality control, raw materials purchase, production and sales, and is possessed of self-run capabilities, and has neither relationship with the controlling shareholder in terms of supply and sales by proxy nor competition with the other. 4. Formulation and Improvement of Internal Control Rules During the report period, the Company drew up and revised various internal control rules in the light of management demand. After repeated revision and amendment, the Company worked out numerous workable internal control rules in terms of production and sales, financial management and information disclosure and so on, and effectively implementing the new rules in its routine operations. so as to ensure strong supports to the Company’s sustainable and repid development, efficaciously preventing misconducts and lowering the Company’s operation risks. Please read the detailed information in Self Evaluation Report on Internal Control. 5. Performance Evaluation and Incentive to Senior Management The Company has already established a system for evaluation of achievement of senior management and the related incentive system, which linked the reward with the Company’s benefit, and personal achievement. The Emolument Committee under Board of Directors assumed the responsibility of stipulating the policy and appraising the scheme for salaries and 15 rewards. Based on the production and business goals, this committee examined senior personnel according to their management achievement and index, and took these as basis for awards or penalties. The Company will orient to the market and complete the implementation of evaluation and incentive systems gradually. VII. BRIEF INTRODUCTION TO THE SHAREHOLDERS’ MEETING Totally three shareholders’ meetings were convened by the Company during the report period. 1. The 2007 Shareholder s’ Meeting The 2007 shareholders’ meeting was held on April 17th, 2008 in the meeting room of the Company’s Wine Culture Museum. The meeting notice was published in “China Securities Newspaper”, “Securities Times” in the PRC and “Hong Kong Commercial Daily” on 18th April, 2007. 2. The 2008 First Interim Shareholders’ Meeting The 2008 first interim shareholders’ meeting was held on September 26th, 2008 in the meeting room of the Company’s Wine Culture Museum. The meeting notice was published in “China Securities Newspaper”, “Securities Times” in the PRC and “Hong Kong Commercial Daily” on September 27th, 2008. 3. The 2008 Second Interim Shareholders’ Meeting The 2008 second interim shareholders’ meeting was held on November 14th, 2008 in the meeting room of the Company’s Wine Culture Museum. The meeting notice was published in “China Securities Newspaper”, “Securities Times” in the PRC and “Hong Kong Commercial Daily” on November 15th, 2008. VIII. BOARD OF DIRECTOR’S REPORT 1. Discussion and Analysis of Management Team (1) The review of operations during the report period ① General information of operations during the report period During the report period, the Chinese wine sector still maintained rather fast growth momentum, even facing the situation of impact from the world financial crisis, slackened development trend of domenstic economic and constrictive consumption. And the Company grasped each and every opportunity, to work hard and effectively at the central task of tapping market potential as best it could, to timely update the operation strategy and steadily cope with increasingly acute competition, thus made remarkable achievements, and futher confirmed the leading position of the Company in Chinese wine industry. Following are the change and relative reasons concerning principal sales, principal profit and net profit of the Company during the report period: Unit: CNY Item 2008 2007 More or less than last year(%) Principal sales 3,453,442,314 2,730,166,091 26.49 Principal profit 1,176,456,406 948,281,314 24.06 Net profit attributed to shareholders of 894,620,794 635,627,764 40.75 listing company Remark to the main factors causing major changes: The increase of principal sales is contributed by the sales revenue increase due to strong market demand during the report period, and the principal profit increase is caused by fast increase of principal sales, while the net profit attributed to shareholders of listed company is contributed by increase of principal profit and reduction of income tax. 16 ②The principal business and its operation a. Principal business achievements assorted by products and trade type Unit: CNY’0000 More or less More or less Gross More or less than Principal Principal than last year of than last year Product Profit Ratio last year of the Sales Cost the principal of the gross % principal sales % cost % profit ratio Wine & alcoholic beverage 341,600 101,394 70.32 25.12 22.60 ↑ 0.61 % Total 341,600 101,394 70.32 25.12 22.60 ↑ 0.61 % by product Wine 274,183 76,968 71.93 29.03 28.03 ↑ 0.22 % Brandy 52,578 18,677 64.48 16.83 12.50 ↑ 1.37 % Healthy Liquor 11,873 4,252 64.18 17.40 13.30 ↑ 1.29 % Sparkling Wine 2,966 1,497 49.54 14.03 5.65 ↑ 4.02 % Total 341,600 101,394 70.32 25.12 22.60 ↑ 0.61 % Related party transaction not 565 - - - - applicable b. Principal business achievements assorted by territory distribution Unit：CNY’0000 District Principal Sales More or less than last year of the principal sales % The coastal region 295,267 29.14 The middle region 34,373 11.08 The western region 15,704 16.90 Total 345,344 26.49 c. Business situations of key products taking over 10% of the Company’s sales The sales of wine and brandy took 10% or more of the Company’s principal business, and the sales revenue, sale cost and gross profit ratio were set below: Unit: CNY’0000 Product Name Sales Sale Cost Gross Profit Ratio (%) Wine 274,183 76,968 71.93 Brandy 52,578 18,677 64.48 During the report period, the Company’s principal business and its structure did not change a lot compared with that of the last year. d. Major suppliers and clients Unit：CNY’0000 Total purchases from the top 5 suppliers 10,017 Proportion of all purchases 16.4% Total products sold to the top 5 clients 12,893 Proportion of all products sold 3.7% 17 ④ The Company’s asset compositions and changes of financial data Unit: CNY’0000 December 31, 2008 December 31, 2007 Increase or decrease Entry Proportion in Proportion in Amount of proportion in total assets Amount total assets total assets (%) (%) Account receivable 8,234 2.23 8,249 2.54 ↓ 0.31% Inventory 99,794 24.57 83,591 25.71 ↓ 1.14% Investable realty 0 0 0 0 _ Long-term investment 1,000 0.25 1,000 0.31 ↓ 0.06% Fixed assets 72,823 17.93 64,071 19.71 ↓ 1.78% Unfinished project 15,449 3.80 4,865 1.50 ↑ 2.30% Short-term loans 0 0 0 0 _ Long-term loans 0 0 0 0 _ Increased or decreased Entry Amount for this year Amount for last year amount % Operating cost 86,979 62,465 39.24 Overheads 19,424 17,797 9.14 Finance cost 3,536 2,338 51.24 Income tax 28,874 31,055 -7.02 Remark to the main factors causing major changes: a) The operating cost is increased due to enlargement of business scope, gradual increase of sales volume, also the increase of advertisement expenditure, frieight and total rewards to sales staff. b) The overheads increase is mainly attributed to the addition of administrative stuff’s salary and also depreciation on fixed assets. c) The finance cost increase is contributed by increase on bank deposit interest income. d) The decrease on income tax is caused by the reduction of income tax rate from 33% to 25% in accordance with new company income tax policy from the beginning of the report period. ⑤ Relevant changes of the Company’s cash flow during report period Unit: CNY Entry Amount this year Amount last year Increased or decreased amount % Cash flow generated from operating activities Subtotal of cash inflow 4,950,074,416 3,483,762,866 42.09 Subtotal of cash outflow 3,699,027,886 2,667,601,708 38.67 Net cash flow generated from operating activities 1,251,046,530 816,161,158 53.28 Cash flow generated from investment activities Subtotal of cash inflow 40,792,997 80,748,868 -49.48 Subtotal of cash outflow 775,791,436 324,434,271 139.12 Net cash flow generated from investment activities -734,998,439 -243,685,403 201.62 Cash flow generated from capital-raising activities Subtotal of cash inflow 150,000 33,000,000 -99.55 Subtotal of cash outflow 580,008,000 421,824,000 37.50 Net cash flow generated from capital-raising activities -579,858,000 -388,824,000 49.13 Remark to the main factors causing major changes: a)The great change on cash flow from operating activities is caused by large increase of cash inflow, cash outflow and net cash flow from operating activities mainly due to better operation achievements and enlargement on business scope . b) The great change on cash flow from investment is caused by large addition on cash outflow 18 from investment activities due to the increase of time deposit over three months during report period. c) The great change on cash flow from capital-raising activities is due to the Company’s performance of 2007 profit distribution plan during the report period, while CNY580.008 million as cash dividends was distributed to all shareholders, much more than that of last year. ⑤ Utilization of the Company’s equipment, market and flow of technicians During the report period, the Company’s equipment was maintained in good running condition, production ran smoothly, capacity factors of equipment kept high, and no production accidents took place. By means of scientific planning and meticulous scheduling, the Company not only ensured stable production but also met market needs and with neither overstocking of products nor serious shortage of supply. There was no change of technicians and backups, thus no impact on the Company’s operations and management. ⑥ The operations and analysis of major holding and sharing company Unit: CNY’0000 Sharing Registered Capital Total Assets Net Assets Net Profit Company Name Business Scope Major Products or Services Ratio Yantai To research, produce Dry red wine, dry white Changyu-Castle Wine 70% and sell wine and wine and sparking wine USD5 million 17,630 14,365 10,079 Chateau Co. LTD. sparkling wine of Changyu-Castle Longfang Castel- To produce Dry red wine, 49% USD3 million 5,822 4,259 1,315 Changyu Wine Co. LTD. and sell wine Dry white wine Yantai Kylin To produce and sell Cork, aluminum cap, 50% USD1.4 million 5,924 3,721 1,058 Packaging Co. LTD. packaging material PVC capsule and so on. Chateau Changyu To research, produce Brandy, premium dry red AFIP Global 70% and sell brandy and 11,000 10,132 8,280 -2,349 wine and white wine wine Chateau Liaoning Changyu Ice Wine 51% To produce ice wine Ice wine 2,630 5,761 3,019 330 Co., Ltd. The net profit from Yantai Changyu-Castel Chateau accounts for 11.27% of the Company’s total and the chateau’s income on main operations is CNY 275.09million, profit from the main operations CNY 133.65million, and net profit CNY100.79 million. Since the Company was no longer enjoy the preferential tax policy for Sino-foreign joint ventures from begining of the report period, that’s to say, its income tax was increased to 25% from former 15%, plus the reduction of inner settlement price on products, which all caused the profit decline by34.90% compared with same period of last year. The loss of Chateau Changyu AFIP Global was produced by the few sales volume since this Chateau only started its sales, and also the large fixed assets depreciation and oveheads. ⑦ Specific subject under control of the Company During the report period, the Company neither had any specific subject under its control nor needed to report related data in a consolidated statement because of existence of a specific subject. (2) Looking forward to the Company’s Development ① The general prediction on development of China wine industry In view of the continuous spread of world financial crisis, the Company expects that China economy will be heavily impacted in 2009, a slowdown of general economy appears unavoidablly along with restaints in consumptive ability and desire.Therefore people might reduce their wine consumption increasing pressure on sustained and rapid development of the Company. At the same time however, increase in quantity and variety of similar products from overseas and domestic competitors’ market expansion, means competition in China’s wine market will surely become more and more intense. Exploitation of the market will be more and more difficult and consequently, the Company’s marketing outlay will need be increased. Even so, the Company anticipates that competition among current market leaders Changyu, Great 19 Wall and Dynasty will remain relatively static in the short term, and extend through the long term as the China wine market continues to extend its scale. Confronting the above disadvantageous situation, the Board of Directors, the Board of Supervisors and entire top management will consistently act in a diligent, conscientious, realistic and surefooted manner to so their utmost to fulfill all budgetary targets and create more value for the stockholders. ② The Company’s development strategy and marketing plan Acknowledging both the current situation and considering the Company’s expectations for great potential for middle to long-term development of China’s wine market. the Company will stick to its strategies of setting wine as its core product while developing various categories; setting middle-range and high-end products as first priority; developing all products at different levelsand continuing to further subdivide the market. Product sales by category, optimization of the products structures and sales channels, gradual increases in the sales proportion of middle-range and high-end products will improve the Company’s profit making abilities in a sustainable steady way. At the same time, the Company will select several products to improve the wholesale channel system, introduce the middle to lower quality wines to meetmarket demands, in order to gradually reduce the gap with competitors on sales volume of those products, and meet multi-mode demands arising from a gradually maturing China wine market, and then further increase the market share. The Company anticipates a turnover not less than CNY 3.7 billion in 2009 and plans to hold the main operating cost and other three costs under CNY 2.2 billion. To realize the abovementioned goals, the Company will mainly take the following measures: First, the Company will continue it’s market focus, with increased financial support to promotion and market penetration;, strengthening marketing management andenhancingthe Company’s marketing level;further differentiating the market and sellingproducts by category in light of different product varieties and assortments. Priority will be given to the establishment of Two Projects including hotels and supermarkets, managing market inputs effectively, increasingthe efficiency of the market input and output ratio, and maximizing market development. The Company will also improve and perfect the sales system pay structure and assessment methodology directly linking the major parts of sales staff compensation to their achievements in sales of different product lines. While continuing to maintain successful market developin three biggest markets of Beijing, Shanghai and Guangdong, the Company will also stress on tapping the markets in several other important cities meanwhile strictly eliminating counterfeit products and hazardous transshipments, in order to preserve and protect market order. Second, to assure sufficient raw material inputs, the company will continue to increase growing areas for premium grapes; bringexpanded production and operation facilities online; and further improve product quality and production capability. Third, to strengthen the financial and auditing management, intensify the management crisis control, effectively push energy saving and consumption reducing, advance the operation quality and profits, try to do better in checking, examining and assessing of the internal financial management, tighten up the control over the production units’ expenses and comparable product costs, complete well the audit including execution audit of annual budget, economic liability audit on all levels, special audit on controllable costs, misappropriation of capital and bad assets, and continue to examine the final settlements of the investments in fixed assets.The Company will also continue to conduct dynamic monitoring of important danger points, pay more efforts to eliminate potential safety hazard, strengthen the security trainning, complete the emergency treatment scheme so as to ensure no safety accident happens, severely perform the supervision and management on abnormal energy consumption to try to reduce correspondingly the energy consumption per CNY10000 of production value by 8%. Fourth, to improve the management and construction on vineyard base, complete well the purchase on raw meterials such as grape in 2009, so as to ensure the good and enough grape supply with proper varieties and fair price, therefore lay the solid foundation for the Company to fulfill its strategy. ③ The Company’s capital demand and investment plan In 2009, the total capital expenditure plan is CNY 122.69 million in construction of five 20 projects including the unfinished Beijing Changyu-AFIP International Chateau for second phase, unfinished Changyu (Nixia) fermentation base for bulk wine, a new project to renovate of production capacity and construct fermentation capacity at Changyu (Jingyang) Wine Company, purchase of offices for sales companies and new ork barrels. All above projects will be finished and put into production during 2009, and will be financed by the Company’s own capital. ④ Potential risks and countermeasures a) Risks of fluctuation of raw material prices Grapes are the main raw materials for the Company to produce wine. The yield and quality of grapes are closely related to several natural factors such as drought, rains, snow and frostetcetera, which will create impacts on the quantity and price of grapes procured by the Company and render theCompany’s production achievement even more unpredictable. Therefore, the Company will optimize the configuration of vineyards to lower the risks of grape price by developing new vineyards in Ningxia and Shanxi as well as extending the area of company vineyards. b) Risks of input-output ratio uncertainties Under the circumstances of intensified market competition and needing to meet demands for market penetration, the Company has to invest more and more in marketing thus increasing sales costs of turnovers, influencing the Company’s operation outcome as measured by input-output ratio such that some aspects that some investments may not yield predicted returns. Especially during the current financial crisis, the unpredictable factorsof people’s consumption capability will then increase generating more market input-output ratio uncertainty. Therefore, the Company will try to enhance the accuracy of market forecasting through intensified market surveys and analysis, and continuedperfection its input-output assessment system to ensure that investment can reach the predicted goals. c) Risks in product transport The Company’s products are fragile yet are distributed at home and abroad mainly by sea, railway and highway. Seasonal conditions during peak sales seasons ofSpring Festivalmust contend with potentially deficient domestic transport capability due to high transportation demands between passengers and cargo, and also some natural & unnatural factors such as strong wind, snow, frost and traffic accident etc, which may result ingoods not being transported to the markets on time,. To overcome such disadvantages, the Company will make its efforts to lower those risks through more effective sales predictionlinking production to sales, arranging production and transport strategically, and increasing inventories in the distant markets before the peak sales season. 2. Investment of the Company (1) The Uses of the Proceeds Collected in the Report Period The Company made a public offering of 32 million A Shares for capital increase in October of 2000, and received net proceeds of CNY 613.46 million. By end of report period, the Company actually invested in same projects as disclosed in the Prospectus, and there is no any change on imvestment project. Except those projects for improvement of middle procedures on production and sales which were difficult to rationally confirm the benefit, other productive projects all made good benefits. (2). Projects invested with non-raised capital During the report period, the Company totally invested self-possessed capital CNY163.25million in the following three projects: First, the construction of a 5,000t fermentation base in Ningxia. The investment amount was planned to be CNY 38million, during the report period, CNY 30million has been spent in completion of construction of fermentation workshop, boundary walls, laying of outside pipelines and construction of 5,000t fermentation tanks. The unfinished construction will be continued in 2009. 21 Second, construction of 15,000t new storage tanks in fermentation center Yantai. Total investment was CNY 25.5million. The project was completed and put in production on July 30th, 2008, which effectively relieved the Company from shortage of tanks. Third, CNY107.75 million was invested for the construction of Beijing Changyu-Afip International Chateau in 2008, yet the whole project is still under construction at present, and is estimanted to finish at June 2009 to start operation. 3. Audits and Changes of Accounting Policies (1) Audits information Ernest & Yong Huaming audited the Company’s 2008 financial report and accordingly compiled a standard auditing report with unreserved audit advice. (2) Changes of accounting policies The Company made a public offering of B shares in 1997 and A Shares in 2000, whereafter, the Company has made initial and continued confirmation & computation of its real estates, workshops and equipments in the financial report to A shareholders according to historical cost method in light of the Chinese accounting standards, in the same time, also made continued confirmation & computation in the financial report to B shareholders according to accepted value method in light of internatinal accounting standards, that is to say, to book the figures after deduction of term-end depreciation from the generally accepted values of the real estates, workshops and equipments that are valued by an independent asset evaluator at regular intervals (at least every three years). Given that the Company has already adopted the new accounting standards which have almost no difference from the international ones and that the differences for the Company’s adopting of the new accounting standards and the international ones in real estates, workshops and equipment are very small and moreover, because China Securities Regulatory Commission no longer required the listing companies with B Shares to submit the financial reports compiled in the light of the international accounting standards as from 2007, approved by the 3rd interim meeting of 4th-term Board of Directors in 2008, the Company decide to change the confirmation & computation method on real estates, workshops and equipment from accepted value to historical cost in the financial report to B Shareholders, that is to say, not to book the figures after deduction of term-end depreciation from the generally accepted values of the real estates, workshops and equipment that are evaluated by an independent asset evaluator at regular intervals (at least every three years). Please read the appendix of financial statement of the Company for other change of accounting policy and accounting estimation or alteration of accounting error, or the difference between China and International accounting standards. 4. Information of Routine Work of the Board of Directors (1) Meetings and resolutions of the Board of Directors Nine meetings of the Board of Directors were convened during the report period. ①The 9th meeting of the 4th-term Board of Directors was held on January 19th, 2008, the resolution announcement was published in “China Securities Newspaper”, “Securities Times” in the PRC and “Hong Kong Commercial Daily” on January 22nd, 2008. ②The 10th meeting of the 4th-term Board of Directors was held on March 21st, 2008, the resolution announcement was published in “China Securities Newspaper”, “Securities Times” in the PRC and “Hong Kong Commercial Daily” on March 25th , 2008. ③The 11th meeting of the 4th-term Board of Directors was held on April 17th ,2008, “The First Quarter Report of 2008” was deliberated and approved. ④ The 1st interim meeting of the 4th-term Board of Directors in 2008 was held on July 1st,2008, the resolution announcement was published in “China Securities Newspaper”, “Securities Times” in the PRC and “Hong Kong Commercial Daily” on July 2nd,2008. ⑤ The 2nd interim meeting of the 4th-term Board of Directors in 2008 was held on July 21st ,2008, the resolution announcement was published in “China Securities Newspaper”, “Securities Times” in the PRC and “Hong Kong Commercial Daily” on July 22nd ,2008. ⑥ The 12th meeting of the 4th-term Board of Directors was held on August 25th,2008, the 22 resolution announcement was published in “China Securities Newspaper”, “Securities Times” in the PRC and “Hong Kong Commercial Daily” on August 27th ,2008. ⑦The 13th meeting of the 4th-term Board of Directors was held on October 14th, 2008, the resolution announcement was published in “China Securities Newspaper”, “Securities Times” in the PRC and “Hong Kong Commercial Daily” on October 15th , 2008. ⑧The 14th meeting of the 4th-term Board of Directors was held on October 29th, 2008, “The Third Quarter Report of 2008” was deliberated and approved. ⑨The 3rd interim meeting of the 4th-term Board of Directors in 2008 was held on December 29th, 2008, “The proposal on Changing the Accounting Policies on the Company’s Real Estates, Workshops and Equipment ”was deliberated and approved. (2) Information on the Board of Directors’ execution of the resolutions of shareholders’ meetings ①According to the resolution of 2007 Stockholders’ Meeting, the Board of Directors brought 2007 profit distribution scheme into effect during the report period, that is, based on the existing 527.28 million shares, the Company distributed CNY 11 for every 10 shares to all of its shareholders (including tax, or CNY 9.90 in cash actually after tax deduction for every 10 shares to A Share’s individual shareholders and investment fund institutions). On May 10th, 2008, the Company published the “Notice of 2007 Dividend Distribution” in “China Securities Newspaper” and “Securities Times” , fixing the date of May 15th, 2008 as the registration day of Stock A and the last transaction day of Stock B and the date of May 16th, 2008 as the equity and interest calculation day. The Company had finished the profit distribution by the end of May 2008. ②. The Board of Directors of the Company has revised The Articles of Association according to the resolutions of 2007 shareholders’ meeting and the 2nd interim meeting of 2008. ③ The Board of Directors of the Company has retained Ernest & Yong Huaming as the auditor in 2008 according to the resolution of the 1st interim shareholders’ meeting of 2008. ④ During the report period, the Board of Directors has performed external investment in accordance with the power limit on decision-making granted by shareholders’ meeting, and no violation of exceeding the authority happened. (3) Summarized report on performance of the auditing committee under the Board of Directors a) The first meeting of auditing committee was convened on March 21st,2008, to vote for the Company’s 2007 financial statements and made out a written resolution which reads “It is unanimously agreed to submit the Company’s 2007 financial statements audited by Ernst & Young Hua Ming to the Company’s Board of Directors for deliberation”. b) On August 25th,2008, the second meeting of auditing committee was convened, on which the auditing committee deliberated and approved “The Proposal of Semi-annual Report 2008”, “The Proposal on Profit Distribution of First Half of 2008”, “The Scheme on Renewal of Contract with Certified Public Accounts Firm”, “The Self-examination Report on the Controlling Shareholder and /or Other Related Party’s Use of Non-operating Capital” and “The Special Rules on Prevention of the Controlling Shareholder and Other Related Parties from Capital Occupation”. c) The auditing committee held the third meeting on Dec.19th, 2008, communicated with certified public accounts firm responsible for the audit of Company’s annual report on financial report 2008, also deliberated and approved The Audit Plan for 2008. d) Before the audit firm started auditing in 2009, the auditing committee examined the Company-compiled financial statements on January 10th, 2009 and aired its opinions which read “①The Company shall deal with the affairs in relation to the subsidiary companies under consolidated financial statement as they are relatively large and usually located in other places, with big and wild variety of inventory at distant markets, and also whether they make the preparations sufficiently will give great impact on audit result, so as to accomplish the audit target finally. ② Due to the large investment amount in 2008, it is very necessary to launch all-around audit in order to prevent any major mistake.③The certified public accountants firm that the Company engaged to make an auditing of the Company’s annual financial statements shall perform its auditing duties strictly in accordance with the “Guidelines on Chinese 23 Certified Public Accountants’ Professional Activities” and duly communicate with this committee whenever it finds important problems. We believe that this financial statement can be submitted to the certified public accountants for annual auditing”. e) The auditing committee examined the Company’s financial statements once again after the engaged accountants had aired their preliminary opinions and afterwards discussed with the accountants on April 3rd, 2009, when they made out the written comments which read “we compared notes in detail with the certified public accountants firm who was responsible for auditing the Company’s annual financial statements and made detailed explanations of the problems found during auditing and the items to be adjusted. The Company has made an adjustment to the items in reference to the certified public accountants’ comments. According to the auditing results we learnt from the said accountants and the production and sales results in the year that were reported to us by the Company’s management as well as the progress of important issues, we came to a conclusion at last that we have no objection to the Company’s 2008 financial statements preliminarily determined by Ernst & Young Hua Ming and its preliminary auditing opinions. f) After the Company’s financial statements were finalized, the auditing committee held a meeting on April 7th, 2009 to vote for the Company’s 2008 financial statements and made out a written resolution which reads “It is unanimously agreed to submit the Company’s 2008 financial statements audited by Ernst & Young Hua Ming to the Company’s Board of Directors for deliberation”. The auditing committee gave full play to its supervision function during the course of auditing the Company’s 2007 and 2008 financial statements and safeguarded the auditing independency. (4) Summarized report on performance of the emolument committee under the Board of Directors The emolument committee under the Board of Directors is responsible for assessment of the performance of the directors and senior managers who get paid by the Company and examine the pay policy and scheme on the Company’s directors and senior managers. The emolument committee of the Company’s Board of Directors inspected in 2008 the paying fulfillment of the directors and senior managers who received their salaries in the Company in 2007 and checked the payroll of the Company’s directors and senior managers disclosed in 2008 annual report. It is believed that the assessment on the salaries of the directors, supervisors and senior managers who get paid by the Company was entirely in accordance with the Company’s economic responsibility system and the salaries disclosed by the Company were in conformity with the actually paid amount. 5. Preliminary plan for profit distribution 2008 The following is the distributable profits of the consolidated and parent company in 2008 according to Chinese accounting standard: Unit:CNY Consolidated Parent company Distributable profit after tax 1,163,188,086 1,128,102,212 Among which: net profit for 2008 894,620,794 992,829,006 Distributable profit carried forward from beginning 848,575,292 715,281,206 of report period Dividends distribution of 2007 (580,008,000) (580,008,000) According to relevant statutes and Articles of Association, considering the shareholders’ interest and also the Company’s long-term development, the Board of Directors will submit the following preliminary plan for profit distribution 2008 to the shareholders’ meeting : The Company will not withfraw legal public reserve fund when launching 2008 profit distribution because the balance of legal public reserve fund has exceeded 50% of the Company’s registered capital. Based on a total of 527.28 million shares of the Company registered on December 31st, 2008, the Company plans to pay CNY12.00 in cash for every 10 shares as dividends to all shareholders, totaling CNY 632.736 million, which accounts for 70.73% of total net profit or CNY894,620,794 attributed to parent company’s shareholders in consolidated financial statements, and the remaining undistributed priofit will be reserved for next year. The 24 cash dividends to the shareholders of Stock B will be paid to the beneficiaries’ accounts in HKD at the middle rate of CNY to HKD listed by People’s Bank of China on the first working day after the day when the resolution of shareholders’ meeting was made. The above distribution plan will be submitted to 2008 shareholders’ meeting for deliberation. The information of cash dividend distribution for preceding three years is as following: Unit: CNY Cash dividend Net profit attributed to parent Percentage of net profit attributed to amount (income tax company’s shareholders in parent company’s shareholders in included ) consolidated financial statements consolidated financial statements 2007 580,008,000.00 635,627,764.00 91.25% 2006 421,824,000.00 394,517,034.00 106.92% 2005 283,920,000.00 312,369,566.00 90.89% 6. Other Disclosed Information The newspapers for the Company to disclose information remained the same and still are “China Securities Newspaper”, “Securities Times” in PRC and “Hong Kong Commercial Daily” at abroad. IX. BOARD OF SUPERVISORS’ REPORT 1. Meetings of the Board of Supervisors Three meetings of the Board of Supervisors were convened during the report period. The 11th meeting of the 3rd-term Board of Supervisors was held on March 23rd , 2008, four proposals were deliberated and approved including “Proposal on 2007 Annual Report ”, “2007 Profit Distribution Scheme ”, “The Working Report of Board of Supervisors 2007 ” and “The Proposal on Board of Supervisors’Rules of Procedures”. The 12th meeting of the 3rd-term Board of Supervisors was held on August 25th, 2008, five proposals were deliberated and approved as “The Proposal of 2008 Semi-annual Report” , “The Profit Distribution Scheme for First Half of 2008”, “The Scheme on Renewal of Contract with Certified Public Accounts Firm”, “The Self-examination Report on the Controlling Shareholder and /or Other Related Party’s Use of Non-operating Capital” and “The Special Rules on Prevention of the Controlling Shareholder and Other Related Parties from Capital Occupation”. The 13th meeting of the 3rd-term board of supervisors was held on October 29th, 2008, the proposal as “The Report of Third Quarter 2008” was delibrated and approved. 2. Independent Comments of the Board of Supervisors for Relative Issues 2008 During the report period, the Board of Supervisors of the Company conscientiously performed its duties, was active in its work, attended several meetings of the board of directors as non-voter, well supervised major issues of the Company including shareholders’ meeting, the meeting procedures of Board of Directors, resolutions, resolutions execution of shareholders’ meeting by board of directors, the duty performance of top management, carried out a series of supervisory and checking activities in the Company’s operations, financial condition, interrelated transactions, use of raised capital, etc.The following comments are hereto written out after careful studies: (1) During the report period, the operation of the Company was completely in accordance with the Company Law of the People’s Republic of China, Articles of the Association, also relevant policies and statutes of state. The decision-making procedure of the Company accorded wih the law, and the Company had established perfect inner management system. During the report period, the directors and senior managerial staff of the Company were honest and dedicated to their work, abided by laws and rules, could conscientiously execute the resolutions of the shareholders’ meetings and the decisions of the Board of Directors, followed the national laws, rules and the Company-made regulations while performing their duties, safeguarded the interests of both the Company and all shareholders, and were found no conducts and behaviors against laws, rules, the company-made regulations or of infringements upon the interests of the Company. 25 (2) The Company’s financial management is up to the standards and accounting system is complete. The Company strictly followed the standards and system, and no Company’s assets were illegally impropriated or capital was lost. During the report period, the Company’s various expenses were reasonable and rational and its reserves accorded with the provisions in law, rules and articles of association. The Company’s financial condition was good and asset quality satisfactory and calculation and confirmation of revenues, outlays and profits were true and accurate. Ernest & Yong Huaming conducted audits to the Company’s 2008 financial statements and issued an auditing report with clean opinion accordingly. This Board of Directors believes that the report reflected the Company’s financial standing, operating outcomes and cash flow authentically, objectively and accurately. (3) No conducts of underground deals and infringements upon shareholders’ interests or of making the losses of corporate assets were found. (4) The interrelated transactions occurred during the report period were carried out strictly in the light of the relevant state stipulations and with complete formalities and on the basis of impartial transaction, which were all for the good of the Company and shareholders. The Company had no corporate or private guarantee/ pledge-related contracts. (5) The Board of Directors and managerial group of the Company fully executed all resolutions of shareholders’ meetings, and made well achievements on operation. X．Major Issues 1. The Company had no major lawsuit and arbitration over the year 2. The relative issues about bankruptcy and reform During the report period, the Company had no any bankruptcy and reform activity. 3. The information about holding share equity of other listed company or financial enterprise The Company does not hold share equity of other listed company, or any financial enterprises including commercial bank, securities company, insurance company, trust company and futures company. 4. Important merger and acquisition, sales of assets The Company had no merger and acquisition, sales of assets during the report period. 5. The performance on share equity incentive scheme The Company does not constitute or execute any share equity incentive scheme. 6. Significant interrelated deals 1) Interrelated creditor’s rights and liabilities By the end of report period, among the running capital involved between the Company and its controlling shareholder, there was still sales amount for wine products CNY 730,000 of the controlling shareholders which has not been paid back to the Company. During the report period, neither the controlling party nor its affiliated businesses ever used the Company’s capital for non-operating purpose, and there is also no any guarantee activity occurred. The Company did not provided capital to its controlling shareholder and subsidiary companies during the report period. The capital circulations among the Company and its controlling shareholder and subsidiary companies all belong to operating capital flow and the interrelated credits and debts between the Company and its controlling shareholder will not produce any impact on the Company’s operating results and financial condition. 2) Read the remark of financial statements “8. Relationship between the Interrelated Parties and Their Deals” for the interrelated deals extended from the previous year(s) to the report 26 period. 7. Major and important contracts and execution results (1) During the report period, the Company had no guarantee/ pledge-related contracts. It didn’t trust, contract or lease the assets of other companies, and vice versa. (2) Major guarantee During the report period, the Company neither had any immature guarantee nor provided any guarantee to any units including the subsidiary companies of the Company and individuals. (3) Financing entrustment During the report period, the Company established no trusteeship with any party in terms of its monetary capital nor was there entrusted financing extended from the previous years to the report period 8. Issues Promised by the Company During the report period, the controlling party Yantai Changyu Group Co., Ltd. promised that as from the day of being granted the right of circulation on stock market, it would not transact or transfer its shareholding in the Company within 36 months and within 12 months as from the day of the expiry of the afore-said promising period, the amount of the former non-circulating stock that Changyu Group may list for transaction at Stock Exchange can’t be over 5% of its total and within 24 months after that, can’t be over 10% of its total. The group company also promised to propose over the shareholders’ meetings 2005, 2006 and 2007 to distribute the Company’s profit in cash no less than 65% of the distributable profit realized in the same year and ensure to have the proposal passed. Yantai Changyu Group Co., Ltd. realized its promise during the report period to have 2007 profit distribution scheme passed over 2007 shareholders’ meeting and agreed to distribute in cash 81.1% of the distributable profits made in 2007. Except Changyu Group, there is no shareholders who held over 5% (including 5%) of the Company’s shares. 9. Information about appointing and dismissing certified public accountants firm The resolution was passed during the first temporary shareholders’ meeting in 2008 in which the Company decided to renewal the contract with Ernest & Yong Huaming to be the auditor for the Company in 2008 for a length of one year. The annual auditing expenditure totalled up to CNY1.5 million including travel fees and all operating cost. 10. Records of punishments, criticism in the form of circular or open reprimands made by the competent authorities During the report period, no punishment records, enquiries, administrative punishment, written criticism, public reprimand nor investigations were made or filed against this company, its directors, supervisors, senior managers, stockholders or actual controller by the China Securities Regulatory Commission, securities exchanges, or other competent authorities, judicial departments or disciplinary inspection departments. Nor were there any prosecutions or individuals detained for criminal responsibilities. 11. Situation of infraction on stock trading for directors, supervisors, senior management 27 and the shareholders with holding over 5% stock of the company During the report period, there is no directors, supervisors, senior management and the shareholders with holding over 5% stock of the company who disobeyed the rules to buy and sell the stocks of the company. 12. The Company’s Receptions, Studies and Visits Reception date Reception place Reception way Visitor Main topic and material provided January 11th 2008 Meeting room of Field survey Franklin Templeton the Company Sealand Fund January 11th 2008 Meeting room of Field survey Fortune SGAM Fund the Company January 11th 2008 Meeting room of Field survey Guangfa Securities Principal the Company operation, future January 11th 2008 Meeting room of Field survey Haitong Securities development the Company January 11th 2008 Meeting room of Field survey Invesco Great Wall the Company Fund January 11th 2008 Meeting room of Field survey Lion Fund the Company January 11th 2008 Meeting room of Field survey Harfor Fund the Company January 11th 2008 Meeting room of Field survey ICBC Credit Suisse the Company Fund January 15th 2008 Meeting room of Field survey SMC China Fund the Company March 8th, 2008 Meeting room of Field survey Shanghai Tajing the Company Investment March 8th, 2008 Meeting room of Field survey Dacheng Fund the Company March 8th, 2008 Meeting room of Field survey Hongta Securities the Company March 28th, 2008 Meeting room of Field survey Lehman Brothers the Company March 28th, 2008 Meeting room of Field survey Fullgoal Fund the Company April 18th, 2008 Meeting room of Field survey Pingan Securities the Company April 18th, 2008 Meeting room of Field survey China Jianyin the Company Investment Securities April 28th, 2008 Meeting room of Field survey Tebon Securities the Company April 28th, 2008 Meeting room of Field survey First Capital Securities the Company June 25th, 2008 Meeting room of Field survey Bosera Fund the Company July 5th, 2008 Meeting room of Field survey China International the Company Fund July 8th, 2008 Meeting room of Field survey Guotai Junan Securities the Company July 18th, 2008 Meeting room of Field survey Fortune SGAM Fund the Company July 23th, 2008 Meeting room of Field survey UBS the Company 28 August 3rd, 2008 Meeting room of Field survey SYWG BNP PARIBAS the Company Fund August 7th , 2008 Meeting room of Field survey Bank of the Company Communication & Schroder Fund August 12th , 2008 Meeting room of Field survey Hanlun Investment the Company Consultant Company August 18th , 2008 Meeting room of Field survey Industrial Fund the Company September 3rd, 2008 Meeting room of Field survey Deutsche Bank the Company September 17th , Meeting room of Field survey Industrial Securities 2008 the Company September 21th , Meeting room of Field survey Guotai Junan Securities 2008 the Company October 3rd, 2008 Meeting room of Field survey Changxin Fund the Company October 7th , 2008 Meeting room of Field survey AIG Huatai Fund the Company October 16th , 2008 Meeting room of Field survey AXA SPDB Fund the Company October 23rd , 2008 Meeting room of Field survey KBC-GOLDSTATE the Company Fund November 4th , 2008 Meeting room of Field survey Donghai Securities the Company November 14th , Meeting room of Field survey Obfuture Zixia 2008 the Company Investment November 26th , Meeting room of Field survey USA GE Asset 2008 the Company Management December 8th , 2008 Meeting room of Field survey China Universal Fund the Company December 16th , Meeting room of Field survey Pengyuan Management 2008 the Company & Consulting December 18th , Meeting room of Field survey Shanghai Jianyong 2008 the Company Investment December 26th , Meeting room of Field survey KGI Consulting 2008 the Company 29 13. Index for Information Disclosure of the Company Announcement Publication Title Publication Address No. Date 2008-Lin001 Announcement on the resolution of the ninth meeting 2008.1.23 of the fourth board of directors 2008-Lin002 Announcement on disclosure postponement of 2007 2008.3.15 annual report 2008-Lin003 Latest information about 2007 business achievement 2008.3.15 2008-Lin004 Announcement on disclosure postponement of 2007 2008.3.18 “China Securities annual report News” 2008-Lin005 Announcement on the resolution of the tenth meeting 2008.3.25 of the fourth board of directors 2008-Lin006 Announcement on the resolution of the eleventh 2008.3.25 meeting of the third board of supervisors 2008-Lin007 The notice of opening 2007 shareholders’ meeting 2008.3.25 2008-Lin008 Announcement on the related transcation 2008 2008.3.25 2008-Ding001 2007 annual report and its summary 2008.3.25 2008-Lin009 Announcement on the resolution of 2007 shareholders’ 2008.4.18 meeting 2008-Ding002 The report of the first quarter 2008 2008.4.19 2008-Lin010 Announcement on the profit distribution 2007 2008.5.10 2008-Lin011 Announcement on the resolution of 2008 first interim 2008.7.02 meeting of the fourth board of directors 2008-Lin012 Announcement on the resolution of 2008 second 2008.7.22 interim meeting of the fourth board of directors 2008-Lin013 Announcement on the trademark of Jiebaina 2008.7.22 2008-Ding003 2008 semi-annual report 2008.8.27 2008-Lin014 Announcement on the resolution of the twelfth meeting 2008.8.27 of the fourth board of directors 2008-Lin015 Notice on convening 2008 first interim shareholders’ 2008.8.27 meeting 2008-Lin016 Announcement on the resolution of the twelfth meeting 2008.8.27 of the third board of supervisors 2008-Lin017 Clarification Announcement 2008.9.24 2008-Lin018 Announcement on the resolution of 2008 first interim 2008.9.27 shareholders’ meeting “Securities Times” 2008-Lin019 Notice on convening 2008 second interim 2008.10.16 shareholders’ meeting 2008-Lin020 Announcement on the resolution of the thirteenth 2008.10.16 meeting of the fourth board of directors 2008-Ding004 The report of the third quarter 2008 2008.10.30 2008-Lin021 Announcement on the resolution of 2008 second 2008.11.15 “Hong Kong interim shareholders’ meeting Commercial Daily” 2008-Lin022 Announcement on the resolution of 2008 third interim 2008.12.31 meeting of the fourth board of directors All above-mentioned information has also been disclosed in web site of http://www.cninfo.com.cn. 14. Other Major Issues (1) Influenced by the natural disaster, the grape output of some main wine producing countries such as France and Australia etc. in 2008 was down and the pirce was increased, so that some domestic wineries purchased the bulk wine from domestic market instead of 30 abroad before. In addition, at the beginning of 2008, it happened a frost disaster in China Jiaodong peninsula-the location of the company, which brought the great reduction of grape output and the short supply of high quality grape, so then the purchase pirce for the domestic grape was also increased. In 2008, the average purhase price for the raw material of the company is up about 18% comparing with last year, which brought a big pressure for the cost reduction of the company. (2) The Company will not make any financing through the issuance any shares or bonds within the prescient one year. XI Financial Report INDEPENDENT AUDITORS’ REPORT To shareholders of Yantai Changyu Pioneer Wine Company Limited (A joint stock limited company incorporated in the People’s Republic of China) We have audited the financial statements of Yantai Changyu Pioneer Wine Company Limited (the “Company”) and its subsidiaries (collectively the “Group”) set out on pages 3 to 85, which comprise the consolidated and company balance sheets as at 31 December 2008, and the consolidated and company income statement, statement of changes in equity and cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes. Directors’ Responsibility for the Financial Statements The management and the directors of the Company are responsible for the preparation and the true and fair presentation of these financial statements in accordance with Chinese Accounting Standards. This responsibility includes designing, implementing, Maintaining internal control relevant to the preparation and the true and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditors’ Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with PRC Standards on Auditing issued by the Chinese Institute of Certified Public Accountants. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance as to whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity’s preparation and true and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the 31 directors, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements give a true and fair view of the state of affairs of the Company and of the Group as at 31 December 2008 and of the profit and cash flows for the year then ended in accordance with Chinese Accounting Standards. Ernst & Young Hua Ming Chinese Certified Public Accountant: Qian Xiao Yun Chinese Certified Public Accountant: Li Peng Beijing, the People’s Republic of China 8 April 2009 32 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED CONSOLIDATED BALANCE SHEET Year ended 31 December 2008 ASSETS Notes 6 2008 2007 CURRENT ASSETS Cash and Bank 1 1,748,573,840 1,322,898,600 Bills Receivable 2 13,378,706 11,524,698 Trade Receivables 3 82,343,029 82,490,201 Advances to Suppliers 4 5,278,985 35,046,532 Interest Receivable 5 19,176,250 13,518,196 Other Receivables 6 23,713,826 24,581,648 Inventories 7 997,942,600 835,906,849 Long-term debt investments due within one year 8 15,000,000 - Other Current Assets 253,935 257,848 Total Current Assets 2,905,661,171 2,326,224,572 NON-CURRENT ASSETS Held-to-Maturity Investments 8 - 15,000,000 Long Term Equity Investments 9 10,000,000 10,000,000 Property, Plant and Equipments 10 728,229,135 640,710,159 Construction in Progress 11 154,490,715 48,646,061 Intangible Assets 12 101,426,926 100,592,748 Biological Assets 13 40,675,990 19,821,941 Long Term Prepaid expense 14 21,452,595 11,808,079 Deferred Tax Assets 15 91,950,794 69,806,649 Other Non-Current Assets 7,045,254 8,614,265 Total Non-Current Assets 1,155,271,409 924,999,902 Total Assets 4,060,932,580 3,251,224,474 33 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED CONSOLIDATED BALANCE SHEET(CONTINUED) Year ended 31 December 2008 LIABILITIES AND EQUITY Notes 6 2008 2007 CURRENT LIABILITIES Trade Payables 18 220,708,265 202,289,452 Advances from Customers 19 188,709,167 45,118,769 Payroll Payable 20 151,849,547 126,456,239 Taxes Payable 21 457,714,254 338,885,842 Other Payables 22 412,923,817 224,095,102 Total Current Liabilities 1,431,905,050 936,845,404 Total Liabilities 1,431,905,050 936,845,404 EQUITY Issued Capital 23 527,280,000 527,280,000 Capital Surplus 24 557,222,454 557,222,454 Surplus Reserve 25 295,942,630 295,942,630 Retained Earnings 26 1,163,188,086 848,575,292 Equity Attributable to Equity Holders of the Company 2,543,633,170 2,229,020,376 Minority Interests 27 85,394,360 85,358,694 Total Equity 2,629,027,530 2,314,379,070 Total Liabilities and Equity 4,060,932,580 3,251,224,474 Legal Representative Financial Controller/ Accounting Supervisor Chief Accountant 8 April, 2009 8 April, 2009 8 April, 2009 34 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED CONSOLIDATED INCOME STATEMENT Year ended 31 December 2008 Notes 6 2008 2007 Revenue 28 3,453,442,314 2,730,166,091 Cost of Sales 28 1,036,020,758 827,001,088 Less: Taxes and Surcharges 29 214,623,474 186,317,901 Selling Expenses 869,788,111 624,646,818 Administrative Expenses 194,243,184 177,966,052 Provision on Impairment of Assets 30 1,635,014 (9,633,943 ) Add: Interest Income 31 35,362,131 23,379,783 Investment Income 32 3,962,502 1,033,356 Operating Profit 1,176,456,406 948,281,314 Add: Non-operating Income 33 10,488,825 5,634,857 Less: Non-operating Expenses 34 3,696,245 4,472,745 Including: losses on disposal of non-current assets 15,664 2,226,670 Profit before Tax 1,183,248,986 949,443,426 Less: Income Tax 35 288,742,526 310,548,848 Profit for the Year 894,506,460 638,894,578 Attributable to Equity holders of the Company 894,620,794 635,627,764 Minority Interests ( 114,334 ) 3,266,814 Earnings Per Share Basic Earnings Per Share 36 1.70 1.21 Diluted Earnings Per Share 36 1.70 1.21 35 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED CONSOLIDATED INCOME STATEMENT Year ended 31 December 2008 2008 Attributable to equity holders of the Company Issued Capital Surplus Retained Minority Capital Surplus Reserve Earnings Subtotal Interest Total At 1 January 2008 527,280,000 557,222,454 295,942,630 848,575,292 2,229,020,376 85,358,694 2,314,379,070 Profit for the Year - - - 894,620,794 894,620,794 ( 114,334) 894,506,460 Investment in Subsidiary - - - - - 150,000 150,000 Final Dividend ( No.26 of Notes6 ) - - - 580,008,000 )( 580,008,000) - ( 580,008,000) At 31 December 2008 527,280,000 557,222,454 295,942,630 1,163,188,086 2,543,633,170 85,394,360 2,629,027,530 2007 Attributable to equity holders of the Company Issued Capital Surplus Retained Minority Capital Surplus Reserve Earnings Subtotal Interest Total At 1 January 2007 527,280,000 557,222,454 295,942,630 634,771,528 2,015,216,612 53,603,184 2,068,819,796 Profit for the Year - - - 635,627,764 635,627,764 3,266,814 638,894,578 Disposal of a Subsidiary - - - - - ( 4,511,304) ( 4,511,304) Investment in Subsidiary - - - - - 33,000,000 33,000,000 Final Dividend ( No.26 of Notes6 ) - - - (421,824,000) ( 421,824,000) - ( 421,824,000) At 31 December 2007 527,280,000 557,222,454 295,942,630 848,575,292 2,229,020,376 85,358,694 2,314,379,070 36 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED CONSOLIDATED CASH FLOW STATEMENT Year ended 31 December 2008 Notes 6 2008 2007 CASH FLOWS FROM OPERATING ACTIVITIES Cash Received form sales of goods or rendering of services 4,818,481,180 3,440,017,628 Cash received relating to Other Operating Activities 131,593,236 43,745,238 Cash Inflows from Operating Activities 4,950,074,416 3,483,762,866 Cash Paid for goods and Services (1,834,039,043 ) (1,263,057,469 ) Cash Paid and on behalf of employees ( 250,604,280 ) ( 218,228,237 ) Cash paid for all types of Taxes ( 843,870,393 ) ( 632,805,773 ) Cash Paid relating Other Operating Activities 37 ( 770,514,170 ) ( 553,510,229 ) Cash Outflows from Operating Activities (3,699,027,886 ) (2,667,601,708 ) Net Cash flows from Operating Activities 38 1,251,046,530 816,161,158 CASH FLOWS FROM INVESTING ACTIVITIES Withdrawed of Matured Term Deposit (Over Three Months) - 53,095,022 Interest Received 38,273,159 23,244,756 Proceeds from Disposals of Property, Plant and Equipment 2,519,838 4,409,090 Cash Inflows from Investing Activities 40,792,997 80,748,868 Cash paid for acquisition of Property, Plant and Equipment, Intangible Assets and Other Long-term Assets ( 286,391,436 ) ( 319,940,385 ) Cash paid for Acquisition of Term Deposits over 3 Months ( 489,400,000 ) - Disposal of Subsidiary - ( 4,493,886 ) Cash Outflows from Investing Activities ( 775,791,436 ) ( 324,434,271 ) Net Cash flows from Investing Activities ( 734,998,439 ) ( 243,685,403 ) The notes on page 15 to page 85 are an integral part of these financial statements. 37 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED CONSOLIDATED CASH FLOW STATEMENT(CONTINUED) Year ended 31 December 2008 Notes 6 2008 2007 CASH FLOWS FROM FINANCING ACTIVITIES Cash Received from Capital Contributions of 150,000 33,000,000 Minority Interests Cash Inflows from Financing Activities 150,000 33,000,000 Cash paid for distribution of dividends or profits (580,008,000 ) ( 421,824,000 ) and for interest expenses 26 Cash Outflows from Financing Activities (580,008,000 ) ( 421,824,000 ) Net Cash flows from Financing Activities (579,858,000 ) (388,824,000 ) NET INCREASE/(DECREASE) IN CASH AND ( 63,809,909 ) CASH EQUIVALENTS 183,651,755 Add: 856,534,631 672,882,876 Cash and Cash Equivalents at Beginning of Year CASH AND CASH EQUIVALENTS AT END OF YEAR 39 792,724,722 856,534,631 38 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED BALANCE SHEET Year ended 31 December 2008 ASSETS Notes 14 2008 2007 CURRENT ASSETS Cash and Bank 1 1,199,543,976 1,075,006,949 Bills Receivable 5,215,800 5,498,698 Trade Receivables 2 13,271,136 10,237,494 Advances to Suppliers 2,942,070 6,812,603 Interest Receivable 19,176,250 13,518,196 Dividend Receivable 16 406,972,236 116,085,055 Other Receivables 3 361,305,380 117,846,668 Inventories 4 438,936,622 433,048,652 Long-term debt investments due within one year 15,000,000 - Other Current Assets - 65,875 Total Current Assets 2,462,363,470 1,778,120,190 NON-CURRENT ASSETS Held-to-Maturity Investments - 15,000,000 Long Term Equity Investments 5 169,077,178 168,027,178 Property, Plant and Equipments 6 351,548,553 376,081,728 Construction in Progress 8,263,910 2,334,103 Intangible Assets 7 93,648,384 96,717,460 Biological Assets 11,738,099 5,841,679 Deferred Tax Assets 8 14,950,351 17,089,266 Other Non-Current Assets 6,747,847 8,044,965 Total Non-Current Assets 655,974,322 689,136,379 Total Assets 3,118,337,792 2,467,256,569 39 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED BALANCE SHEET(CONTINUED) Year ended 31 December 2008 LIABILITIES AND EQUITY Notes 14 2008 2007 CURRENT LIABILITIES Trade Payables 10 169,592,563 154,766,924 Payroll Payable 11 105,145,026 109,276,553 Taxes Payable 12 68,218,327 60,392,343 Other Payables 13 266,834,580 47,094,459 Total Current Liabilities 609,790,496 371,530,279 Total Liabilities 609,790,496 371,530,279 EQUITY Issued Capital No.23 of Notes 6 527,280,000 527,280,000 Capital Surplus No.24 of Notes 6 557,222,454 557,222,454 Surplus Reserve No.25 of Notes 6 295,942,630 295,942,630 Retained Earnings 14 1,128,102,212 715,281,206 Total Equity 2,508,547,296 2,095,726,290 Total Liabilities and Equity 3,118,337,792 2,467,256,569 Legal Representative Financial Controller/ Accounting Supervisor Chief Accountant 8 April, 2009 8 April, 2009 8 April, 2009 40 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED INCOME STATEMENT Year ended 31 December 2008 Notes 14 2008 2007 Revenue 15 1,208,537,522 1,044,073,399 Cost of Sales 15 947,070,136 766,664,404 Less: Taxes and Surcharges 136,557,840 119,953,382 Administrative Expenses 129,538,650 107,033,805 Provision on Impairment of Assets - ( 328,085 ) Add: Interest Income 34,112,567 21,707,941 Investment Income 16 973,811,469 1,627,148,419 Operating Profits 1,003,294,932 1,699,606,253 Add: Non-operating Income 681,831 3,068,835 Less: Non-operating Expenses 110,159 1,727,300 Profits before Tax 1,003,866,604 1,700,947,788 Less: Income Tax 11,037,598 34,237,438 Profit for the Year 992,829,006 1,666,710,350 Earnings Per Share Basic Earnings Per Share 1.88 3.16 Diluted Earnings Per Share 1.88 3.16 41 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED STATEMENT OF CHANGES IN EQUITY Year ended 31 December 2008 2008 Capital Surplus Retained Issued Capital Surplus Reserve Earnings Subtotal At 1 January 2008 527,280,000 557,222,454 295,942,630 715,281,206 2,095,726,290 Profit for the Year - - - 992,829,006 992,829,006 Final Dividend (No.26 of Notes 6) ( 580,008,00 - - - 0) ( 580,008,000) At 31 December 2008 527,280,000 557,222,454 295,942,630 1,128,102,212 2,508,547,296 2007 Capital Surplus Retained Issued Capital Surplus Reserve Earnings Subtotal At 1 January 2007 527,280,000 557,222,454 295,942,630 (529,605,144) 850,839,940 Profit for the Year - - - 1,666,710,350 1,666,710,350 Final Dividend (No.26 of Notes 6) - - - ( 421,824,000) ( 421,824,000) At 31 December 2007 527,280,000 557,222,454 295,942,630 715,281,206 2,095,726,290 42 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED CASH FLOW STATEMENT Year ended 31 December 2008 Notes 14 2008 2007 CASHFLOWS FROM OPERATING ACTIVITIES Cash received from sale of goods or Rendering of Services 1,433,463,793 1,301,180,899 Cash received relating to Other Operating Activities 19,269,709 31,268,038 Cash Inflows from Operating Activities 1,452,733,502 1,332,448,937 Cash Paid for goods and services ( 1,008,871,977 ) ( 996,044,835) Cash Paid to and on behalf of employees ( 145,647,681 ) ( 205,002,621) Cash paid for all types of Taxes ( 201,360,736 ) ( 181,459,155) Cash Paid relating to Other Operating Activities ( 44,521,466 ) ( 68,833,514) Cash Outflows from Operating Activities (1,400,401,860 ) (1,451,340,125) Net Cash flows from Operating Activities 17 52,331,642 ( 118,891,188) CASH FLOWS FROM INVESTING ACTIVITIES Withdrawed of Matured Term Deposit (Over Three Months) - 53,095,022 Disposal of Subsidiary - 3,413,961 Interest Received 32,278,239 23,244,756 Proceeds from Disposals of Property, Plant and Equipment ( 5,406,167 ) 1,926,515 Gain on Investment 678,961,787 627,389,356 Other Cash Received from Investment 3,962,501 - Cash Inflows from Investing Activities 709,796,360 709,069,610 Cash paid for acquisition of Property, Plant and Equipment, Intangible Assets and Other Long-term Assets ( 56,318,124 ) ( 44,873,920) Cash paid for Acquisition of term Deposits over 3 Months ( 467,400,000 ) - Cash Paid for Investment 5 ( 1,350,000 ) ( 47,000,000) Cash Outflows from Investing Activities ( 525,068,124 ) ( 91,873,920) Net Cash flows from Investing Activities 184,728,236 617,195,690 43 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED CASH FLOW STATEMENT (CONTINUED) Year ended 31 December 2008 Notes 14 2008 2007 CASH FLOWS FROM FINANCING ACTIVITIES Cash paid for distribution of dividends or profits 14 (580,008,000) (421,824,000) Cash Outflows from Financing Activities (580,008,000) (421,824,000) Net Cash flows from Financing Activities (580,008,000) (421,824,000) NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS (342,948,122) 76,480,502 Add: Cash and Cash Equivalents at Beginning of Year 18 608,642,980 532,162,478 CASH AND CASH EQUIVALENTS AT END OF YEAR 18 265,694,858 608,642,980 44 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 1. CORPORATE INFORMATION Yantai Changyu Pioneer Wine Co., Ltd. (the “Company”) was incorporated as a joint stock limited company in accordance with the Company Law of the People’s Republic of China (the “PRC”) in a reorganization carried out by Yantai Changyu Group Co., Ltd. (“Changyu Group Company”), in which Changyu Group Company injected certain assets and liabilities in relation to the brandy, wine, sparkling wine, and tonic wine production and sales businesses to the Company. The Company and its subsidiaries (the “Group”) are principally engaged in the production and sales of wine, brandy, sparkling wine and tonic wine. Pursuant to the approval from the Government of Shandong Province (Luzheng [1997]119), the Company was reorganized as a joint stock limited company on 10 April 1997. On 23 September 1997, the Company was approved by China Securities Regulatory Commission (the “CSRC”) ([1997] No. 52) to issue 88,000,000 domestically listed foreign investment shares (“B shares”) on Shenzhen Stock Exchange. On 18 September 1997, the Company obtained the business license with the registered number No. 26718011-9. In October 2000, the Company was approved by CSRC to issue 32,000,000 domestically listed Shares (“A Shares”). The A shares were listed on Shenzhen Stock Exchange on 26 October 2000. Pursuant to the share reform notices issued by the Company in February 2006, Changyu Group Company transferred its 13,977,600 shares to the shareholders of A share of the Company. After the reform, percentage of equity attributable to Changyu Group Company decreased from 53.8% to 50.4%. At 31 December 2008, the total shares issued by the Company amounts to 527,280,000. Please refer to No.23 of Notes 6 in detail. The holding company of the Group is Changyu Group Company, which was ultimately controlled by Yantai SASAC, ILLVA Saronno Investment Italy, International Finance Corporation and Yantai Yuhua Investment and Development Company Limited. 2 BASIS OF PREPARATION AND ANNOUNCEMENT ON COMPLIANCE WITH CAS The financial statements are prepared in according with “Corporate Accounting Standards – The Principles” which published by Ministry of Finance in February 2006, and “the 38 specific accounting standards”, its application guide, interpretations for accounting standards, and other relevant regulations (with common name “Corporate Accounting Standards”). The financial statements are prepared on a going concern basis. Declaration for Implementing CAS The financial statements are prepared in according with CAS, which showing a true and fair view of the financial position on 31 December 2008, financial performance and cash flow in 2008 of the Company and the Group. 45 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES The financial statements of the Company and the Group in 2008 are prepared in accordance with the following primary accounting policies and estimates as stated in CAS. (1) Accounting Year The accounting year of the Group is from 1 January to 31 December. (2) Reporting Currency The Group reporting and presentation currency is the Renminbi (“RMB”). Unless otherwise stated, the unit of the currency is Yuan. (3) Basis of Accounting and Measurement Except for certain financial instruments, the Group accounts have been prepared on an accrual basis using the historical cost as the basis of measurement. Subsequently, if the assets are impaired, impairment provisions are made in accordance with the relevant requirements. (4) Business Combination A business combination is the bringing together of separate entities or businesses into one reporting entity, classifying into the business combination under common control and business combination under non common control. Business Combination under Common Control A business combination involving entities or businesses under common control is a business combination in which all of the combining entities or businesses are ultimately controlled by the same party or parties both before and after the business combination, and that control is not transitory. The combining entity that obtains control of other combining entities or businesses is the acquirer, and the other entities involved are the acquirees. The combination date is when the acquirer effectively obtains the control of the acquirees. The assets and liabilities obtained by the acquirer shall be measured at carrying amount in the acquiree's accounts as at the date of combination. Where there is a difference between the carrying amount of the net assets of the acquiree and the cost of combination, capital surplus shall be adjusted. Where the capital surplus is not sufficient to offset the value of the net assets acquired, retained earnings shall be adjusted. Any costs directly attributable to the combination are recognized as expenses when incurred, and recognized in profit and loss in the accounting period. 46 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (Continued) (4) Business Combination (Continued) Business Combination under Non-Common Control A business combination involving entities or businesses under non-common control is a business combination in which all of the combining entities or businesses are not ultimately controlled by the same party or parties both before and after the business combination. The acquisition entity that obtains control of other acquisition entities or businesses is the acquirer, and the other entities involved are the acquirees. The acquisition date is when the acquirer effectively obtains the control of the acquirees. For business combination under non-common control, cost of business combination is the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the acquirer, in exchange for control of the acquiree plus any cost directly attributable to the business combination. For business combination impalement through more then one exchange, the cost of business combination is the sum of each exchange. When a business combination agreement provides for an adjustment to the cost of the combination contingent on future events, the acquirer shall include the amount of that adjustment in the cost of the combination at the acquisition date if the adjustment is probable and can be measured reliably. For business combination under non-common control, the assets and liabilities and contingent liabilities obtained by the acquirer shall be measured at fair value as at the date of combination. Where the cost of combination is greater then the fair value of assets and liabilities and contingent liabilities, the difference should be recognized as goodwill. Where the cost of combination is smaller then the fair value of assets and liabilities and contingent liabilities, the fair value of acquiree’s assets and liabilities and contingent liabilities, and cost of combination should be reevaluated. Where cost of combination is still smaller than fair value of acquiree’s net assets, the difference should be recognized in income statement. (5) Consolidated Financial Statements The consolidation scope of consolidated financial statements is determined on the basis of control. The consolidated financial statements include the financial statements of the Company and its subsidiaries for the year ended 31 December 2008. The subsidiaries are entities that are controlled by the Company. The subsidiaries adopt the same accounting year and accounting policies as the Company adopted. All intercompany balances, transactions, income and expenses within the Group are eliminated in full on consolidation. Shareholders other than the Company in the consolidation refer to “Minority Interests”, which is presented separately in the consolidated financial statements. 47 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (Continued) (5) Consolidated Financial Statements (Continued) For the subsidiaries acquired through business combination under non-common control, their financial performance and cash flow shall be included in the consolidated financial statements from the combination date, as long as they are under control by the Company. In preparation of the consolidated financial statements, the subsidiaries’ identifiable assets, liabilities and contingent liabilities are adjusted by their fair value on the combination date. For the subsidiaries acquired through business combination under common control, their financial performance and cash flow shall be included in the consolidated financial statements on the reporting date. When preparing comparable consolidated financial statement, the per-combination adjustment of the subsidiary’s financial statements is considered as it existed when the post-combination reporting entity control the subsidiary. (6) Cash Equivalents Cash equivalents refers to short-term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value. (7) Foreign Currencies Foreign Currency Transactions For any foreign currency transactions, they are recorded in functional currency. Foreign currency transactions are initially recorded using the functional currency rates ruling at the date of the transactions. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rates of exchange ruling at the balance sheet date. All differences are recognized in income statement, except differences due to foreign borrowing that satisfied the capitalization treatment permitted. Non-monetary foreign currency items which measured at historical cost are translated using the exchange rates on transactions day. Non-monetary foreign currency items which measured at fair value are translated using the exchange rates on balance sheet day, and any difference is recognized in equity or income statement. (8) Inventories Inventories comprised raw materials, working in progress products, finishing goods and turnover materials. Inventories are assets that are held for sale in the ordinary course of business, in the process of production for such sale, and in the form of materials or supplies to be consumed in the production process. 48 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 The inventories are initially measured at cost. The cost of inventories comprises all costs of purchase, cost of conversion and other costs. When inventories are sold, the cost of sale is calculated using weighted-average cost. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (Continued) (8) Inventories (Continued) Agricultural produce harvested form the entity’s biological assets are measured at its weighted-average book value. The book value comprises all material, labor and other indirect expense occurred in producing and gathering the agricultural assets. Agricultural produce harvested are reported in accordance with the CAS 1 Inventories. The Company uses perpetual inventory system. Inventories are measured at the lower of cost and net realizable value at the balance sheet date. If the cost of inventories is higher than the net realizable value, the impairment of inventories is accrued, and the lost is recognized in income statement. If the factors causing any impairment of the inventories are not exist, where the net realizable value is higher then the cost, the amount of impairment is reversed from the provision had been recorded. The reversed amount is recognized in the income statement in the current year. The net realizable value is estimated selling prices in ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. The inventory provision for raw materials is assessed by categories of inventories, where finished goods are assessed by items. (9) Long Term Equity Investments Long term equity investments comprise investments in subsidiaries, joint ventures, associates and any investment which can not be reliable measured in an active market and investor entity has no control, joint control, or significant influence over an economy entity. The investment is initially measured at cost of investment. The Group using Cost Method for the investments which the Group has no controls, joint control or significant influence on an investee entity, and the investment can not be reliable measured in an active market. The Group uses Cost Method for a few investee entities which under control of the Group. In Cost Method, the long term equity investments are measured at its initial investment cost. The dividends or profits declared to distribute by the invested entity are recognized as the investment income in current income statement. The investment income recognized by the Group is limited to the amount received from the accumulative net profits that arise after the invested entity has accepted the investment. Where the amount of profits or cash dividends received by the Group exceeds the aforesaid amount, it is regarded as recovery of initial investment cost. 49 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (Continued) (9) Long Term Equity Investments (Continued) The invested entities over which the Group has joint control or significant influence are measured on equity method basis. Jointly-control refer to the control over an economic activity in accordance with the agreements, which does not exist unless the investing party of the economic activity with one an assent on sharing the control power over the relevant important financial and operating decisions. Significant influences refers to the power to participate in making decisions on the financial and operating of an enterprise but not to control or joint control together with other parties over the formulation of the policies. In Equity Method, where initial cost of investment excess the fair value of identifiable net assets of investee, the difference should be recognized in initial investment cost. Where initial cost of investment is smaller then the fair value of identifiable net assets of investee, the difference should be recognized in income statement and the investment cost should be adjust accordingly. In Equity Method, after investment, The Group recognizes the investment profits or losses and adjusts the book value of the long term equity investment based on the invest share of the net profits or losses of the investee entity. The invest share of the net profits and losses of the invested entity should be recognized at fair value of all identifiable assets in accordance with the accounting policy and accounting period of the Group, and the inter company transactions between the associate and joint ventures attributable to the Group on the ground of the interest in invested entities should be eliminated after making adjustments on the net profits of the invested entities. For the investment in associate and joint ventures before the first time adoption date, the debit balance of the investments, if any, also should be deducted from the investment income. The Group will reduce the book value of the long term equity investment in accordance with the share of profits or cash dividends declared to distribute by the invested entities. The net losses of the invested entity should be recognized until the book value of the long term equity investment and other long term rights and interests which substantially form the net investment made to the invested entities are reduced to zero, unless the Group has the obligation to assume extra losses. Where any change is made to the owner's equity other than the net profits and losses of the invested entity, the book value of the long term equity investment are adjusted and be included in the owner's equity, which will be transferred to the income statement according to a certain proportion when disposing of the long term equity investment. When disposing of a long term equity investment, the difference between its book value and the actual sales price is recognized in the income statement of the corresponding period. 50 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (Continued) (10) Biological Assets The biological assets of the Group are vines. Biological asset should be recognized when and only when: (i) The Group controls the asset as a result of past events, (ii) It is probable that future economic benefits associate with the asset will flow to the entity, and (iii) The cost of the asset can be measured reliably. Biological assets comprise consumptive biological assets, productive biological assets, and not for profit biological assets. Biological assets are initially measured at its cost. The Group charge deprecation for productive biological assets which satisfy expected production, and record the deprecation in balance sheet and income statement. The Group uses straight line method to calculate the deprecation, and details as follows: Category Estimated Useful Estimated Residual Annual Depreciation Life Rate Rate Vines 20years - 5% Consumptive biological assets and productive biological assets are measured as at each balance sheet date. Where reliable evidence shows there is natural disaster, plant diseases, insect pests, animal disease or change of market demand that make the realizable net value of any consumptive biological asset or the recoverable amount of any productive biological asset is lower than its book value, provision or impairment should be recognized in income statement in according to the difference. Where the factors which cause any provision of a consumptive biological asset are not exist, the amount of provision are reversed limited to the provision which has been made. The reversed amounts are recognized in the income statement of the current period. Impairment on productive biological assets can not be reversed. No provision should be made for not for profit biological assets. The Group evaluates the useful life, expected net salvage value, and the depreciation method of the property, plant and equipment at the end of each year. Agricultural produce harvested form the entity’s biological assets are measured at its weighted-average book value. The book value comprises all material, labor and other indirect expense occurred in producing and gathering the agricultural assets. Agricultural produce harvested are reported in accordance with the CAS 1 Inventories. When disposal on biological asset which is sold, lost, dead, or damaged, the carrying amount deducted relevant taxes is recognized in the income statement. 51 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (Continued) (11) Property, Plant and Equipment Property, plant and equipment defines as the assets held for use in the production or supply of goods or services, for rental to other, or for administrative purpose, and are expected to be used during more than one period. Property, plant and equipment should be recognized as an asset if, and only if: (i) It is probable that future economic benefits associated with the item will flow to the entity; and (ii) The cost of the item can be measured reliably. Subsequent expenditure related to property, plant and equipment under the recognition principle could be recognized as asset in balance sheet, otherwise is recognized in income statement. Property, plant and equipments are initially measured at cost. The cost of an item of property, plant and equipment comprises its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates; and any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. Depreciation is calculated on a straight line basis. The estimated useful life and residual value rate are as follows: Estimated Useful Estimated Residual Annual Depreciation Life Rate Rate Buildings 30-40years 5%-40% 2%-3.2% Machinery 10-20years 5% 4.8%-9.5% Motor Vehicles 6-12years 5% 7.9%-15.8% A variety of depreciation rate can be used for different components of an item of property, plant and equipment according to its different useful lives or nature. The Group evaluates the useful life, expected net residual value, and the depreciation method of the property, plant and equipment every year, and makes adjustment where necessary. (12) Construction in Progress Construction in progress are measured on actual construction costs, including the direct costs of construction, capitalized borrowing costs during the period of construction and other expenditures. Construction in progress is reclassified to the property, plant and equipment when completed and ready for use. 52 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (Continued) (13)Intangible Assets Intangible assets are measured initially at cost. The estimated useful lives are determined on the periods during which it can bring economic benefits to the Group. If the periods cannot be reliably determined, the intangible assets are classified as intangible assets with indefinite useful life. The useful lives of the intangible assets are as follows: Useful life Land Use Rights 50years Software 5years The land use rights obtained by purchase or payment of land lease prepayment are recorded as intangible assets. For self constructed buildings, the land use rights and plants are recorded as intangible assets and property, plant and equipment respectively. Purchased buildings are allocated between land use rights and buildings based on actual payments, and are totally recorded as property, plant and equipment when it is difficult to allocate. Intangible assets with finite lives are amortized over the useful life on the straight line basis. The amortization period and amortization method for an intangible asset with a finite useful life are reevaluated at each year end. Intangible assets with indefinite lives are assed for impairment every year whenever there is an indication that the intangible asset may be impaired. If there is evidence that the useful lives of the intangible assets are finite, the change in the useful life assessment from infinite to finite is accounted for on a prospective basis. (14) Long Term Prepaid Expenses Long term prepaid expenses refer to the prepaid expenses which are amortized over 1 year. Long term prepaid expenses are amortized over the useful economic life on the straight line basis. (15) Financial Instruments Financial instruments refer to the contracts whereby the financial assets of an enterprise are formed, and whereby the financial liabilities or right instruments of any other entity are formed. Recognition and Derecognizing of Financial Instruments The Group recognizes the financial assets or financial liabilities as it contracted in financial instruments agreements. 53 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (Continued) (15) Financial Instruments (Continued) If a financial asset meets any of the following requirements, it is derecognized: (i) If the contractual rights for collecting the cash flow of the said financial asset are terminated; or (ii) Remained the ownership of receive the cash flow form financial assets, but with the responsibility of transferred all cash flow received form financial assets to the third parties; or (iii) Transferred out the ownership of receive cash flow form financial assets, (a) actually transferred out all the risk and reward related to the financial assets, or (b) actually neither remained nor transferred out almost of the risk and reward of financial assets, but lost the control of the financial assets. A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognizing of the original liability and a recognition of a new liability, and the difference between the respective carrying amounts is recognized in the income statement. Classification and Measurement of Financial Assets Financial assets are classified into four categories when they are initially recognized, including financial assets at fair through profits or losses, held to maturity investments, loans and receivables and available for sale financial assets. Financial assets and financial liabilities initially recognized at fair value. For financial assets measured at fair value through profits or losses, the transaction expenses thereof are directly included in the current profits or losses; for other categories of financial assets and financial liabilities, the transaction expenses thereof are included in the initial costs. Financial Assets at Fair Value through Profits and Losses Financial assets at fair value through profit or loss include financial assets held for trading and financial assets designated upon initial recognition as at fair value through profit or loss. Financial assets are classified as held for trading if they meet any of the following requirements: (i) The financial assets being acquired mainly for the purpose of selling or repurchase in the near future; (ii) Forming a part of the identifiable combination of financial instruments, which are managed in a centralized way, and for which there is objective evidence that the enterprise will manage the combination by way of short term profit making in the near future; (iii) Being a derivative instrument. Theses financial assets are subsequently measured at fair value, and all the realized and unrealized profits and losses are included in profits and losses of the current 54 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 year. Gains or losses on these financial assets are recognized in the income statement whenever they are realized or not realized. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (Continued) (15) Financial Instruments (Continued) Held to Maturity Investments Non derivative financial assets with fixed or determinable payments and fixed maturity are classified as held to maturity when the Group has the positive intention and ability to hold to maturity. Held to maturity investments are subsequently measured at carried amortized cost using the effective interest method. Gains and losses are recognized in the income statement when the investments are derecognized or impaired, as well as through the amortization. Loans and Receivables Loans and receivables are non derivative financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are subsequently carried at amortized cost using the effective interest method. Gains and losses are recognized in the income statement when the loans and receivables are derecognized or impaired, as well as through the amortization process. Available for Sale Financial Assets Available for sale financial assets are non derivative financial that are initially designated as available for sale or are not classified into any of the other three categories. After initial recognition, available for sale financial assets are measured at fair value, with gains or losses recognized as capital surplus reserve until the investment is derecognized or until the investment is determined to be impaired, at which time the cumulative gain or loss previously reported in equity are recognized in the income statement. Amortized cost is calculated taking into account any discount or premium on acquisition and includes fees that are an integral part of the effective interest rate and transaction costs. Interest and dividends earned are recoded as interest income and dividend income, respectively and are recognized in the income statement. Available for sale financial assets which have no quoted price and fair value cannot be reliably measured are measured at cost. Classification and Measurement of Financial Liabilities Financial liabilities are classified into financial liabilities at fair through profits and losses and other financial liabilities when they are initially recognized. For financial liabilities at fair through profits and losses, the transaction expenses thereof are directly included in the current profits or losses, while the transaction expenses of other financial liabilities are include in the initially recognized amounts. 55 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (Continued) (15) Financial Instruments (Continued) Classification and Measurement of Financial Liabilities (Continued) Financial Liabilities at Fair Value through Profits and Losses Financial liabilities at fair through profits and losses include transaction financial liabilities, and the designated financial liabilities measured at fair value upon initial recognition, and whose variation is recognized in the income statement of the current year. Financial liabilities that meet any of the following requirements are classified as transaction financial liabilities: (i) The financial liability being undertaken mainly for the purpose of selling or repurchase in the near future; (ii) Forming a part of the identifiable combination of financial instruments, which are managed in a centralized way, and for which there is objective evidence that the enterprise will manage the combination by way of short term profit making in the near future; (iii) Being a derivative instrument. Theses financial liabilities are subsequently measured at fair value, and all the realized and unrealized profits and losses are recognized in the income statement of the current year. Other Financial Liabilities The financial liabilities are subsequently measured at amortized cost by adopting effective interest rate method. Fair Value of Financial Instruments The fair value of investments that are actively traded in organized financial markets is determined by reference to quoted market prices. For investments where there is no active market, fair value is determined using valuation techniques. Such techniques include using recent arm’s length market transactions; reference to the current market value of another instrument, which is substantially the same; a discounted cash flow analysis; option pricing models and other valuation models. Impairment of Financial Assets The Group assesses at each balance sheet date whether there is any objective evidence that a financial asset or a group of financial assets is impaired. Positive evidences refer to those occurred after the initial recognition, have effect on estimated future cash flows of the financial assets, and can be measured reliably. Assets Carried at Amortized Cost If there is objective evidence that an impairment loss on financial assets carried at amortized cost has been incurred, the amount of the loss is measured as the difference between the assets’ 56 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate after taking into account of the collateral over these balances. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (Continued) (15) Financial Instruments (Continued) Impairment of Financial Assets (Continued) The Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant. If it is determined that objective evidence of impairment exists for an individually assessed financial asset, the impairment losses are recognized in the income statement of the current year. Not individually significant financial assets are assessed individually or collectively included in a group of financial assets with similar credit risk characteristics. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment. If, in a subsequent period, the amount of impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed. Any subsequent reversal of an impairment loss is recognized in the income statement, to the extent that the carrying value of asset does not exceed its amortized cost at the reversal date. Available for Sale Financial Assets When a decline in the fair value of an available for sale financial asset has been recognized directly in equity and there is objective evidence that the asset is impaired the accumulative loss that had been recognized directly in capital surplus are removed from equity and recognized in profit or loss of the current period. The amount of the cumulative loss that is removed from equity and recognized in the income statement is be the difference between the acquisition cost (net of any principal repayment and amortization) and current fair value, less any impairment loss on that financial asset previously recognized in the income statement. Impairment losses on debt instruments are reversed through the profits or losses, if the increase in fair value of the instrument can be objectively related to an event occurring after the impairment, loss was recognized in the income statement. Impairment losses on equity instruments classified as available for sale are not reversed through the income statement. Financial Assets Carried at Cost If there is objective evidence that the financial assets have been impaired, the amount of the impairment loss is measured as the difference between the carrying amount of the financial asset and the present value of estimated future cash flows discounted at the current market rate 57 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 of return for a similar financial asset, and recognized in the income statement of the current year. Such impairment losses are not reversed. The impairment on long term equity investment which are measured by employing cost method in accordance with CAS2 Long term equity investments, have no quoted market price in an active market and the fair value cannot be reliably measured are recorded according to the aforesaid requirements. 58 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (Continued) (15) Financial Instruments (Continued) Transfers of Financial Assets If the Group has transferred substantially all the risks and rewards of the asset and waived the control of the asset, the asset is derecognized. If the Group has retained substantially all the risks and rewards of the asset, the assets are not de recognized. Where the Group has neither transferred nor retained substantially all the risks and rewards of the asset, if the Group waived the control of the assets, the financial assets are derecognized and the assets and liabilities are recognized accordingly; if the Group did not waive the control of the assets, the financial assets are recognized to the extent of the Group's continuing involvement in the asset, and the liabilities are recognized accordingly. (16) Impairment of Assets Impairments on assets other than inventories, deferred tax, financial assets and long term equity investments without quoted market price in active market the fair value cannot be reliably measured are determined according to the following methods: On each balance sheet date, the Group made assessment on whether or not there is any indication of potential asset impairment. If there is any evidence that indicates the possibility of asset impairment, the recoverable amount of the asset is being estimated. Independent of whether there are indication of potential impairment, the goodwill from an enterprise merger and intangible assets whose useful lives are indefinite are subjected to impairment testing each year. The recoverable amount of an asset is the higher of the asset's or cash generating unit's value in use and its fair value less costs to sell, and is determined for an individual asset. If it is difficult to determine the recoverable amount individually, the recoverable amount is determined for the cash generating unit to which the asset belongs. Cash generating unit is determined as the asset generate cash inflows that are largely independent of those from other assets or groups of assets, in which case An impairment loss is recognized only if the carrying amount of an asset exceeds its recoverable amount. An impairment loss is charged to the income statement and provision is made accordingly. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group's cash generating units, or groups of cash generating units, that are expected to benefit from the synergies of the combination, and not larger than the reportable segment determined by the Group. 59 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (Continued) (16) Impairment of Assets (Continued) When conducting impairment testing on relevant cash generating units or groups of cash generating units that have related goodwill, if there is any evidence indicating that impairment of the cash generating units or groups of units has occurred, the enterprise first carries out impairment testing on the cash generating units or groups of units excluding goodwill, calculating the recoverable amount, comparing it with the corresponding carrying amount and recognizing any resulting impairment loss. Then impairment testing are conducted on the cash generating units or groups of units with goodwill included, the carrying amount of these cash generating units or combinations of cash generating units (including the carrying amount of the goodwill allocated thereto) compared to the recoverable amount; if the recoverable amount of said cash generating units or groups of units is below the carrying amount thereof, The impairment loss are first deducted from the carrying amount of the corporate assets and goodwill which have been allocated to the cash generating unit or group of units, and then deducted from the carrying amount of the remaining assets pro rata with goodwill excluded from consideration. After a loss of asset impairment has been recognized, it is not be reversed in future accounting periods. (17) Contingent Liabilities The Standard defines provisions as liabilities of uncertain timing or amount. A provision should be recognized when and only when: (i) The group has a present obligation as a result of a past event; (ii) It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; (iii) A reliable evaluation can be made of the obligation. The contingent liabilities are measured at the best estimate of the expenditure required to settle the present obligation at the balance sheet date, taking into consideration of the risks, uncertainties and time value of money. The book value of contingent liabilities is reviewed at each balance sheet date. Whether there is any objective evidence indicating that the book value cannot reflect the best estimated amount, adjustments should be make to the book value. (18) Revenue Revenue is recognized when it is probable that the economic benefits will flow to the Group and when the revenue can be measured reliably, on the following bases: Revenue from the sale of goods When the significant risks and rewards of ownership have been transferred to the buyer, provided that the Group maintains neither managerial involvement to the degree usually associated with ownership, nor effective control over the goods sold, and cost of sales can be measured reliably. 60 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (Continued) (18) Revenue (Continued) Interest income Interest income is measured based on the borrowing periods and actual interest rate. (19) Leases Leases that transfer substantially all the rewards and risks of ownership of assets to the Group, are accounted for as finance leases, otherwise are accounted for as operating leases. As a lessee Rental expenses under the operating leases are credited to related costs of the assets or the income statement on the straight line basis over the lease terms. (20) Employee Benefits Employee benefits refer to all kinds of remunerations and other relevant reimbursements made by enterprises to their employees in exchange for services of employees. During accounting periods wherein an employee renders services to an enterprise, the Group recognized the benefits payable as a liability. The benefits payable which will be matured over 1 year are discounted when it is material. Medical insurance, pensions, unemployment insurance, other social insurance and housing fund are recorded as cost of relevant assets or expenses for the current period. If an Group terminates the labor relationship with any employee prior to the expiration of the relevant labor contract or makes a severance package proposal with the purpose of enticing the employees to willingly accept such a termination, the Group recognized the contingent liabilities to be incurred due to severance pay, and recorded them in income statement of the current period. The treatment for the early retirement planning is on the same basis to that of the termination benefits. The salaries and the social insurance expenses for the period from the employee’s termination of service and the normal retirement of these staffs are recognized as employee benefits payable when meeting the above said retirement benefits recognition requirements, and recognized to income statement of the current period. (21) Income Tax Income tax comprises current and deferred tax. Income tax is recognized in the income statement or in equity if it relates to goodwill generated from merger or affairs causing recognition of equity. Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. Taxable income is the adjusted profit before tax in accordance with the corporate income tax law. 61 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (Continued) (21) Income Tax (Continued) The group recognized the income tax assets or liabilities related to current period and prior period by calculating the payable or refund amount prospectively in accordance with the tax law. Deferred tax is provided, using the liability method, on all temporary differences at the balance sheet date between the tax bases of assets and liabilities or items not recognized as assets or liabilities but can be measure at tax bases and their carrying amounts. Deferred tax liabilities are recognized for all taxable temporary difference, except: (i) where the deferred tax liability arises from goodwill or the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and (ii) In respect of taxable temporary differences associated with interests in subsidiaries, associates and joint ventures, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred tax assets are recognized for all deductible temporary differences, carry forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry forward of unused tax credits and unused tax losses can be utilized except: (i) where the deferred tax asset relating to the deductible temporary differences arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and (ii) in respect of deductible temporary differences associated with interests in subsidiaries, associates and joint ventures, deferred tax assets are only recognized to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. Conversely, previously unrecognized deferred tax assets are reassessed at each balance sheet date and are recognized to the extent that it is probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. 62 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (Continued) (22) Government Grants Government grants refers to monetary or non monetary assets received by an enterprise from the government, but excludes capital invested in the Group by the government that gives the government ownership rights. Government grants are recognized where there is reasonable assurance that the grant will be received and all attaching conditions will be complied with. Monetary grants are measured on the basis of the amount received or the amount receivable. Non monetary grants are measured based on the fair value of relevant assets. Where the grant relates to an asset, the fair value is credited to a deferred income account and is released to the income statement over the expected useful life of the relevant asset by equal annual installments. Government grants relating to income are handled accordingly as follows: (i) Those to be used as compensation for future expenses or losses are recognized as deferred income and are be recorded in the profit and loss account for the period where the relevant expenses are recognized; or (ii) Those to be used as compensation for relevant expenses or losses already incurred are recorded directly in the profit and loss account for the current period. (23) Profits Distribution Profits after tax are distributed after appropriation of statutory surplus reserves and discretionary common reserve. In accordance with the Company Law of the PRC and the Company’s articles of association, the Company is required to appropriate 10% of the net profit reported in the statutory accounts (after offsetting prior years’ losses) to the statutory surplus reserve fund (“SRF”) until the balance of SRF reaches 50% of the Company’s share capital. The SRF can be transferred to shares. However, SRF is maintained at a minimum of 25% of the registered capital after the transfer. The proposed dividends or profits after the balance sheet date is not recognized as liability and shall be disclosed in the notes to the financial statements. (24) Significant Accounting Judgments and Accounting Estimates Estimation Uncertainty The following are key assumptions for after balance sheet date event and other factors of uncertain estimation. They may cause material adjustment on balance sheet in following accounting period. 63 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (Continued) (24) Significant Accounting Judgments and Accounting Estimates (Continued) Estimation Uncertainty (Continued) Deferred tax assets Deferred tax assets are recognized for all unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilized. Significant management judgment is required to determine the amount of deferred tax assets that can be recognized, based upon the likely timing and level of future taxable profits together with future tax planning strategies. Depreciation As set out in No.11 of note 3, the depreciation is calculated on the straight line basis to write-off the cost of each item of fixed assts to its residual value over its estimated useful life. The Group’s management determines the estimated useful lives for its property, plant and equipment. This estimate is based on the historical experience of the actual useful lives of property, plant and equipment of similar nature and functions. If the previous estimates have significant changes, and depreciation expenses will be adjusted in the future periods. Useful life of the intangible assets The estimated useful lives of the intangible assets are determined based on the historical experience of the actual useful lives of intangible assets of similar nature and functions as well as considering the contractual rights and statutory rights applicable to the intangible assets. When the estimated useful lives of finite intangible assets are shortened or extended, the amortization periods should be adjusted accordingly. When there is evidence indicating the useful lives of intangible assets with indefinite useful lives becomes finite, the useful lives should be estimated and the intangible assets should be accounted for in accordance with the standards for the intangible assets with finite useful lives. Useful life of the biological assets The useful life of biological assets is determined based on the industries practice and estimated productive life. If the previous estimates have significant changes, the depreciation expenses will be adjusted in the future periods. 64 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (Continued) (24) Significant Accounting Judgments and Accounting Estimates (Continued) Impairment of biological assets As set out in No. 10 of note 3, the Group examined the consumptive biological assets and productive biological assets at each balance sheet date. If any reliable evidence shows that the realizable net value of any consumptive biological asset or the recoverable amount of any productive biological asset is lower than its book value due to natural disaster, plant diseases and insect pests, animal disease or change of market demand, the Group, on the basis of the difference between the realizable net value or the recoverable amount and the book value, make provision for the loss on decline in value of or for the impairment of the biological asset and are recorded it in the profits and losses of the current period. The aforesaid realizable net value and recoverable amount is determined according to the CAS 1 Inventories and CAS 8 Asset Impairment, respectively. Impairment of non current assets As set out in No.16 of note 3, the Group assesses whether the recoverable amount is lower than the book value. If there are any indicators that the book value of non current assets cannot be fully recoverable, impairment losses should be recorded. The recoverable amount is the higher of an asset’s fair value less costs to sell and the present value of the future cash flows expected to be derived from an asset. As it is difficult for the Group to obtain the quoted market price of the assets (or assts group), the fair value of the assets cannot be reliably estimated. When the management make estimation on the expected future cash flows from the asset or cash generating unit, estimates should be made on choosing a suitable production volume, selling price and related operating costs discount rate in order to calculate the present value of those cash flows. When recoverable amounts are undertaken, management may use all available for use information, including the forecast on production volume, selling price and related operating costs in reasonable and supportable assumptions. Estimated provision for trade and other receivables A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy are considered indicators that the trade receivable is impaired. The provision is reassessed at the end of each year. Inventory provision based on net realizable value The inventory are measured on the lower of carrying value and net realizable value, and provision should be made for impairment on obsolete and slow moving inventories. The group will reassess whether the net realizable value is lower than the carrying cost at the end of each year. 65 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (Continued) (24) Significant Accounting Judgments and Accounting Estimates (Continued) Corporate income tax The Company and its subsidiaries are required to pay corporate income tax separately for they are located in different provinces. Because certain affairs have not been confirmed by the tax bureau when income tax expenses are provided, the management should make reliable estimates and judgments based on prevailing tax laws and other related policies. If the final results confirmed by the tax bureau are different from the recorded amounts, the difference will have an impact on income tax expenses provided for the current period. 4. TAXES The main taxes and tax rate are as follows: Value Added Tax VAT is levied at 17% on the invoiced amount after deduction of eligible input VAT. The subsidiary of the Company, Huanren Changyu Wine National Wines Sales Co., Ltd. was incorporated in Huanren Manchu Autonomous Country. According to Caishui [2006] No. 103 Notice on continuing to implementing VAT preferential policy to goods sold by nationality trading enterprises which are closed to frontier or in nationality areas, the nationality trading enterprise in nationality area is exempt from VAT. Consumption Tax Consumption tax of the tonic wine is levied at quantity and certain tax rate of gross turnover, namely levied at 20% of total turnover and RMB 1000 per ton. For all other product, consumption tax is levied on gross revenue at rates ranging from 10% to 20%. Turnover Tax Turnover tax is levied at 5% of taxable turnover. City Development Tax Levied at 7% of total Turnover Tax payment. Education Supplementary Fee Levied at 4% of total Turnover Tax payment. 66 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 4. TAXES (Continued) Corporate Income Tax The Group adopts 25% tax rate which states by “Corporate Income Tax Legislations” affected on 1 January 2008, and Corporate Income Tax is levied at 25% of taxable profit, whereas tax was levied at 33% of taxable profit in 2007. The subsidiary of the Company, Huanren Changyu Wine National Wines Sales Co., Ltd. was incorporated in Huanren Manchu Autonomous County. According to Liaoguoshui [2008] No. 201 “Re: Liaoning State Administration of Taxation exempts CIT for Huanren Changyu Wine National Wines Sales Co., Ltd”, Huanren Changyu Wine National Wines Sales Co., Ltd. is exempt from CIT. As one subsidiary of the Company, Beijing AFIP Tourism and Culture Company was established in Miyun county in Beijing which is belong to a mini-type and meager profit company with 20% of the income tax rate in accordance with PRC Income Tax Laws. The subsidiary of the Company, Liaoning Changyu Ice Wine Chateau Company Limited which is a productive foreign-invested enterprise was incorporated in Huanren Manchu Autonomous Country. In accordance with PRC Income Tax of Foreign Investment and Foreign Enterprises and Notice of the State Council’s implementation of the transitionally preferential Policies, the productive foreign invested company with term of more than 10 years, was exempted from corporate income tax in first and second profit-making year and reduced by half in the ensuing three years. 2008 was the second year of exempted from CIT of the company. All other subsidiaries and the Company are subject to 25% income tax rate. 67 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 5. SCOPE OF CONSOLIDATED FINANCIAL STATEMENTS Percentage of equity attributable to the Company Name Place and date of Registered Directly Indirect Investment Voting Incorporated Principle activities registration capital amount power % code Yantai Changyu Pioneer 1 December 1992 RMB 100% - RMB 100% 165 031 729 Transportation Vehicular Transport Yantai in Shandong 300,000 300,000 service Co., Ltd. (“Vehicular Province, China Transportation”) Beijing Changyu Sales and 14 July 1998 RMB 70% 30% RMB 100% 634 377 029 Sales of wine Distribution Co., Ltd. Beijing, China 500,000 500,000 (“Beijing Sales”) Yantai Kylin Packaging Co., 29 September 1999 USD 50% - RMB 62.5% 863 052 455 Production of Ltd. (“Kylin Packaging”) Yantai in Shandong 1,400,000 5,953,878 packaging (a) Province, China materials Yantai Changyu-Castel Wine 3 September 2001 USD 70% - RMB 100% 730 682 613 Production and Chateau Co., Ltd. Yantai in Shandong 5,000,000 28,968,100 sales of wine (“Changyu-Castel”) (b) Province, China Changyu (Jingyang) Pioneer 5 December 2001 RMB 90% 10% RMB 100% 732 663 643 Production and Wine Co., Ltd. (“Jingyang Jingyang in Shanxi 1,000,000 1,000,000 sales of wine Wine”) Province, China Yantai Changyu Pioneer Wine 24 December 2001 RMB 90% 10% RMB 100% 746 576 380 Sales of wine Sales Co., Ltd. (“Sales Yantai in Shandong 8,000,000 8,000,000 Company”) Province, China Langfang Development Zone 1 March 2002 USD 49% - RMB 100% 735 624 56X Production and Castel-Changyu Wine Co., Langang in Hebe 3,000,000 12,142,200 sales of wine Ltd. (“Langfang Castel”) (c) Province, China Changyu (Jingyang) Pioneer 8 April 2002 RMB 10% 90% RMB 100% 735 379 154 Sales of wine Wine Sales Co., Ltd. Jingyang in Shanx 1,000,000 1,000,000 (“Jingyang Sales”) Province, China Langfang Changyu Pioneer 19 April 2002 RMB 10% 90% RMB 100% 737 388 150 Sales of wine Wine Sales Co.,Ltd. Langfang in Hebe 1,000,000 1,000,000 (“Langfang Sales”). Province, China Shanghai Changyu Sales and 28 April 2004 RMB 30% 70% RMB 100% 749 571 075 Sales of wine Distribution Co., Shanghai, China 1,000,000 1,000,000 Ltd.(“Shanghai Sales”) (d) Beijing Changyu Castel Wine 27 October 2005 RMB 70% -- RMB 70% 780 953 469 Production and Chateau Co., Ltd. (“Beijing Beijing, China 110,000,000 77,000,000 sales of wine Chateau”) (d) Yantai Changyu Wine Sales 9 January 2006 RMB 90% 10% RMB 100% 783 487 627 Sales of wine Co., Ltd.( “Wines Sales”) Yantai in Shandong 5,000,000 5,000,000 Province, China Yantai Changyu Pioneer 29 September 2005 RMB 70% 30% RMB 100% 780 766 161 Import and International Co., Yantai in Shandong 5,000,000 5,000,000 export of wine Ltd.(“Pioneer Province, China and technology International”) 68 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 5. SCOPE OF CONSOLIDATED FINANCIAL STATEMENTS (Continued) Percentage of equity attributable to the Company Name Place and date of Registered Directly Indirect Investment Voting Incorporated Principle activities registration capital amount power % code Hangzhou Changyu Wine 14 June 2006 RMB - 100% RMB 100% 788 283 631 Whole-sale and retail of Sales Co., Ltd. Hangzhou in 500,000 500,000 packaging food Zhejinag Province ,China Ningxia Changyu 16 November 2006 RMB 100% - RMB 100% 788 200 410 Plant and Grape-Growing Co., Yinchuang in Ningxia, 1,000,000 1,000,000 purchase of Ltd.(“Ningxia China grape Growing”) Huanren Changyu 16 November 2006 RMB 100% - RMB 100% 794 822 179 Sales of wine, health National Wines Sales Huanren in 2,000,000 2,000,000 liquor, liqueur ， Co., Ltd.(“National Liaoning ,China non-alcohol beverages Wines”) Liaoning Changyu Ice 20 November 2006 RMB 51% - RMB 100% 747 128 301 Production and Wine Chateau Co., Benxi in Liaonin 26,300,000 13,413,000 sales of ice wine Ltd.(“Ice Chateau”) (e) Province, China Yantai Development 4 December 2006 RMB - 100% RMB 100% 796 183 411 Whole-sale and retail o Zone Changyu Trade Yantai in Shandong 5,000,000 5,000,000 wine Co., Province, China Ltd.(“ Development Zone Trade”) Shenzhen Changyu Wine 31 July 2007 RMB - 100% RMB 100% 664 195 20X Whole-sale and retail o Marketing Ltd. Futian in Shenzhen 500,000 500,000 wine Province, China Yantai Changyu Trading 27 March 2007 RMB - 100% RMB 100% 660 176 044 Whole-sale and retail o Company (“Changyu Yantai in Shandong 5,000,000 5,000,000 wine Trading”) Province, China Beijing Meeting Center 9 October 2007 RMB - 100% RMB 100% 669 926 612 Meeting service, food Miyun in Beijing , 500,000 500,000 accommodation, China tourism and sales o souvenir Beijing AFIP Tourism 4 June 2008 RMB 70% - RMB 70% 676 627 372 Tourism and cultur and Culture Company Miyun in Beijing , 500,000 350,000 communication, (“AFIP Tourism”) (f) China development of touri resources, meetin service Ningxia Changyu 2 April 2008 RMB 100% - RMB 100% 670 408 275 Manufacturing and sales Pioneer Wine Co., Ltd. Yinchuang in 1,000,000 1,000,000 of wine, packing (“Ningxia Wine”) (f) Ningxia, China material, plant, process and purchase of grapes 69 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 5. SCOPE OF CONSOLIDATED FINANCIAL STATEMENTS (Continued) Machine Packaging is a solely owned subsidiary. On 22 August 2008, it was merged by the Company through merger consolidation. All assets and liabilities are merged in the Company’s financial statements. The business deregistration is still in process. (a) Kylin Packaging is a Sino-foreign joint venture. Pursuant to the agreement, the Company has invested USD 700,000 (about RMB 5,794,000), accounting for 50% of Kylin’s equity interest. By 31 December 2008, the Company has completed the capital contribution by property, plant and equipment and inventories of RMB 5,953,878. For the Company have over half of the voting rights and therefore has the power to control its strategic operating, investing and financing policies, the financial statements of Kylin Packaging are consolidated in the Group’s financial statements. (b) Changyu-Castel is a Sino-foreign joint venture established by the Company and a foreign investor. According to an operation contract signed by the Company, Changyu-Castel and the foreign investor, the Company is entrusted to manage Changyu-Castel and therefore has the power to control its strategic operating, investing and financing policies, therefore the financial statements of Changyu Castel are consolidated in the Group’s financial statements. (c) Langfang Castel is a Sino-foreign joint venture established by the Company and a foreign investor. Pursuant to the agreement signed by the Company, Langfang Castel and the foreign investor, the Company is entrusted to manage Langfang Castel and therefore has the power to control its strategic operating, investing and financing policies, therefore the financial statements of Langfang Castel are consolidated in the Group’s financial statements. (d) The registered capital of Shanghai Sales increased from RMB 500,000 to RMB 1,000,000 which was invested by the Sales Company. (e) Ice Chateau is a Sino-foreign joint venture established by the Company and a foreign investor. Pursuant to the agreement signed by the Company, Ice Chateau and the foreign investor, the Company is entrusted to manage Ice Chateau and therefore has the power to control its strategic operating, investing and financing policies, therefore the financial statements of Ice Chateau are consolidated in the Group’s financial statements. (f) AFIP Tourism and Ningxia Wine were newly established subsidiaries in 2008. 70 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 6. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Cash and Bank 2008 2007 Cash on hand 129,612 170,398 Cash in bank 1,745,992,613 1,320,364,233 Others 2,451,615 2,363,969 1,748,573,840 1,322,898,600 At 31 December 2008, the balance of restricted cash and bank of the Group is RMB 2,449,118, for details please refer to No. 17 of note 6. At 31 December 2008, the Group has no cash and bank deposited overseas. Interest income of current deposit is calculated based on interest rate issued by central bank for different terms. Periods of short-term term deposits range from 3 months to 1 year to satisfy the Group’s cash demands. The balance of term deposits over three months as at 31 December 2008 of the Group is RMB 953,400,000（31 December 2007: RMB 464,000,000）, with maturity terms ranging from 3 months to 1 year, including RMB17,000,000 of 3-month term deposit which was drawn before 15 January 2009, and interest rates ranging from 2.25% to 4.14% (2) Bills Receivable 2008 2007 Bank acceptance bills 13,378,706 11,524,698 As at 31 December 2008, there was no bills receivable due from the Company’s shareholders with voting rights of 5% or above. (31 December 2007: NIL) As at 31 December 2008, there was no discounted bill receivable. (31 December 2007: NIL) (3) Trade Receivables The normal credit term of trade receivable is one month, which can be extended to three months for certain major customers. The trade receivables are interest free. 71 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 6. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (3) Trade Receivables (Continued) The aged analysis is as follows: 2008 2007 Within 1 year 82,343,029 82,490,201 Less: Provision - - 82,343,029 82,490,201 2008 2007 Amount % Provision % Amount % Provision % Individually significant 41,100,907 49.9 - - 34,676,283 42.0 - - Others 41,242,122 50.1 - - 47,813,918 58.0 - - 82,343,029 100.0 - - 82,490,201 100.0 - - The movement of bad debt provision is as follows: At beginning Accrual Decrease At end of of year year Reversal Write-off 31 December 2008 - - - - - 31 December 2007 3,995,672 - (3,882,501 ) (113,171 ) - 2008 2007 Top five of trade receivables 24,519,023 32,673,932 Proportion of total trade receivables 29.8% 39.6% Aging of receivables Within 1 year Within 1 year As at 31 December 2008, there was no trade receivables due from the shareholders with voting rights of 5% or above. (31 December 2007: NIL) 72 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 6. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (4) Advances to Suppliers At 31 December 2008, all advances to suppliers are aged within one year. At 31 December 2008, there was no any outstanding balances due from the shareholders with voting rights of 5% or above. (31 December 2007: NIL) (5) Interest Receivable 2008 2007 Interest receivable from bank deposits with maturity of less than one year 19,176,250 13,518,196 19,176,250 13,518,196 (6) Other Receivables The aged analysis is as follows: 2008 2007 Within 1 year 19,813,906 23,581,648 1-2 years 3,435,777 9,000,000 8,464,143 2-3 years - 31,713,826 32,581,648 Less: Provision ( 8,000,000 ) ( 8,000,000 ) 23,713,826 24,581,648 2008 2007 Amount % Provision % Amount % Provision % Individually significant 15,355,044 48.4 8,000,000 52.1 9,000,000 27.6 8,000,000 88.9 Others 16,358,782 51.6 - - 23,581,648 72.4 - - 31,713,826 100.0 8,000,000 32,581,648 100.0 8,000,000 - - 73 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 6. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (6) Other Receivables (Continue) The movement of bad debt provision is as follows: At beginning of year Accrual Decrease At end of year Reversal Write-off 2008 8,000,000 - - - 8,000,000 2007 8,206,530 - - ( 206,530 ) 8,000,000 2008 2007 Top five other receivables 11,862,182 12,979,681 Proportion of total other receivables 37.4% 39.8% Aging of Receivables Within 2 Years Within 2 Years At 31 December 2008, there was no other receivable due from the shareholders with voting rights of 5% or above. (31 December 2007: NIL) (7) Inventories 2008 2007 Raw materials 61,258,927 59,719,003 Finished goods 452,646,099 357,708,640 Semi-finished products 492,854,720 425,661,338 1,006,759,746 843,088,981 Less: inventory provision ( 8,817,146 ) ( 7,182,132 ) 997,942,600 835,906,849 The movement of inventory provision is as follow: 2008 At beginning of year Accrual Write-off At end of year Finished goods 7,182,132 1,635,014 - 8,817,146 2007 At beginning of year Accrual Write-off At end of year Finished goods 12,933,574 ( 5,751,442 ) - 7,182,132 At 31 December 2008, no ownership of inventory was restricted. (31 December 2007: NIL) 74 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 6. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (8) Held-to-Maturity Investment 2008 2007 Long-term debt investments 15,000,000 15,000,000 Less: Long-term debt investments due within one year 15,000,000 - Less: impairment - - - 15,000,000 The Group did not dispose any unmatured hold-to-maturity investment in 2008 (In 2007: NIL). The Group’s intention and capability of holding the long-term debt investment till its maturity date did not change. As this debt matures on 31 December 2009, it has been reclassified. (9) Long-Term Equity Investment 2008 Initial Cost At beginning Addition Dividend At end of of year distribution year Cost Method Yantai Dingtao Construction and Development Co., Ltd. (“Yantai Dingtao”) 10,000,000 - - - 10,000,000 Less: impairment - - - - - 10,000,000 - - - 10,000,000 2007 Initial Cost At beginning Addition Dividend At end of of year distribution year Cost Method Yantai Dingta Construction an Development Co., Ltd. (“Yantai Dingtao”) 10,000,000 - - - 10,000,000 Less: impairment - - - - - 10,000,000 - - - 10,000,000 As at 31 December 2008 and 2007, the registered capital of Yantai Dingtao is RMB 10,000,000, and the Group hold 18% of its’ equity interests. 75 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 6. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (10) Property, Plant and Equipment Machineries and Motor Buildings equipments vehicles Total Cost At 1 January 2008 430,582,587 545,169,393 13,968,034 989,720,014 Purchase 36,766,972 45,867,790 812,226 83,446,988 Transferred from construction in progress 36,645,289 28,902,716 - 65,548,005 Disposal ( 8,461,443 ) ( 159,031) ( 372,100 ) 8,992,574 ) At 31 December 2008 495,533,405 619,780,868 14,408,160 1,129,722,433 Accumulated depreciation At 1 January 2008 80,510,352 259,869,996 8,629,507 349,009,855 Depreciation 12,592,386 39,943,370 1,388,836 53,924,592 Disposal ( 1,008,485 ) ( 79,169) ( 353,495 ) ( 1,441,149 ) At 31 December 2008 92,094,253 299,734,197 9,664,848 401,493,298 Net carrying amount At 31 December 2008 403,439,152 320,046,671 4,743,312 728,229,135 At 31 December 2007 350,072,235 285,299,397 5,338,527 640,710,159 Machineries and Motor Buildings equipments vehicles Total Cost At 1 January 2007 337,619,001 453,719,398 14,270,482 805,608,881 Purchase 2,313,500 22,506,680 791,444 25,611,624 Transferred from construction in progress 94,240,145 70,830,150 263,300 165,333,595 Disposal ( 3,590,05 ) ( 1,886,8 ) ( 1,357,192 ) ( 6,834,086 ) At 31 December 2007 430,582,587 545,169,393 13,968,034 989,720,014 Accumulated depreciation At 1 January 2007 68,453,638 225,843,191 8,642,354 302,939,183 Depreciation 12,249,672 34,216,218 1,180,377 47,646,267 ( 189 Disposal ( 192,958 ) ,413 ) (1,193,224 ) ( 1,575,595 ) At 31 December 2007 80,510,352 259,869,996 8,629,507 349,009,855 Net carrying amount At 31 December 2007 350,072,235 285,299,397 5,338,527 640,710,159 At 31 December 2006 269,165,363 227,876,207 5,628,128 502,669,698 76 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 6. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (10) Property, Plant and Equipment (Continued) As at 31 December 2008, no ownership of the fixed assets was restricted. As at 31 December 2008, no idle machineries, no property, plant and equipment held for disposal, and no property, plant and equipment under finance lease or held under operating lease. As at 31 December 2008, the cost and net carrying amount of fully depreciated property, plant and equipment still in use is RMB 129,920,368 and RMB 3,224,199 respectively. As at 31 December 2008, the application of the property certificates of the buildings with net book value of RMB 155,090,890 were still in process. The management of the Group believes that the above mentioned affairs have no significant unfavorable impacts on the financial position of the group. (11) Construction in Progress Transferred to property, 31 Accumulated 1 January plant and Decembe Financing expenditure 2008 Budget 2008 Addition equipment r 2008 by /budget Cabernet Manufacturing center reconstruction project 31,000,000 316,743 1,380,001 ( 1,696,744 ) - Own Funds 101.5% Wine lending system development project in Brandy Company 4,950,000 1,390,870 487,021 ( 1,877,891 ) - Own Funds 38.0% Sparkling wine reconstruction project 42,000,000 787,360 23,998,502 (16,521,952 ) 8,263,910 Own Funds 129.6% Beijing Castel Chateau 102.1% Project 230,000,000 30,691,242 97,320,427 (29,130,980 ) 98,880,689 Own Funds Kylin Packaging’s purchase of equipments 3,511,481 3,511,481 124,535 ( 3,636,016 ) - Own Funds 103.5% Changyu-Castel construction project 10,000,000 7,508,224 2,436,522 ( 9,944,746 ) - Own Funds 99.5% Plants for Ice Wine in Liaoning 5,000,000 3,210,141 - ( 1,455,350 ) 1,754,791 Own Funds 64.2% Video Management System 2,460,000 1,230,000 54,326 ( 1,284,326 ) - Own Funds 52.2% Ningxia united workshop 100,000,000 - 26,079,028 - 26,079,028 Own Funds 26.1% Ningxia ferment project 29,210,425 - 19,512,297 - 19,512,297 Own Funds 66.8% 48,646,061 171,392,659 (65,548,005 ) 154,490,715 77 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 6. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (11) Construction in Progress (Continued) Transferred to property, 31 Accumulated 1 January plant and December Financing expenditure 2007 Budget 2007 Addition equipment 2007 by /budget Cabernet Manufacturing center reconstruction project 31,000,000 5,669,989 5,873,533 ( 11,226,779 ) 316,743 Own funds 97.0% Wine lending system development project in Brandy Company 4,950,000 1,390,870 - - 1,390,870 Own funds 28.1% Oaken barrel and cellar reconstruction project 15,595,300 6,073,777 9,521,480 ( 15,595,257 ) - Own funds 100.0% Sparkling wine reconstruction project 42,000,000 - 30,430,922 ( 29,643,562 ) 787,360 Own funds 72.5% Own Beijing Castel Chateau funds/raised Project 230,000,000 32,849,835 104,782,834 (106,941,427 ) 30,691,242 funds 59.8% Kylin Packaging’s purchase of equipments 3,511,481 - 3,511,481 - 3,511,481 Own funds 100.0% Changyu-Castel construction project 10,000,000 - 7,508,224 - 7,508,224 Own funds 75.1% Plants for Ice Wine in Liaoning 5,000,000 - 3,210,141 - 3,210,141 Own funds 64.2% Cabernet aging system 2,400,000 - 1,926,570( 1,926,570 ) - Own funds 80.3% Video Management System 2,460,000 - 1,230,000 - 1,230,000 Own funds 50.0% 45,984,471 167,995,185 (165,333,595 ) 48,646,061 No interest was capitalized for the year ended 31 December 2008. At 31 December 2008, there are no indications for the impairment of construction in progress, and no provision was made. 78 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 6. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (12) Intangible assets Land use right Software Total Cost 1 January 2008 100,484,337 3,480,000 103,964,337 Increase 5,031,586 - 5,031,586 31 December 2008 105,515,923 3,480,000 108,995,923 Accumulated amortization 1 January 2008 3,371,589 - 3,371,589 Accrual 3,501,408 696,000 4,197,408 31 December 2008 6,872,997 696,000 7,568,997 Net carrying amount 31 December 2008 98,642,926 2,784,000 101,426,926 31 December 2007 97,112,748 3,480,000 100,592,748 Land use right Software Total Cost 1 January 2007 93,437,000 469,376 93,906,376 Increase 7,047,337 3,480,000 10,527,337 Decrease - ( 469,376 ) ( 469,376 ) 31 December 2007 100,484,337 3,480,000 103,964,337 Accumulated amortization 1 January 2007 505,609 459,243 964,852 Accrual 2,865,980 - 2,865,980 ( 459,24 Decreased - ( 459,243 ) 3) 31 December 2007 3,371,589 - 3,371,589 Net carrying amount 31 December 2007 97,112,748 3,480,000 100,592,748 31 December 2006 92,931,391 10,133 92,941,524 At 31 December 2008, no ownership of the intangible asset is restricted (2007: NIL). 79 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 6. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (13) Biological Assets 2008 2007 At begining of year 19,821,941 - Addition 20,854,049 19,821,941 Depreciation - - Provision - - At end of year 40,675,990 19,821,941 At 31 December 2008, no ownership of the biological asset is restricted (2007: NIL). The productive biological assets are vines. The vines may suffer from scourge, plant diseases and insect pests, market demand and other risk factors, which lead to impairment on assets. The Group will adopt effective procedures to prevent plant diseases and insect pests, and strengthen the management of trees and soils to safeguard the biological assets. (14) Long Term Prepaid Expenses 2008 2007 Land lease prepayments 19,380,988 9,477,318 Others 2,071,607 2,330,761 21,452,595 11,808,079 (15) Deferred Tax Assets The movement of deferred tax assets is as follows: 2008 Unrealized Provision profits from for Pre- intercompany Retirement impairment operating transactions benefits of assets expenses Total At beginning of year 48,962,631 16,489,697 3,795,533 558,788 69,806,649 Recognized in the income statement 24,405,131 ( 2,530,088 ) 408,753 (139,651 ) 22,144,145 At end of year 73,367,762 13,959,609 4,204,286 419,137 91,950,794 80 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 6. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (15) Deferred Tax Assets (Continued) 2007 Unrealized Provision profits from for Pre- intercompany Retirement impairment operating transactions benefits of assets expenses Total At beginning of year 45,319,968 20,075,292 8,294,806 992,000 74,682,066 Recognized in the income statement 3,642,663 ( 3,585,595 ) (4,499,273 ) ( 433,212 ) ( 4,875,417 ) At end of year 48,962,631 16,489,697 3,795,533 558,788 69,806,649 At 31 December 2008, there was no deductable temporary difference that was not recognized as deferred tax assets. (16) Provision for Impairment of Assets 2008 At beginning Decrease Accrual At end of year of year Reversal Write-off Bad debt provision 8,000,000 - - - 8,000,000 Inventory provision 7,182,132 1,635,014 - - 8,817,146 15,182,132 1,635,014 - - 16,817,146 2007 At beginning Decrease Accrual At end of year of year Reversal Write-off Bad debt provision 12,202,202 - (3,882,501) (319,701 ) 8,000,000 Inventory provision 12,933,574 - (5,751,442) - 7,182,132 25,135,776 (9,633,943) (319,701 ) 15,182,132 - 81 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 6. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (17) Ownership-Restricted Assets 2008 Other factors lead to ownership restricted of assets At beginning of year Increase Decrease At end of year Housing fund 2,363,969 85,149 - 2,449,118 2,363,969 85,149 - 2,449,118 2007 Other factors lead to ownership restricted of assets At beginning of year Increase Decrease At end of year Housing fund 2,427,357 - (63,388) 2,363,969 2,427,357 - (63,388) 2,363,969 (18) Trade Payables The trade payables are interest free. The Group is normally granted a credit period of not more than three months from its suppliers. As at 31 December 2008, there was no outstanding balance due to the shareholders with 5% or above of voting rights. (31 December 2007: NIL) As at 31 December 2008, no significant outstanding balances are aged over one year. (19) Advance from Customers As at 31 December 2008, there was no outstanding balance due to the shareholders with 5% or above of voting rights or other related parties. (31 December 2007: NIL) As at 31 December 2008, there was no significant outstanding balance due to customers was aged over one year. 82 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 6. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (20) Payroll Payable 2008 At beginning Addition Reversal Payment At end of year of year Salaries and bonus 30,742,836 216,455,419 - (193,967,712) 53,230,543 Staff welfare - 6,298,968 -( 6,298,968) - Social insurance - 34,985,025 - (27,129,030) 7,855,995 Including: Medical insurance - 9,838,306 -( 7,108,197) 2,730,109 Pension - 21,046,564 - ( 16,599,543) 4,447,021 - Unemployment insurance - 2,338,790 ( 1,783,067) 555,723 Injury -( 858,11 insurance - 922,745 7) 64,628 Pregnant -( 780,10 insurance - 838,620 6) 58,514 Compensation for release of employees 65,958,788 - - ( 10,120,355) 55,838,433 Housing fund - 8,275,699 -( 6,811,670) 1,464,029 Union fee and education fee - 5,445,098 -( 2,605,740) 2,839,358 Allowances 29,754,615 3,375,555 -( 2,508,981) 30,621,189 126,456,239 274,835,764 - (249,442,456) 151,849,547 2007 At beginning Addition Reversal Payment At end o f year of year Salaries and bonus 47,951,584 117,970,249 - (135,178,997) 30,742,836 Staff welfare 26,153,788 12,574,979 (28,420,330) ( 10,308,437) - Social insurance - 23,808,176 - ( 23,808,176) - Including: Medical insurance - 7,699,478 -( 7,699,478) Pension - 12,949,933 - ( 12,949,933) - Unemployment insurance - 1,584,995 -( 1,584,995) - Injury insurance - 825,492 - ( 825,492) - Pregnant insurance - 748,278 - ( 748,278) - Compensation for release of employees 76,824,227 - - ( 10,865,439) 65,958,788 Housing fund - 5,291,402 -( 5,291,402) - Union fee and education fee - 3,414,552 -( 3,414,552) - Allowances 27,813,400 31,302,349 - ( 29,361,134) 29,754,615 178,742,999 194,361,707 (28,420,330) (218,228,137) 126,456,239 83 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 6. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (21) Tax Payables 2008 2007 Value Added Tax 46,660,776 25,131,319 Consumption Tax 22,164,073 14,223,346 Corporation Income Tax 366,301,998 277,647,339 City Safeguard and Construction Tax 5,979,432 4,565,157 Others 16,607,975 17,318,681 457,714,254 338,885,842 (22) Other Payables 2008 2007 Payables for advertising expenses 138,938,687 86,266,177 Payables for deposition of selling agencies 188,657,721 69,969,101 Payables for deposition of supplies 19,215,534 11,701,550 Payable for trademark usage 16,209,426 23,250,755 Payables for equipment purchases, construction costs and transportation charges 19,605,721 19,488,091 Others 30,296,728 13,419,428 412,923,817 224,095,102 At 31 December 2008, the balance due to the shareholders with voting right of 5% or above is RMB 16,209,426 (31 December 2007: RMB 23,250,755). At 31 December 2008, significant outstanding balances aged over one year is as follows: Nature Amount payable Reasons for not paid Deposits from suppliers 7,269,433 Deposits Deposits from distributors 74,147,700 Deposits 81,417,133 84 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 6. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (23) Share Capital At 31 December 2008, the issued capital of the Company is RMB527,280,000, with a par value of RMB1.00 each. Issued and fully paid ordinary share At 31 December 2008 and 31 December 2007 shares % Restricted listed State shares - - Domestic legal person shares - - Minority shares - - Including: domestic non-state owned legal person shares 265,749,120 50.40% domestic individuals - - Foreign shares - - Including: foreign corporation shares - - foreign individuals shares - - Total of Restricted Listed 265,749,120 50.40% Unrestricted Listed China A Share 83,066,880 15.75% China B Share 178,464,000 33.85% Hong Kong H Share Others - - Total of Unrestricted Listed 261,530,880 49.60% Total shares 527,280,000 100.00% (24) Capital Surplus 2008 At beginning of year Increase Decrease At end of year Share Premium 557,222,454 557,222,454 2007 At beginning of year Increase Decrease At end of year Share Premium 557,222,454 557,222,454 85 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 6. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (25) Surplus Reserve 2008 At beginning of yrar Increase Decrease At end of yrar Statutory surplus reserve 295,942,630 295,942,630 2007 At beginning of yrar Increase Decrease At end of yrar Statutory surplus reserve 295,942,630 295,942,630 In accordance with the Company Law of the PRC and the Company’s articles of association, the Company is required to appropriate 10% of the net profit reported in the statutory accounts (after offsetting prior years’ losses) to the statutory surplus reserve fund (“SRF”) until the balance of SRF reaches 50% of the Company’s share capital. The SRF can be used to offset prior years’ losses, expend company’s operating scope or transfer to shares. However, SRF is maintained at a minimum of 25% of the registered capital after the transfer. At 31 December 2008, the statutory surplus reserve fund has reached 50% of the issued capital. The board of directors approved that no appropriation of SRF. (26) Retained Profits 2008 2007 Ending balance of the prior year 848,575,292 634,771,528 Add: net profits for the year 894,620,794 635,627,764 Less: Final dividends ( 580,008,000) (421,824,000) Ending balance of retained profits 1,163,188,086 848,575,292 Pursuant to the resolution of the board meeting of directors held on 8 April 2009, the proposed cash dividend is RMB1.20 per share (based on the total 527,280,000 shares), amounting to a total cash dividend of RMB632,736,000.This dividend distribution plan is subject to approval in the next Annual General Meeting. 86 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 6. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (27) Minority Interests The minority interests of the subsidiaries of the Group is as follows: 2008 2007 Beijing Chateau 25,951,824 33,005,045 Ice Chateau 14,505,226 12,887,000 Changyu Castel 12,174,645 12,174,645 Langfang Castel 12,640,000 12,640,000 Others 20,122,665 14,652,004 85,394,360 85,358,694 (28) Revenue and Cost of Sales Operating Income is as follows: 2008 2007 Income from principal activities 3,447,556,737 2,726,615,487 Other operating income 5,885,577 3,550,604 3,453,442,314 2,730,166,091 Revenue and Cost of Sales are as follows: 2008 2007 Revenue Cost Revenue Cost Sales of goods 3,447,556,737 1,031,457,939 2,726,615,487 824,503,294 Rendering services 5,885,577 4,562,819 3,550,604 2,497,794 3,453,442,314 1,036,020,758 2,730,166,091 827,001,088 2008 2007 Revenue from top five customers 128,934,148 209,430,894 Proportion of total revenue 3.7% 7.7% 87 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 6. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (29) Taxes and Surcharges 2008 2007 Consumption tax 156,696,562 140,180,333 City construction tax 36,459,414 28,624,586 Education surcharges 20,934,213 17,512,982 Turnover tax 197,811 - Other 335,474 - 214,623,474 186,317,901 (30) Provision for Impairment of Assets 2008 2007 Bad debt reversal - (3,882,501)) Inventory provision/(Reversal) 1,635,014 (5,751,442)) Total 1,635,014 (9,633,943)) (31) Finance Income 2008 2007 Interest income 38,399,700 26,857,992 Less: bank charges ( 3,037,569) ( 3,478,209 ) 35,362,131 23,379,783 (32) Investment Income 2008 2007 Yield on bond investment 1,026,000 823,500 Losses on disposal of subsidiaries - ( 48,249 ) Other investment income 2,936,502 258,105 3,962,502 1,033,356 At the balance sheet dates, there were no significant restrictions on the repatriation of profit. 88 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 6. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (33) Non-Operation Income 2008 2007 Gains on disposal of non-current assets 30,000 233,429 Penalty 291,091 236,822 Government Subvention 4,654,572 1,976,950 Gain on Inventory Profit 4,331,298 - Others 1,181,864 3,187,656 10,488,825 5,634,857 (34) Non-Operation Expenses 2008 2007 Loss on disposal of non-current assets 15,664 2,226,670 Donation 3,037,000 397,434 Others 643,581 1,848,641 3,696,245 4,472,745 (35) Income Tax 2008 2007 Current income tax 310,886,671 305,673,431 Deferred income tax ( 22,144,145 ) 4,875,417 288,742,526 310,548,848 2008 2007 Profit before tax 1,183,248,986 949,443,426 25% 33% Income tax at PRC statutory income tax rate (a) 295,812,246 313,316,331 Subsidiaries are subject to different income tax rates ( 11,386,107 ) ( 31,730,147) Tax losses not recognized 5,848,658 6,533,813 Expenses not deductible for taxation purpose - 5,276,400 Non taxable income ( 5,262,746 ) Effect on deferred tax as a result of change in tax rate 3,730,475 17,152,451 Tax charge at effective tax rate 288,742,526 310,548,848 89 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 6. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (36) Earnings per Share 2008 2007 Earnings Earnings per share attributable to ordinary shareholders 894,620,794 635,627,764 Shares Weighted average number of ordinary shares issued 527,280,000 527,280,000 Basic earnings per share 1.70 1.21 Diluted earnings per share 1.70 1.21 The company has no dilutive potential ordinary shares. During the period from the balance sheet date to the reporting date, there are no subsequent events took place which may impact the number of the ordinary shares issued or potential ordinary shares. (37) Cash Payments on Other Operating Activities The cash outflows with large amounts are as follows: 2008 2007 Transportation Expenses 118,367,513 88,272,279 Trademark License Fee 78,000,000 57,565,816 Traveling Fee 23,048,032 17,541,978 Advertising Fee 430,145,517 274,354,650 Office Suppliers 9,457,023 20,608,682 Storage Expenses 27,000,157 16,791,204 Others 84,495,928 78,375,620 770,514,170 553,510,229 90 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 6. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (38) Cash Flow from Operating Activities 2008 2007 Reconciled the net profit to Cash flow from operating activities Net profit 894,506,460 638,894,578 Adjustments for: Provision for impairment of assets 1,635,014 ( 9,633,943 ) Depreciation 53,924,592 47,646,267 Intangible assets amortization 4,197,409 2,865,980 Amortization of long term prepaid expenses 968,074 9,293,924 Losses on disposal of property, plant and equipments - 1,993,241 Finance costs ( 39,968,711 ) ( 23,244,756 ) Investment income ( 3,962,502 ) ( 1,033,356 ) Decrease/(increase) in deferred tax assets ( 22,144,145 ) 4,875,417 Increase in inventories ( 162,130,841 ) (115,249,465 ) Decrease/(increase) in operating receivables 27,289,518 ( 3,888,657 ) Increase in operating payables 496,731,662 263,641,928 Net cash flows from operating activities 1,251,046,530 816,161,158 (39) Cash and cash equivalents 2008 2007 Cash and bank No.1 of Note 6 1,748,573,840 1,322,898,600 Less: restricted bank deposits 2,449,118 2,363,969 term deposits with original maturity of more than three months when acquired 953,400,000 464,000,000 Cash and cash equivalents at end of year 792,724,722 856,534,631 91 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 7. SEGMENT INFORMATION Over 99% of the Group’s revenue is generated from domestic customers, and 100% assets of the Group are located in mainland China. Since the major customers and operating activities are located in mainland China, it is not necessary to disclose detailed geographical segment information. The business of the Group is all related to the manufacturing and sales of wines, so it is not necessary to disclose business segment information. 8. RELATED PARTY TRANSACTIONS (1) Definition for Related Parties Related parties are those one party directly or indirectly has control, is controlled by or is under common control with the another entity, or has significant influence or joint control over another entity. The following parties are the related parties of the Group: (i) The parent of the Company, (ii) The subsidiaries of the Company, (iii) Fellow subsidiaries under the common control, (iv) Investors having common control on the Company, (v) Investors having significant influence on the Company, (vi) Joint-ventures of the Company, (vii) Associates of the Company, (viii) Key investors and their close families, (ix) Key Management person of the Company and their close families, (x) Other enterprises controlled, common controlled or significantly influenced by key investors or key management person of the Company or their close families. (2) Parent and Subsidiary Place of Scope Percentage Percentage of Code of the Registered registration of business of shares voting rights organization capital Changyu Group Company Yantai Manufacturing 50.4% 50.4% 265 645 824 50,000,000 During the year ended 31 December 2008, there is no change in parent company’s registered capital, holding shares or voting rights. The subsidiaries of the Company are disclosed in notes 5 and No.5 of notes 14. (3) Other Related Parties Code of the organization Nature of related parties Yantai Changyu Travelling Company Limited 258 258 654 Fellow subsidiary Yantai Changyu International Window of the Wine City Company Limited 672 208 146 Fellow subsidiary 92 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 8. RELATED PARTY TRANSACTIONS (continued) (4) Significant related party transactions (continued) Sales to related parties 2008 2007 Yantai Changyu Travelling Co. Ltd. 5,104,530 6,734,991 Yantai Changyu International Window of the Wine City Company Limited 549,564 - 5,654,094 6,734,991 Till 31 December 2008, sales to related parties are account for 0.1% of the Group’s total sales (for 2007: 0.2%). All related party transactions are based on the negotiated price. 2008 2007 Changyu Group Company Trademark license fee (i) 69,068,846 55,722,350 Service fee - 500,000 Patent fee (ii) 50,000 50,000 Rental expenses (iii) 6,383,000 6,383,000 Remuneration of management 7,055,900 5,725,000 All related party transactions are based on the negotiated price. (i) Trademarks License Pursuant to a trademark’s license agreement dated 18 May 1997, starting from 18 September 1997, the Company may use certain trademarks of Changyu Group Company, which have been registered with the PRC Trademark Office. An annual fee at 2% of the Group’s annual sales is payable to Changyu Group Company. The license is effective until the expiry of the registration of the trademarks. For the year ended 31 December 2008, the Group paid trademarks fee of RMB 69,068,846(2007: RMB55,722,350) to Changyu Group Company. (ii) Patents Pursuant to a patents implementation license dated 18 May 1997, starting from 18 September 1997, the Company may use the patents of Changyu Group Company. The annual patents usage fee payable by the Company to Changyu Group Company is RMB50,000. The contract was expired on 20 December 2005. The Company renewed the contract on 20 August 2006 for 10 years, the annual patents usage fee payable by the Company to Changyu Group Company is still RMB 50,000. For the year ended 31 December 2008, the patents usage fee payable to Changyu Group Company amounted to RMB 50,000 (2007: RMB50,000). 93 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 8. Related party transactions (continued) (4) Significant related party transactions (continued) (iii) Property leasing agreements Pursuant to a patents implementation license dated 28 November 2006, starting from 1 January 2007, the Company may rent properties from Changyu Group Company for operation purposes at a basic annual rental of RMB 6,383,000, and the expired date is 31 December 2011. For the year ended 31 December 2008, the rental expenses payable to Changyu Group Company amounted to RMB 6,383,000 (2007: RMB6,383,000). (5) Amounts Due from Related Parties 2007 2007 Trade Receivables Yantai Changyu Travelling Company Limited 663,143 1,387,695 Yantai Changyu International Window of the Wine City Company Limited 66,915 - Other Payables Changyu Group Company Trademark license fee payable 16,209,426 23,250,755 The amounts due from related parties are daily operation current accounts. It was interest-free, unsecured and with no specified repayment date. 9. OPERATING LEASE ARRANGEMENTS As lessee Significant Operating Lease: the Company had total future minimum lease payables under non-cancellable operating leases with its tenants falling due as follows: 2008 2007 Within one year, inclusive 14,235,372 17,727,558 In second years, inclusive 11,204,647 11,223,549 In the third years, inclusive 9,590,248 10,271,143 Over three years 15,464,635 29,904,485 50,494,902 69,126,735 94 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 10. COMMITMENTS 2008 2007 Capital Commitments Authorized by the board of directors but not contracted 179,400,760 100,850,000 At 31 December 2008, the Company fulfilled capital commitments in 2007. 11. FINANCIAL INSTRUMENTS AND RISK ANALYSIS The Group’s instruments are aggregated with cash and bank, trade receivable, hold-to-maturity investments and so on, which is mainly use to gain the working capital for the company through the investment activities. The group has a series of other financial instruments and liabilities due to the diversification, such as trade receivable, other receivable, account payable and other payable. The financial instruments cause the Company exposure to credit risk, liquidity risk and market risk. CLASSIFICATION FOR FINANCIAL INSTRUMENT On balance sheet date, Company’s financial instruments have following book value: 2008 Financial Assets Hold to Maturity Loan and Receivable Total Cash and Bank 1,748,573,840 1,748,573,840 Bill Receivable 13,378,706 13,378,706 Trade Receivable 82,343,029 82,343,029 Other Receivable 23,713,826 23,713,826 Interest Receivable 19,176,250 19,176,250 Long Term Debts Investment 15,000,000 - 15,000,000 15,000,000 1,887,185,651 1,902,185,651 Financial Liabilities Other Financial Liability Total Trade Payable 220,708,265 220,708,265 Other Payable 412,923,817 412,923,817 633,632,082 633,632,082 95 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 11. FINANCIAL INSTRUMENTS AND RISK ANALYSIS (Continued) CLASSIFICATION FOR FINANCIAL INSTRUMENT (Continued) 2007 Financial Assets Hold to Maturity Loan and Receivable Total Cash and Bank 1,322,898,600 1,322,898,600 Bill Receivable 11,524,698 11,524,698 Trade Receivable 82,490,201 82,490,201 Other Receivable 24,581,648 24,581,648 Interest Receivable 13,518,196 13,518,196 Long Term Debts Investment 15,000,000 - 15,000,000 15,000,000 1,455,013,343 1,470,013,343 Financial Liabilities Other Financial Liability Total Account Payable 202,289,452 202,289,452 Other Payable 224,095,102 224,095,102 426,384,554 426,384,554 CREDIT RISK Credit risk arises mainly from the risk that counterparties defaulting on the terms of their agreements. The Group only conducts transactions with being authorized and good credit third parties. In according with Group’s policy, the Group requires sales on credit term only apply to those third parties who satisfy the credit assessment. In addition, the Group keeps continuing control on trade receivable and other receivables to ensure that the Group will not face significant credit risk. For those not using the entity’s functional currency transactions, unless the Group’s Credit Control Department approval, they are not offered the credit term of trade. The Group’s instruments includes cash and bank, trade receivable, other receivable and hold-to-maturity investments, which their credit risk derived from impairment of their values caused by counterpart default or poor management of counterpart. The greatest risk that exposes to the Group is equivalent to these financial assets’ book value. 96 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 11. FINANCIAL INSTRUMENTS AND RISK ANALYSIS (Continued) CREDIT RISK (Continued) The Group only conducts transactions with being authorized and good credit third parties, therefore there is no guaranty for the third parties. Credit risk management focuses on different clients, geographic areas and industries. Base on nature of the Group’s business, the credit risk has been spread to a large number of customers therefore the Company has no significant credit risk. The Group’s credit risk caused by trade receivable and other receivables are measured in No.3 and No.6 of Notes 6. As at 31 December 2008, the financial assets aging analysis is as follows: 2008 Total Not Overdue Overdue Not Within 1 1 to 3 3 to 6 Over 6 Impairment Month Months Months Months Trade Receivable 82,343,029 82,343,029 - - - - Other Receivable 23,713,826 23,249,683 - - - 464,143 Bill Receivable 13,378,706 13,378,706 - - - - Interest Receivable 19,176,250 19,176,250 - - - - Long Term Debts Investment 15,000,000 15,000,000 - - - - 153,611,811 153,147,668 - - - 464,143 2007 Total Not Overdue Overdue Not Within 1 1 to 3 3 to 6 Over 6 Impairment Month Months Months Months Trade Receivable 82,490,201 82,490,201 - - - - Other Receivable 32,581,648 31,581,648 - - - 1,000,000 Bill Receivable 11,524,698 11,524,698 - - - - Interest Receivable 13,518,196 13,518,196 - - - - Long Term Debts Investments 15,000,000 15,000,000 - - - - 155,114,743 154,114,743 - - - 1,000,000 97 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 11. FINANCIAL INSTRUMENTS AND RISK ANALYSIS (Continued) LIQUIDITY RISK Liquidity risk represents the risk for shortage of fund to repay financial liabilities, which may arise from failure to sell the financial assets at fair value timely, default on counterparties to pay its liabilities, repay the liabilities in advance or no projected cash flows from operations can be generated. The following summarized financial assets and financial liabilities’ aging analysis: 2008 Financial Assets 1 to 3 Months 3 to 12 Months 1 to 5 Years Total Cash and Bank 370,000,000 1,378,573,840 - 1,748,573,840 Trade Receivable 13,378,706 - - 13,378,706 Bill Receivable 82,343,029 - - 82,343,029 Other Receivable 19,813,906 - 3,899,920 23,713,826 Held-to-Maturity Investment - 15,000,000 - 15,000,000 485,535,641 1,393,573,840 3,899,920 1,883,009,401 Financial Liability 1 to 3 Months 3 to 12 Months 1 to 5 Years Total Account Payable 215,645,069 - 5,063,196 220,708,265 Other Payable 331,506,683 - 81,417,134 412,923,817 547,151,752 - 86,480,330 633,632,082 The Group raise fund mainly through increase shares. The Group’s financial liabilities are mainly arise from advance from customers directly form operation, account payable, and other payable due in 3 months (except deposit). The financial liabilities’ book value equivalent to their fair value. The Group believes that the Group could cash the financial liabilities to generate funds to pay off matured financial liabilities. Therefore, there is no significant liquidity risk. 2007 Financial Assets 1 to 3 Months 3 to 12 Months 1 to 5 Years Total Cash and Bank 858,898,600 464,000,000 - 1,322,898,600 Bill Receivable 11,524,698 - - 11,524,698 Trade Receivable 82,490,201 - - 82,490,201 Other Receivable 15,581,648 - 1,000,000 16,581,648 Held-to-Maturity Investments - - 15,000,000 15,000,000 968,495,147 464,000,000 16,000,000 1,448,495,147 98 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 11. FINANCIAL INSTRUMENTS AND RISK ANALYSIS (Continued) LIQUIDITY RISK (Continued) 2007 Financial Liability 1 to 3 Months 3 to 12 Months 1 to 5 Years Total Account Payable 202,089,452 - 200,000 202,289,452 Other Payable 224,095,102 - - 224,095,102 426,184,554 200,000 426,384,554 - MARKET RISK Market risk represents the fair value of financial instruments or the present value of future cash flows may vary by the market price. Market risk includes interest rate risk, foreign currency risk and other pricing risk. INTEREST RATE RISK Interest rate risk represents the fair value of financial instruments of the present value cash flows may vary by the change of interest rate. The earnings and cash flow from operating activities are generally independent with fluctuation of market interest rate, and there were no significant interest bearing assets and liabilities except for cash in bank. The company believes that the Group has no significant concentration of interest rate risks, and no interest rate swaps are designated to hedge against interest rate risks. FOREIGN CURRENCY RISK Foreign currency risk represents the risks on fluctuation of fair value of financial instruments or the future cash flow as a result of the fluctuation in foreign exchange. The group has no significant concentration of foreign currency risk because its business is principally conducted in PRC and all transactions are denominated in RMB. FAIR VALUE The Group’s instruments are aggregated with cash and bank, trade receivable, other receivable and hold-to-maturity investments, where their book value equivalent to their fair value. On 31 December 2008, except restricted bank deposit, the Company states that the Group has no other restricted for cashing financial instrument. The Group has no other financial instrument should be impaired or accrued provision, except those have been impaired or accrued provision. 99 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 12. CONTINGENT LIABILITIES The Group and the Company did not have any significant contingent liabilities as at 31 December 2008. 13. POST BALANCE SHEET DATE EVENTS On 8 April 2009, the board of the directors proposed a cash dividend in respect of 2008 issued shares of 527,280,000 of RMB1.2 per share, amounting to a total cash dividend of RMB 632,736,000. The proposed dividend is subject to the approval from the Annual General Meeting. 14. NOTES TO FINANCIAL STATEMENTS (1) Cash and Bank 2008 2007 Cash on hand 43,844 34,823 Cash in bank 1,197,051,014 1,072,608,157 Others 2,449,118 2,363,969 1,199,543,976 1,075,006,949 All the restricted cash and bank at 31 December 2008 of the Company is RMB2,449,118. There is no cash and bank of overseas deposit at 31 December 2008. Interest income of current deposit is calculated based on interest rate issued by central bank for different terms. Periods of short-term term deposits range from 6 months to 1 year to satisfy the company’s cash demand. The balance of term deposits over three months as at 31 December 2008 of the Company is RMB 931,400,000（31 December 2007: RMB 460,000,000）, with maturity terms ranging from 6 months to 1 year, and interest rates ranging from 2.25% to 4.14%. (2) Trade Receivables The normal credit term of trade receivables is one month, which can be extended to three months for certain major customers. The trade receivables are interest free. The normal credit term of trade receivable is normally one month, and the major customers can be granted a credit term up to three months. The trade receivable balances are interest free. The aged analysis is as follows: 2008 2007 Within 1 year 13,271,136 10,237,494 Less: Bad debt provision - - 100 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 13,271,136 10,237,494 14. NOTES TO FINANCIAL STATEMENTS (Continued) (2) Trade Receivables (Continued) The category analysis for trade receivables is as follows: 2008 2007 amount % bad debt % amount % bad debt % provision provision Individually significant 13,271,136 100.0 - - 9,329,715 91.1 - - Others - - - - 907,779 8.9 - - 13,271,136 100.0 - - 10,237,494 100.0 - - The movement of bad debt provision for trade receivables is as follows: At beginning Accrual Decrease At end of year of year Reversal Write-off 2008 - - - - - 2007 328,085 - (328,085 ) - - 2008 2007 Top five of trade receivables 13,271,136 9,354,777 Proportion of total trade receivables 100.0% 91.4% Aging of receivable Within 1 year Within 1 year As at 31 December 2008, there was no any trade receivables due from the shareholders with voting rights of 5% or above. (31 December 2007: NIL) 101 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 14. NOTES TO FINANCIAL STATEMENTS (Continued) (3) Other Receivables The aging analysis is as follows: 2008 2007 Within 1 year 357,013,168 116,846,668 1-2 years 3,828,069 9,000,000 2-3 years 8,464,143 - 369,305,380 125,846,668 Less: Bad debt provision ( 8,000,000 ) ( 8,000,000) 361,305,380 117,846,668 2008 2007 Bed debt Bed debt Amount % % Amount % % provision provision Individually significant 362,947,856 98.3 8,000,000 2.2 118,410,151 94.1 8,000,000 6.8 Others 6,357,524 1.7 - - 7,436,517 5.9 - - 369,305,380 100.0 8,000,000 - 125,846,668 100.0 8,000,000 - The movement of bad debt provision of other receivables is as follows: At beginning of year Accrual Decreasing At end of year Reversal Write-off 2008 8,000,000 - - - 8,000,000 8,000,000 8,000,000 2007 - - - 2008 2007 Top five of other receivables 325,731,990 118,410,151 94.1% Proportion of total other receivables 88.2% As at 31 December 2008, there was no any other receivables due from the shareholders with voting rights of 5% or above. (31 December 2007: nil) 102 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 14. NOTES TO FINANCIAL STATEMENTS (Continued) (4) Inventories 2008 2007 Raw materials 36,040,016 19,988,710 Finished goods 14,985,941 144,182,426 Semi-finished products 387,910,665 268,877,516 438,936,622 433,048,652 Less: inventory provision - - 438,936,622 433,048,652 There was no accrual of inventory provision. (5) Long-Term Equity Investment 2008 At beginning o Note f year Additions Disposals At end of year Equity investment by cost method -subsidiaries (i) 157,827,178 1,350,000 (300,000) 158,877,178 -other investments (ii) 10,200,000 10,200,000 - - 168,027,178 1,350,000 (300,000) 169,077,178 2007 At beginning o Note f year Additions Disposals At end of year Equity investment by cost method -subsidiaries (i) 115,469,074 47,000,000 4,641,896 157,827,178 -other investments (ii) 10,200,000 - - 10,200,000 125,669,074 47,000,000 4,641,896 168,027,178 103 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 14. NOTES TO FINANCIAL STATEMENTS (Continued) (5) Long-Term Equity Investment (Continued) (i) Investments in Subsidiaries Percentage of equity interest 1 January 31December Subsidiaries Directly Indirectly Additions Disposals 2008 2008 Machine Packaging 100% - 300,000 - ( 300,000) - Vehicular Transportation 100% - 300,000 - - 300,000 Beijing Sales 70% 30% 350,000 - - 350,000 Kylin Packaging 50% - 5,953,878 - - 5,953,878 Changyu-Castel 70% - 28,968,100 - - 28,968,100 Jingyang Wine 90% 10% 900,000 - - 900,000 Sales Company 90% 10% 7,200,000 - - 7,200,000 Langfang Castel 49% - 12,142,200 - - 12,142,200 Jingyang Sales 10% 90% 100,000 - - 100,000 Langfang Sales 10% 90% 100,000 - - 100,000 Shanghai Sales 30% 70% 300,000 - - 300,000 Pioneer International 70% 30% 3,500,000 - - 3,500,000 Beijing Chateau (a) 70% - 77,000,000 - - 77,000,000 Wine sales 90% 10% 4,500,000 - - 4,500,000 Ningxia Growing 100% - 1,000,000 - - 1,000,000 National Wine 100% - 2,000,000 - - 2,000,000 Ice Chateau 51% - 13,413,000 - - 13,413,000 AFIP Tourism 70% - - 350,000 - 350,000 Ningxia Wine 100% - - 1,000,000 - 1,000,000 Total 158,027,178 1,350,000 ( 300,000) 159,077,178 104 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 14. NOTES TO FINANCIAL STATEMENTS (Continued) (5) Long-Term Equity Investment (Continued) (ii) Other Investments Percentage of Invested entity equity interest 1 January 31December 2008 Additions Disposals 2008 Yantai Dingtao 18% 10,000,000 - - 10,000,000 10,000,000 10,000,000 - - (6) Property, Plant and Equipment Machineries and Motor Buildings equipments vehicles Total Cost At 1 January 2008 224,846,337 450,128,112 8,866,270 683,840,719 Purchase 4,751,681 12,959,881 1,101,419 18,812,981 Transferred from 2,494,965 23,098,805 - 25,593,770 construction in progress Disposal ( 36,584,131 ) ( 16,17 ) ( 36,600,302 ) At 31 December 2008 195,508,852 486,170,627 9,967,689 691,647,168 Accumulated depreciation At 1 January 2008 65,782,665 236,619,892 5,356,434 307,758,991 Depreciation 4,159,847 32,300,688 984,130 37,444,665 ( 5,092,290 ) ( 12,75 ) ( 5,105,041 ) Disposal 1 - At 31 December 2008 64,850,222 268,907,829 6,340,564 340,098,615 Net carrying amount At 31 December 2008 130,658,630 217,262,798 3,627,125 351,548,553 At 31 December 2007 159,063,672 213,508,220 3,509,836 376,081,728 105 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 14. NOTES TO FINANCIAL STATEMENTS (Continued) (6) Property, Plant and Equipment (Continued) Buildings Machineries Motor Total and vehicles equipments Cost At 1 January 2007 214,785,751 408,975,369 8,605,142 632,366,262 Purchase 1,588,975 6,926,109 303,137 8,818,221 Transferred from construction in progress 10,405,100 34,234,234 - 44,639,334 Disposal ( 1,933,489 ) ( 7,600 ) ( 42,009 ) ( 1,983,098 ) At 31 December 2007 224,846,337 450,128,112 8,866,270 683,840,719 Accumulated depreciation At 1 January 2007 59,833,886 208,884,756 4,880,900 273,599,542 Depreciation 6,136,737 27,742,419 489,835 34,368,991 Disposal ( 187,958 ) ( 7,283 ) ( 14,301 ) ( 209,542 ) At 31 December 2007 65,782,665 236,619,892 5,356,434 307,758,991 Net carrying amount At 31 December 2007 159,063,672 213,508,220 3,509,836 376,081,728 At 31 December 2006 154,951,865 200,090,613 3,724,242 358,766,720 As at 31 December 2008, no ownership of the fixed assets is restricted (31 December 2007: NIL). As at 31 December 2008, no idle machineries, no property, plant and equipment held for disposal, and no property, plant and equipment under finance lease or held under operating lease. As at 31 December 2008, the cost and net carrying amount of fully depreciated property, plant and equipment still in use is RMB 126,176,981 and RMB 3,027,770 respectively. As at 31 December 2008, the application of the property certificates of the buildings with net book value of RMB 25,277,435 were still in process. The management of the Company believes that the above mentioned affairs have no significant unfavorable impacts on the financial position of the Company 106 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 14. NOTES TO FINANCIAL STATEMENTS (Continued) (7) Intangible Assets Land use right Software Total Cost 1 January 2008 96,594,766 3,480,000 100,074,766 Increase - - - Decrease - - - 31 December 2008 96,594,766 3,480,000 100,074,766 Accumulated amortization - 3,357,306 1 January 2008 3,357,306 Accrual 2,373,076 696,000 3,069,076 Decrease - - - 5,730,382 31 December 2008 696,000 6,426,382 Net carrying amount 90,864,384 2,784,000 31 December 2008 93,648,384 93,237,460 3,480,000 31 December 2007 96,717,460 Land use right Software Total Cost 1 January 2007 93,437,000 - 93,437,000 Increase 3,157,766 3,480,000 6,637,766 Decrease - - - 31 December 2007 96,594,766 3,480,000 100,074,766 Accumulated amortization 1 January 2007 505,609 - 505,609 Accrual 2,851,697 - 2,851,697 Decrease - - - 31 December 2007 3,357,306 - 3,357,306 Net carrying amount 31 December 2007 93,237,460 3,480,000 96,717,460 31 December 2006 92,931,391 - 92,931,391 As at 31 December 2008, no ownership of the intangible assets is restricted (31 December 2007: nil). 107 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 14. NOTES TO FINANCIAL STATEMENTS (Continued) (8) Deferred Tax Assets The movement of deferred tax assets is as follows: 2008 Retirement Provision for Total benefits impairment of assets At beginning of year 15,089,266 2,000,000 17,089,266 Recognized in the income statement ( 2,138,915 ) - ( 2,138,915 ) At end of year 12,950,351 2,000,000 14,950,351 2007 Retirement Provision for Total benefits impairment of assets At beginning of year 18,306,845 2,640,000 20,946,845 Recognized in the income statement ( 3,217,579 ) ( 640,000 ) ( 3,857,579 ) At end of year 15,089,266 2,000,000 17,089,266 At 31 December 2008, there was no deductable temporary difference that was not recognized as deferred tax assets. (9) Provision 2008 Less At beginning At end of of year Accrual Reversal Write-off year Bad debt provision Trade receivables - - - - - Other receivables 8,000,000 - - - 8,000,000 8,000,000 - - - 8,000,000 2007 less At beginning At end of of year Accrual Reversal Write-off year Bad debt provision Trade receivables 328,085 - (328,085) - - Other receivables 8,000,000 - - - 8,000,000 8,328,085 - (328,085) - 8,000,000 108 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 14. NOTES TO FINANCIAL STATEMENTS (Continued) (10) Trade Payables The trade payables are interest free. The Company is normally granted a credit period of not more than three months from its suppliers. As at 31 December 2008, there was no outstanding balance due to the shareholders with 5% or above of voting rights or above. (31 December 2007: nil) As at 31 December 2008, no significant outstanding balances are aged over one year. (11) Payroll Payable 2008 At beginning At end of Addition Reversal Payment of year year Salaries and bonus 19,164,878 122,417,570 - (123,432,449 ) 18,149,999 Staff welfare - 5,743,868 -( 5,743,868 ) - Social insurance - 12,373,976 - ( 10,031,878 ) 2,342,098 Including: Medical insurance - 7,878,030 -( 6,331,577 ) 1,546,453 Pension - 2,318,328 -( 1,791,710 ) 526,618 Unemployment insurance - 420,538 -( 270,368 ) 150,170 Injury insurance - 920,375 -( 858,117 ) 62,258 Pregnant insurance - 836,705 -( 780,106 ) 56,599 Compensation for release of employees 60,357,061 - -( 8,555,656 ) 51,801,405 Housing fund - 6,108,411 -( 5,979,272 ) 129,139 Union fee and education fee - 4,034,693 -( 1,905,538 ) 2,129,155 Allowances 29,754,614 3,347,597 -( 2,508,981) 30,593,230 109,276,553 154,026,115 - (158,157,642) 105,145,026 109 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 14. NOTES TO FINANCIAL STATEMENTS (Continued) (11) Payroll Payable (Continued) Year ended 31 December 2007 At beginning Addition Payment At end of of year Reversal year Salaries and bonus 44,456,020 141,230,278 - (166,521,420 ) 19,164,878 Staff welfare 25,381,127 11,290,808 (28,420,330) ( 8,251,605 ) - Social insurance - 13,328,810 - ( 13,328,810 ) - Including: Medical insurance - 3,423,356 - ( 3,423,356) - Pension - 7,755,612 - ( 7,755,612) - Unemployment -( 578,65 insurance - 578,653 3) - -( 824,01 Injury insurance - 824,019 9) - -( 747,17 Pregnant insurance - 747,170 0) - Compensation for release of employees 70,107,303 - - ( 9,750,242) 60,357,061 （ 5,054,98 Housing fund - 5,054,986 - 6) - Union fee and education fee - 2,095,558 - ( 2,095,558 ) - Allowances 27,813,400 1,941,214 - - 29,754,614 167,757,850 174,941,654 (28,420,330) (205,002,621) 109,276,553 (12) Taxes Payables 2008 2007 Value Added Tax 7,682,342 7,597,775 Consumption Tax 16,408,240 11,166,059 Corporation Income Tax 28,116,289 24,917,303 City Safeguards and Construction Tax 2,135,350 1,490,314 Others 13,876,106 15,220,892 68,218,327 60,392,343 110 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 14. NOTES TO FINANCIAL STATEMENTS (Continued) (13) Other Payables 2008 2007 Payables for the Changyu Group Company 230,336,025 - Payables for deposit of suppliers 15,001,565 10,825,275 Payables for equipment purchases, construction costs and transportation charges 8,954,505 16,371,914 Others 12,542,485 19,897,270 266,834,580 47,094,459 At 31 December 2008, other payable with aging over 1 year are listed as follow: Other Payable Nature Deposit from Supplier 4,597,695 Deposits (14) Retained Profits 2008 2007 Ending balance of the prior year 715,281,206 ( 529,605,144) Add: net profits for the year 992,829,006 1,666,710,350 Less: Final dividends ( 580,008,000) ( 421,824,000) Ending balance of retained profits 1,128,102,212 715,281,206 Pursuant to the resolution of the board meeting of directors held on 8 April 2009, the proposed cash dividend is RMB1.20 per share (based on the total 527,280,000 shares), amounting to a total cash dividend of RMB632,736,000.This dividend distribution plan is subject to approval in the next Annual General Meeting. (15) Revenue and Cost of Sales 2008 2007 Income from pincipal activities 1,203,589,401 1,041,624,997 4,948,121 Other operating income 2,448,402 1,208,537,522 1,044,073,399 111 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 14. NOTES TO FINANCIAL STATEMENTS (Continued) (15) Operating Income and Cost of Sales (Continued) Revenue and Cost of Sales are as follows: 2008 2007 Revenue Cost of sales Revenue Cost of sales Sale of goods 1,203,589,401 943,134,502 1,041,624,997 764,044,365 Other operating income 4,948,121 3,935,634 2,448,402 2,620,039 1,208,537,522 947,040,136 1,044,073,399 766,664,404 Revenue from top five customers 1,203,589,401 1,034,475,945 Proportion of total revenue 99.6% 99.1% (16) Gain on Investment 2008 2007 Yield on bond investment 1,026,000 823,500 Losses on disposal of subsidiary - ( 1,227,935) Gains on subscription of new shares 2,936,501 163,498 Investment gains by applying cost method 969,848,968 1,627,389,356 973,811,469 1,627,148,419 At the balance sheet dates, there were no significant restrictions on the repatriation of profit. During the year 2008, the subsidiaries have declared dividends of RMB969,848,968, including cash dividend of RMB562,876,732 and dividend receivable of RMB406,972,236. 112 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 14. NOTES TO FINANCIAL STATEMENTS (Continued) (17) Cash Flow from Operating Activities 2008 2007 Reconciled the net profit to Cash flow from operating activities Net profit 992,829,006 1,666,710,350 Add :provision for impairment of assets - ( 328,085 ) Depreciation 37,444,665 34,368,991 Intangible assets amortization 3,069,076 2,851,697 Losses on disposal of property, plant and equipments - 152,959 Finance income ( 36,639,174 ) ( 22,421,256 ) Investment income (973,811,469 ) (1,627,148,419 ) Decrease in deferred tax assets 2,138,914 3,857,579 Increase in inventories ( 5,887,970 ) ( 11,481,381 ) increase in operating receivables (205,124,744 ) ( 209,080,605 ) Increase in operating payables 238,313,338 43,626,982 Net cash flows from operating activities 52,331,642 ( 118,891,188 ) (18) Cash and Cash Equivalents 2008 2007 Cash and bank (No. 1 of Notes 14) 1,199,543,976 1,075,006,949 Less: restricted bank deposits 2,449,118 2,363,969 term deposits with original maturity of more than three months when acquired 931,400,000 464,000,000 Cash and cash equivalents at end of year 265,694,858 608,642,980 113 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 14. NOTES TO FINANCIAL STATEMENTS (Continued) (19) Related Party Transactions Sales to related parties 2008 2007 Kylin Packaging 322,948 - Pioneer International 7,678,181 10,285,798 Beijing Chateau 4,827,584 - Sales Company 1,112,777,644 941,295,617 Langfang Castel 6,402,472 4,361,192 Jingyang Wine 5,995,524 5,701,518 Yantai Changyu Traveling Co., Ltd. 3,753,230 3,350,618 Changyu - Castel 31,813,646 - Wines Sales 9,120 313,368 Development Zone Trade - 68,229,823 Changyu Trading - 1,572,276 National Wines - 8,963,189 Sub-total 1,173,580,349 1,044,073,399 Total revenue of the Company 1,208,537,522 1,044,073,399 Proportion of total revenue 97% 100% Purchase from Related Parties 2008 2007 Kylin Packaging 56,110,476 47,561,796 Changyu - Castel 3,652,286 25,455,096 Pioneer International 290,200 - Beijing Chateau 465,938 - Yantai Changyu Pioneer Wine Sales Co., Ltd. 6,125,187 - Shanghai Changyu Sales and Distribution Co. Ltd - 954,539 66,644,087 73,971,431 114 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 14. NOTES TO FINANCIAL STATEMENTS (Continued) (19) Related Party Transactions (Continued) Other Related Party Transactions 2008 2007 Service fee - 500,000 Rental expenses 6,383,000 6,383,000 Patent fee 50,000 50,000 Management Remuneration 7,055,900 5,725,000 Please refer to No. 4 of note 8 for the detailed content of the contracts. 115 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 14. NOTES TO FINANCIAL STATEMENTS (Continued) (20) Due to/from Related Parties Amounts Due from Related Parties 2008 2007 Other Receivables Ningxia Wine 52,432,295 - Kylin Packaging 2,223,331 2,775,611 Ningxia Growing 35,270,498 22,922,038 National Wines - 580,372 Ice Chateau 16,978,245 2,500,000 Beijing Chateau 218,827,621 81,212,499 Beijing Sales - 5,900 Jingyang Wine - 881,921 Sales Company - 793,289 325,731,990 111,671,630 Dividend Receivable Yantai Changyu Pioneer Wine Sales Co., Ltd. 406,972,236 116,085,055 Other Payables Vehicular Transportation 4,417,323 - Changyu-Castel 157,867,224 - Pioneer International 11,665,499 - National Wines 25,128,717 - Langfang Sales 126,614 - Langfang Castel 10,640,113 - Jingyang Wine 19,106,097 - Jingyang Sales 1,414,901 - Parent Company-Royalty Fee 16,209,426 - 246,575,914 - 15. APPROVAL OF THE FINANCIAL STATEMENTS The financial statements have been authorized by the board of directors on 8 April 2009. According to the Company’s article, the financial statements will be reviewed by shareholders on the shareholder’s meeting. 116 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 1. RETRUN ON NET ASSETS AND EARNINGS PRE SHARE 2008 Return on net assets (%) Earnings per share (RMB) Fully diluted Weighted Average Basis Diluted Net profit attributable to shareholders of the Company 35.17 38.26 1.70 1.70 Net profit attributable to shareholders of the Company deduct Non-incidental profits/(losses) 34.88 37.95 1.68 1.68 There are no potential dilutive shares outstanding. 2007 Return on net assets (%) Earningsmper share (RMB) Fully diluted Weighted Average Basis Diluted Net profit attributable to shareholders of the Company 28.52 30.98 1.21 1.21 Net profit attributable to shareholders of the Company deduct Non-incidental profits/(losses) 28.46 30.92 1.20 1.20 There are no potential dilutive shares outstanding. Net profit deducting incidental income/expenses attributable to the ordinary shareholders of the Company 2008 2007 Net profit attributable to shareholders of the Company 894,620,794 635,627,764 Add/(Less): incidental (profits)/losses - - Profit/loss form disposal of non-current assets ( 14,336) 1,993,241 Investment income ( 2,936,502) ( 209,856) Other non-operating income ( 6,778,244) ( 3,155,353) Tax effect of incidental expense 2,432,270 404,297 Net profit deducting incidental expenses 887,323,982 633,851,499 Add :attributable to minority shareholders 16,793 468,048 Net profit deducting incidental income/expenses attributable to the ordinary shareholders of the Company 887,340,775 634,319,547 117 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 1. RETRUN ON NET ASSETS AND EARNINGS PRE SHARE (CONTINUED) The reorganization of incidental (profits)/losses is based on explanation to information disclosures regulations on Public securities issuing Corporate, CRSC [2008] No.43. 2. VARIANCE ANALYSIS Analysis on items with fluctuation more than 30% (inclusive) in consolidated financial statements or balance greater than 5% (inclusive) of the total assets at the balance sheet date or amount greater than 10% (inclusive )of gross profit of the reporting period. (1) The balance of cash and bank as at 31 December 2008 was RMB 1,748,573,840, which increased RMB 425,675,240 compared with the balance at 31 December 2007. The increase was due to the increased cash inflow from operating activities in line with the sales expansion. (2) The balance of inventory as at 31 December 2008 was RMB 997,942,600 easing by 19.4% as compared with that of 31 December 2007. The increase was mainly attributable to the increase in purchase of semi-products and raw materials as a result of the sales expansion and more stock of productions for the peak season of in new year. (3) The balance of property, plant and equipment as at 31 December 2008 was RMB 728,229,135, increasing by 13.7% as compared with that of 31 December 2007. The increase was mainly due to many projects in progress were completed and transferred to property, plant and equipment, and the Group made significant investment in machineries to keep up with the development in production capability during current year. (4) The balance of biological assets as at 31 December 2008 was RMB 40,675,990, increasing by 105.2% as compared with that of 31 December 2007, which was mainly due to grape planting expenses of Ningxia, Penglai and Beijing AFIP chateau were capitalized. (5) The balance of long term prepaid expenses was RMB 21,452,595 as at 31 December 2008 which increased more than 81.7% compared with that of 31 December 2007. The increase was mainly due to the increased prepayment of land lease for Beijing AFIP chateau. The rental commitment was prepaid land lease expense for vineyard. (6) The balance of account payable was RMB 220,708,265 as at 31 December 2008, increasing by 9.1% as compared with that of 31 December 2007. The increase was mainly due to the increased storage of the raw wine and blended wine and the production dimension and volume enlargement as a result of several new production lines was put into operation during current year. (7) -The balance of tax payable was RMB 457,714,254 as at 31 December 2008, increasing by 35.1% as compared with that of 31 December 2007. The increase was mainly attributable to income tax payable in line with the increase in gross profit and value added tax increased for the selling peak season in end of 2008. (8) The balance of other payables was RMB 412,923,817 as at 31 December 2008, increasing about 84.3% as compared with that of 31 December 2007. The increase was mainly contributed by more propaganda of advertising expense payable. In 2008, there 118 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 were more than 100 new selling agencies, so deposition of selling agencies increased accordingly. (9) The balance of issued capital was RMB 527,280,000 as at 31 December 2008 with no fluctuation as compared with that of 31 December 2007. 2. VARIANCE ANALYSIS (CONTINUED) (10) The balance of capital surplus was RMB 557,222,454 as at 31 December 2008, with no fluctuation as compared with that of 31 December 2007. (11) The balance of surplus reserve was RMB 295,942,629 as at 31 December 2008, and no fluctuation as compared with that of 31 December 2007. As at 31 December 2008, the statutory surplus reserve fund has accounted to the 50% of the issued capital, so no appropriation of net profit is made to SRF. (12) The balance of retain earning was RMB 1,163,188,086 at 31 December 2008, increasing by 37.1% as compared with that of the year 2007. Please refer to No. 26 of note 6 for details. (13) The balance of minority interests at the end of 2008 was RMB 85,394,360, increasing by 0.04% as compared with that of the year 2007. The increase was contributed by the minority shareholders’ capital injection in the Beijing Chateau of RMB 150,000 and the share of profits attributable to the minority shareholders was RMB 114,334, the net increase of minority interest was RMB 35,666. (14) The operating income for the year ended 31 December 2008 was RMB 3,453,442,314, increasing by 26.5% as compared with that of the year 2007. The increase was mainly contributed by the continuously stable growth in sales of wine, champagne and brandy. The operating cost the year ended 31 December 2008 was RMB 1,036,020,758, increasing by about 25.3% as compared with that of year 2007. The increase was mainly due to the increase in sales revenue. (15) The tax surcharges for the year ended 31 December 2008 was RMB 214,623,474, increasing 15.2% as compared with that of year 2007. The increase was in line with the increase in sales income in the current year. (16) The selling expense for the year ended 31 December 2008 was RMB 869,788,111, increasing by 39.2 % as compared with that of the year 2007. The increase was mainly contributed by the operating scale enlargement, the increase in promotion fee together with the increase in salary and bonus of sales staff. (17) The administrative expense for the year ended 31 December 2008 was RMB 194,243,184, increasing by 9.1 % as compared with that of the year 2007. The increase was mainly due to the increase of depreciation and the staff welfare. (18) The provision of the year ended 31 December 2008 was RMB 1,635,014, increasing by 1.2 times as compared with that of year 2007. The increase was mainly due to the reversal of provision for the evidences indicating the impairment in current assets disappeared in 2007. Please refer to No. 16 of notes6 for details. (19) The investment income was RMB 3,962,502 for the year ended 31 December 2008, increasing about 3 times as compared with that the year 2007. The increase was mainly attributable to the income after new shares listed. (20) The non-operating income for the year ended 31 December 2008 was RMB 10,488,826, 119 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2008 increasing by 86.1% as compared with year 2007. The increase was mainly due to gains on physical inventory and addition of governmental subsidies income. (21) The non-operating expense for the year ended 31 December 2008 was RMB 3,696,245, decreasing by 17.4% as compared with year 2007. The decrease was mainly due to losses on the disposal of non-current assets. 2. VARIANCE ANALYSIS (CONTINUED) (22) The income tax expense was RMB 288,742,526 for the year ended 31 December 2008, decreasing by 7.0% as compared with that of the year 2007. The decrease was mainly due to corporate income tax rate is 25% current year while 33% in 2007. 120 XII. Reference Documents (1)The original of annual report autographed by the chairman. (2)The financial statements autographed and signed by the chairman, chief accountant and accountants in charge. (3)The Prospectus and Public Offering Announcement for Stock B in 1997, the Prospectus and The Shares’ Change & Public Offering Announcment for Stock A in 2000. (4) The originals of all documents and announcements that the company made public during the report period in the newspapers designated by China Securities Regulatory Commission. Yantai Changyu Pioneer Wine Company Limited Board of Directors April 10th, 2009 121