晨鸣Ｂ(200488)2008年年度报告（英文版）

Important: The board of directors (the “Board”), the supervisory committee (the “Supervisory Committee”) and the directors (the “Directors”), supervisors (the “Supervisors”) and senior management (the “Senior Management”) of the Company hereby warrant that there are no false representations, misleading statements or material omissions contained in this report (the “Report”), and jointly and severally accept full responsibility for the truthfulness, accuracy and completeness of its contents. This Report has been prepared in both Chinese and English. For any discrepancies, the Chinese version shall prevail. Chen Hongguo, the chairman of the Company, Liu Junwu, the financial controller of the Company and Wang Chunfang, the head of the financial department, declare that they guarantee the truthfulness and completeness of the financial statements of the 2008 Annual Report. Definitions: “Company”, “the Company”, and “Chenming Paper”, “us”, and “we” refer to Shandong Chenming Paper Holdings Limited, and the Company and its subsidiaries are collectively referred to as “the Group” in this report, unless otherwise specified. 1 Contents I. Company Information [●] II. Summary of Financial and Operating Results [●] III. Changes in Share Capital and Shareholders [●] IV. Directors, Supervisors and Senior Management and the Staff [●] V. Corporate Governance Report [●] VI. Particulars about the Shareholders’ Meeting [●] VII. Directors’ Report [●] VIII. Supervisory Committee’s Report [●] IX. Material Matters [●] X. PRC Auditors’ Report and Financial Statements and Notes thereto Prepared in Accordance with Accounting Standards for Business Enterprises [●] XI. Documents Available for Inspection [●] 2 I Company Information 1. Legal Chinese name of the Company: 山東晨鳴紙業集團股份有限公司 Legal English name of the Company: SHANDONG CHENMING PAPER HOLDINGS LIMITED Abbreviation of the English name: SCPH 2. Legal Representative of the Company: Chen Hongguo 3. Secretary to the Board of the Company: Hao Yun Company Secretary: Poon Shiu Cheong Securities Affairs Representatives: Fan Yingjie, Sun Wenke Correspondence Address: No. 595 Shengcheng Road, Shouguang City, Shandong Province, People’s Republic of China Telephone: (86)-0536-2158011, (86)-0536-2156488 Facsimile: (86)-0536-2158640 Email address: chenmmingpaper@163.com 4. Registered Address and Office No. 595 Shengcheng Road, Shouguang City, Shandong address of the Company: Province, People’s Republic of China Postal Code: 262700 Website of the Company: http://www.chenmingpaper.com 5. Designated Newspapers for China Securities Journal and Hong Kong Commercial Information Disclosure: Daily Designated Domestic Website for the Publication of the Annual Report as approved by China Securities Regulatory Commission: http://www.cninfo.com.cn Designated Overseas Website for the Publication of the Annual Report: http://www.hkex.com.hk Places for Inspection of the Company’s Annual Report: Capital operation department of the Company 3 6. Stock Information: A shares Shenzhen Stock Exchange Stock Abbreviation: 晨鳴紙業 Stock Code: 000488 B shares Shenzhen Stock Exchange Stock Abbreviation: 晨鳴B Stock Code: 200488 H shares The Stock Exchange of Hong Kong Limited Stock Abbreviation: Chenming Paper Stock Code: 1812 7. Share Registrar A Share and B Share Registrar: China Securities Depository and Clearing Corporation Limited Shenzhen Branch 18th Floor, CITIC Plaza, 1093 Shennan Zhong Road, Shenzhen H Share Registrar: Computershare Hong Kong Investor Services Limited Shops 1712-16, 17/F, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong 8. Other Relevant Information Date of Change in Registration of the Company: 27 September 2008 Registered Address: No. 595 Shengcheng Road, Shouguang City, Shandong Province, People’s Republic of China Legal Person Business License Registration Number: 370000400001170 Taxation Registration Number: 370783613588986 Organization No.: 61358898-6 4 9. PRC and International Auditors Retained by the Company PRC Auditors: Deloitte Touche Tohmatsu Certified Public Accountants Ltd. Office Address: Beijing Branch, 8/F office Tower W2, The Towers, Oriental Plaza, 1 East Chang An Avenue, Beijing 100738, PRC International Auditors: Deloitte Touche Tohmatsu Office Address: 35/F., One Pacific Place, 88 Queensway, Hong Kong 10. PRC and Hong Kong Legal Advisers Retained by the Company PRC Legal Advisers: Hylands Law Firm 5A1, 5th Floor, East Zone, Hanwei Plaza, No. 7 Guanghua Road, Chaoyang District, Beijing City, PRC Hong Kong Legal Advisers: Li & Partners Solicitors 22nd Floor, World Wide House, Central, Hong Kong 11. Principal Bankers Industrial and Commercial Bank of China, Shouguang Branch No. 118 Guangchang Street, Shouguang City, Shandong Province, PRC 5 II Summary of Financial and Operating Results I. Major financial data for the year of the Group Major financial data for the year of the Group prepared in accordance with Accounting Standards for Business Enterprises Unit: RMB No Key financial indicators Amount 1 Operating profit 1,292,771,697.51 2 Total profit 1,555,339,310.69 3 Net profit attributable to the equity holders of the Company 1,075,291,741.53 4 Net profit after extraordinary gains or losses attributable to the equity holders of the Company 854,268,917.39 5 Net cash flows from operating activities 1,934,140,803.04 Extraordinary gains or losses items (Unit: RMB) Extraordinary gains or losses items Amount Gains and losses generated from held for trading financial assets, other than effective hedging activities associated with normal business operations of the Company 1,738,200.00 Reversal of impairment provision on receivables tested for impairment on individual basis 39,718,405.84 Net gain and loss from disposal of non-current assets -1,219,356.66 Government grants received 178,084,185.07 Net gains or losses attributable to debt restructuring 103,365.66 The shortfall of the consideration for the acquisition of minority interests in comparison with the attributable book value of the identifiable net assets of the acquiree 28,209,117.78 Profit or loss arising from investment costs for acquisition of a subsidiary by the corporation being less than its share of fair value of identifiable net assets of the invested entity on acquisition 60,519.78 Non-operating net gain and loss other than the above 23,477,854.77 Effect of extraordinary gains or losses on income tax -34,679,297.41 Effect of minority interests -14,470,170.69 Total 221,022,824.14 6 II. Effect of adjustment in accordance with International Financial Reporting Standards on net profit and net assets Net profit in the Financial Statements 2008 prepared in accordance with Accounting Standards for Business Enterprises by the Company was RMB1,259,541,454.27, and net assets were RMB14,021,774,664.96. The main differences with the net profit and net assets set out in the financial statements prepared in accordance with International Financial Reporting Standards were as follows: Unit: RMB For the year As at ended 31 December 31 December 2008 2008 Items Net assets Net profit Amounts set out in the financial statements prepared in accordance with International Financial Reporting Standards 13,656,968,902.24 1,294,998,937.34 Special fund for treasury bonds and special payables received 344,948,245.89 -32,490,567.06 Exchange gains or losses from special foreign currency borrowings 19,857,516.83 -2,966,916.01 Amounts set out in the financial statements prepared in accordance with Accounting Standards for Business Enterprises 14,021,774,664.96 1,259,541,454.27 7 III. Major financial data and indicators of the last three years prepared in accordance with Accounting Standards for Business Enterprises Unite: RMB For the year For the year For the year ended ended ended 31 December 31 December Increase / 31 December 2006 Items / Indicators 2008 2007 decrease Before After (%) adjustments adjustments Operating revenue 15,529,593,435.77 15,164,742,450.26 2.41% 11,814,092,426.36 11,983,464,568.89 Total profit 1,555,339,310.69 1,489,336,202.56 4.43% 891,269,259.51 615,690,757.28 Net profit attributable to the equity holders of the Company 1,075,291,741.53 967,636,172.39 11.13% 602,967,195.37 356,907,182.90 Net profit after extraordinary gains or losses attributable to the equity holders of the Company 854,268,917.39 878,418,573.66 -2.75% 436,232,957.51 396,061,925.60 Net cash flows from operating activities 1,934,140,803.04 1,324,263,125.01 46.05% 1,008,558,176.84 1,008,558,176.84 Basic earnings per share 0.57 0.60 -5.00% 0.4425 0.26 Diluted earnings per share N/A 0.59 N/A 0.4415 N/A Basic earnings per share after extraordinary gains or losses 0.45 0.54 -16.67% 0.3201 0.29 Rate of return on net assets on fully diluted basis 8.77% 11.06% -2.29% 10.03% 5.80% Rate of return on net assets on weighted average basis 10.24% 12.64% -2.40% 10.83% 6.06% Rate of return on net assets on fully diluted basis after extraordinary gains and losses 6.97% 10.04% -3.07% 7.26% 6.44% Rate of return on net assets on weighted average basis after extraordinary gains and losses 8.13% 11.47% -3.34% 7.84% 6.73% Net cash flows per share from operating activities 0.9380 0.7761 20.86% 0.7385 0.7385 8 III. Major financial data and indicators of the last three years prepared in accordance with Accounting Standards for Business Enterprises (continued) As at As at As at 31 December 31 December Increase / 31 December 2006 2008 2007 decrease Before After (%) adjustments adjustments Total assets 26,299,495,745.01 22,011,108,257.29 19.48% 20,547,990,949.39 20,558,560,560.77 Equity attributable to equity holders of the Company 12,259,078,901.99 8,745,035,011.85 40.18% 6,010,124,970.09 6,151,642,343.81 Net assets per share attributable to equity holders of the Company 5.9451 5.1250 16.00% 4.4009 4.5045 Note: According to the requirement of Article 14 “gains and losses on changes in fair value of financial assets held for trading and financial liabilities held for trading and investment income generated from disposal of financial assets held for trading, financial liabilities held for trading and available-for-sale financial assets, other than effective hedging activities associated with normal business operations of the company” of Dilution Information Disclosure by Companies Offering Securities to the Public No.1 － extraordinary gains or losses (2008), the Company had adjusted the extraordinary gains or losses of 2007. IV. Rate of Return on net assets and earnings per share in accordance with Preparation Criteria of Information Disclosure by Companies Offering Securities to the Public No. 9 issued by China Securities Regulatory Commission Rate of Return on Earnings per net assets (%) share (RMB) Fully Weighted Fully Weighted diluted average diluted average Net profit attributable to equity holders of the Company 8.77% 10.24% 0.57 N/A Net profit after extraordinary gains or losses attributable to equity holders of the Company 6.97% 8.13% 0.45 N/A 9 III Changes in Share Capital and Shareholders I. Changes in share capital (Unit: shares) Increase/decrease (+/-) Opening balance resulting from changes in the reporting period Closing balance Transfer Increase of state- Issue of Number Number in lock- Restricted owned new Sub- of of shares Percentage up shares shares shares shares total shares Percentage I. Restricted shares 339,500,453 19.90% 176,774 -120,101 -35,570,000 — -35,513,327 303,987,126 14.74% of which: State-owned legal person shares 328,573,657 19.26% — — -35,570,000 — -35,570,000 293,003,657(1) 14.21% Shares held by Senior Management 10,926,796 0.64% 176,774 -120,101 — — 56,673 10,983,469(2) 0.53% II. Non-restricted shares 1,366,845,488 80.10% -176,774 120,101 35,570,000 355,700,000 391,213,327 1,758,058,815 85.26% of which: Renminbi ordinary shares (A shares) 809,348,003 47.43% -176,774 120,101 — — -56,673 809,291,330 39.25% Domestic listed foreign shares (B shares) 557,497,485 32.67% — — — — — 557,497,485 27.04% Overseas listed foreign shares (H shares) — — — — 35,570,000 355,700,000 391,270,000 391,270,000 18.97% III. Total number of shares 1,706,345,941 100.00% — — — 355,700,000 355,700,000 2,062,045,941 100.00% 10 I. Changes in share capital (continued) Note: 1. Pursuant to the Notice of the Provisional Administrative Measures for State-owned Shares reduction for Raising Social Security Fund promulgated by the State Council (《國務院關於印發減持國有股籌集社會 保障資金管理暫行辦法的通知》), the State-owned Assets Supervision and Administration Commission of the State Council approved the transfer from Shouguang Chenming Holdings Co., Ltd. to the National Social Security Fund Council of the PRC (the “NSSF Council”) such number of A shares held by it in aggregate equivalent to 10% of the number of the offer shares, representing 35,570,000 state-owned legal person shares, which were converted into overseas listed foreign shares (H shares) and listed on the Main Board of The Stock Exchange of Hong Kong Limited upon the issuance of overseas listed foreign shares (H shares) by the Company. The number of A shares held by Shouguang Chenming Holdings Co., Ltd. was reduced to 293,003,657 shares. 2. During the reporting period, the restricted shares held by the Senior Management changed by 56,673 shares from 10,926,796 shares to 10,983,469 shares. The reasons for such change were as follows: 1 According to “the Practice Guidance for the Company’s shares held by the Directors, Supervisors and senior management of the listed companies of Shenzhen Stock Exchange” (《深圳證券交易所 上市公司董事、監事和高級管理人員所持本公司股份管理業務操作指南》), the shares held by the existing Directors, Supervisors and senior management would be unlocked up on the basis of the percentage of 25% of the shares held at the beginning of each year. For the 27,301 shares held by the senior management, the nature of the shareholdings would be changed from “restricted shares held by the senior management” to “non-restricted RMB ordinary shares (A shares)”. The Senior Management of the Company did not dispose any shares of the Company. 2 During the reporting period, the half year lock-up period for the resigned directors and senior management of the Company was expired. Therefore, the nature of the 92,800 shares, used to be held by the senior management, was changed from restricted shares held by the senior management to the non-restricted RMB ordinary shares (A shares). 3 During the reporting period, the unlocked non-restricted shares held be Dong Jianwen, the resigning deputy general manager, were locked up again as his resignation had been effective for less than 6 months. The shares held by Meng Feng, the new deputy general manager, were locked up, therefore the number of lock-up shares held by Senior Management increased by 176,774 shares. 11 II. Offering of shares and the listing 1. As approved by the approval document No. [2008] 290 on Approval of the Issue of Overseas Listed Foreign Shares by Shandong Chenming Paper Holdings Ltd. from the CSRC, and the approval from the Stock Exchange of Hong Kong Limited (the “Hong Kong Stock Exchange”), the Company issued overseas listed foreign shares (H shares) through global offering. The offer price per H share of this global offering was HK$9.00 per H share, and the Company offered 355,700,000 H shares for the global offering, of which, 35,570,000 H shares were offered in the Hong Kong public offering and the remaining 320,130,000 H shares were offered in the international offering. 35,570,000 state-owned legal person shares were transferred to NSSF Council due to the reduction of shareholding of state-owned shares by the Company’s relevant state-owned corporate shareholders were converted into overseas listed foreign shares (H shares). A total of 391,270,000 H shares were listed on the main board of the Hong Kong Stock Exchange on 18 June 2008. The Company’s English abbreviation is “Chenming Paper” and its stock code is “1812”. 2. No staff shares of the Company have been issued. III. Shareholders’ profiles 1. Change in restricted shares Unit: shares Restricted Restricted Restricted Restricted shares at shares shares shares Reason Names of the beginning released increased at the end for Date of release shareholders the of year this year this year of the year restriction from restriction Shouguang Chenming 328,573,657 35,570,000 0 293,003,657 Commitments 29 March 2010 Holdings Company during the reform Limited of conversion Shares held by Senior 10,926,796 120,101 176,774 10,983,469 Lock-up of Released Management shares held according to of the Company by senior relevant rules of management the ShenZhen of the Company Stock Exchange Total 339,500,453 35,690,101 176,774 303,987,126 — — Note: For “Restricted shares released this year” of Shouguang Chenming Holdings Company Limited, please refer to the descriptions in Note 2 of Part I in this section. 12 III. Shareholders’ profiles (continued) 2. Top ten shareholders and the top ten shareholders of non-restricted shares Unit: shares Total number of shareholders The total number of shareholders was 153,980, of which, 116,525 were holders of A shares, 36,629 were holders of B shares and 826 were holders of H shares Shareholdings of the top ten shareholders Total Number of Number of Percentage number restricted shares Nature of of of shares shares pledged Name of shareholders shareholders shareholding held held or locked-up HKSCC Nominees Limited Overseas non-state-owned 18.89% 389,783,500 0 Unknown legal person (foreign shareholder) Shouguang Chenming State-owned legal person 14.21% 293,003,657 293,003,657 None Holdings Company Limited Agricultural Bank of China - Domestic non-state-owned 1.67% 34,499,190 0 Unknown 中郵核心成長股票型證券 legal person 投資基金 Agricultural Bank of China - Domestic non-state-owned 1.62% 33,494,942 0 Unknown 中郵核心優選股票型證券 legal person 投資基金 Bank of China - 華夏行業 Domestic non-state-owned 1.27% 26,107,478 0 Unknown 精選股票型證券 legal person 投資基金(LOF) China Construction Bank - Domestic non-state-owned 1.20% 24,731,696 0 Unknown 鵬華價值優勢股票型 legal person 證券投資基金 Industrial and Commercial Domestic non-state-owned 1.19% 24,578,106 0 Unknown Bank of China - legal person 諾安股票證券投資基金 13 III. Shareholders’ profiles (continued) 2. Top ten shareholders and the top ten shareholders of non-restricted shares (continued) Total Number of Number of Percentage number restricted shares Nature of of of shares shares pledged Name of shareholders shareholders shareholding held held or locked-up China Construction Bank Domestic non-state- 0.99% 20,415,255 0 Unknown - 華夏紅利混合型 owned legal person 開放式證券投資基金 Joincare Pharmaceutical Domestic non-state- 0.92% 18,900,000 0 Unknown Group Industry Co., Ltd owned legal person KEYWISE GREATER CHINA Overseas legal person 0.85% 17,476,904 0 Unknown OPPORTUNITIES MASTER FUND Shareholding of the top ten shareholders of non-restricted shares Number of non- Name of shareholders restricted shares held Class of shares HKSCC Nominees Limited 389,783,500 H share Agricultural Bank of China - 中郵核心成長股票型證券投資基金 34,499,190 A share Agricultural Bank of China - 中郵核心優選股票型證券投資基金 33,494,942 A share Bank of China - 華夏行業精選股票型證券投資基金(LOF) 26,107,478 A share China Construction Bank - 鵬華價值優勢股票型證券投資基金 24,731,696 A share Industrial and Commercial Bank of China - 諾安股票證券投資基金 24,578,106 A share China Construction Bank - 華夏紅利混合型開放式證券投資基金 20,415,255 A share Joincare Pharmaceutical Group Industry Co., Ltd 18,900,000 A share KEYWISE GREATER CHINA OPPORTUNITIES MASTER FUND 17,476,904 B share PLATINUM ASIA FUND 16,234,459 B share 14 III. Shareholders’ profiles (continued) 2. Top ten shareholders and the top ten shareholders of non-restricted shares (continued) Connected relationship or Among the top ten shareholders of the Company, Shouguang Chenming Holdings concert-party relationship Company Limited, a state-owned legal person shareholder, is not connected with among the above shareholders any of the other shareholders, nor is it a party acting in concert with any of them as defined in Administrative Measures for Information Disclosure of the Changes in Shareholdings of Listed Companies (《上市公司持股變動信息披露管理辦法》); among which, Agricultural Bank of China －中郵核心成長股票型證券投資基金 and Agricultural Bank of China－中郵核心優選股票型證券投資基金 are the sub-funds of 中郵創業基金管理有限公司. Bank of China — 華夏行業精選股票型證券投資基金 (LOF) and China Construction Bank — 華夏紅利混合型開放式證券投資基金are the sub-funds of 華夏基金管理有限公司. Save for the above, the Company is not aware that any other shareholders of outstanding shares as aforesaid are connected with others or whether any of these shareholders falls within the meaning of parties acting in concert as defined in Administrative Measures for Information Disclosure of Changes in Shareholdings of Listed Companies (《上市公 司持股變動信息披露管理辦法》). 3. Profile of controlling shareholders and beneficial controllers (1) The Company’s controlling shareholders and beneficial controllers remained unchanged during the reporting period. (2) The controlling shareholder of the Company, Shouguang Chenming Holdings Company Limited (hereinafter referred to as “Chenming Holdings”), was established on 30 December 2005 with registered capital of RMB1.685 billion. Its legal representative is Chen Hongguo. Scope of business is investment in paper-making, electricity, heat and forestry projects. At the end of the reporting period, it held 293,003,657 state-owned legal person shares, representing 14.21% of the total share capital of the Company. During the reporting period, 35,570,000 state-owned shares were converted to overseas listed foreign shares (H share) and transferred to NSSF Council due to the reduction of shareholding of state-owned shares by the Company in connection with the issuance of overseas listed foreign shares (H share), the remaining shares held by it were neither pledged or locked-up. During the reporting period, Shandong San Wei Oil Group Company Limited (“Shandong Sanwei”), a shareholder of Chenming Holdings, transferred 10.86% equity interests in Chenming Holdings held by it to Shouguang Henglian Enterprise Investment Co. Ltd.; upon completion of transfer, Shandong Sanwei no longer held any equity interests in Chenming Holdings. State-owned Assets Supervision and Administration Commission of Shouguang City continued to hold 75.73% equity interests in Chenming Holdings. The beneficial controllers of the Company remained unchanged. 15 III. Shareholders’ profiles (continued) 3. Profile of controlling shareholders and beneficial controllers (continued) (3) State-owned Assets Supervision and Administration Commission of Shouguang City is the controlling shareholder of Chenming Holdings, holding 75.73% equity interests in Chenming Holdings. Person in charge of the unit is Zhang Yuhua. Scope of business is administration and supervision of state-owned assets, properties and titles belonging to Shouguang City. (4) Chart illustrating the relationship between the Company and the beneficial controllers 16 IV. Directors, Supervisors and Senior Management and the Staff I. Changes in shareholdings and remunerations of the Directors, Supervisors and Senior Management Total remuneration received from the Shares Shares Company during held at the held at Change in the reporting beginning the end number Reasons period (in ten Terms of the year of the year of shares for thousands Name Position Sex Age in office (share) (share) (share) change RMB) I. Executive Directors Chen Hongguo Chairman M 44 April 2007 - April 2010 6,334,527 6,334,527 0 — 144.68 Yin Tongyuan Vice-chairman and M 51 April 2007 - April 2010 3,231,520 3,231,520 0 — 96.12 general manager Li Feng Director, M 36 April 2007 - April 2010 471,818 471,818 0 — 59.40 sales director Hou Huancai Director M 47 April 2007 - April 2010 628,915 628,915 0 — 54 Zhou Shaohua Director M 47 April 2007 - April 2010 125,307 123,007 -2,300 Note 3 27 Xing Fangtong Director M 43 April 2007 - April 2009 355,561 355,561 0 — 19.84 Wu Bingyu Director M 43 April 2007 - April 2009 428,107 428,107 0 — 27.65 II. Non-executive Directors Gan Zhihe Director M 64 April 2007 - April 2010 0 0 0 — 4 Zhao Wei Director M 49 April 2007 - April 2010 0 0 0 — 4 Cao Chunyu Director M 45 April 2007 - April 2010 0 0 0 — 4 III. Independent non-executive Directors Diao Yuntao Independent Director M 44 April 2007 - April 2010 0 0 0 — 4 Wang Zhihua Independent Director M 50 April 2007 - April 2010 0 0 0 — 4 Zhou Chengjuan Independent Director F 45 April 2007 - April 2010 0 0 0 — 4 Wang Yumei Independent Director F 46 April 2007 - April 2010 0 0 0 — 4 Lau Ying Kit Independent Director M 34 April 2007 - April 2010 0 0 0 — 10 17 I. Changes in shareholdings and remunerations of the Directors, Supervisors and Senior Management (continued) Total remuneration received from the Company during Shares Shares the reporting held at the held at Change in Reasons period (in ten Terms beginning the end number for thousands Name Position Sex Age in office of the year of the year of shares change RMB) IV. Supervisors Gao Junjie Chairman of M 38 April 2007 - April 2010 39,606 39,606 0 — 7.42 Supervisory Committee Wang Ju Supervisor F 43 April 2007 - April 2010 0 0 0 — 13.45 Yang Hongqin Supervisor F 41 April 2007 - April 2010 0 0 0 — 6.94 Zhao Shujun Supervisor M 35 April 2007 - April 2010 0 0 0 — 6.47 Liu Wenzheng Supervisor M 37 April 2007 - April 2010 0 0 0 — 0 18 I. Changes in shareholdings and remunerations of the Directors, Supervisors and Senior Management (continued) Total remuneration received from the Company during Shares Shares the reporting held at the held at Change in Reasons period (in ten Terms beginning the end number for thousands Name Position Sex Age in office of the year of the year of shares change RMB) V. Senior Management Wang Baoliang Deputy general M 35 April 2007 - April 2010 209,200 209,200 0 — 28.08 manager Geng Guanglin Deputy general M 35 April 2007 - April 2010 437,433 437,433 0 — 45.90 manager Ren Wei Deputy general M 47 April 2007 - April 2010 109,200 109,200 0 — 21.60 manager Li Xueqin Deputy general F 43 April 2007 - April 2010 429,348 429,348 0 — 25.92 manager Hao Yun Deputy general M 46 April 2007 - April 2010 708,441 708,441 0 — 27 manager, secretary to the Board of Directors Wang Zaiguo Deputy general M 46 April 2007 - April 2010 195,600 195,600 0 — 21.6 manager Wang Shihong Deputy general M 45 April 2007 - April 2010 0 0 0 — 18 manager Fang Lijun Deputy general M 39 April 2007 - April 2010 436,851 436,851 0 — 25.24 manager Meng Feng Deputy general M 37 April 2008 - April 2010 185,700 185,700 0 — 27 manager Han Chunlai Deputy general M 45 April 2008 - April 2010 0 0 0 — 21.6 manager Xia Guangchun Deputy general M 44 April 2007 - April 2009 70,700 70,700 0 — 18.73 manager Liu Junwu Chief financial officer M 47 April 2007 - April 2009 0 0 0 — 17.28 Total — — — — 14,397,834 14,395,534 -2,300 — 798.82 19 I. Changes in shareholdings and remunerations of the Directors, Supervisors and Senior Management (continued) Note: 1. The 2001 annual general meeting of the Company approved the resolution to establish a Share Option Incentive Scheme for the Senior Management and resolved to adopt share option incentives for the Senior Management of the Company. The Company had purchased its own A shares for some of its Directors and operating management in prior years, details of which were disclosed in the 2004 and 2006 annual reports. There were no share option incentive events during the year. 2. None of the Directors, Supervisors and Senior Management of the Company had received any remunerations from shareholder or other related entities. 3. During the reporting period, Mr. Zhou Shaohua, an executive Director of the Company, sold part of the outstanding A shares held by him in the secondary market after sales restrictions were released. II. Major career histories of Directors, Supervisors and Senior Management and their positions 1. Brief Biographies of Directors (1) Brief biographies of executive Directors Mr. Chen Hongguo, who joined the Company in 1987, had held different positions including chief officer of manufacturing section, chief officer of branch factory, deputy general manager, executive Director of the Company and the chairman of Wuhan Chenming Hanyang Paper Co., Ltd., etc. He is currently the Chairman of the Company and the chairman and general manager of Chenming Holdings. Mr. Chen Hongguo is the spouse of Ms. Li Xueqin, a deputy general manager of the Company. Mr. Yin Tongyuan, who joined the Company in 1982, had held different positions including the chief officer of manufacturing section, director of technology department, deputy factory chief and standing deputy factory chief. He is presently the party committee secretary, vice-chairman and general manager of the Company and a director of Chenming Holdings. Mr. Li Feng, who joined the Company in 1992, had held different positions including the chief officer of manufacturing section, assistant to the general manager, deputy general manager of Shandong Chenming Paper Group Qihe Paperboard Co., Ltd., deputy general manager, vice-chairman and chairman of Wuhan Chenming Hanyang Paper Co., Ltd. He is currently the executive Director and the sales director of the Company. Mr. Li Feng is the brother of Ms. Li Xueqin, a deputy general manager of the Company. 20 II. Major career histories of Directors, Supervisors and Senior Management and their positions (continued) 1. Brief Biographies of Directors (continued) (1) Brief biographies of executive Directors (continued) Mr. Hou Huancai, who joined the Company in 1983, had held different positions including the chief officer of manufacturing section, chief of branch factory, chairman of Jilin Chenming Paper Co., Ltd., chairman of Shandong Chenming Paper Group Qihe Paperboard Co., Ltd. and Jiangxi Chenming Paper Co., Ltd. and the chairman of the 1st and 2nd Supervisory Committee of the Company. He is currently an executive Director of the Company and the chairman of Jilin Chenming Paper Co., Ltd. Mr. Zhou Shaohua, who joined the Company in 1997, had held different positions of the standing deputy general manager, chief engineer, vice-chairman of Wuhan Chenming Hanyang Paper Co. Ltd. and the chairman of Jiangxi Chenming Paper Co., Ltd. He is currently an executive Director of the Company and the party committee secretary of Zhanjiang Chenming Paper Pulp Co., Ltd. Mr. Xing Fangtong, who joined the Company in 1984, had held different positions including the machines supervisor, chief officer of manufacturing section and general manager and chairman of Chibi Chenming Paper Co., Ltd. He is currently the executive Director of the Company. On 8 April 2009, the Twelfth Meeting of the Fifth Session of the Board approved the resolution for Xing Fangtong’s resignation from executive Director of the Company. Mr. Wu Bingyu, who joined the Company in 1989, had held different positions including the supervisor of organization department, officer of the party office, leader of the party section, assistant to the general manager and party committee vice secretary of Wuhan Chenming Hanyang Paper Co. Ltd. and the chairman of Jilin Chenming Paper Co., Ltd. He is currently the executive Director of the Company. On 8 April 2009, the Twelfth Meeting of the Fifth Session of the Board approved the resolution for Wu Bingyu’s resignation from executive Director of the Company. 21 II. Major career histories of Directors, Supervisors and Senior Management and their positions (continued) 1. Brief Biographies of Directors (continued) (2) Brief biographies of non-executive Directors of the Company Mr. Gan Zhihe had held positions of head of Technical Development Department of National Construction Material Bureau, Principal of China Construction Material Institute, vice chief of Technical Equipment Department of National Commission of Economics and Commerce, director of Investment and Planning Department of National Commission of Economics and Commerce, vice chief secretary of National Commission of Economics and Commerce, and vice chief secretary of National Development and Reformation Committee, etc. He is also an independent director of Xinjiang Tianshan Cement Co., Ltd. and is currently a non-executive Director of the Company. Mr. Zhao Wei had held positions of director of Paper Manufacturing Department of Minister of Light Industry and deputy director of the paper making industry management office of China Light Industry Association （中國輕工總會造紙工業管理辦公室）, and is currently vice president and general secretary of the China Paper Association, independent non-executive director of Guangdong Guanhao High-Tech Co., Ltd. and Qunxing Paper Holdings Co. Ltd., a Hong Kong listed company. He is currently a non-executive Director of the Company. Mr. Cao Chunyu is currently the vice president of China National Pulp & Paper Research Institute, deputy general manager of China Paper Production Development Company and a member of the Academic Committee of China Technical Association of Paper Industry. He also serves as an independent director of Mudanjiang Hengfeng Paper Co., Ltd. and a non-executive Director of the Company. (3) Brief biographies of independent non-executive Directors Mr. Diao Yuntao previously held positions of vice executive officer of Accounting Department of Financial Bureau of Shandong Province, executive officer of Local Taxation Bureau office of Shandong Province and president of Shandong Province Qilu CPAs. He is currently the vice chairman of Wanlong Asia CPAs and independent director of Guangdong Golden Horse Tourism Group Stock Co., Ltd. Mr. Diao became an independent non-executive Director of the Company in April 2003. Mr. Wang Zhihua had held the positions of tutor for Accounting of Shandong Economic College, secretary of Shandong Electricity Academe. Mr. Wang is currently the deputy chief economist and general manager of capital operation department of Luneng Group Co., Ltd., and concurrently serves as a director of Shandong Luneng Taishan Cable Co., Ltd., Guangdong Golden Horse Tourism Group Stock Co., Ltd. and Tianjin Guangyu Development Co., Ltd., as well as an independent director of Wuzhou Minovo Co., Ltd. He became an independent non-executive Director of the Company in April 2003. 22 II. Major career histories of Directors, Supervisors and Senior Management and their positions (continued) 1. Brief Biographies of Directors (continued) (3) Brief biographies of independent non-executive Directors (continued) Ms. Zhou Chengjuan was assigned to the School of Finance Taxation & Public Administration of Shandong University of Finance in 1987, and is now deputy head of Institute of Public Finance and Taxation of Shandong University of Finance. She became an independent non-executive Director of the Company in April 2003. Ms. Wang Yumei had held the positions of committee member of the 6th and 7th People’s Political Consultative Committee of Haidian District, Beijing City and a committee member of the Committee for Social and Legal Affairs. Ms. Wang is currently the vice president of the department of insurance of the Central University of Finance and Economics, a standing director of the Labor Science Education Branch of the China Association for Labor Studies and a committee member of the Beijing City Economic Enterprise Committee of the China National Democratic Construction Association, etc. She became an independent non-executive Director of the Company in April 2007. Mr. Lau Ying Kit was the chief financial officer and company secretary of two listed companies, and is now the chief financial officer and company secretary of C Y Foundation Group Limited (a Hong Kong listed company) and an independent non-executive director of Kingdom Holdings Limited (a Hong Kong listed company). Mr. Lau became an independent non-executive Director of the Company in April 2007. 2. Brief biographies of Supervisors of the Company Mr. Gao Junjie, who joined the Company in 1994, had held the positions of the chief officer of the legal section, chief officer of auditing department and chief officer of capital operations department, etc. He is now the chairman of supervisory committee, assistant to general manager, supervisor of Chenming Holdings and supervisor of Shouguang Henglian Enterprise Investment Co. Ltd. Ms. Wang Ju, who joined the Company in 1987, had held the positions of deputy chief officer and chief officer of manufacturing section, deputy manager and general manager of branch company, assistant to the general manager and deputy general manager of Chenming Holdings. She is now a Supervisor of the Company and the vice president of the workers’ union. 23 II. Major career histories of Directors, Supervisors and Senior Management and their positions (continued) 2. Brief biographies of Supervisors of the Company (continued) Ms. Yang Hongqin, who joined the Company in 1987, held the positions of the deputy chief and chief officer of quality control section, the chief of after sale services department and manager of property management company. She presently serves as a Supervisor of the Company and assistant to general manager of Shandong Chenming Power Supply Holdings. Co., Ltd. Mr. Zhao Shujun, who joined the Company in 1997, had held the positions of the deputy chief of the party office, deputy chief of the training department and the deputy chief of the human resources department, etc. He is now a Supervisor of the Company and the deputy chief of the party group department. On 8 April 2009, the Ninth Meeting of the Fifth Session of the Supervisory Committee approved the resolution for Zhao Shujun’s resignation from Supervisor of the Company. Mr. Liu Wenzheng, who joined the Company in 1993, had held the positions of the chief officer of financial department of Shandong Chenming Paper Group Qihe Paperboard Co., Ltd. and the deputy chief officer and chief officer of audit department etc. He is currently a Supervisor of the Company. The Ninth Meeting of the Fifth Session of the Supervisory Committee approved the resolution for Liu Wenzheng’s resignation from Supervisor of the Company. 3. Brief biographies of Senior Management of the Company Mr. Wang Baoliang held the positions of secretary, deputy chief, deputy chief of Bureau of Investigation, deputy chief of the Office and deputy secretary-general of the committee office of Shouguang City, etc. He joined the Company in October 2003, and currently serves as deputy general manager of the Company and director of Chenming Holdings. Mr. Geng Guanglin, who joined the Company in 1992, had held the positions of chief of manufacturing section, deputy general manager of Chibi Chenming Paper Co., Ltd, the chairman of Wuhan Chenming Hanyang Paper Holdings Co., Ltd. and chairman of Jilin Chenming Paper Co., Ltd. He is now a deputy general manager of the Company. Mr. Ren Wei held the positions of credit teller, deputy chief of credit section, deputy manager of international business department, chief of operation department, assistant to president, deputy president and president of Industrial and Commercial Bank, Shouguang City Branch etc. He joined the Company in July 2004 and currently serves as a deputy general manager of the Company. 24 II. Major career histories of Directors, Supervisors and Senior Management and their positions (continued) 3. Brief biographies of Senior Management of the Company (continued) Ms. Li Xueqin, who joined the Company in 1987, had held the positions of the chief of audit department, the vice chairman of the Supervisory Committee, etc.. Ms. Li has been a deputy general manager of the Company and a director of Chenming Holdings since March 2003. Ms. Li Xueqin is the spouse of Mr. Chen Hongguo, chairman of the Company. Mr. Hao Yun, who joined the Company in 1984, had held the positions of secretary of the communist youth league of the Company, chief of the labor & personnel department, chief of shares and securities office and assistant to the general manager, etc. He is currently a deputy general manager of the Company and secretary to the Board. Mr. Wang Zaiguo, who joined the Company in 1987, had held the positions of the deputy chief of office, assistant to the general manager, chief of logistics department of our Company, manager of hotel, deputy general manager of Chenming Holdings, Supervisor of the Company, etc. He is now a deputy general manager of the Company and the chairman of Zhanjiang Chenming Arboriculture Co., Ltd. Mr. Wang Shihong had held the positions of deputy secretary of China National Development and Planning Committee, general manager of administration department of Fuxing Pulp Co., Ltd., head of Office of Party Committee and assistant to the general manager of China Gaoxin Investment Group Corp. He became a deputy general manager of the Company in March 2006. Mr. Fang Lijun, who joined the Company in 1991, had been the manager and the assistant to the general manager of the Beijing branch office of the Company and the general manager of the sales office etc.. He currently serves as a deputy general manager of the Company. Mr. Meng Feng, who joined the Company in 1992, had held the positions of deputy general manager of the Company, general manager of Jiangxi Chenming Paper Co., Ltd., chairman of printing paper company and chairman of news press paper company, etc. He is currently a deputy general manager of the Company and a director of Chenming Holdings. Mr. Han Chunlai, who joined the Company in 1983, had held the positions of a manager of branch supplying company and the chief representative of the sales management section. He is currently a deputy general manager of the Company and concurrently serves as manager of paperboard and coated paper products in sales office. 25 II. Major career histories of Directors, Supervisors and Senior Management and their positions (continued) 3. Brief biographies of Senior Management of the Company (continued) Mr. Liu Junwu, who joined the Company in 2002, had held the positions of financial controller of Jilin Paper Holdings Company Limited, chief accountant of Shandong Chenming Paper Group Qihe Paperboard Co., Ltd., chief of the financial department of the Company, assistant to the general manager and financial controller of the Company. On 8 April 2009, the Twelfth Meeting of the Fifth Session of the Board approved the resolution for Liu Junwu’s resignation from chief financial officer of the Company. Mr. Xia Guangchun, who joined the Company in 1989, had held the positions of deputy general manager of Wuhan Chenming Hanyang Paper Co. Ltd., general manager of Shandong Chenming Power Supply Holdings. Co., Ltd., party committee secretary of Jilin Chenming Paper Co., Ltd and deputy general manager of the Company. On 8 April 2009, the Twelfth Meeting of the Fifth Session of the Board approved the resolution for Xia Guangchun’s resignation from deputy general manager of the Company. 26 III. Annual remunerations of Directors, Supervisors and Senior Management 1. The remunerations of directors, Supervisors and Senior Management are determined by the remuneration committee of the Board of the Company, which will submit the same to the Board for approval and execution. 2. Factors determining the remunerations of the Directors and Senior Management include: actual profitability of the Company, position held, workload undertaken and interests created by the individual. Based on the principles of personnel stability and combination of incentives and restrictions, annual remuneration policy categorized by position is adopted on Directors and Senior Management. Fixed annual remuneration policy is adopted on Supervisors. The annual remunerations of Supervisors assuming specific managerial duties in the Company are determined by the meetings of the management of the Company based on the specific managerial duties assumed by them. 3. As approved on the 2006 annual general meeting, the Company will pay each of the independent non-executive Directors and non-executive Directors of the Company annual allowance of RMB40,000 － RMB100,000 (after tax). The travel expenses for attending board meetings and shareholders’ meeting and fees incurred reasonably in the performance of their duties under the Articles of the Associations by independent non-executive Directors and non-executive Directors are reimbursed as expensed. 4. For the total remunerations received from the Company by Directors, Supervisors and Senior Management in 2008, please refer to Part I of this section. 27 IV. Change of Directors, Supervisors and Senior Management 1. On 11 April 2008, upon the approval of the seventh meeting of the fifth session of the Board, Mr. Meng Feng and Mr. Han Chunlai were appointed as deputy general managers of the Company. For details, please refer to the relevant announcements published on China Securities Journal, Hong Kong Commercial Daily and http://www.cninfo.com.cn on 15 April 2008. 2. On 18 July 2008, upon the approval of the second extraordinary meeting of the fifth session of the Board, Mr. Dong Jianwen resigned from his duties as deputy general manager due to personal reasons. For details, please refer to the relevant announcements published on China Securities Journal, Hong Kong Commercial Daily, http://www.cninfo.com.cn and Hong Kong Stock Exchange’s website (http://www.hkex.com.hk) on 19 July 2008. V. Personnel of the Company At the end of the reporting period, the Group had 17,163 employees in aggregate, including 12,467 production staff, 524 sales staff, 1,120 technical staff, 288 financial staff, 908 administrative staff and 1,856 other staff. By level of education, there were 711 employees with bachelor’s degree or above, 2,051 employees with college degree, 4,254 employees with technical secondary school education and 10,147 employees with high school, technical school education and levels below technical secondary school education. 28 V Corporate Governance Report I. Disclosures as required by China Securities Regulatory Commission (I) Corporate Governance Under the requirement of Company Law (《公司法》), Securities Law (《證券法》), Code of Corporate Governance for Listed Companies (《上市公司治理準則》), listing rules of Shenzhen Stock Exchange (《深圳證券交易所股票上市規則》), Hong Kong Listing Rules and the related requirements as required by China Securities Regulatory Commission, the Company further established and optimized its legal person governance structure in the reporting period. The Company operated in accordance with the practices stipulated in Procedural Rules of Shareholders Meetings ( 《 股 東 大 會 議 事 規 則 》 ), Procedural Rules of Board Meetings 《董事會議事規則》 ( ), Procedural Rules of Supervisory Committee Meetings (《監事會議事規則》) and Information Disclosure Criteria (《信息披露管理制度》). The corporate governance of the Company was in compliance with the requirements of Code of Corporate Governance for Listed Companies (《上市公司治理準則》). In 2007, the Company seriously conducted special corporate governance activities in light of its actual situation in strict compliance with the requirements and integrated arrangements relating to special corporate governance activities of listed companies of China Securities Regulatory Commission, China Securities Regulatory Commission Shandong Bureau, and Shenzhen Stock Exchange, as well as the laws and regulations such as Company Law (《公司法》) and Securities Law (《證券法》), the Articles of Association of the Company and the requirements of internal systems such as the Procedural Rules of Shareholders Meetings (《股東大會議事規則》), Procedural Rules of Board Meetings (《董事會議事規則》), Procedural Rules of Supervisory Committee Meetings (《監事會議事 規則》). The activities were completed in three stages including self investigation, public inquiry and rectification. The governance standard of the Company was fully reviewed, summarized and enhanced. The Company made timely rectification based on the issues discovered in self investigation and the consolidated appraisal and rectification suggestions on corporate governance from China Securities Regulatory Commission and China Securities Regulatory Commission Shandong Bureau. The Company timely revised and improved the Connected Transaction Criteria (《關聯交易管理制度》), Information Disclosure Criteria (《信息披露管理制度》), General Manager Working Criteria 《總經理工作細則》 ( ), Internal Control Criteria 《內部控制制度》 ( ), Independent Director Administration Criteria (《獨立董事管理辦法》), Secretary of Board Working Criteria (《董事會秘書工 作細則》), and Reception and Promotion Criteria (《接待和推廣工作制度》). All of these regulations were examined and approved at the second meeting of the fifth session of the Board. 29 I. Disclosures as required by China Securities Regulatory Commission (continued) (I) Corporate Governance (continued) In 2008, according to the requirements and integrated arrangements of China Securities Regulatory Commission Announcement [2008] No. 27 and the Notice Regarding the Furthering of Self-Inspection Procedures of Works Related to the Enhancement of Special Governance Matters in Listed Companies （《關於做好加強上市公司治理專項活動自查階段有關工作通知》）,《關於做好加強上市 公司治理專項活動自查階段有關工作通知》, Notice Regarding Further Regulation of Behavior Relating to Preventing of Recurrence of Embezzling of Funds in Listed Companies by Substantial Shareholders (Lu Zheng Jian Gong Si Zi [2008] No.41)《關於進一步規範相關行為防止大股東佔用上市 公司資金問題复發的通知》（魯證監公司字[2008] 41號）and Implementation Proposal for the Special Campaign in Shandong Jurisdiction for Prevention of Embezzling of Funds in Listed Companies by Substantial Shareholders and Related Parties (Lu Zheng Jian Gong Si Zi [2008] No.42)《山東區防止大 股東及關聯方佔用上市公司資金行為專項活動實施方案》（魯證監公司字[2008] 42號）issued by China Securities Regulatory Commission Shandong Bureau, the Company continued to conduct special corporate governance activities based on the achievements of special corporate governance activities in 2007 and conducted self investigation and rectification in light of the existing issues relating to corporate governance. On 18 July 2008, the second extraordinary meeting of the fifth session of the Board considered and approved its rectification report on corporate governance and the resolutions regarding to the establishment of the Special System to Take Precautions against Controlling Shareholders and Related Parties from Embezzling the Company’s Fund《防範控股股東及關聯方佔用 公司資金專項制度》. The related resolution announcement was published on China Securities Journal, Hong Kong Commercial Daily, www.cninfo.com.cn and the Hong Kong Stock Exchange’s website (http://www.hkex.com.hk). The full text of rectification report on corporate governance and the Special System to Take Precautions against Controlling Shareholders and Related Parties from Embezzling the Company’s Fund 《 防 範 控 股 股 東 及 關 聯 方 佔 用 公 司 資 金 專 項 制 度 》 was published on www.cninfo.com.cn and the Hong Kong Stock Exchange’s website (http://www.hkex.com.hk). 30 I. Disclosures as required by China Securities Regulatory Commission (continued) (II) Performance of the independent non-executive Directors In the reporting period, each of the independent non-executive Directors continued to suggest constructive opinion on the material matters relating to operations and management and internal control of the Company. They issued their independent opinion on related matter pursuant to related requirements, thus raising the science and objectiveness of Board decisions. Attendance of independent non-executive Directors at Board meetings in 2008 is as follows: Name of Number of Board independent meetings requiring Attendance Attendance non-executive Directors attendance in person by proxy Absence Liu Yingjie 9 9 0 0 Wang Yumei 9 9 0 0 Diao Yuntao 9 9 0 0 Wang Zhihua 9 9 0 0 Zhou Chengjuan 9 9 0 0 In the reporting period, independent non-executive Directors of the Company issued their independent opinions on the connected transactions pursuant to the related laws and regulations, they raised no objection opinion on the proposals of Board meetings or other issues. (III) Particulars about the separation of businesses, personnel, assets, organizations, and finance from the controlling shareholder 1. In terms of business: The Company was completely independent from the controlling shareholder, and had its independent and complete business operation capability. 2. In terms of personnel: The labour, personnel and salary management were completely separated from the controlling shareholder. 3. In terms of assets: There was only shareholding relationship between the Company and Chenming Holdings. The assets of the Company were completely separated from those of the controlling shareholder. 4. In terms of organization: The Company had a mature and independent organization structure, which was established according to the legal processes and the business practice of the Company. It was completely separated from that of the controlling shareholder. 5. In terms of finance: The Company had its own accounting department, accounting system, financial management system, and bank accounts. The controlling shareholder never interfered in the financial activities of the Company. 31 I. Disclosures as required by China Securities Regulatory Commission (continued) (IV) Internal Control of the Company 1. Internal control overview The Company established the procedural rules for shareholders’ meetings, board meetings, and the Supervisory Committee meetings to ensure their decision-making, execution, and supervision duties to be carried out effectively. Meanwhile, the Company also established the Strategic Committee, Nomination Committee, Audit Committee and Remuneration and Assessment Committee of the Board. In accordance with their respective working criteria, they assumed the functions of discussing the material matters and decision making, raising the science and professionalism of Board decisions. Internal administration departments were established to monitor the set-up, improvement and implementation of internal control systems. Audit Committee reviewed and monitored the material connected transactions. The Company established a complete internal control system covering production management, financial management, connected transactions, external guarantee, use of proceeds, and material investment of the Company and its subsidiaries. 2. Control over major activities of the Company (1) Administration of and control over controlling subsidiaries The Company managed its controlling subsidiaries according to the related laws and regulations and relevant listing rules of the Shenzhen Stock Exchange and the Hong Kong Stock Exchange. According to the requirements of Company Law, subsidiaries established their respective board of directors and supervisory committee and lawfully conducted management and supervision duties. Sound operation and financial management systems were established according to the practices of the Company’s business operations. By exercising its rights as a shareholder, the Company controlled the director and key management nomination process and decision-making process of the subsidiaries. As a result, the Company was assured that its subsidiaries were under firm control and the decisions and systems of the Company were effectively, promptly and consistently implemented within its subsidiaries. So all the tasks within the Company and its subsidiaries were consistently dealt with. 32 I. Disclosures as required by China Securities Regulatory Commission (continued) (IV) Internal Control of the Company (continued) 2. Control over major activities of the Company (continued) (1) Administration of and control over controlling subsidiaries (continued) According to the related requirements of Shenzhen Stock Exchange Guidelines on Internal Controls of Listed Companies（《深圳證券交易所上市公司內部控制指引》）, the Company set up and improved the related systems such as Internal Control System, Measures on Administration of Subsidiaries and Measures on Administration of Expatriate Senior Management based on the strategic development, the requirement of the management and the characteristics of various subsidiaries, and persuaded the subsidiaries to set up corresponding operation plans, risk management processes and required the subsidiaries to set up the system of shareholders’ meeting, board meetings and supervisory committee meetings modeling on their parent company and optimize their corporate governance structure. The Company seriously implemented the material matters reporting and approval system to strengthen its control over its subsidiaries. (2) Administration of and control over connected transactions The Articles of Association of the Company has provided clear rules for the authorities, the auditing procedure the examination procedures of connected transactions by the Board and shareholders’ meeting and waiving of voting by related Directors and shareholders. According to Shenzhen Stock Exchange Guidelines on Internal Controls of Listed Compaines 《 深 圳 證 券 交 易 所 上 市 公 司 內 部 控 制 指 引 》 , the Company prepared its Administration on Connected Transactions, which set out the regulations regarding classification, identification, contract execution and disclosure of connected transactions. The Company also set up the Special System to Take Precautions against Controlling Shareholders and Related Parties from Embezzling the Company’s Fund《防範控股股東及關 聯方佔用公司資金專項制度》. None of capital, assets, or other resources of the Company has been appropriated or transferred by the controlling shareholder and its related persons. All connected transactions were conducted under the principle of faithfulness, fairness, voluntary, and open and their information was disclosed according to the disclosure requirements and published in the annual report of the Company. No action was conducted which was harmful to the benefits of the Company and the shareholders. Overall, the connected transactions of the Company were in compliance with Shenzhen Stock Exchange Guidelines on Internal Controls of Listed Compaines《深圳證券交易所上市公司內部控制指 引》and the related laws and regulations. 33 I. Disclosures as required by China Securities Regulatory Commission (continued) (IV) Internal Control of the Company (continued) 2. Control over major activities of the Company (continued) (3) Administration of and control over external guarantee The authority of external guarantee was stipulated by the Articles of Association and the Company had implemented the requirements relating to aggregate amount of external guarantees according to the Rules Governing Listing of Stocks on Shenzhen Stock Exchange. Meanwhile the Company had set up “The Working Procedures of Financing and Guarantee”. Except for guarantees provided to the subsidiaries, the Company made no external guarantees. Overall, external guarantees of the Company were in compliance with Shenzhen Stock Exchange Guidelines on Internal Controls of Listed Compaines《深圳證券 交易所上市公司內部控制指引》 and the related laws and regulations. (4) Administration of and control over using of financing proceeds The Company had set up Administration Criteria of Financing Proceeds to govern the use, approval, deposit, change of use, report and supervision of financing proceeds and liabilities. Financing proceeds were used according to their intended usage. The Company disclosed the information about the use of financing proceeds in compliance with related requirements. (5) Administration of and control over capital The Company had set up Capital Administration Criteria, Financing and Guarantee Procedures, Reporting Rules of Material Financial Issues, and Administrative Rules of Account Receivable, which set up strict procedures for authorization and approval of receipts and payments of monetary capital, separated the incompatible positions in the process of monetary capital operation and established a checking system in the related organization and staff. The Company set up procedures such as those for approval of receipts and payments of monetary capital and strictly implemented verification and investigation of receipts and payments of monetary capital. (6) Administration of and control over material investments Material investment operations were conducted under principles of lawfulness, cautiousness, safety and effectiveness. The Articles of Association has clearly set out the authorities of shareholders’ meeting and the Board on approval of major investment operations. The Company has been focusing on its main businesses and made no material investment other than the main businesses so far. 34 I. Disclosures as required by China Securities Regulatory Commission (continued) (IV) Internal Control of the Company (continued) 2. Control over major activities of the Company (continued) (7) Administration of and control over finance In accordance with the laws and regulations such as Company Law, Accounting Law, and Accounting Standards for Business Enterprises and their supplementary requirements, the Company prepared its Financial Management Rules, which set out the procedures and rules for major financial decisions, standardized the procedures for accounting evidence, books and reports, defined the responsibilities of accounting staff and set up the evidence flow. Transactions were implemented with evidence timely prepared and delivered to the accounting department and filing department for record and filing. Meanwhile, the records were compared with the corresponding accounting entries to build up a sound internal control system of accounting in the form of computerization. The Company introduced ERP system as the common platform for the management techniques and coordinating of the internal administration. The platform effectively standardized corporate and foundation information and business operations, increased the management efficiency and timely provided the management of the Company and the Board with related information. The financial system of the Company is sound and complete and in compliance with the requirements of related laws and regulations. (8) Administration of and control over information disclosure The Company prepared the Information Disclosure Criteria, Internal Reporting of Material Information, Investor Relationship Management Criteria, and Investor Reception and Promotion Criteria, which set out the extent, reporting, examination, disclosure, and confidentiality of material information. China Securities Journal, Hong Kong Commercial Daily, www.cninfo.com.cn and Hong Kong Stock Exchange website were the designated information disclosure media of the Company, through which the information of the Company was first disclosed. The Company also timely released its public information through its own website to communicate with the investors. Reception of visitors and online road shows were lawfully conducted to ensure open, just and fair information disclosure. 35 I. Disclosures as required by China Securities Regulatory Commission (continued) (IV) Internal Control of the Company (continued) 2. Control over major activities of the Company (continued) (9) Shareholding structure of the subsidiaries of the Company 36 I. Disclosures as required by China Securities Regulatory Commission (continued) (IV) Internal Control of the Company (continued) 3. Implementation of internal control system The Company performed inspection and monitoring operation on implementation of internal control system. The planning department was in charge of inspecting and monitoring the internal control system and made amendments from time to time to ensure effective implementation of the internal control system and normal production and operating activities. The Company took a top-down approach in the annual inspection of its subsidiaries to assess the compliance of the financial system and financial audit of the subsidiaries. The audit department of the Company performed random audit on the financial position the Company and its subsidiaries. 4. Overall assessment on the internal control system The Board is of opinion that the internal control system of the Company and its measures were comprehensive and reasonable and practically effective. The internal control system was consistent with the actual situation of the Company and was implemented seriously and effectively. It proved to be effective as illustrated by its practices from many years without significant fault. After the special corporate governance activities in 2008, the internal control system became more comprehensive. Directors, Supervisors and the Senior Management of the Company became more aware of the importance of corporate governance and standard operation, thus laying a foundation for continuous improvement on corporate governance. 5. Supervisors and independent non-executive Directors of the Company made the following self-evaluation comments on the internal controls of the Company: The internal control measures of the Company are in compliance with the requirements of the relevant regulations and the securities regulatory authorities, while are also appropriate taking into account of the prevailing practical needs of the Company. The internal control measures of the Company provided better results in controlling of all the processes and integral parts of company management. The “Self-evaluation Report on Internal Controls” adopted by the Company objectively reflected the actual circumstances of internal control within the Company and formed a comprehensive overview on the internal controls of the Company. 37 I. Disclosures as required by China Securities Regulatory Commission (continued) (v) Assessment and incentive mechanism for the Senior Management in the reporting period The Senior Management of the Company is assessed monthly and annually. Monthly assessments were focused on the completion status of major tasks and working performance. It was carried out monthly by way of cross assessment and supervision among the related departments. Results of monthly assessments provided the basis for the annual assessment. The annual assessments were carried out by the Remuneration and Assessment Committee with reference to the results of monthly assessments and performances all over the year. 38 VI. Particulars about the Shareholders’ Meeting I. Shareholders’ annual meeting The shareholders’ annual meeting 2007 was held on 29 June 2008. Five resolutions regarding directors’ reports, supervisory committee’s report and independent non-executive directors’ report of the Company for 2007, 2007 financial statements, profit distribution plan for 2007, proposal on appointing of certified public accountants were passed at the meeting. Related resolution announcements were published on China Securities Journal, Hong Kong Commercial Daily, http://www.cninfo.com.cn and Hong Kong Stock Exchange website (http://www.hkex.com.hk) on 1 July 2008. II. Shareholders’ extraordinary meetings The shareholders’ first extraordinary meeting was held on 11 April 2008. Three resolutions, among other things, regarding extension of the expiry date of the related matters on H shares issue, guarantee for the banking facilities granted to the subsidiaries of the Company and revision to the Articles of Association (draft) of the Company, related resolution announcements were published on China Securities Journal, Hong Kong Commercial Daily and http://www.cninfo.com.cn on 12 April 2008. 39 VII. Directors’ Report I. Management discussion and analysis under Accounting Standards for Business Enterprises (I) Overall operations during the reporting period In 2008, the Group experienced rapid development of the domestic economy during the first half year, and suffered the slowdown of economy resulted from the global financial crisis, which presented the Company and the whole papermaking industry an austere test in the 2008. During the first half of 2008, market supply and demand for paper products underwent a gradual change as a result of effective implementation of the national energy saving and environmental emission reduction policies, and the macroeconomic policies such as phasing out of obsolete capacity in the papermaking industry under the “Eleventh Five-Year Plan” by way of accelerated closure of companies not up to standard environmentally and of obsolete capacity. Since the second half of 2007, the price of the Company’s products had seen rises of various degrees driven by many factors such as the surge in raw materials costs. Meanwhile, the phenomenon of the Beijing Olympic Games boosted the swift development of the macroeconomic environment to the speedway of growth, as a result of the high positive correlation between the papermaking industry and the marcoeconomy, the whole papermaking industry was positioned in a benevolent environment of growth that had seen prices of paper and pulp maintained at generally higher positions, as reflected from the significant increase in paper demands. To a lesser extent, the papermaking industry was also one of the benefactors of the appreciation of Renminbi, because the appreciation of Renminbi made the import of pulp, waste paper and paper making equipment by domestic corporations less expensive, which turned into lowering of production costs and finance expenses as well as higher profitability. Under the influence of the above macroeconomic factors, the Company enjoyed substantial growth in its economic benefits in the first half year of 2008, which served as a solid base for the operations of the whole year. 40 I. Management discussion and analysis under Accounting Standards for Business Enterprises (continued) (I) Overall operations during the reporting period (continued) In the second half of 2008, the subprime crisis in the United States turned into a global financial crisis, and its further deterioration severely impacted the global economy. China’s economy retreated in its pace of growth, directly led to the slump in paper demands both domestically and overseas, as more clearly shown in the post-Olympic Games period. Against the backdrop of demand constriction and slow-moving inventories, the price of most paper products in China suffered significant downward correction. Although the cost of raw materials recorded significant period-on-period drops in October to an extent exceeding the period-on-period drop in paper prices, the decline in costs did not sufficiently reflect in the fourth quarter results due to the approximately two-month inventory period of raw materials. The management of the Company had taken effective measures to tackle the challenges in the second half year: in respect of product structure, the Company reinforced its efforts in research and development of new products to optimize product offerings; in terms of sales, flexible sales strategies were used to lower inventory level and build-up a policy to avoid business risks; for supply of raw materials, through considering the actual state of affairs in the Company, production limitations were imposed on certain pulp production lines on a targeted basis; while procurement of principal raw materials were strictly based on the principle of “tendering for lump sum purchases and quality to price comparison for small lot purchases” under the Group’s central administration in order to minimize procurement costs. 41 I. Management discussion and analysis under Accounting Standards for Business Enterprises (continued) (I) Overall operations during the reporting period (continued) 1. Overview of production and operation During 2008, the Company completed machine-made paper production of 3.17 million tonnes, representing a growth of 300,000 tonnes compared with 2007, or a growth of 10.45%; revenue realized from principal operations amounted to 15.53 billion, up RMB365 million or 2.41% over 2007. Costs of principal operations were RMB12.557 billion, increased by RMB482 million or 3.99% over 2007. Realized operating profit and net profit attributable to shareholders of the parent company were RMB1.293 billion and RMB1.075 billion respectively, showing respective growths of 0.62% and 11.13%. The growths were mainly attributable to: the 98,000-tonne annual capacity waste paper de-inking project, the 120,000-tonne annual capacity art paper project and the Jilin 300-tonne daily chemical pulp production line came into operation successively during the reporting period, while the proprietary 300,000-tonne per annum super art paper project and the Jilin 180,000-tonne light weight coated paper project commenced operation in 2007 achieved benchmark during the reporting period, thereby expanding the production size of the Company. In spite of the financial crisis which resulted in lower sales prices in the fourth quarter, sales price for the year on an integrated basis was higher than 2007; on the other hand, unit production costs were driven up by inflated raw material prices, however, was countered by the decrease of 87,000 tonnes in sales volume to record slightly increased but substantially unchanged cost of revenue. The reduction in interest expenses and asset losses and the acquisition of minority interests in subsidiaries had resulted in increases in operating profit and net profit. 42 I. Management discussion and analysis under Accounting Standards for Business Enterprises (continued) (I) Overall operations during the reporting period (continued) 2. Progress of the Zhanjiang Chenming pulp project (1) As undertaken in the offering prospectus, 91% of the proceeds from H share offering were used in the Zhanjiang Chenming pulp project in Guangdong Province. As at 31 December 2008, RMB500 million was injected into the project while the rest of the amount was deposited in a bank account for the project to ensure safety of the funds. (2) The construction area of the woodlands for papermaking materials reached 600,000 mu already, of which 260,000 mu of woodlands for papermaking materials had obtained legal forestry rights certificates (林權證) at the end of 2008. (3) The site formation work of the Zhanjiang Chenming pulp project was 70% complete. (4) On the site of the Zhanjiang Chenming pulp project, the ancillary fencing work, catchment and drainage work design and the tendering works were under progress and would soon commence in all areas. (5) Actively worked with domestic ancillary equipment providers and installation service providers through idea exchange, detailed discussions and preparation in connection with the proposal and plan in tendering of the project by stages (6) Procurement of main imported equipment. As affected by the global financial crisis, the price of steel materials experienced a significant decline. To maximize the benefits under the construction of the Zhanjiang Chenming pulp project and ensure the investment returns of shareholders, the project company believed it necessary to further lower the relevant terms in pricing of the related main equipment supply contracts. The import price of the main equipment are currently under negotiation, and the project company will determine the construction progress of the main equipment in view of the international economic environment and pay the import equipment prepayments as stipulated in the contracts, in order to proceed with the construction of the Zhanjiang Chenming pulp project in an active and steady manner. 43 I. Management discussion and analysis under Accounting Standards for Business Enterprises (continued) (I) Overall operations during the reporting period (continued) 2. Management and innovation (1) The Company had made it a policy to convene joint-meetings for production, sales and management in 2008, which called management of the Company, responsible personnel in relevant departments and officials above chief representative level of each sales administrative area to attend the joint-meetings. During the meetings, the economic operations of each type and model of machines was seriously analyzed to identify and raise issues, while each of such issues would be discussed to formulate corrective measures. For the weaker links of management in the Company and each subsidiary that were identified, the Group would establish dedicated committees in the areas of technology, environmental protection, energy saving and equipment, allocation, costs, electricity and safety, etc. Professionally structured vertical management was enhanced to help the Company and all subsidiaries identify and solve issues in the course of operation to allow effective and better level of governance throughout the Company. (2) During the reporting period, the national-level technology centers and post-doctoral technological research workstations were utilized to scrupulously improve upon our abilities to innovate and create. Also, the corporate collaborations with advanced international corporations such as Arjo Wiggins of France and Sappi of South Africa immersed us in an engaging atmosphere of research and development and innovation, under which we produced a series of high added-value new products that would be suitable for marketing and sales; these products had optimized our product structure and increased our market competitiveness, thereby building ourselves as an international brand name in both PRC and overseas markets. The “High Yield Pulping and Chemical Pulping Technological Research” （高得率制漿及化學制漿技術研究） of the Company was granted construction work job qualification by Yuandu Scholars （鳶都學者） of Weifang City. Our study subject “The Practical Key Techniques Study in Mixed Wide Leaves for Bleaching in a Chemithermomechanical Pulping Process”（混合闊葉材漂白化學熱磨機械漿生產應用關鍵技 術研究）was listed as a national scientific support project under the “Eleventh Five-Year Plan”, the results of the study improved the quality of pulping using mixed wide leaves through bleaching in chemithermomechanical pulping process. In response to market demands, newly development products such as lightweight paper for phone books and low gram copperplate paper were introduced to further enrich our product mix and allow more channels of profit generation. 44 I. Management discussion and analysis under Accounting Standards for Business Enterprises (continued) (I) Overall operations during the reporting period (continued) 2. Management and innovation (continued) In connection with energy saving and emission reduction, the Company maximized recycling and reuse to the largest extent by implementing a scientific method of water usage categorized by quality, quantity, process and techniques in our production system. Papermaking water was reused at a rate above 90%. During the reporting period, a 30,000 cubic daily capacity intermediate water reuse project was put into use, all the processed waste water would be returned to use in production to reduce overall pollutants and waste emission by 40%. Building upon the recycling of methane, electricity plant ash-slag and papermaking mud produced in the processing of waste water with anaerobic gas, the “double alkali method” of desulphurization was used for the modification of three coal powder kilns to reduce production of sulfur dioxide by 7,000 tonnes annually and process white sludge recovered from papermaking alkali by 17,000 tonnes. The 130t/h circulating sulphurized bed boiler for waste substances equipped with a 12MW single stage extraction turbine electricity generation module was put into operation for mixed usage of solid waste substances, including bark, wood bits, sawdust, ink sludge and mud, producing a win-win situation with both economic benefits and environmental benefits. During the reporting period, the Company was listed on the main board of Hong Kong Stock Exchange and became the first company in China listed with A, B and H shares; The Company was named by the People’s Government of Shandong Province as the “Leading Enterprise of Foreign Economic and Trade in Shandong Province” （山東省外經貿先進企業）; The Company’s aldehyde-free fiberboard was given the “Technological Advancement Award for China’s Fiberboard Industry”（中國纖維板行業技術進步獎）; The Company won the accolades of “Pioneering Energy Saving Enterprise in Shandong Province”（山東省節能先進企業） and “Leading Unit in Earthquake Relief in Weifang City”（濰坊 市抗震救災先進單位）; The Company was honored with the titles of “Excellent Paper Making Enterprise in China for the Year 2008” (2008中國造紙年度優秀企業) and “Model Company of Labor Protection Integrity”（勞 動保障誠信示範單位）; 45 I. Management discussion and analysis under Accounting Standards for Business Enterprises (continued) (I) Overall operations during the reporting period (continued) 2. Management and innovation (continued) The People’s Government of Shandong Province heralded the Company as “Leading Tax-paying Enterprise in Shandong Province”（山東省納稅先進企業）; The Company was ranked 165 in the Top 500 China Manufacturing Enterprises （中國製造企業 500強） published by China Enterprise Confederation and China Enterprise Director Association, retaining its highest position among papermaking industrial players. (II) Principal operations of the Company and analysis on their operations 1 Principal operations by industry and product Unit: RMB in ten thousands Principal operations by industry Year-on-year Year-on-year Year-on-year increase / increase / increase / decrease decrease decrease Sales Cost of Gross profit in sales in cost of in gross profit By industry or product revenue sales margin (%) revenue (%) sales (%) margin (%) Machine made paper 1,457,392.10 1,181,495.56 18.93% 5.18% 7.02% -1.39% Electricity and steam 23,555.16 19,948.53 15.31% -3.92% 8.67% -9.81% Construction materials 51,259.42 44,427.32 13.33% -41.08% -38.92% -3.06% Chemicals for papermaking 8,863.99 3,697.06 58.29% -3.66% -19.44% 8.17% Hotel industry 2,414.89 835.63 65.40% Others 9,473.78 5,272.13 44.35% -7.18% -32.05% 20.36% Total 1,552,959.34 1,255,676.23 19.14% 2.41% 3.99% -1.23% Principal operations by product Light weight coated paper 175,859.59 146,586.20 16.65% -6.94% -4.64% -2.01% Duplex press paper 206,039.86 158,442.89 23.10% -0.56% -2.11% 1.21% Writing paper 38,933.62 30,774.44 20.96% 53.72% 57.92% -2.1% Art paper 261,118.84 197,660.47 24.30% 12.96% 11.41% 1.05% News press paper 213,287.29 172,542.40 19.10% 7.64% 7.74% -0.08% Paperboard 83,347.88 79,816.12 4.24% -9.10% 4.03% -12.09% White paperboard 215,858.53 174,874.58 18.99% -8.20% -9.42% 1.09% 46 I. Management discussion and analysis under Accounting Standards for Business Enterprises (continued) (II) Principal operations of the Company and analysis on their operations (continued) 2 Breakdown of revenue form paper products of principal operations by geographical segment Unit: RMB in ten thousands Year-on-year increase / decrease in Geographical segment Sales revenue sales revenue (%) PRC 1,263,291.65 9.37% United States 4,965.80 -80.14% Hong Kong 20,712.97 -31.70% Japan 14,667.01 -56.11% South Africa 23,646.04 -19.17% Other overseas countries 130,108.63 15.63% Total 1,457,392.10 5.18% (III) Analysis and explanation on major year-on-year changes in composition of assets of the Company during the reporting period Unit: RMB 2008 2007 As percentage As percentage At the end of total At the end of total Items of the year assets in 2008 of the year assets in 2007 Difference Bank balances and cash 2,853,418,128.07 10.85% 740,621,843.91 3.36% 7.49% Bills receivable 974,009,788.24 3.70% 1,676,684,054.95 7.62% -3.92% Inventories 3,397,792,930.38 12.92% 1,744,492,612.36 7.93% 4.99% Fixed assets 14,213,441,758.08 54.04% 13,243,156,039.93 60.17% -6.13% Construction in progress 431,379,272.50 1.64% 904,753,634.02 4.11% -2.47% Intangible assets 1,277,076,588.53 4.86% 822,301,826.32 3.74% 1.12% Consumable biological assets 301,212,691.14 1.15% 92,159,871.29 0.42% 0.73% 47 I. Management discussion and analysis under Accounting Standards for Business Enterprises (continued) (III) Analysis and explanation on major year-on-year changes in composition of assets of the Company during the reporting period (continued) 1. Explanation on the main reasons leading to the changes (1) Bank balances and cash: the Company issued H shares in June 2008 with a total of RMB2,728 million in proceeds and interests, increasing bank balances and cash. (2) Bills receivable: mainly due to the Group conducted sales on credit more frequently, requiring distributors to repay within a credit period instead of settling by bills receivable, which caused a drop in the balance of bills receivable. (3) Inventories: under the impact of the financial crisis, the market price for paper products dropped during the year with substantially lowered demands, which was caused by lower sales volume in all four quarters. (4) Fixed assets: (1) constructions in progress including 120,000-tonne art paper project, Shandong Grand View Hotel construction and 98,000-tonne waste paper de-inking project were transferred to fixed assets, increasing amount in fixed assets; and (2) subsidiary Fuyu Chenming Paper Co., Ltd.（富裕晨鳴紙業有限責任公司） acquired all the fixed assets in Heilongjiang Sida Paper Company Limited （黑龍江斯達紙業有限公司） and Heilongjiang Paper Factory （黑龍江造紙廠） during the year, also led to increase in fixed assets. (5) Construction in progress: constructions in progress such as 120,000-tonne art paper project, Shandong Grand View Hotel construction and 98,000-tonne waste paper de-inking project were transferred to fixed assets, which increased fixed assets and reduced construction in progress. (6) Intangible assets: primarily due to subsidiary Zhanjiang Chenming Paper Pulp Co., Ltd. starting preparation for construction works that resulted in increase of land use rights. (7) Consumable biological assets: mainly attributable to the purchase, nurturing and fair value change in forestry of subsidiaries Zhanjiang Chenming Arboriculture Co., Ltd., Yangjiang Chenming Arboriculture Co., Ltd., Nanchang Chenming Arboriculture Co., Ltd. and Huanggang Chenming Arboriculture Co., Ltd.. 48 I. Management discussion and analysis under Accounting Standards for Business Enterprises (continued) (III) Analysis and explanation on major year-on-year changes in composition of assets of the Company during the reporting period (continued) 2. Nature of measurement adopted for the major assets of the Company: Historical cost method is normally used for measurement in preparing the financial statements of the Company, except the below asset items were carried at fair value: (1) Financial assets carried at fair value through profit or loss for the current period (2) Consumable biological assets (please refer to Note 17 of financial statements items prepared in accordance with Accounting Standards for Business Enterprises) (3) Changes on and effects of changes in major assets carried at fair value: Unit: RMB Effect on Method of obtaining Balance as of 31 Balance as of 31 profit or loss Statement items Item fair value December 2008 December 2007 for the year Financial assets Derivative financial Quotations from 0 5,955,480.00 1,738,200.00 held for trading instruments financial institutions Consumable Consumable Note (1) 301,212,691.14 92,159,871.29 918,451.60 biological assets timber assets The Group adopted the following critical methodology and assumptions when estimating the fair value of financial assets held for trading and consumable biological assets carried at fair value at the balance sheet date: (1) Derivative financial instruments: the fair values of forward foreign exchange contracts were determined by the difference between the present value of the price of contractual forward foreign exchange and the spot foreign exchange price at the balance sheet date. The Group used the forward contract settlement exchange rate for same day settlement published by banks on 31 December 2008 as the basis and used the contractual settlement exchange rate for determination of the difference. 49 I. Management discussion and analysis under Accounting Standards for Business Enterprises (continued) (III) Analysis and explanation on major year-on-year changes in composition of assets of the Company during the reporting period (continued) 2. Nature of measurement adopted for the major assets of the Company: (continued) (2) Consumable biological assets: independent valuers determined the market price of timber harvest by the active market quotations in Zhanjiang City and Fujian Province where our biological assets were located. In estimating future cash flow, the independent valuers considered the following factors: 1) the expected nominal market price of the timber harvest; 2) expected timber gains was dependent on the opinion and judgment of biological assets by considering the expected timber reserve level and timber production rate formulated by experts for a limited scope; 3) the expected costs for maintaining and nurturing existing biological assets; and 4) the expected costs of sales (including our estimated harvest costs and transportation costs). (IV) Analysis and explanation on major year-on-year changes in profit and loss indicators during the reporting period Unit: RMB Accrued during Accrued during Increase (+) Item this year the previous year Decrease (-) Sales revenue 15,529,593,435.77 15,164,742,450.26 2.41% Costs of sales 12,556,762,340.80 12,074,481,475.02 3.99% Tax and levies on operations 12,582,354.31 17,854,424.80 -29.53% Selling and distribution expenses 705,595,565.95 783,289,341.85 -9.92% General and administrative expenses 561,194,537.62 530,820,858.29 5.72% Finance expenses 287,136,504.05 392,163,050.56 -26.78% Losses on impairment of assets 93,125,334.87 102,198,629.26 -8.88% Gain on change in fair value 2,656,651.60 30,370,880.31 -91.25% Investment income -23,081,752.26 -9,461,550.75 -143.95% Non-operating income 274,366,224.82 232,218,083.67 18.15% Non-operating expenses 11,798,611.64 27,725,881.15 57.45% Net profit attributable to shareholders of the parent company 1,075,291,741.53 967,636,172.39 11.13% Gains and losses of minority interests 184,249,712.74 250,905,016.90 -26.57% 50 I. Management discussion and analysis under Accounting Standards for Business Enterprises (continued) (IV) Analysis and explanation on major year-on-year changes in profit and loss indicators during the reporting period (continued) Explanation on the main reasons leading to the changes (1) Please refer to “1. Overview of production and operation” under “(I) Overall operations during the reporting period” of this section for changes in indicators of sales revenue, costs of sales and net profit attributable to shareholders of the parent company. (2) Tax and levies on operations decreased by 29.53% over in 2007, because Chibi Chenming Paper Co., Ltd, a subsidiary of the Company, was changed into a foreign-invested enterprise on 29 June 2007, therefore tax and levies on operations (e.g. city construction tax) were no longer required. (3) Selling and distribution expenses fell by 9.92% compared with 2007, mainly because sales volume decreased in 2008 under the impact of the financial crisis, allowing more room for a drop in transportation expenses. (4) General and administrative expenses increased by 5.72% over 2007, mainly due to loss from production interruption in certain subsidiaries. (5) Finance expenses decreased by 26.78% when compared with 2007, mainly because the Company issued H shares in June 2008, the proceeds collected therefrom increased interests income; the Group also reduced interest expenses by repaying a portion of borrowings with the proceeds from issuance of RMB1,900 million short-term debentures in 2008.; and the convertible bonds were converted into shares in 2007, thus reducing interest expenses in 2008. (6) Losses on impairment of assets was reduced by 8.88% compared with 2007, primarily due to the Group’s receipt of goods payment from 佛山市順德區星辰紙業有限公司 (Foshan Shunde Xingchen Paper Co., Ltd.) which was recognized as impaired in 2008, therefore, the Group reversed a bad debt fully provided for in 2007; meanwhile, the Group performed impairment tests on inventories in view of the impact of the financial crisis, which had led to increase in losses from impairment of assets. 51 I. Management discussion and analysis under Accounting Standards for Business Enterprises (continued) (IV) Analysis and explanation on major year-on-year changes in profit and loss indicators during the reporting period (continued) Explanation on the main reasons leading to the changes (continued) (7) Gain on change in fair value dropped by 91.25% compared with 2007, the main reason was forestry assets recorded less gain on change in fair value when compared with 2007 as affected by the financial crisis. (8) Investment income decreased by 143.95% over 2007, primarily due to the exacerbation of losses in associated corporations during 2008. (9) Non-operating income increased by 18.15% over 2007, primarily attributable to the increase in government grants and negative goodwill arising from purchase of minority interests in 2008. (10) Non-operating expenses decreased by 57.45% over 2007, mainly due to the effect of reduction in net loss from disposal of assets during the period. (11) Gains and losses attributable to minority interests fell by 26.57% compared with 2007, mainly due to in the acquisition of Shandong Chenming Power Supply Holdings Co., Ltd., a subsidiary of the Company, in 2008, and the decrease in profit of certain non-wholly owned subsidiaries. 52 I. Management discussion and analysis under Accounting Standards for Business Enterprises (continued) (V) Cash flow generated from operating activities of the Company during the reporting period Unit: RMB For the corresponding For the period of the Increase (+) Item current period previous year Decrease (-) Net cash flow generated from operating activities 1,934,140,803.04 1,324,263,125.01 46.05% Net cash flow generated from investment activities -1,503,850,542.15 -977,001,495.03 -53.93% Net cash flow generated from financing activities 1,661,066,800.52 -512,996,336.43 423.8% Note: In the cash flow statements prepared by the Company, receipt of outstanding bank acceptance bills are not reflected as cash inflow in “cash received from sales of goods, rendering of servicesٛ ; similarly, payments made using outstanding bank acceptance bills are not reflected as cash outflow in “cash paid for goods and services” nor “cash paid to acquire fixed assets, intangible assets and other long-term assets” with respect to bills paid in the course of investment activities. Explanation on the main reasons leading to the changes: (1) Net cash flow generated from operating activities increased by 46.05% over 2007, mainly due to increase in income and profit in 2008, as well as the Company’s proportionate reduction in settlements by bills and the increase in amount of financial grants received. (2) Net cash flow generated from investment activities dropped 53.93% over 2007, mainly due to increase in investments, including the 120,000-tonne art paper project launched during the reporting period, the acquisition of the entire interests in Heilongjiang Sida Paper Company Limited （黑龍江斯達紙業有限公司） and Heilongjiang Paper Factory（黑龍江造紙廠） by our subsidiary Fuyu Chenming Paper Co., Ltd. （富裕晨鳴紙業有限責任公司） during the year, investments in the Zhanjiang pulp project and other technological reform projects. (3) Net cash flow generated from financing activities increased 423.8% over 2007, mainly attributable to the Company’s issued H shares in June 2008 and increased repayment of borrowings. 53 I. Management discussion and analysis under Accounting Standards for Business Enterprises (continued) (VI) Operation and results of major subsidiaries of the Company Unit: RMB in ten thousands Principal Name of Shareholding products subsidiary Business nature percentage manufactured Registered capital Asset size Net profit 武漢晨鳴陽紙業 股份有限公司 Papermaking 50.93% Writing paper, RMB21,136.70 239,559.46 18,457.76 (Wuhan Chenming news press paper Hanyang Paper Holdings Co., Ltd.) 山東晨鳴紙業集團 Papermaking 100.00% Paperboard, RMB37,620.00 123,822.64 -1,019.48 齊河板紙有限責任公司 corrugated paper (Shandong Chenming Paper Group Qihe Paperboard Co., Ltd.) 山東晨鳴熱電股份有限公司 Electricity and heat 86.71% Generation and RMB9,955.31 70,188.45 3,811.73 (Shandong Chenming sales of electricity Power Supply and heat Holdings Co., Ltd.) 吉林晨鳴紙業有限責任公司 Papermaking 100.00% News press paper, RMB150,000.00 243,002.92 -365.60 (Jilin Chenming Paper Co., Ltd.) light weight coated paper 赤壁晨鳴紙業有限責任公司 Papermaking 35.79% Duplex press paper RMB17,741.94 50,477.37 6,448.03 (Chibi Chenming Paper Co., Ltd.) 江西晨鳴紙業有限責任公司 Papermaking 51.00% Coated paper USD172 million 338,680.79 13,049.21 (Jiangxi Chenming Paper Co., Ltd.) 延邊晨鳴紙業有限公司 Pulping 76.73% Pulp and chemicals RMB8,163.30 32,843.27 1,328.05 (Yanbian Chenming Paper Co., Ltd.) 54 I. Management discussion and analysis under Accounting Standards for Business Enterprises (continued) (VII)Explanation on single subsidiaries with net profit (or investment gains) accounting for over 5% of the net profit of the Company Unit: RMB in ten thousands Net profit attributable to the Company Revenue from Profit from according to As a percentage principal principal shareholding of net profit of Name of company operations operations Net profit percentage the Company 武漢晨鳴漢陽紙業股份有限公司 (Wuhan Chenming Hanyang Paper Holdings Co., Ltd.) 184,965.69 36,177.1 18,457.76 9,400.54 8.74% 江西晨鳴紙業有限責任公司 (Jiangxi Chenming Paper Co., Ltd.) 183,839.13 31,170.39 13,049.21 6,655.1 6.19% II. Prospect of the future developments of the Company 1. The development trend of the industry to which the Company belongs and the strategic plans for the Company’s future development The industry to which the Company belongs is the paper making industry, which is a light industry. The paper making industry is an important basic raw materials industry which is closely related to the national economy and social matter development. The paper making industry features capital and skills intensive characteristics with prominent economy of scale. Its growth rate is strongly and positively correlated to that of GDP. 55 II. Prospect of the future developments of the Company (continued) 1. The development trend of the industry to which the Company belongs and the strategic plans for the Company’s future development (continued) As the extent and scope of influence under the global financial crisis is still highly uncertain, this will directly affect the pace of economic growth in China, and therefore make it difficult for the Company to accurately judge the development prospects of the papermaking industry. Nevertheless, as the papermaking industry in China is still undergoing a general direction of growth, the Board is of opinion that: after the trough experienced in the second half of 2008, papermaking industry will begin to stabilize; while the price for upstream raw materials will remain low for a certain period, the price for paper products will be able to maintain a reasonable balanced point of profitability; following the implementation of the new environmental protection policies and renewed efforts in implementing policies related to the papermaking industry, small-to-medium papermaking enterprises will face expansion limitation, challenges in economy of scale and heavier costs for environmental protection in their future development, which will lead to higher degree of industry concentration that is beneficial to enterprises with larger structural scale. Based the above viewpoints, the Company will stick to its existing strategy already made to operate in an orderly way towards the development, mainly including the following aspects: (1) Solving the bottleneck of the raw materials which restricts the Company’s development and improving the control over product cost The Company established the Zhanjiang wood pulp project and ancillary raw materials bases as its major development targets. At present, out of the Zhanjiang wood pulp project, 3 million mu of raw materials base has been under development smoothly on schedule. The pre-stage constructions of apparatus, exchange and selection of land sites have been already finished. After the implantation of the project, the Company will form the raw material structure of its proprietary wood pulp as the backbone and wasted paper as a complement, further reducing the proportion of purchasing the wood pulp from external parties. The Company also accelerated the construction of the Hubei forestry project base, establishing the production chain of “forestry-pulp-paper integration” in order to eliminate any restrictions posed by upstream resource industries on the Company and strengthen the sustainable development capacity of the Company. 56 II. Prospect of the future developments of the Company (continued) 1. The development trend of the industry to which the Company belongs and the strategic plans for the Company’s future development (continued) (2) Dedicated to research and development and production of the advanced paper products and enhancing the Company’s share in high-end PRC and international markets. By relying on the existing national-level technological research and development centres and post-doctoral scientific research work stations, the Company put greater efforts to innovate, research and develop products, develop new advanced paper products, improve existing product quality; strengthen the omni-directional co-operations with the international advanced paper making enterprises, utilizing their advanced management models, production technologies and marketing experiences as much as possible; continue to increase the input in projects, expand production capacity, build paper making production lines with high technical input, further improve the Company ‘s production scale, product specifications, strive to step into the direction towards becoming a frontrunner in the international paper making industry in the future. (3) Paying close attention to environment protection construction, and committed to the goal of “energy saving, reduced emission and harmonious development” The Company is devoted to its mission of “environmental protection comes first during enterprise’s development”, and adopts the goal of “energy saving, reduced emission and harmonious development”. As the national environmental protection standard is raised and more efforts are made to administration, the Company will emphasize to develop the recycle economy, exchange of wastes, recycle use, enhance the resources utilization ratios to the greatest extent, put greater efforts in the construction of environmental protection project at the same time and guarantee the discharge of wastes in strict compliance with the standard. 57 II. Prospect of the future developments of the Company (continued) 1. The development trend of the industry to which the Company belongs and the strategic plans for the Company’s future development (continued) (4) Continuous improving the Company ‘s operational efficiency The Company will further optimize and promote production procedures and production equipment, thereby increasing output and improving production efficiency and products quality; further improve the Company’s unifies administrative system, including the unified sales of products and unified procurement of raw materials; continue to optimize the portfolio of financial instruments and lower financial costs. (5) Taking advantage of capital operation of the Company to realize low-cost expansion As the Chinese paper industry is in the process of consolidation, the Company may engage in such an acquisition or merger if it fits the expansion strategies of the Company and optimizes the geographic layout of the Company to realize low-cost expansion and take advantage of capital operation of the Company accumulated throughout the years. 2. Consolidating the deep understanding of the senior management as to the future development trend, the senior management takes the view that, in relation to 2009: although the impact of the financial crisis will sustain, it is foreseen that the atmosphere of the industry will improve gradually in 2009 due to factors such as the reinforced macro-control measures of the State, the promulgation and implementation of encouraging policies and the forced elimination of lagging production capabilities through competition, and the further implementation of energy-saving and emission-reducing policies. In 2009, Company will mainly launch the following works: (1) To accelerate the structural adjustment and achieve scientific development The Company will actively optimize the low value-added and resource-consuming products, eliminate obsolete techniques, equipment and raw materials, and improve technical equipment and product grade. In order to improve the quality and volume of the pulp, the headquarters of the Company, Wuhan Chenming Hanyang Paper Co., Ltd. and Shandong Chenming Paper Group Qihe Paperboard Co., Ltd. will upgrade the oxygen delignification techniques for some pulp production lines. Shouguang Chenming Art Paper Co., Ltd will carry out the project of changing first and second drying to vacuum rolls in light of the web break and low output problems in it dryer section. Jiangxi Chenming Paper Co., Ltd. and Fuyu Chenming Paper Co., Ltd.（富裕晨鳴紙業有限責任公司）, two subsidiaries of the Company, will successfully carry out technological upgrade projects in light of their actual situation. 58 II. Prospect of the future developments of the Company (continued) 1. The development trend of the industry to which the Company belongs and the strategic plans for the Company’s future development (continued) (2) To enhance independent innovation Leveraging on the support and resources of the national-level technology centres and the post-doctoral technological research workstations, we will enhance cooperation with leading international papermaking enterprises as well as conduct collaboration and exchange ideas with PRC and international scientific research institutes. Through actively acquiring, promoting and applying new skills and technologies, we will fully utilize the scientific and technological resources to keep up with the forefront technologies of international research studies, aiming to capture an advanced position when competing for market share. With respect to talents, we will reinforce the establishment of technical teams and encourage innovation; more resources will be mobilized to nurture top-notch technical talents, and solicitation of technical professionals of all kinds will be carried out through all means without any prejudice. By exploiting the technological and research advantages of the Company, we can focus aggressively on the research and development of new products; based on prevailing market demands and after considering the actual state of affairs of the Company, we aim to broaden the Company’s sources of revenue by actively developing new products with high added value and high technological content, including: high basis weight copperplate paper, anti-forgery white paper board and restickable business labels. (3) To enhance energy saving and emission reduction and ability to sustain development Energy saving, emission reduction and environmental protection are the highlighted items in the corporate development strategies of the Company. Reduction of water resources consumption continue to be the focal point of such work, through developing and promoting new technologies, techniques and equipment for water conservation, we aim to raise our ratio of repeated water utilization. We will also excel to perform well in the project “對製漿生產線原黑液提取工段進行的 項目”. Inspection and supervision on the completion of energy saving and emission reduction at each unit will be regularly conducted by the environmental protection department, and practical experiences obtained from implementing such advanced energy saving and emission reduction technologies will be communicated in a timely manner, in order to ensure that these works are carried out in an effective way. 59 II. Prospect of the future developments of the Company (continued) 1. The development trend of the industry to which the Company belongs and the strategic plans for the Company’s future development (continued) (4) To accelerate the forestry-pulp-paper integration The Company speeds up the progress of the Zhanjiang pulp project by making great efforts in professional management, target management and planning management with careful organization and scientific deployment. The project site construction is in full swing and the “Five Accesses and One Leveling” will be completed as soon as possible in order to carry out wood chip yards, warehouse and plants construction. At the same time, the Company fully communicates with the domestic ancillary equipment suppliers and service providers to complete the tender biddings and plans in the course of the Zhanjiang Chenming pulp project, thereby speeding up the project progress. The Company puts great emphasis on the Zhanjiang Chenming and accelerates the construction of raw timber bases of the forestry subsidiaries in Hubei to build an industry chain of “forestry-pulp-paper integration”. (5) To strengthen corporate brand building to gain market share in the PRC and overseas markets The Company builds its brand with product quality. The Company is determined to nurture “Chenming” as an internationally well-known brand by enhancing quality awareness across the Group to raise the product quality of the Company to the utmost top level among its counterparts. The Company also strengthens the building of its marketing team through optimization of the salary assessment plan to give incentive to the operating staff to improve their service quality in order to build up “Chenming” as brand of quality service. The Company strives to gain its market share in the PRC market and expands overseas at the same time by seriously studying and making good use of the PRC export policy, exploring export channels to gain its market share in the overseas market. (6) Standardization of corporate management to fully enhance the operating quality The Company consistently maintains a philosophy of people-oriented management and further explores and innovates new management models. The Company also strives to enhance its overall management level to quicken its convergence with international practices by making a reference to the management experience of the international leading enterprises. 60 II. Prospect of the future developments of the Company (continued) 3. The risk factors in the course of realization of the future development strategies and operating targets of the Company The competition of the paper product market becomes intense, exaggerated by the repercussions of the financial crisis in the second half of 2008, as the production capacity of the paper industry rapidly grows in recent years. The results of the Company will be undermined due to the decline in prices of various paper products and the volatility of the raw material prices. In face of the intense market competition, the Company continues to develop new products with high added value and high technological level. However, the product development process covering from experiment, research, testing, mass production and gaining market recognition is so long that the Company is subject to the risk of product development failure at any time. 4. Future capital requirement, sources of funds and their planned use The demand for capital of the Company is ever increasing as the Company and its operating scale continuously grows. As the largest paper making company and a company listed with A shares, B shares and H shares, the Company has a good reputation in the financial market and extensive financing sources. The Company will adopt the following effective sources of funds based on its growth and future development strategies: (1) Reinforcement for market sales - The Company will increase its sales revenue and put greater efforts in the recovery of receivables to speed up capital turnover, utilize capital potential and take full advantage of its own funds. (2) Taking advantage of the credibility and reputation of the Company - The Company will secure bank loans and syndicated loans and strengthen its internal financial control and enhance its capital utilization. (3) Optimization of financial structure to reduce finance expenses - The Company intends to issue of medium-term notes of not more than RMB 2,300 million to fund working capital and repay bank loans. (4) Reasonable use of proceeds from H shares issue - The Company will contribute capital into the Zhanjiang pulp project on schedule as set out in the prospectus. 61 III. Investments during the reporting period 1. Use of proceeds during the reporting period The Company issued 355.7 million H shares in June 2008 with the issue price of HK$ 9. The total proceeds from the issue were translated into RMB 2,831 million. The net proceeds less the expenses of RMB 103 million were RMB 2,728 million. As of 31 December 2008, RMB 746 million of the proceeds from the issue was used, of which, RMB 245 million was used to fund the working capital and RMB 501 million was used in the Zhanjiang pulp project primarily for land and plants areas construction. As of the end of the reporting period, the use of proceeds in the reporting period was as follows: Unit: RMB in ten thousands Use of total proceeds Total proceeds 272,825 during the reporting period 74,565 Accumulated use of total proceeds 75,565 Whether Whether progressing as Proposed Project Actual Benefits progressing scheduled with Project undertaken investment changes investment realized as scheduled estimated benefits Zhanjiang 700,000-tonne per annum pulp project 248,271 No 50,055 — — — Supplement to working capital 24,554 No 24,510 — — — Total 272,825 — 74,565 — — — Explanation on failure to progress as scheduled and realize benefits (by project) Nil Reasons for modification and modification procedures (by project) Nil Use of unused proceeds and their status The entire unused portion of the proceeds to be used in the Zhanjiang pulp project as set out in the prospectus was deposited at special deposit bank accounts. 62 III. Investments during the reporting period (continued) 2. Other investments during the reporting period (1) The 120,000-tonne per annum coated art paper project was financed by self-owned funds and the actual total investment for the project was RMB 783 million. The project commenced operation in July 2008. (2) The 98,000-tonne de-ink waste paper project was financed by self-owned funds and the actual total investment for the project was RMB 263 million. The project commenced operation in April 2008. (3) The Grand View Hotel project was financed by self-owned funds and the actual total investment for the project was RMB 260 million. The hotel commenced operation in the reporting period. 3. Setting up of subsidiaries during the reporting period (1) 黃岡晨鳴林業發展有限責任公司 (Huanggang Chenming Arboriculture Co., Ltd.) - The company contributed capital to set up Huanggang Chenming Arboriculture Co., Ltd. on 23 January 2008. Its registered capital was RMB 10 million and it was fully owned by the Company. Its principal activities were nutrition of forest resources, cultivation, processing and sales of forest, and comprehensive development and utilization of forestry. (2) 咸寧晨鳴林業發展有限責任公司 (Xianning Chenming Arboriculture Co., Ltd.) －The Company contributed capital to set up Xianning Chenming Arboriculture Co., Ltd. on 1 September 2008. Its registered capital was RMB 10 million and it was fully owned by the Company. Its principal activities were nutrition of forest resources, cultivation, processing and sales of forest, forest and tree nursery construction, comprehensive development and utilization of forestry, and development and utilization of related ancillary products and related business consultation. (3) 黃 岡 晨 鳴 漿 紙 有 限 公 司 (Huangguang Chenming Paper Pulp Co., Ltd.) － The Company contributed capital to set up Huangguang Chenming Paper Pulp Co., LTd. on 26 September 2008. Its registered capital was RMB 20 million and it was fully owned by the Company. Its principal activities were construction of raw timber base, operation and acquisition of lumber, production of pulp and related products, preparation of production, processing and sales projects. During the reporting period, for the establishment of indirectly owned subsidiaries by the directly owned subsidiaries of the Company please refer to the financial statements prepared in accordance with Accounting Standards for Business Enterprises and note 7 thereto. 63 IV. Auditors of the Compnay, Deloitte Touche Tohmatsu Certified Public Accountants Ltd. and Deloitte Touche Tohmatsu, issued standard auditors’ reports for the year without qualified opinion on the Company V. Day-to-day operation of the Board 1. Board meetings and their resolutions During the reporting period, the Board held nine meetings. (1) On 19 January 2008, the fifth session of the Board held its fifth meeting, at which, the principal matters considered included circulation and studying of the documents in respect of the information disclosed in the 2007 annual report, approval of the resolution to write off some bad debt loss of sales branches of the Company, approval of the resolution to increase the shareholding in Shandong Chenming Power Supply Holdings Co., Ltd. by the Company and approval of the resolution to invest in a forestry project company in Hubei by the Company. The related resolution announcement was published on China Securities Journal, Hong Kong Commercial Daily and http://www.cninfo.com.cn on 22 January 2008. (2) On 24 March 2008, the fifth session of the Board held its sixth meeting, at which, the principal matters considered included approval of the resolution to extend the expiry date of the related matters on H shares issue, approval of the resolution to extend the expiry date of the authorization to the chairman and deputy chairman of the Company to deal with the related matters on H shares issue with full power, approval of the resolution to apply for comprehensive banking credit facilities, approval of the resolution to provide guarantee for comprehensive banking credit facilities granted to the controlling subsidiaries of the Company, approval of the resolution to liquidate certain fixed assets and approval of the resolution to revise the Articles of Association (draft) of the Company and approval of notice of the first extraordinary shareholders’ meeting. The related resolution announcement was published on China Securities Journal, Hong Kong Commercial Daily and http://www.cninfo.com.cn on 25 March 2008. 64 V. Day-to-day operation of the Board (continued) 1. Board meetings and their resolutions (continued) (3) On 11 April 2008, the fifth session of the Board held its seventh meeting, at which, the principal matters considered included approval of the 2007 Directors’ report, approval of the 2007 general manager report, listening to the 2007 independent non-executive Directors’ report of the Company, approval of the full text of the 2007 annual report and its summary, approval of the 2007 final accounts of the Company, approval of the profit appropriation plan for 2007 of the Company, listening to the conclusion on 2007 auditing from the accounting firms, approval of the resolution to appoint the auditors of the Company, approval of the resolution to appoint senior management of the Company, approval of the resolution to establish System of Work on Annual Report of independent Directors, approval of the resolution to establish Work Flow on Annual Report of the Audit Committee of the Board, approval of the Self Assessment Report on Internal Control of the Company, approval of the resolution to adjust the opening balance of certain items of the 2007 balance sheet of the Company and approval of the remuneration scheme on the Directors and senior management of the remuneration committee of the Board. The related resolution announcement was published on China Securities Journal, Hong Kong Commercial Daily and http://www.cninfo.com.cn on 15 April 2008. (4) On 29 May 2008, the fifth session of the Board held its eighth meeting, which was a procedural meeting held as stipulated by the related requirements of the listing rules of Hong Kong as part of the arrangement of issue of H shares of the Company. The main purposes of the meeting was to further confirm the related matters of issue and listing of H shares of the Company as approved at the first extraordinary shareholders’ meeting in 2007, the first extraordinary shareholders’ meeting in 2008, the twentieth meeting of the fourth session of the Board, the twentieth-first meeting of the fourth session of the Board and the sixth meeting of the fifth session of the Board and to make arrangements for the future actions on the listing of H shares. The related resolution announcement was published on China Securities Journal, Hong Kong Commercial Daily and http://www.cninfo.com.cn on 31 May 2008. (5) On 6 June 2008, the fifth session of the Board held its ninth meeting, at which, among other things, the notice of the 2007 annual general meeting was approved. The related resolution announcement was published on China Securities Journal, Hong Kong Commercial Daily and http://www.cninfo.com.cn on 7 June 2008. 65 V. Day-to-day operation of the Board (continued) 1. Board meetings and their resolutions (continued) (6) On 18 July 2008, the fifth session of the Board held its second extraordinary meeting, at which, the principal matters considered included circulation and studying of seven documents such as Opinion on Improvement of the Quality of Listed Company（《關於提高上市公司質量的意見》）, Amendment VI to Criminal Law of the PRC and China Securities Regulatory Commission (the “CSRC”) Announcement [2008] No.27, approval of the rectification report on corporate governance, approval of the resolution to establish the Special System to Take Precautions against Controlling Shareholders and Related Parties from Embezzling the Company’s Fund （《防範控股股東及關聯方占用公司資金專項制度》） and approval of change of senior management of the Company. The related resolution announcement was published on China Securities Journal, Hong Kong Commercial Daily, http://www.cninfo.com.cn and Hong Kong Stock Exchange website (http://www.hkex.com.hk) on 19 July 2008. (7) On 1 August 2008, the fifth session of the Board held its third extraordinary meeting, at which, the principal matters considered included approval of the resolution to acquire assets by Fuyu Chenming Paper Co., Ltd.（富裕晨鳴紙業有限責任公司）, a wholly-owned subsidiary of the Company. The related resolution announcement was published on China Securities Journal, Hong Kong Commercial Daily, http://www.cninfo.com.cn and Hong Kong Stock Exchange website (http://www.hkex.com.hk) on 4 August 2008. (8) On 28 August 2008, the fifth session of the Board held its tenth meeting, at which, the full text of 2008 interim report of the Company and its summary, and the resolutions to provide entrusted loans to subsidiaries by the Company, to obtain bank loans by the Company, to contribute capital for the establishment of Huanggang Chenming Paper Pulp Co., Ltd.（黃岡晨鳴漿紙有限公司）and to contribute capital for the establishment of Arjo Wiggins Chenming Specialty Paper Co., Ltd. （阿爾諾維根斯晨鳴特種紙有限公司）were approved. The related resolution announcement was published on China Securities Journal, Hong Kong Commercial Daily, http://www.cninfo.com.cn and Hong Kong Stock Exchange website (http://www.hkex.com.hk) on 29 August 2008. (9) On 30 October 2008, the fifth session of the Board held its eleventh meeting, at which, the full text of 2008 third quarterly report of the Company and its summary, and the resolutions to provide entrusted loans by the Company to its wholly-owned subsidiaries or controlling subsidiaries, and to contribute capital by the Company to increase the registered capital of Jilin Chenming Paper Co., Ltd. were approved. The related resolution announcement was published on China Securities Journal, Hong Kong Commercial Daily, http://www.cninfo.com.cn and Hong Kong Stock Exchange website (http://www.hkex.com.hk) on 31 October 2008. 66 V. Day-to-day operation of the Board (continued) 2. Implementation of resolutions of shareholders’ meetings by the Board The Board discharged its duties diligently as authorized by shareholders’ meetings and the Articles of Association. It completed the principal tasks under the authorization of shareholders’ meetings as follows: (1) the Board dealing with the matters with respect to issue of H shares with full power under the authorization granted at the first extraordinary shareholders’ meeting dated 11 April 2008 During the reporting period, the Board actively worked for the Hong Kong public offering of the global offering of H shares under the authorization of shareholders’ meetings. It was completed in the period from 4 to 10 June 2008. The final issue price of H shares was determined at HK$ 9.00 with a issue of 355,700,000 H shares by the Company, as approved by the Stock Exchange, and 35,570,000 overseas listed foreign shares (H shares) converted from state-owned shares and transferred to the National Social Security Fund Council of the PRC resulting from disposal of state-owned shares by the relevant shareholder. A total of 391,270,000 H shares were listed on the main board of Stock Exchange on 17 June 2008. The short name of the Company was Chenming Paper and its stock code was 1812. The related announcement was published on China Securities Journal, Hong Kong Commercial Daily, http://www.cninfo.com.cn and Hong Kong Stock Exchange website on 26 June 2008. (2) Implementation of the profit appropriation plan for 2007 The 2007 annual general meeting resolved the 2007 profit appropriation plan of the Company: based on the total share capital of 1,706,345,941 shares as at the end of 2007, a cash bonus of RMB 1.60 (including tax) per 10 shares was to be paid to all shareholders and the total cash bonus in this distribution was RMB 273,015,350.56 (including tax), which represented 30.79% of the net profit attributable to the shareholders of the Company as set out in the 2007 combined financial statements and 37.43% of the net profit attributable to the equity holders of the parent company less statutory surplus reserve respectively. The balance of RMB 2,303,634,998.82 after the profit appropriation was retained for future distribution. The 2007 bonus payment announcement was published by the Company on China Securities Journal, Hong Kong Commercial Daily, http://www.cninfo.com.cn and Hong Kong Stock Exchange website (http://www.hkex.com.hk) on 2 July 2008. The 2007 profit appropriation plan was implemented with 8 July 2008 as the book closure date of A shares and B shares. 67 V. Day-to-day operation of the Board (continued) 3. Discharge of duties by the audit committee of the Board The audit committee of the Board discharged of its duties with diligence in accordance with the related requirements of the China Securities Regulatory Commission and the Shenzhen Stock Exchange and the work instructions of the audit committee of the Board as follows: (1) The audit committee completed the following major tasks during 2008: it conducted pre-audit communication with external auditing institution engaged by the Company in respect of the 2007 financial report auditing on pre-auditing work, reviewed the 2007 auditing report and financial report and submitted such reports to the Board of the Company; it reviewed the 2008 interim financial statements for the six months ended 30 June 2008, which was passed to the Board for approval. (2) Auditing work conducted on the 2008 financial report of the Company were as follows: It reviewed the 2008 auditing plan and the related information of the Company with the auditing certified public accountants and the finance department of the Company prior to the on site audit and negotiated and determined the schedule of an audit of the 2008 financial statements of the Company with Deloitte Touche Tohmatsu Certified Public Accountants Ltd.; it reviewed the draft of financial statements of the Company prior to an annual on site audit performed by the auditing certified public accountants and issued its approval to audit; it kept in close contact with the auditors upon the annual on site audit and issued a letter to the auditors to urge the submission of the auditors’ report on schedule; it reviewed the financial statements of the Company again upon the issue of draft opinion on the annual audit by the auditing certified public accountants, and considered the financial statements of the Company true, accurate and complete to reflect the overall position of the Company; at the second meeting of the audit committee in 2009, the auditors’ report on the annual audit issued by the certified public accountants was approved and then was passed to the Board, and the audit fee for the year ended 31 December 2009 payable to the PRC and international auditors was approved and Deloitte Touche Tohmatsu Certified Public Accountants Ltd. was proposed to be re-appointed as the PRC auditors and Deloitte Touche Tohmatsu as the international auditors; it reviewed the report on internal audit and internal control of the Company for the year ended 31 December 2008. 68 V. Day-to-day operation of the Board (continued) 4. Discharge of duties by the nomination committee of the Board In the reporting period, the nomination committee held a meeting, at which, the principal matters considered included a discussion about appointment of Meng Feng and Han Chunlai as deputy general manager of the Company, which then was passed to the seventh meeting of the fifth session of the Board for approval. 5. Discharge of duties by the remuneration committee of the Board The remuneration and assessment committee of the Company were primarily responsible for formulating the remuneration and assessment for the Directors and the senior management of the Company and formulating and examining the remuneration package of the Directors and the senior management of the Company, and accountable to the Board. In the reporting period, the remuneration and assessment committee formulated the 2007 remuneration package of the Directors and the senior management of the Company, which then was passed to the Board for approval, based on the production and operation conditions of 2007 and assessment of the Directors and the senior management of the Company. The 2008 remuneration proposal for Directors and senior management of the Company was formulated in view of the production and operation of the Company as well as the appraisal on Directors and senior management, and was submitted to the Board. VI. The proposed profit distribution plan of 2008 According to the relevant requirements imposed by the State Ministry of Finance and Articles of Association, the distributable profit shall be the lower of the distributable profit as calculated in accordance with Accounting Standards for Business Enterprises and that calculated in accordance with International Financial Reporting Standards. The net profit attributable to shareholders realized in 2008 according to the Accounting Standards for Business Enterprises was RMB973,557,811.58, and net profit attributable to shareholders realized in 2008 according the International Financial Reporting Standards was RMB1,000,553,922.04; accordingly, the amount of distributable profit for this year was RMB973,557,811.58. Based on the total share capital of 2,062,045,941 shares as at the end of 2008, a ash bonus of RMB0.5 (tax included for A shares) per 10 shares was to be paid to all shareholders and the total cash bonus in this distribution was RMB103,102,297.05 (tax included), which accounted for 10.59% of the net profit as set out in the financial statements of the parent company in 2008 after deducting appropriation to statutory reserves. The balance after this distribution would be rolled over for distribution in subsequent years. 69 VII. The cash bonus of the Company in the last three years Unit: RMB Net profit Ratio of attributable to cash bonus shareholders of to net profit the parent attributable company for to shareholders the bonus of the Year Cash bonus distribution year parent company Remarks 2005 163,880,245.56 479,207,870.83 34.20% — 2006 204,761,512.92 616,598,966.61 33.21% — 2007 273,015,350.56 967,636,172.39 28.21% 31.35% of the distributable profit realized in 2007 VIII. Major suppliers and customers The purchase from the largest supplier of the Group for 2008 was RMB 336 million, which accounted for 2.44% of the total purchase of the Group for the year and the total purchase from the five largest suppliers was RMB 1,403 million, which accounted for 10.17% of the total purchases of the Group for the year. None of the Directors, Supervisors and their respective associates, or, so far as the Directors were aware, shareholders who owned more than 5% of the Company’s issued share capital had any interest in any of the five largest suppliers of the Group. The sales to the largest customer of the Group for 2008 was RMB 193 million, which accounted for 1.24% of the total sales of the Group for the year and the total sales from the five largest customers was RMB 768 million, which accounted for 4.94% of the total sales of the Group for the year. None of the Directors, Supervisors and their respective associates, or, so far as the Directors were aware, shareholders who owned more than 5% of the Company’s issued share capital had any interest in any of the five largest customers of the Group. 70 VIII. Supervisory Committee’s Report I. Performance of duties In the reporting period, all the Supervisors, who are accountable to the shareholders, performed their duties in accordance with Company Law, the Articles of Association, and Procedural Rules for Supervisory Committee’s Meetings, and under the principle of diligence. They monitored whether the business activities were lawfully operated, and supervised the financial management and connected transactions of the Company. In the reporting period, they examined and supervised the subsidiaries and branch companies in terms of accounting, raw materials purchase, sales of goods, and connected transactions to provide strong protection for the lawful operation and healthy development of the Company. II. Meetings of the Supervisory Committee 1. The fourth meeting of the fifth session of the Supervisory Committee was held on 19 January 2008. The resolution regarding to writing off part of bad debts of sales branches of Shandong Chenming Paper Holdings Limited was considered and passed at the meeting. The related resolution announcement was published on China Securities Journal, Hong Kong Commercial Daily and http://www.cninfo.com.cn on 22 January 2008. 2. The fifth meeting of the fifth session of the Supervisory Committee was held on 11 April 2008. Resolutions regarding to 2007 financial report, 2007 financial statements of the Company, Supervisory Committee’ report for 2007, the 2007 annual report, and adjustments of opening balance on 2007 balance sheet was considered and passed at the meeting. The related resolution announcement was published on China Securities Journal, Hong Kong Commercial Daily and http://www.cninfo.com.cn on 9 May 2008. 3. The sixth meeting of the fifth session of the Supervisory Committee was held on 27 April 2008. The 2008 first quarter report of the Company and its original text were considered and passed at the meeting. 4. The seventh meeting of the fifth session of the Supervisory Committee was held on 28 August 2008. The 2008 interim report of the Company and its summary were considered and passed at the meeting. 5. The eighth meeting of the fifth session of the Supervisory Committee was held on 30 October 2008. The 2008 third quarter report of the Company and its original text were considered and passed at the meeting. 71 III. Independent opinion of the Supervisory Committee 1. Operation According to the law (1) In the reporting period, the Company conducted its businesses according to Company Law, Securities Law, Articles of Association of the Company and the related national laws and regulations. Information disclosures were conducted under the principles of truthfulness, completeness, accuracy, and timeliness. No false or misleading information was released. (2) The Board undertook all of the rights and responsibilities set out by Company Law, Securities Law, and Articles of Association of the Company, and fully implemented the resolutions passed by the shareholders’ meetings and Board meetings. The decision making processes were lawful with timely consideration and approval of the production targets, sustainable development measures, operation according to the law and standardization operation. A comprehensive internal control system was established to ensure a healthy development of the Company. The management of the Company was able to perform their duties as stipulated in the Articles of Association of the Company and executed the resolutions of the Board. No contravention of laws or regulations or the Articles of Association nor acts detrimental to the interests of the Company were found. 2. Financial position inspection The financial statements of the Company were audited by Deloitte Touche Tohmatsu Certified Public Accountants Ltd. and Deloitte Touche Tohmatsu, which issued standard auditors’ reports with unqualified opinion on them upon auditing. In the opinion of the Supervisory Committee, the auditors’ report gave a true and fair view of the financial conditions and operating results of the Company. 3. Use of proceeds The actual use of the proceeds from the latest fund raising activity was consistent to their intended use. 4. Significant purchase or sales of assets The consideration for the purchase of assets by the Company was fair and reasonable and no insider trades and connected transactions, which were detrimental to the interests of any shareholders or resulted in loss of assets of the Company, were found. 5. Connected transactions The connected transactions were entered into at arm’s length and were not detrimental to the interests of the Company and the shareholders. 72 IX. Material Matters I. There was no material litigation or arbitration of the Company during the reporting period. II. Liquidation of controlling subsidiaries in the reporting period Xiangfan Chenming Copperplate Paper Co., Ltd. (“Xiangfan Chenming”), an indirect controlling subsidiary of the Company, was incorporated in 1998 with registered capital of RMB32.2580 million. The Company took 20% of the total capital of Xiangfan Chenming through injection of intangible assets of RMB6.452. Wuhan Chenming Hanyang Paper Co., Ltd., a company held by the Company as to 50.93%, took 31% the total capital of Xiangfan Chenming through investment in kind and cash of RMB10 million. Hubei Hanyang Paper Mill took 19% of the total capital of Xiangfan Chenming through capitalization of debts of RMB6.129 million. Xiangfan Bailan Group Co., Ltd. took 30% of the total capital of Xiangfan Chenming through investment in kind of RMB9.677 million. Xiangfan Chenming suffered from out-of-date equipment and a single product mix with a production capacity of less than 20,000 tonnes and it should be eliminated according to the national industrial policies. At present, Xiangfan Chenming has stopped production and entered into the liquidation process as approved at its shareholders’ meeting. During the reporting period, the liquidation process was completed. For details, please refer to PRC Auditors’ Report and Financial Statements and Note VII thereto Prepared in Accordance with Accounting Standards for Business Enterprises in this Report. 73 III. Significant purchase or sales of assets and merger and acquisition in the reporting period 1. The fifth meeting of the fifth session of the Board considered and approved the resolution to further increase the shareholding in Shandong Chenming Power Supply Holdings Co., Ltd. (“Chenming Power”) by the Company. In the reporting period, the Company completed the related shareholding increase. The Company purchased 2,378,000 state-owned shares, representing 2.39% of the registered share capital, and 33,175,000 collective shares, representing 33.32% of the registered share capital, of Chenming Power, from the State-owned Assets Supervision and Administration Commission of Shouguang City and the People’s Government of Shouguang City respectively. The consideration for the shares was determined based on the net assets of Chenming Power. The shares of Chenming Power held by the Company were increased to 91,326,061 shares and the shareholding in Chenming Power of the Company was increased to 86.71% from 51%. The increase in shareholding constituted no change to the business of the Company on going concern and to the management of the Company. Under Rule 10.1.3 (V) of the Listing Rules of the Shenzhen Stock Exchange, this constituted connected transaction for which independent Directors had expressed their independent opinion and the Company disclosed information related to this connected transaction. For details, please refer to the relevant announcements published on China Securities Journal, Hong Kong Commercial Daily and http://www.cninfo.com.cn on 22 January 2008. 2. On 1 August 2008, the third extraordinary meeting of the fifth session of the Board considered and approved the related resolution regarding to the related assets acquisition of Fuyu Chenming Paper Co., Ltd. (“Fuyu Chenming”), a wholly-owned subsidiary of the Company. According to the net assets value and auction price of the relevant assets acquired, the assets acquisition involved a total amount of RMB208.02 million. At the beginning of August 2008, the management executed the relevant agreements for acquisition of such assets in full compliance with the mandate granted by and amount estimated by the Board. For details, please refer to the relevant announcements published on China Securities Journal, Hong Kong Commercial Daily, http://www.cninfo.com.cn and Hong Kong Stock Exchange website (htto://www.hke.com.hk) on 2 August 2008. 74 IV. Major connected transactions For material connected transactions of the Group during the reporting period under the relevant rules of the Shenzhen Stock Exchange, please refer to the relevant information set out in Part III “1” of this section. Save for such connected transactions, the Group had no other material connected transactions. 75 V. Significant contracts and their performance 1. External guarantees (1) During the reporting period, the Company did not provide any guarantee to external parties (excluding the guarantees provided to its subsidiaries) and provide any guarantees against the rules and regulations. As at 31 December, 2008, the Company provided guarantees to its subsidiaries amounting to RMB784,094,400, representing 6.4% of the net assets attributable the shareholders of the parent company. The amounts being guaranteed Name of the subsidiaries (RMB in ten thousand) Jiangxi Chenming Paper Co., Ltd. 34,500.00 Jilin Chenming Paper Co., Ltd. 26,879.52 Wuhan Chenming Hanyang Paper Co. Ltd. 4,341.73 Zhanjiang Chenming Paper Pulp Co., Ltd. 10,683.46 Heze Chenming Panels Co., Ltd. 2,004.73 Total 78,409.44 (2) The first extraordinary shareholders’ meeting for 2008 approved a resolution regarding to provision of guarantee for banking facilities granted to its subsidiaries. The Company provides guarantee for banking facilities granted to its subsidiaries in 2007, which will expire successively. In order to ensure the normal production and management of each of its subsidiaries, the Company intends to continue to provide guarantee for RMB comprehensive banking facilities granted to the related subsidiaries in 2008, with the total value of RMB 2.25 billion under guarantee and effect of one year therefrom. The related announcement was published on China Securities Journal, Hong Kong Commercial Daily and www.cninfo.com.cn on 12 April 2008. 2. Entrusted loans During the reporting period, in order to save financial expenses, increase incomes, and regulate funds exchanged between the Company and its subsidiaries at the same time, the Company granted entrusted loans from banks of RMB1,790 million to Jiangxi Chenming Paper Co., Ltd, Wuhan Chenming Hanyang Paper Co., Ltd and Heze Chenming Panels Co., Ltd subsidiaries of the Company, for their use. During the reporting period, save for the above entrusted loans to the controlling subsidiaries, the Company had no other entrusted wealth management matters or those incurred in prior periods extending into the reporting period. 76 V. Significant contracts and their performance (continued) 3. Other significant contracts (1) During the reporting period, Zhanjiang Chenming Paper Pulp Co., Ltd., a subsidiary of the Company, entered into Zhangjiang Pulp Project Syndicated Loan Contract（《湛江木漿專案銀團貸款合同》）and Syndicated Loan Mortgage Contract（《銀團貸款抵押合同》）with a syndicate of banks, which included China Development Bank, Zhanjiang branch of Agricultural Bank of China, Zhanjiang branch of Industrial and Commercial Bank of China Limited, Zhanjiang branch of China Construction Bank Corporation, Qingdao Branch of China Merchants Bank Co., Ltd., and Shenzhen Branch of China CITIC Bank Corporation Limited. The syndicated loan was intended to finance the project of Zhanjiang Chenming Paper Pulp. In the meantime, the Company entered into Syndicated Loan Guarantee Contract（《銀團貸款保證合同》）with a syndicate of banks, pursuant to which, the Company provided joint responsibility guarantees to a syndicate of banks for Zhanjiang Chemming for the insolvent part of the debts except for the future asset pledged as collateral. The details of the loan agreement were published in China Securities Journal, Hong Kong Commercial Daily and the website of CHINF (www.cninfo.com.cn) on 22 January 2008. (2) During the reporting period, the Company intended to build the Zhanjiang 700,000-tonne pulp project as soon as possible. Therefore, Zhanjiang Chenming Paper Pulp Co., Ltd (湛江晨鳴漿紙有限公司), a wholly-owned subsidiary of the Company, and MetsoFiberKarlstadAB, MetsoPaperValkeakoskioy, MetsoPaper (China) Co., Ltd, MetsoPaperSundsvallAB.MetsoPoweroy ( all of them were relevant subsidiaries of Meizhuo Papermaking Machinery Co., Ltd. (美卓造紙機械有限公司) entered into procurement contracts for pulp board machines, alkali retrieval stoves, cook and stream apparatus, wash, select and bleach apparatus, wood-cutting apparatus respectively on 13 August 2008. The contracts involve in the total cost equivalent to 194 million euro and come into force from the date on which both parties sign, with effective period from August 2008 to October 2010. The details of the loan agreement were published in China Securities Journal, Hong Kong Commercial Daily, the website of CHINF (www.cninfo.com.cn) and Hong Kong Stock Exchange website (http://www.hkex.com.hk) on 21 August 2008. 77 VI. Commitments by holders of non-tradable shares during the reform of conversion 1. Commitments during the reform of Conversion The Company completed the reform of Conversion on 29 March 2006. State-owned Assets Supervision and Administration Commission of Shouguang City, the controlling shareholder, and other holders of non-tradable shares transferred some of their shares to all of the shareholders of tradable A Shares in the proportion of 2.6 shares for every 10 tradable A Shares. During the reporting period, the controlling shareholder of the Company changed to Shougoang Cheming Holdings Co., Ltd. from State-owned Assets Supervision and Administration Commission of Shouguang City. Shougoang Cheming Holdings Co., Ltd. promises it will fulfill the following commitments made by the original controlling shareholder, State-owned Assets Supervision and Administration Commission of Shouguang City, during the reform of Conversion: (1) According the audited financial reports (standard and without qualified opinion) of the Company for 2005-2007, if the compound annual growth rate of the Company’s net profit for 2005 to 2007 is less than 20%, then it shall be determined the register day for the top-up matching price share right (i.e. the tenth trading day of disclosing the 2007 annual report) after the fifth trading day of disclosing the 2007 annual report and disclosed the top-up matching price announcement and complete the implementation of top-up matching price on the first trading day after the top-up matching price share right register day. Chenming Holdings will transfer, without consideration, 5% of the total number of tradable A Shares on share right register day to implement the scheme to holders of tradable A Shares with no restricted conditions registered after the close of register day to top-up matching-price share right. (If this scheme is implemented between stock right register day to the top-up matching price share right register day, there is a change in capital due to bonus issue and transfer to capital surplus, it shall adjust number of shares for this top-up matching price arrangement.) (2) Shares held by Chenming Holdings shall not be listed and traded within 48 months from the date of the reform of Conversion. (3) After this reform scheme of Conversion has been approved to implement, Chenming Holdings proposed the bonus distribution at the shareholders’ meetings of the Company for 2005, 2006 and 2007, proposing profit allocation proportion not lower than 30% of those of realized distributable profit in those years (i.e. net profit for those years set out in the income statement net of amount transferred to statutory common reserve fund and statutory public welfare reserve) and guarantee to vote for this proposal when proposed at the shareholders’ meeting. 78 VI. Commitments by holders of non-tradable shares during the reform of conversion (continued) 2. Undertakings and their performance during the reporting period The financial reports of the Company for the three years ended from 2005 to 2007 were audited by Deloitte Touche Tohmatsu Certified Public Accountants Ltd., while it issued auditors’ reports of德師京 （審報字(06)第173號，德師報（審）第PB006號，德師報（審）字(08)第P0262號respectively, all of them were of unqualified opinion. The net profit of Company under Accounting Standards for Business Enterprises amounted to RMB 503,721,298.14, RMB 602,433,342.24, RMB 602,967,195.37 and RMB 967,636,172.39 in 2004, 2005, 2006 and 2007 respectively. The Company’s compound annual growth rate of net profit from 2005 to 2007 amounted to 24.31% (i.e. higher than 20%) and did not trigger the performance condition of top-up price matching shares, thus Chenming Holdings was not required to further increase the matching price. 18,653,854 shares were kept under the custody of the Shenzhen branch of China Securities Depository and Clearing Corporation temporarily to be used for top-up price matching in the undertakings. The temporary custody of these shares was released during the reporting period and the nature of such shares remained restricted state-owned legal person shares. For the end of the reporting period, Chenming Holdings, the controlling shareholders of the Company has fulfilled all the commitments which made during the reform of Conversion, except the commitment of “Shares held by Shouguang Chenming Holdings Co., Ltd. shall not be listed and traded within 48 months from the date of reform of Conversion”. VII. The accounting firm engaged by the Company during the reporting period At the seventh meeting of the fifth session of the Board, the Company approved the resolution to engage an accounting firm (Deloitte Touche Tohmatsu Certified Public Accountants Ltd.) as auditing agency for the 2008 financial information of the Company to provide auditing service for one year, at the auditor’s fee of RMB4,800,000. Meanwhile, the Company bears traveling expenses of personnel from such accounting firm, which was approved at the 2007 general shareholders’ meeting of the Company. This accounting firm has been acting continuously as auditing agency for the Company for 5 years since 2004. 79 VIII. During the reporting period, the Board and the Directors of the Company were not fined by China Securities Regulatory Commission nor condemned by any stock exchange. IX. Launch various channels to communicate and strengthen investor’s relation management During the reporting period, the Board of the Company not only promptly disclosed sufficient information in strict compliance with the relevant regulations, but also launched various channels to actively manage investor’s relations, and strengthen the direct communications with investors, news media and the public, thereby fully introducing and displaying the outstanding image of the Company, as well as our advantages over other players, our continuous improving results and unlimited development prospects which lead investors to further understand the investment value of the Company in depth. Our disclosure of information was comprehensively assessed by the Shenzhen Stock Exchange as “good” for seven years in succession (2001-2007). In 2008, the receiving organization under the Company’ general headquarters handled more than 100 visits for individual investor surveys and studies. The Company fully utilized investor’s special telephone lines, strengthened the telephone communication with shareholders, and answered queries from each shareholder patiently. By way of exchanges through the network, an investor’s relation forum was set up on the Company’s websites where six personnel were arranged to be responsible for answering questions of various aspects from investors. 80 IX. Launch various channels to communicate and strengthen investor’s relation management (continued) Reception of activities including research, communication and interviews Time of Place of Manner of Received Main contents of conversation and reception reception reception parties information provided January 2008 Shouguang, Investigation Researchers of Changjiang Recent development of the industry and Shandong and research River Securities, Beijing development trend in the future, production on site office of Gao Ling Capital and management of the company, direction and Eastern securities of strategic development in the future and progress of issuance of H shares March 2008 Shouguang, Investigation CITIC Securities’ researchers Recent development of the industry and Shandong and research and investment managers of development trend in the future, production on site Huatai Assets Management and management of the company, direction Co., Ltd of strategic development in the future and progress of issuance of H shares March 2008 Shouguang, Investigation Institutional researchers and Recent development of the industry and Shandong and research fund managers of 國泰君安， development trend in the future, production on site 中投證券，國金證券， and management of the company, direction 招商證券，長盛基金， of strategic development in the future and 嘉實基金 and 諾安基金 progress of issuance of H shares March 2008 Shouguang, Investigation Researchers and fund Recent development of the industry and Shandong and research managers of 中金公司， development trend in the future, production on site 華寶興業基金，寶鋼財務， and management of the company, direction 富國基金LibraCap(QFII) and of strategic development in the future and 嘉實基金 progress of issuance of H shares March 2008 Shouguang, Investigation Institutional researchers and Recent development of the industry and Shandong and research investment managers of development trend in the future, production on site 長江證券，泰達菏銀基金， and management of the company, direction 博時基金，第一創業證券， of strategic development in the future and 工銀瑞信基金 and 兵器 progress of issuance of H shares 財務公司 81 IX. Launch various channels to communicate and strengthen investor’s relation management (continued) Reception of activities including research, communication and interviews (continued) Time of Place of Manner of Received Main contents of conversation and reception reception reception parties information provided March 2008 Shouguang, Investigation Researchers and fund Recent development of the industry and Shandong and research managers of 中銀國際， development trend in the future, production on site 天弘基金，華安基金， and management of the company, direction 海富通基金，中海基金， of strategic development in the future and 平安資產，Lehman Brothers progress of issuance of H shares and長城基金 June 2008 Shouguang, Investigation Sales director and analysts Recent development of the industry and Shandong and research of Merrill Lynch Securities development trend in the future, production on site and representatives of and management of the company, direction 富達資產管理公司 of strategic development in the future and progress of issuance of H shares June 2008 Shouguang, Investigation Investment directors and Recent development of the industry and Shandong and research industry researchers of development trend in the future, production on site 中海基金投資總監及行業 and management of the company, direction 研究員 of strategic development in the future and progress of issuance of H shares September 2008 Shouguang, Investigation Researchers of 台證綜合證券 Recent development of the industry and Shandong and research development trend in the future, production on site and management of the company, and direction of strategic development in the future September 2008 Shouguang, Investigation Vice-president of Recent development of the industry and Shandong and research Deutsche Bank development trend in the future, production on site and management of the company, and direction of strategic development in the future 82 IX. Launch various channels to communicate and strengthen investor’s relation management (continued) Reception of activities including research, communication and interviews (continued) Time of Place of Manner of Received Main contents of conversation and reception reception reception parties information provided September 2008 Shouguang, Investigation Customers of 中金證券客戶 Recent development of the industry and Shandong and research （橡樹資本上市證券公司） development trend in the future, production on site and management of the company, and direction of strategic development in the future October 2008 Shouguang, Investigation Study group of Hong Kong Recent development of the industry and Shandong and research analysts development trend in the future, production on site and management of the company, and direction of strategic development in the future November 2008 Shouguang, Investigation Analysts of 中國銀河證券 Recent development of the industry and Shandong and research 股份有限公司 development trend in the future, production on site and management of the company, and direction of strategic development in the future December 2008 Shouguang, Investigation Directors of 海角資產管理 Recent development of the industry and Shandong and research 有限公司投資 development trend in the future, production on site and management of the company, and direction of strategic development in the future December 2008 Shouguang, Investigation Shareholders of the Company Recent development of the industry and Shandong and research development trend in the future, production on site and management of the company, and direction of strategic development in the future December 2008 Shouguang, Investigation Researchers of research Recent development of the industry and Shandong and research institute of Shenyin Wanguo development trend in the future, production on site and management of the company, and direction of strategic development in the future 83 X. Other material matters Independent Directors of the Company expressed the following opinions on the use of funds by related parties and external guarantee provided during the reporting period: Under the requirements of the listing rules of the Shenzhen Stock Exchange in relation to connected transactions, except for the matter set out in III.1 of section X of the Report, the Company had no material connected transactions, on which independent non-executive Directors of the Company had expressed their independent opinion, during the reporting period; according to the requirements of the Accounting Standards for Business Enterprises, except for the ordinary connected transactions between the Company and its controlling subsidiaries and interested companies of the Company (for details, please refer to PRC Auditors’ Report and Financial Statements and Note VIII thereto Prepared in Accordance with Accounting Standards for Business Enterprises), there were no use of funds by controlling shareholders and other related parties; while the connected transaction took place were true and accurate reflection of the ordinary connected transactions of the Company that were fair and reasonable and in compliance with the relevant requirements of the Company Law and the Articles of Association, the transaction price was objective and just and without prejudice to the interests of the Company and its shareholders (especially minority shareholders and non-related shareholders). Upon validation, except for the above guarantees provided to controlling subsidiaries, the Company had provided RMB0 of external guarantee for the period of and accrued up to 2008. The Company strictly followed the relevant requirements of the Notice on Regulation of External Guarantee Provided by Listed Companies (Zheng Jian Fa [2005] No.120)（《關於規範上市公司對外擔保行為的通知》（證監發[2005]120 號））and the Articles of Association to earnestly perform its information disclosure obligations in respect of external guarantees and honestly provided information concerning all external guarantee matters to the public accountant. During the reporting period, the guarantee provided guarantee for controlling subsidiaries for their ordinary production and operation and to meet reasonable funding needs, the decision procedures were legal and without prejudice to the interests of the Company and the shareholders of the Company (especially minority shareholders). 84 XI. Index of information disclosure in 2008 Announcement Subject mattter Media for publication date 2008-1-10 Clarification announcement C12 of China Securities Journal, B6 of Hong Kong Commercial Daily http://www.cninfo.com.cn 2008-1-22 Announcement in respect of the resolutions D045 of China Securities Journal, passed at the fifth meeting of the fifth B3 of Hong Kong Commercial Daily session of the Board http://www.cninfo.com.cn Announcement in respect of the resolutions passed at the fifth meeting of the fourth session of the Board Connected transaction announcement and announcement in respect of Zhanjiang Chenming and the syndicated loan agreement Independent opinion of the independent Directors on writing off bad debts of sales branches Independent opinion of the independent Directors on further increase in the shareholdings of the Company in Chenming Power 2008-2-26 Indicative announcement in respect of the D005 of China Securities Journal, listing of foreign shares listed overseas A9 of Hong Kong Commercial Daily approved by the China Securities Regulatory Commission 2008-3-25 Announcement in respect of the granting of C12 of China Securities Journal, B7 financial subsidy, announcement in respect of Hong Kong Commercial Daily of the resolutions passed at the sixth http://www.cninfo.com.cn meeting of the fifth session of the Board Notice in respect of the convention of 2008 first extraordinary general meeting 85 XI. Index of information disclosure in 2008 (continued) Announcement Related matters Media for publication date 2008-3-26 Announcement in respect of the external D141 of China Securities Journal, guarantees B9 of Hong Kong Commercial Daily http://www.cninfo.com.cn 2008-4-12 Announcement in respect of the resolutions C045 of China Securities Journal, passed at the 2008 first extraordinary A3 of Hong Kong Commercial Daily general meeting http://www.cninfo.com.cn 2008-4-15 Summary of 2007 annual report D053 of China Securities Journal, A7 of Hong Kong Commercial Daily Announcement in respect of the resolutions passed at the seventh meeting of the fifth http://www.cninfo.com.cn session of the Board Announcement in respect of the resolutions passed at the fifth meeting of the fifth session of the Supervisory Committee 2008-4-24 Indicative announcement in respect of the A28 of China Securities Journal, A9 change of the disclosure date of 2008 first of Hong Kong Commercial Daily quarter report http://www.cninfo.com.cn 2008-4-29 Summary of 2008 first quarter report D076 of China Securities Journal, A10 of Hong Kong Commercial Daily http://www.cninfo.com.cn 2008-5-10 Announcement in respect of the C005 of China Securities Journal, undertakings associated with the share A9 of Hong Kong Commercial Daily reform http://www.cninfo.com.cn Announcement in respect of the change of on-going monitoring sponsor for the share reform 86 XI. Index of information disclosure in 2008 (continued) Announcement Related matters Media for publication date 2008-5-24 Announcement in respect of the application C021 of China Securities Journal, of the issue and listing of the H shares of A10 of Hong Kong Commercial the Company considered by the Hong Kong Daily Stock Exchange and the web proof http://www.cninfo.com.cn information pack of H shares issue 2008-5-31 Announcement in respect of the resolutions C009 of China Securities Journal, passed at the eighth meeting of the fifth B6 of Hong Kong Commercial Daily session of the Board http://www.cninfo.com.cn 2008-6-4 Announcement in respect of the related B of China Securities Journal, B3 of matters of H share prospectus, price range Hong Kong Commercial Daily of H shares and the H share Hong Kong http://www.cninfo.com.cn Public Offering http://www.hkex.com.hk 2008-6-7 Announcement in respect of the resolutions C012 of China Securities Journal, passed at the ninth meeting of the fifth A8 of Hong Kong Commercial Daily session of the Board http://www.cninfo.com.cn Notice in respect of the convention of 2007 General Meeting 2008-6-11 Announcement in respect of the offering D005 of China Securities Journal, price for the IPO of foreign shares listed B5 of Hong Kong Commercial Daily overseas (H share) http://www.cninfo.com.cn http://www.hkex.com.hk 2008-6-17 Announcement in respect of the listing and D005 of China Securities Journal, quotation for the foreign shares listed B5 of Hong Kong Commercial Daily overseas (H shares) of IPO http://www.cninfo.com.cn http://www.hkex.com.hk 87 XI. Index of information disclosure in 2008 (continued) Announcement Related matters Media for publication date 2008-7-1 Announcement in respect of the resolutions D013 of China Securities Journal, passed at the 2007 shareholders’ meeting B10 of Hong Kong Commercial Daily http://www.cninfo.com.cn http://www.hkex.com.hk 2008-7-1 Legal opinions as witnessed by lawyers on http://www.cninfo.com.cn the announcement in respect of the http://www.hkex.com.hk resolutions passed at the 2007 shareholders’ meeting 2008-7-3 Announcement in respect distribution of D004 of China Securities Journal, bonus and dividends in 2007 B6 of Hong Kong Commercial Daily http://www.cninfo.com.cn http://www.hkex.com.hk 2008-7-11 The articles of association of the Company http://www.cninfo.com.cn (June 2008) http://www.hkex.com.hk 2008-7-17 Announcement in respect of action in price D012 of China Securities Journal, stabilization and end of period for the price B4 of Hong Kong Commercial Daily stabilization http://www.cninfo.com.cn http://www.hkex.com.hk 2008-7-19 The special system to take precautions http://www.cninfo.com.cn against controlling shareholders and related http://www.hkex.com.hk parties from embezzling the Company’s fund 2008-7-19 Announcement in respect of the resolutions C086 of China Securities Journal, passed at the second extraordinary meeting A6 of Hong Kong Commercial Daily of the fifth session of the Board http://www.cninfo.com.cn http://www.hkex.com.hk 2008-7-19 Explanation of governance and rectification http://www.cninfo.com.cn http://www.hkex.com.hk 88 XI. Index of information disclosure in 2008 (continued) Announcement Related matters Media for publication date 2008-8-04 Announcement in respect of revision of D004 of China Securities Journal, expected results A5 of Hong Kong Commercial Daily Announcement in respect of the resolutions http://www.cninfo.com.cn passed at the third extraordinary meeting of http://www.hkex.com.hk the fifth session of the Board 2008-8-19 Announcement in respect of the Board http://www.cninfo.com.cn meeting date http://www.hkex.com.hk 2008-8-21 Announcement in respect of procurement A16 of China Securities Journal contracts entered into for main apparatus http://www.cninfo.com.cn used in the Zhanjiang pulp project http://www.hkex.com.hk 2008-8-26 Reminder announcement in respect of C04 of China Securities Journal, A5 issuing the short-term financing certificates of Hong Kong Commercial Daily http://www.cninfo.com.cn http://www.hkex.com.hk 2008-8-29 2008 interim report http://www.cninfo.com.cn 2008 interim report (English version) http://www.hkex.com.hk 2008 interim financial report 2008-8-29 Summary of 2008 interim report D060 of China Securities Journal, A7-A8 of Hong Kong Commercial Announcement in respect of the resolutions Daily passed at the tenth meeting of the fifth session of the Board http://www.cninfo.com.cn http://www.hkex.com.hk Announcement in respect of estimated increase in the performance results 2008-10-17 H share announcement http://www.cninfo.com.cn http://www.hkex.com.hk 89 XI. Index of information disclosure in 2008 (continued) Announcement Related matters Media for publication date 2008-10-31 2008 third quarter report (Chinese and D025 of China Securities Journal, English version) A5 of Hong Kong Commercial Daily Announcement in respect of the resolutions http://www.cninfo.com.cn passed at the eleventh meeting of the fifth http://www.hkex.com.hk session of the Board 2008-11-06 H share announcement http://www.cninfo.com.cn http://www.hkex.com.hk 2008-12-20 H share announcement http://www.cninfo.com.cn http://www.hkex.com.hk 90 X PRC Auditors’ Report and Financial Statements and Notes thereto Prepared in Accordance with Accounting Standards for Business Enterprises De Shi Bao (Shen) Zi (09) No. P0262 TO THE SHAREHOLDERS OF SHANDONG CHENMING PAPER HOLDINGS LIMITED We have audited the accompanying financial statements of Shandong Chenming Paper Holdings Limited (the “Company”) and its subsidiaries (collectively referred to as the “Group”) , which comprise the company and consolidated balance sheets as at 31 December 2008, the company and consolidated income statements, the company and consolidated statements of changes in equity and the company and consolidated cash flow statements for 2008 and notes to the financial statements. 1. MANAGEMENT’S RESPONSIBILITY FOR THE FINANCIAL STATEMENTS The Chenming Group’s management is responsible for preparing financial statements in accordance with Accounting Standards for Business Enterprises. This responsibility includes (1) designing, implementing and maintaining internal controls relevant to the preparation of the financial statements that are free from material misstatement whether due to fraud or error; (2) selecting and applying appropriate accounting policies; and (3) making accounting estimates that are reasonable in the circumstances. 2. AUDITORS’ RESPONSIBILITY Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the Chinese Auditing Standards 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 a 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, we consider the internal controls relevant to the entity’s preparation of 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 controls. An audit also includes evaluating the appropriateness of the accounting polices used and the reasonableness of the accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 91 3. OPINION In our opinion, the Chenming Group’s financial statements have been prepared in accordance with Accounting Standards for Business Enterprises and present fairly, in all material aspects, the company and consolidated financial position of Chenming Group as at 31 December 2008 and the results of their operations and their cash flows for 2008. Deloitte Touche Tohmatsu CPA Ltd., Shanghai, The People’s Republic of China 童傳江 張扣娣 Chinese Certified Public Accountant 8 April 2008 92 X Domestic Auditors’ Report and Financial Statements and Notes thereto Prepared in Accordance with Accounting Standards for Business Enterprises Balance Sheets As at 31 December 2008 Consolidated The Company Closing Opening Closing Opening ASSETS Notes VII balance balance balance balance RMB RMB RMB RMB CURRENT ASSETS Bank balances and cash 1 2,853,418,128.07 740,621,843.91 2,142,439,739.51 348,948,724.68 Derivative financial instruments 20 — 5,955,480.00 — — Bills receivable 2 974,009,788.24 1,676,684,054.95 465,681,067.32 998,809,409.00 Accounts receivable 3 1,752,409,349.17 1,660,020,696.84 1,937,280,312.86 1,466,109,588.60 Advance to suppliers 4 462,526,338.87 574,014,801.43 438,759,362.48 279,890,382.88 Dividends receivable — — 164,874,997.10 42,933,862.14 Other receivables 5 135,889,612.93 196,162,672.11 936,468,514.72 776,521,148.45 Inventories 6 3,397,792,930.38 1,744,492,612.36 1,682,657,074.51 721,354,749.54 Entrusted loans due within one year 7 — — 982,000,000.00 1,864,000,000.00 Other current assets 8 151,993,045.95 — 52,747,204.98 — Total current assets 9,728,039,193.61 6,597,952,161.60 8,802,908,273.48 6,498,567,865.29 NON-CURRENT ASSETS Entrusted loans 7 — — 965,000,000.00 625,000,000.00 Long-term investments 9 92,673,769.14 96,289,936.43 4,081,859,577.02 2,194,652,949.31 Investment properties 10 28,164,724.15 29,902,980.19 28,164,724.15 29,902,980.19 Fixed assets 11 14,213,441,758.08 13,243,156,039.93 6,258,618,550.53 6,555,767,873.32 Construction in progress 12 431,379,272.50 904,753,634.02 59,788,891.26 275,351,308.78 Project materials 42,079,864.21 44,433,213.61 1,981,408.48 6,850,752.92 Intangible assets 13 1,277,076,588.53 822,301,826.32 364,509,396.99 377,022,979.83 Goodwill 14 20,283,787.17 20,283,787.17 — — Long-term deferred expenditure 15 37,227,730.36 56,513,234.75 — — Deferred income tax assets 16 127,916,366.12 103,361,571.98 78,605,721.73 72,516,429.65 Consumable biological assets 17 301,212,691.14 92,159,871.29 — — Total non-current assets 16,571,456,551.40 15,413,156,095.69 11,838,528,270.16 10,137,065,274.00 TOTAL ASSETS 26,299,495,745.01 22,011,108,257.29 20,641,436,543.64 16,635,633,139.29 93 Consolidated The Company LIABILITIES AND Opening Openinng Opening Opening OWNERS’ EQUITY Notes VII balance balance balance balance RMB RMB RMB RMB CURRENT LIABILITIES Short-term loans 19 1,516,945,042.67 3,594,000,057.28 1,144,068,305.68 3,350,420,391.17 Financial liability held for trading 20 198,900.00 — — — Notes payable 21 367,627,562.14 130,056,316.74 210,151,045.59 121,487,222.14 Accounts payable 22 2,642,308,185.90 1,656,706,980.62 1,716,031,795.17 1,332,552,331.70 Advances from customers 23 101,693,578.57 170,286,629.21 66,019,457.87 92,126,887.49 Employee benefits payable 24 190,209,067.13 234,880,219.06 98,888,359.60 119,224,432.42 Taxes payable 25 49,965,982.34 102,444,450.86 16,156,180.51 100,151,250.80 Dividends payable 26 36,089.31 36,075.17 36,089.31 36,075.17 Other payables 27 346,226,242.06 305,050,016.38 283,099,241.86 278,838,344.66 Non-current liabilities due within one year 28 1,038,125,240.62 667,746,417.91 883,602,600.00 586,144,500.00 Short-term debentures 29 1,941,874,444.43 506,212,916.67 1,941,874,444.43 — Total current liabilities 8,195,210,335.17 7,367,420,079.90 6,359,927,520.02 5,980,981,435.55 NON-CURRENT LIABILITIES Long-term loans 30 4,019,250,823.86 4,056,194,662.35 3,064,076,035.94 2,899,617,835.94 Deferred income 31 56,828,375.23 830,000.00 5,537,541.95 — Deferred income tax liabilities 32 6,431,545.79 6,103,850.08 — — Total non-current liabilities 4,082,510,744.88 4,063,128,512.43 3,069,613,577.89 2,899,617,835.94 TOTAL LIABILITIES 12,277,721,080.05 11,430,548,592.33 9,429,541,097.91 8,880,599,271.49 94 Consolidated The Company LIABILITIES AND Closing Opening Closing Opening OWNERS’ EQUITY Notes VII balance balance balance balance RMB RMB RMB RMB OWNERS’ EQUITY Share capital 33 2,062,045,941.00 1,706,345,941.00 2,062,045,941.00 1,706,345,941.00 Capital surplus 34 6,093,483,801.92 3,737,991,906.21 6,184,215,988.77 3,827,378,359.74 Surplus reserve . 35 825,476,850.53 723,742,920.58 813,287,268.62 711,553,338.67 Undistributed profits 36 3,277,192,810.40 2,576,650,349.38 2,152,346,247.34 1,509,756,228.39 Translation reserve . 879,498.14 303,894.68 — — Equity attributable to equity holders of the company Total equity 12,259,078,901.99 8,745,035,011.85 11,211,895,445.73 7,755,033,867.80 Minority Interests 37 1,762,695,762.97 1,835,524,653.11 — — Total equity . 14,021,774,664.96 10,580,559,664.96 11,211,895,445.73 7,755,033,867.80 TOTAL LIABILITIES AND OWNERS’ EQUITY 26,299,495,745.01 22,011,108,257.29 20,641,436,543.64 16,635,633,139.29 The notes form an integral part of the financial statements. The financial statements as set out from pages 127 to 284 have been signed by: Head of Corporation: [●] Chief Financial Officer: [●] Head of the finance section: [●] 95 X Domestic Auditors’ Report and Financial Statements and Notes thereto Prepared in Accordance with Accounting Standards for Business Enterprises Income statements For the year ended 31 December 2008 Consolidated The Company Accumulated Accumulated Accumulated Accumulated Notes VII for this year for last year for last year for last year RMB RMB RMB RMB Operating Revenue 38 15,529,593,435.77 15,164,742,450.26 13,557,782,274.40 12,552,589,262.55 Less: Cost of main operations 39 12,556,762,340.80 12,074,481,475.02 11,949,922,698.03 10,887,601,388.35 Tax and levies on main operations 40 12,582,354.31 17,854,424.80 306,581.16 282,690.99 Selling and distribution expenses 705,595,565.95 783,289,341.85 340,787,921.65 397,932,244.92 General and administrative expenses 561,194,537.62 530,820,858.29 207,830,251.32 210,224,821.41 Finance expenses 41 287,136,504.05 392,163,050.56 197,961,693.30 303,883,491.96 Loss on impairment of assets 42 93,125,334.87 102,198,629.26 11,932,470.59 4,908,666.11 Add: Gain on change in fair value 43 2,656,651.60 30,370,880.31 — — Investment income 44 (23,081,752.26 ) (9,461,550.75 ) 302,967,881.91 222,885,767.76 Including: Investment income from associates and joint ventures (23,167,629.22 ) (9,461,550.75 ) (23,167,629.22 ) (9,461,550.75 ) Operating profit 1,292,771,697.51 1,284,844,000.04 1,152,008,540.26 970,641,726.57 Add: Non-operating income 45 274,366,224.82 232,218,083.67 142,693,393.66 47,503,266.20 Less: Non-operating expenses 46 11,798,611.64 27,725,881.15 5,983,889.34 10,417,366.26 Including: Loss on disposal of non- current assets 5,007,364.04 27,181,945.34 1,388,338.83 10,400,342.17 Total profit 1,555,339,310.69 1,489,336,202.56 1,288,718,044.58 1,007,727,626.51 Less: Income tax expenses 47 295,797,856.42 270,795,013.27 271,378,745.12 197,214,107.46 Net profit 1,259,541,454.27 1,218,541,189.29 1,017,339,299.46 810,513,519.05 96 Consolidated The Company Accumulated Accumulated Accumulated Accumulated Notes VII for this year for last year for last year for last year RMB RMB RMB RMB Net profit attributable to the equity holders of the Company 1,075,291,741.53 967,636,172.39 1,017,339,299.46 810,513,519.05 Minority interests 184,249,712.74 250,905,016.90 — — Earnings per share Basic 49 0.57 0.60 0.54 0.50 Diluted 49 N/A 0.59 N/A 0.50 The notes form an integral part of the financial statements. 97 X Domestic Auditors’ Report and Financial Statements and Notes thereto Prepared in Accordance with Accounting Standards for Business Enterprises Cash Flow Statements For the year ended 31 December 2008 Consolidated The Company Accumulated Accumulated Accumulated Accumulated Notes VII for this year for last year for last year for last year RMB RMB RMB RMB Cash Flows from Operating Activities Cash received from sales of goods, rendering of services 16,583,978,475.35 15,346,933,191.88 12,816,080,559.54 14,486,782,584.79 Refund of taxes and levies 33,851,926.78 75,372,967.36 — — Cash received relating to other operating activities 53 237,097,779.40 118,085,044.97 163,421,906.83 539,291,856.66 Subtotal of cash inflows from operating activities 16,854,928,181.53 15,540,391,204.21 12,979,502,466.37 15,026,074,441.45 Cash paid for goods and services 12,123,175,577.65 11,811,905,431.94 10,851,617,699.47 12,261,934,180.86 Cash paid to and on behalf of employees 696,574,804.91 487,126,693.03 272,735,589.72 180,749,301.33 Payments of taxes and levies 1,312,935,590.68 1,039,124,100.69 782,472,375.13 561,696,003.74 Cash paid relating to other operating activities 54 788,101,405.25 877,971,853.54 511,205,605.42 470,013,272.89 Subtotal of cash outflows from operating activities 14,920,787,378.49 14,216,128,079.20 12,418,031,269.74 13,474,392,758.82 Net cash flows from Investing activities 1,934,140,803.04 1,324,263,125.01 561,471,196.63 1,551,681,682.63 Cash Flows from Investing Activities Cash received from investments — — 2,332,000,000.00 620,000,000.00 Cash received from returns on investments 85,876.96 — 187,328,257.66 200,606,101.29 Cash received from disposal of fixed assets, intangible assets and other long-term assets 603,818.56 15,746,133.62 1,193,105.59 962,227.06 Cash received relating to other investing activities 55 57,823,238.62 — 5,643,238.62 — Subtotal of cash inflows from investing activities 58,512,934.14 15,746,133.62 2,526,164,601.87 821,568,328.35 98 Consolidated The Company Accumulated Accumulated Accumulated Accumulated Notes VII for this year for last year for last year for last year RMB RMB RMB RMB Cash paid to acquire fixed assets, intangible assets and other 1,542,798,830.74 884,022,116.21 108,944,870.20 677,874,762.20 long-term assets Cash paid on investments 19,564,645.55 108,725,512.44 3,618,100,000.00 1,338,426,063.80 Subtotal of cash outflows from investing activities 1,562,363,476.29 992,747,628.65 3,727,044,870.20 2,016,300,826.00 Net cash flows from investing activities (1,503,850,542.15 ) (977,001,495.03 ) (1,200,880,268.33 ) (1,194,732,497.65 ) Cash Flows from Financing Activities Cash received from investment 2,711,191,895.71 37,554,000.00 2,711,191,895.71 — Cash received from borrowings 6,002,051,512.02 8,076,267,182.50 5,332,258,412.74 6,241,624,261.50 Cash received from issuance of bonds 1,892,400,000.00 496,965,000.00 1,892,400,000.00 — Cash received relating to other financing activities 56 — — 50,557,068.28 — Subtotal of cash inflows from financing activities 10,605,643,407.73 8,610,786,182.50 9,986,407,376.73 6,241,624,261.50 Cash repayments of amounts borrowed 7,546,630,384.92 6,137,101,438.52 6,890,979,853.42 4,053,206,228.24 Cash payments for interest expenses, and distribution of dividends or profits 858,902,641.36 897,534,770.36 596,770,954.15 620,902,705.10 Including: Dividend and profit paid by subsidiaries to minority shareholders 142,483,663.78 139,553,201.91 — — Cash repayments for conversion of short-term debentures 500,000,000.00 2,000,000,000.00 — 2,000,000,000.00 Cash payments relating to other financing activities 57 39,043,580.93 89,146,310.05 — 117,291,492.65 Subtotal of cash outflows from financing activities 8,944,576,607.21 9,123,782,518.93 7,487,750,807.57 6,791,400,425.99 99 Consolidated The Company Accumulated Accumulated Accumulated Accumulated Notes VII for this year for last year for last year for last year RMB RMB RMB RMB Net cash flows from financing activities 1,661,066,800.52 (512,996,336.43 ) 2,498,656,569.16 (549,776,164.49 ) Effect of foreign exchange rate changes on cash (17,604,358.18 ) (4,759,232.11 ) (15,199,414.35 ) (3,154,716.00 ) Net increase in cash and cash equivalents 51 2,073,752,703.23 (170,493,938.56 ) 1,844,048,083.11 (195,981,695.51 ) Add: Balance of cash and cash equivalents at the beginning of the year 51 613,826,456.62 784,320,395.18 235,957,551.29 431,939,246.80 Balance of cash and cash equivalents at the end of the year 51 2,687,579,159.85 613,826,456.62 2,080,005,634.40 235,957,551.29 The notes form an integral part of the financial statements. 100 XI Domestic Auditors’ Report and Financial Statements and Notes Accordance with Accounting Standards for Business Enterprises Statement of Change in Shareholders' Equity For the year ended 31 December 2008 Consolidated Attributable to the equity holders of Share Capital Surplus Undistributed Exchange the parent Minority Total Share Ca capital surplus reserve profit differences company interests equity capital sur RMB RMB RMB RMB RMB RMB RMB RMB RMB R I. Balance at prior year end 1,706,345,941.00 3,737,991,906.21 723,742,920.58 2,576,650,349.38 303,894.68 8,745,035,011.85 1,835,524,653.11 10,580,559,664.96 1,706,345,941.00 3,827,378,3 II. Changes in the current year (+/-) 355,700,000.00 2,355,491,895.71 101,733,929.95 700,542,461.02 575,603.46 3,514,043,890.14 (72,828,890.14 ) 3,441,215,000.00 355,700,000.00 2,356,837,6 (I) Net profit — — — 1,075,291,741.53 — 1,075,291,741.53 184,249,712.74 1,259,541,454.27 — (II) Profit and loss directly dealt with in shareholders’ equity — — — — 575,603.46 575,603.46 — 575,603.46 — 1,345,7 I.Others — — — — 575,603.46 575,603.46 — 575,603.46 — 1,345,7 Sub-total of (I) and (II) — — — 1,075,291,741.53 575,603.46 1,075,867,344.99 184,249,712.74 1,260,117,057.73 — 1,345,7 (III) Shareholders’ contributions and decrease in capital 355,700,000.00 2,355,491,895.71 — — — 2,711,191,895.71 — 2,711,191,895.71 355,700,000.00 2,355,491,8 1. Shareholders’ contributions in capital 355,700,000.00 — — — — 355,700,000.00 — 355,700,000.00 355,700,000.00 Capital premium — 2,355,491,895.71 — — — 2,355,491,895.71 — 2,355,491,895.71 — 2,355,491,8 (IV) Profit distribution — — 101,733,929.95 (374,749,280.51 ) — (273,015,350.56 ) (142,483,663.78 ) (415,499,014.34 ) — 1. Transfer to surplus reserves — — 101,733,929.95 (101,733,929.95 ) — — — — — 2. Distribution to shareholders — — — (273,015,350.56 ) — (273,015,350.56 ) (142,483,663.78 ) (415,499,014.34 ) — (V) Acquisition of minority interest — — — — — — (114,594,939.10 ) (114,594,939.10 ) — III. Balance at the end of the current year 2,062,045,941.00 6,093,483,801.92 825,476,850.53 3,277,192,810.40 879,498.14 12,259,078,901.99 1,762,695,762.97 14,021,774,664.96 2,062,045,941.00 6,184,215,9 101 Statement of Change in Shareholders' Equity For the year ended 31 December 2007 Consolidated Attributable to the equity holders of Share Capital Surplus Undistributed Exchange the parent Minority Total Share Ca capital surplus reserve profit differences company interests equity capital sur RMB RMB RMB RMB RMB RMB RMB RMB RMB R I. Balance at prior year end 1,365,670,155.00 1,917,835,010.34 677,829,746.88 2,048,792,497.87 (2,440.00 ) 6,010,124,970.09 1,739,491,572.97 7,749,616,543.06 1,365,670,155.00 2,065,990,8 1. Changes in accounting policies — 330,621,007.98 (35,138,178.20 ) (153,965,456.06 ) — 141,517,373.72 (1,881,791.39 ) 139,635,582.33 — 260,181,0 II. Balance at the beginning of the current year 1,365,670,155.00 2,248,456,018.32 642,691,568.68 1,894,827,041.81 (2,440.00 ) 6,151,642,343.81 1,737,609,781.58 7,889,252,125.39 1,365,670,155.00 2,326,171,9 III. Changes in the current year (+/-) 340,675,786.00 1,489,535,887.89 81,051,351.90 681,823,307.57 306,334.68 2,593,392,668.04 97,914,871.53 2,691,307,539.57 340,675,786.00 1,501,206,4 (I) Net profit — — — 967,636,172.39 — 967,636,172.39 250,905,016.90 1,218,541,189.29 — (II) Profit and loss directly dealt with in shareholders’ equity — 1,000,000.00 — — 306,334.68 1,306,334.68 — 1,306,334.68 — 12,670,5 I.Others — 1,000,000.00 — — 306,334.68 1,306,334.68 — 1,306,334.68 — 12,670,5 Sub-total of (I) and (II) — 1,000,000.00 — 967,636,172.39 306,334.68 968,942,507.07 250,905,016.90 1,219,847,523.97 — 12,670,5 (III) Shareholders’ contributions and decrease in capital 340,675,786.00 1,488,535,887.89 — — — 1,829,211,673.89 37,554,000.00 1,866,765,673.89 340,675,786.00 1,488,535,8 1. Shareholders’ contributions in capital — — — — — — 37,554,000.00 37,554,000.00 — 2. Increase in capital from conversion of convertible bonds 340,675,786.00 1,488,535,887.89 — — — 1,829,211,673.89 — 1,829,211,673.89 340,675,786.00 1,488,535,8 (IV) Profit distribution — — 81,051,351.90 (285,812,864.82) — (204,761,512.92 ) (139,553,201.91 ) (344,314,714.83 ) — 1. Transfer to surplus reserves — — 81,051,351.90 (81,051,351.90 ) — — — — — 2. Distribution to shareholders — — — (204,761,512.92 ) — (204,761,512.92 ) (139,553,201.91 ) (344,314,714.83 ) — (V) Acquisition of minority interest — — — — — — (50,990,943.46 ) (50,990,943.46 ) — IV. Balance at the end of the current year 1,706,345,941.00 3,737,991,906.21 723,742,920.58 2,576,650,349.38 303,894.68 8,745,035,011.85 1,835,524,653.11 10,580,559,664.96 1,706,345,941.00 3,827,378,3 The notes form an integral part of the financial statements. 102 X Domestic Auditors’ Report and Financial Statements and Notes thereto Prepared in Accordance with Accounting Standards for Business Enterprises Notes to the financial statements For the year ended 31 December 2008 I. General Information Shandong Chenming Paper Holdings Limited (hereinafter referred as the “Company”), whose predecessor was Shandong Shouguang Paper Mill Corporation, was reorganized to become a joint stock limited company by way of private placement in May 1993. In December 1996, with the approval issued by the Shandong Provincial Government (Lu Gu Zi [1996] Document No. 270) and by the Securities Committee of the State Council (Zheng Wei [1996] Document No.59), the Company was reorganized to become a joint stock limited company by way of public subscription. In May 1997, with the approval issued by the Securities Committee of the State Council (Zheng Wei Fa [1997] Document No. 26), the Company issued 115 million B Shares in connection with its international offering. B-shares from this issuance were listed on the Shenzhen Stock Exchange since 26 May 1997. In September 2000, with the approval issued by China Securities Regulatory Committee (hereinafter referred as the “CSRC”) (Zheng Jian Gong Si Zi [2000] Document No. 151), the Company issued 70 million A Shares. A-shares from this issuance were listed on the Shenzhen Stock Exchange on 20 November 2000. In February 2008, with the approval issued by the Stock Exchange of Hong Kong Limited (hereinafter referred as the “Stock Exchange”), the Company issued 355,700,000 H shares. Meanwhile, the relevant state shareholders of the Company performed the reduction of state-owned shares, by way of transferring to the Social Security Fund Council (the “NSSF Council”) such number of shares held by it, representing 35,570,000 shares, which were to be converted into overseas listed foreign shares (H shares). This issuance of 391,270,000 H-shares were listed on the Hong Kong Stock Exchange on 18 June 2008. As at 31December 2008, the Company has a total of 2,062,045,941 shares (refer to note VII.33). The business scope of the Company and its subsidiaries (hereinafter referred as the “Group”) covers: processing and sale of paper products (including machine made paper and paper board), paper making raw materials and machinery; generation and sale of electric power and thermal power; forestry, saplings growing, processing and sale of timber; manufacturing, processing and sale of wood products; and manufacturing and sale of laminated boards and fortified wooden floorboards. 103 2 Statement of Compliance with the Accounting Standards for Business Enterprises (“ASBEs”) The financial statements have been prepared in conformity with the ASBEs, which truly and fully reflect the financial positions of the Company and the Group as at 31 December 2008, and the operating results and cash flows of the Company and the Group for the year ended 31 December 2008. 3. Significant Accounting Policies and Estimates The following principal accounting policies and accounting estimates are determined based on the ASBEs. Accounting Year The fiscal year of the Group is from 1 January to 31 December of each calendar year. Reporting currency The currency of the primary economic environment in which the Company and its domestic subsidiaries operate is Renminbi (“RMB”). The Company and its domestic subsidiaries regard RMB as their reporting currency. Overseas subsidiaries of the Company recognize U.S. dollar as their reporting currency according to the primary economic environment in which they subsidiaries operate. The Group prepares its financial statement based on RMB. Basis of preparation and principle of measurement The Group’s financial statements have been prepared on an accrual basis. Except for consumable biological assets and certain financial instruments which are measured at fair value, the financial statements are prepared under the historical cost convention. A provision for impairment of assets was made according to the accounting policies. Cash equivalents Cash equivalents held by the Group represent short-term and highly liquid investments that are readily convertible to known amounts of cash and which are subject to insignificant risk of value change. 104 3. Significant Accounting Policies and Estimates (continued) Foreign currency translation On initial recognition, foreign currency transactions are translated into the reporting currency using the spot exchange rate prevailing at the date of transaction. At the balance sheet date, monetary items denominated in foreign currencies are translated to RMB using the spot exchange rate at that date. Exchange differences arising from the difference between the spot exchange rate on the balance sheet date on which foreign currency monetary items are translated at the spot exchange rate and the spot exchange rate at the time of initial recognition or on the last balance sheet date shall be recorded into the profit or loss for the current period. Non-monetary items denominated in foreign currency measured at historical cost shall continue to be translated into the reporting currency at the spot exchange rate at the date of transaction. Exchange differences arising from change in exchange rate where the preparation of consolidated financial statements relates to overseas operation and foreign currency monetary items materially constitute net investment in overseas operation shall be recorded into “translation reserve” in the shareholders’ equity: disposal of overseas operation shall be included into profits and losses on disposal in the current period. Method of determination of the fair value for financial instruments The fair value refers to the amount, at which both willing parties to a fair transaction who are familiar with the condition exchange their assets or clear off their debts under fair conditions. Financial instruments exist in an active market. Fair value is determined based on the quoted price in such market. An active market refers to where pricing is easily and regularly obtained from exchanges, brokers, industrial organizations and price-fixing service organizations, representing the actual price of a market transaction that takes place in a fair deal. Financial instruments not only exist in an active market, but fair value is also determined using valuation techniques. Valuation technologies include reference to be familiar with situation and prices reached in recent market transactions entered into by both willing parties, reference to present fair values of similar other financial instruments, cash flow discounting method and option pricing models. 105 3. Significant Accounting Policies and Estimates (continued) Recognition and measurement of the financial assets By way of buying and selling the financial assets in a regular way, recognition and derecognition are carried out according to the accounts on the transaction day. Financial assets are divided into financial assets at fair value through profit or loss, held-to-maturity investments, loans and the account receivables and available-for-sale financial assets when they are initially recognized. Financial assets and financial liabilities are initially recognized at fair value. For financial assets and financial liabilities classified as at fair value through profit or loss, relevant transaction costs are directly recognized in profit or loss for the current period. For financial assets classified as other categories, relevant transaction costs are included in the amount initially recognized. Financial assets are classified at initial recognition with reference to the nature and the purpose of holding. The Group’s financial assets are mainly trust loans and accounts receivable. Loans and accounts receivable Trust loans and accounts receivable adopt the actual interest rate method to carry out the ongoing measure based on amortized costs. On derecognition, profit or loss arising from impairment or amortization is carried as at profit or loss Impairment of financial assets In addition to financial assets at fair value through profit or loss, the Group reviews the book value of other financial assets in each balance sheet date and provide for impairment where there is objective evidence that financial assets are impaired. 106 3. Significant Accounting Policies and Estimates (continued) Impairment of financial assets (continued) Objective evidence of impairment on financial asset includes those observable matters listed as follows: (1) issuers or debtors encounter severe financial difficulties; (2) debtors violate terms of contract, such as a breach of rules or delay during settlement of interests or principal; (3) the Group gives way to those under financial difficulty accounting on economic or legal reasons; (4) debtors may go into liquidation or conduct other financial reorganization; (5) transaction of the financial assets ceases in the active market as the issuer encounters great financial difficulties; (6) any reduction in cash flow of certain assets among a group of financial assets cannot be identified, while it is discovered that the estimated future cash flow of the financial assets has been reduced and can be measured since initial recognition after an overall evaluation based on disclosed information, including that the repayment capability of the debtor of the group of financial assets gradually deteriorates, economy difficulties of the country or region where the debtor is staying appear a situation where this group of financial assets cannot be paid; (7) significant and adverse changes have taken place in the technological, market, economic or legal environments in which the debtor operates, making investors of equity instruments difficult to recover the investment cost; (8) substantial or non-temporary reduction of the fair value of investment on equity instruments; (9) other objective evidence showing signs of impairment on financial assets. For a financial asset that is individually significant, the Group assesses the asset individually for impairment. For a financial asset that is not individually significant, the Group assess the asset individually for impairment or include the asset in a group of financial assets with similar credit risk characteristics and collectively assess them for impairment. If it is determined that no objective evidence of impairment exists for an individually assessed financial asset, whether the financial asset is individually significant or not, the financial asset is included in a group of financial assets with similar credit risk characteristics and collectively assessed for impairment. Financial assets for which an impairment loss is individually recognized are not included in the collective assessment for impairment. 107 3. Significant Accounting Policies and Estimates (continued) Impairment of financial assets (continued) Impairment of loans and accounts receivable The carrying amount of financial assets measured as costs or amortized costs are subsequently reduced to the present value discounted from its projected future cash flow. The reduced amount is recognized as impairment loss and recorded as profit or loss for the period. Upon recognition of the impairment loss from financial assets, if there is objective evidence showing recovery in value of the amount of such financial assets so impaired and which is related to any event occurring after such recognition, the impairment loss originally recognized shall be reversed to the extent that the carrying value of the financial assets upon reversal will not exceed the amortized cost as at the reversal date assuming there is no provision for impairment. Derecognition of Financial Asset Financial asset that satisfied any of the following criteria shall be derecognized: (1) the contract right to recover the cash flows of the financial asset has terminated; (2) the financial asset, along with substantially all the risk and return arising from the ownership of the financial asset, has been transferred to the transferee; (3) the financial asset has been transferred to the transferee, and the transferor has given up the control on such financial asset, though it does not assign maintain substantially all the risk and return arising from the ownership of the financial asset. Inventories Inventories of the Group mainly include raw materials, products and finished products. Inventories include purchasing cost, processing cost and other expenses that help deliver the inventories to the current location and situation. Inventories are stated at standard costs upon delivery. The amount is adjusted for price variance to arrive at actual cost at the end of month. The inventory taking system shall use permanent inventory system. 108 3. Significant Accounting Policies and Estimates (continued) Provision for Inventory Impairment At the balance sheet date, inventories were calculated at the lower of cost and net realizable value. Provision for inventory impairment is made when the net realizable value is lower than the cost. Provisions for impairment of inventory shall be made according to the amount by which the cost of a single item exceeds its net realizable value. After making the provision for inventory impairment, in case the factors causing inventory impairment no longer exists, and the net realizable value of an inventory is higher than its book-value, the original provision for inventory impairment shall be transferred back and incorporated into the profit or loss for the current period. Net realizable value refers to the amount of the estimated price of inventories less the estimated cost incurred upon completion, estimated sales expenses and other amounts after tax and levies in daily operation. The realizable value of inventories shall be determined on the basis of definite evidence, purpose of holding the inventories and effect of after-balance-sheet-date events. Consumable biological assets Consumable biological assets refer to biological assets held for sale or to be harvested as agricultural produce in the future, which include growing commercial forests. Consumable biological assets are stated at cost at initial recognition. The cost of self-planting, self-cultivating consumable biological assets is the necessary expenses directly attributable to such assets prior to canopy closure, including borrowing costs eligible for capitalization. Subsequent expenses incurred after canopy closure shall be included in profit or loss for the current period. The cost of consumable biological assets shall, at the time of harvest or disposal, be carried forward at carrying value using the rotation age method. All the consumable biological assets of the Group are subsequently measured at fair value as they are quoted in an active market where the Group can obtain a quoted market price and other information of the assets, and thus their fair values can be reliably estimated. Changes in fair values shall be recognized as profit or loss in the current period. 109 3. Significant Accounting Policies and Estimates (continued) Investment Property Investment property is held to earn rentals or for capital appreciation or both, including buildings leased out. Investment property is initially measured at cost. Subsequent expenditures related to an investment property shall be included in cost of investment property only when the economic benefits associated with the asset will likely flow to the Group and its cost can be measured reliably. All other expenditures on investment property shall be included in profit or loss for the current period when incurred. The Group adopts cost method for subsequent measurement of investment property, which is depreciated or amortized using the same policy as that for buildings and land use rights. In the event that an owner-occupied property is converted to an investment property (or vice versa), upon the conversion, the property shall be stated at the carrying amount prior to the conversion. When an investment property is sold, transferred, retired or damaged, the amount of proceeds on disposal of the property net of the carrying amount and related tax and surcharges is recognized in profit or loss for the current period. Long-term equity investments For a long-term equity investment acquired through a business combination involving enterprises under common control, the initial investment cost of the long-term equity investment shall be the absorbing party’s share of the carrying amount of the owner’s equity of the party being absorbed at the date of combination. For a long-term equity investment acquired through business combination not involving enterprises under common control, the initial investment cost of the long-term equity investment acquired shall be the cost of acquisition. The long-term equity investment acquired through means other than a business combination shall be initially measured at its cost. Cost method is used to account for a long-term equity investment where the investor does not have joint control or significant influence over the investee, and the investment is not quoted in an active market and its fair value cannot be reliably measured. Long-term equity investment with joint control or significant influence on the investee is accounted for using equity method. Long-term equity investment without control or joint control or significant influence with a fair value which can be reliably measured is accounted for as available-for-sale financial assets. 110 3. Significant Accounting Policies and Estimates (continued) Long-term equity investments (continued) In addition, long-term equity investment with control on the investee is accounted for using equity method and record in the Company’s financial statement. The term “control” means that the Group has the power to decide an enterprise’s financial and operating policy, pursuant to which, the Group can get the power to obtain benefits from its operating activities. Joint control is the contractually agreed sharing of control over an economic activity, which only exists when relevant and important financial affairs and management decisions related to such economic activity require sharing of control by investors who unanimously agree upon. Significant influence is the power to participate in the financial and operating policy decisions of an enterprise, but to fail to control or joint control the formulation of such policies together with other parties. Long-term equity investment accounted for using the cost method Under the cost method, a long-term equity investment is measured at its initial investment cost. Investment income recognized in the current period shall be limited to the amount distributed to it out of accumulated net profits of the investee arising after the investment was made. Any cash dividends or distributions declared by the investee received in excess of this amount shall be treated as return of initial investment cost to reduce the carrying amount of the investment. Long-term equity investment accounted for using the equity method Under the equity method, where the initial investment cost of a long-term equity investment exceeds the investor’s interest in the fair value of the investee’s identifiable net assets at the acquisition date, no adjustment shall be made to the initial investment cost. Where the initial investment cost is less than the investor’s interest in the fair value of the investee’s identifiable net assets at the acquisition date, the difference shall be charged to profit or loss for the current period, and the cost of the long-term equity investment shall be adjusted accordingly. 111 3. Significant Accounting Policies and Estimates (continued) Long-term equity investments (continued) Long-term equity investment accounted for using the equity method (continued) Under the equity method, investment gain or loss represents the Group’s share of the net profits or losses made by the investee for the current period. The Group shall recognize its share of the investee’s net profits or losses based on the fair values of the investee’s individual separately identifiable assets at the time of acquisition, after making appropriate adjustments thereto in conformity with the accounting policies and accounting periods of the Group. The unrealized gain or loss from internal transactions entered into between the Group and its associated enterprises and joint ventures is set off according to the shareholding attributable to the Group and accounted for as investment income and loss based such basis. However, the unrealized gain or loss from internal transactions entered into between the Group and its investee is not set up if belonging to impairment loss from assets transferred according to regulations such as “Accounting Standards for Business Enterprises No. 8 “Assets impairment”. For any changes in shareholders’ equity other than net profits or losses in the investee, the Group shall adjust the carrying amount of the long-term equity investment and include the corresponding adjustment in shareholders’ equity. The Group’s share of net losses of the investee shall be recognized to the extent that the carrying amount of the long-term equity investment together with any long-term interests that in substance form part of the investor’s net investment in the investee are reduced to zero. If the Group has to assume additional obligations, the estimated obligation assumed shall be provided for and charged to the profit or loss as investment loss for the period. Where the investee is making profits in subsequent periods, the Group shall resume recognizing its share of profits after setting off against the share of unrecognized losses. Disposal of long-term equity investments On disposal of a long-term investment, the difference between the carrying amount of the investment and the actual consideration paid is recognized in current profit or loss. Where the equity method is adopted, the amount attributable to the long-term equity investment previously included shareholders’ equity shall be transferred to current profit or loss on a pro-rata basis. 112 3. Significant Accounting Policies and Estimates (continued) Long-term equity investments (continued) Acquisition of minority interests As for minority interests of subsidiaries acquired before 7 August 2008, since acquisition of minority interests increased cost of long-term equity investment which was compared to fair value of identifiable net assets recognized on the acquisition date of subsidiaries attributable to the Group calculated according to the proportion of newly acquired shares, the difference of which recognized as goodwill in the consolidated balance sheet. Since acquisition of minority interests increased cost of long-term equity investment which was compared to fair value of identifiable net assets recognized which are measured based on the continuous measurement since the acquisition date (or combination date) of subsidiaries attributable to the Group calculated according to the proportion of newly acquired shares, the difference of which recognized as a portion of goodwill, capital premium of adjusted capital surplus, the remaining sum of the capital premium insufficient to set off impairment, adjusted retained earnings. As for minority interests of subsidiaries acquired on and after 7 August 2008 and upon the preparation of the consolidated financial statements, since acquisition of minority interests increased cost of long-term equity investment which was compared to fair value of identifiable net assets recognized which are measured based on the continuous measurement since the acquisition date (or combination date) of subsidiaries attributable to the Group calculated according to the proportion of newly acquired shares, the difference of which recognized as adjusted capital surplus, capital surplus insufficient to set off impairment and adjusted retained earnings. The Group had not acquired minority interests in any subsidiaries since 7 August 2008. Fixed assets and depreciation Fixed assets are tangible assets that are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and have a useful life of more than one accounting year. 113 3. Significant Accounting Policies and Estimates (continued) Fixed assets and depreciation (continued) Fixed assets shall be initially measured at cost and the effect of any expected costs of abandoning the asset at the end of its use. Depreciation is provided over their estimated useful lives from the month after they have reached the working condition for their intended use using the straight-line method. The useful life, estimated residual value and annual depreciation rate of each category of fixed assets are as follows: Annual Estimated depreciation Category residual value Useful life rate Buildings and structures 5-10% 20-40 years 2.25- 4.75% Machinery and equipment 5-10% 8-20 years 4.50-11.88% Vehicles 5-10% 5-8 years 11.25-19.00% Electronic equipment and others 5-10% 5 years 18.00 -19.00% Estimated net residual value of a fixed asset is the estimated amount that the Group would currently obtain from disposal of the asset, after deducting the estimated costs of disposal, if the asset were already of the stage and in the condition expected at the end of its useful life. Subsequent expenditures incurred for a fixed asset shall be included in the cost of the fixed asset, only if it is probable that economic benefits associated with the asset will flow to the Company and the relevant cost can be measured reliably; meanwhile the carrying amount of the replaced part shall be derecognized. Other subsequent expenditures shall be charged to profit or loss when incurred. The Group reviews the useful life and estimated net residual value of a fixed asset and the depreciation method applied at least at each financial year-end. A change in the useful life or estimated net residual value of a fixed asset or the depreciation method used shall be accounted for as a change in accounting estimate. When a fixed asset is sold, transferred, retired or damaged, the Group shall recognize the amount of any proceeds on disposal of the asset net of the carrying amount and related taxes in profit or loss for the current period. 114 3. Significant Accounting Policies and Estimates (continued) Construction in progress Construction in progress is recognized based on the actual construction cost, including all expenditures incurred for construction projects, capitalized borrowing costs for the construction in progress before it has reached the working condition for its intended use, and other related expenses during the construction period. A construction in progress is transferred to fixed assets when it has reached the working condition for its intended use. Intangible assets An intangible asset is an identifiable non-monetary asset without physical substance owned or controlled by the Group. An intangible asset shall be initially measured at cost. The expenditures incurred on an intangible asset shall be recognized as cost of the intangible asset only if it is probable that economic benefits associated with the asset will flow to the Group and the cost of the asset can be measured reliably. Other expenditures on an intangible asset shall be charged to profit or loss when incurred. Land use right acquired shall normally be recognized as an intangible asset. Self-constructed buildings (e.g. plants), related land use right and the buildings shall be separately accounted for as an intangible asset and fixed asset. For buildings and structures purchased, the purchase consideration shall be allocated among the land use right and the buildings on a reasonable basis. In case there is difficulty in making a reasonable allocation, the consideration shall be recognized in full as fixed assets. All the intangible assets of the Group have a finite useful life. An intangible asset with a finite useful life shall be amortized using the straight-line method over its useful life when the asset is available for use. The Group shall review the useful life of intangible asset and the amortization method applied at least at each financial year-end. A change in the useful life or amortization method used shall be accounted for as a change in accounting estimate. The estimated useful life of the Company’s intangible assets is set out as follows: Category Useful life Land use rights 50 years Software 5 -10 years 115 3. Significant Accounting Policies and Estimates (continued) Long-term deferred expenses Long-term deferred expenses are expenditures and other expenses which have incurred but that shall be amortized over the current period and subsequent periods of more than one year. Long-term deferred expenses are amortized evenly over the estimated benefit period. Impairment of non-monetary assets The Group assesses at each balance sheet date whether there is any indication that any long-term equity investment, investment properties, fixed assets, construction in progress, construction materials and intangible assets may be impaired. If there is any evidence indicating that an asset may be impaired, recoverable amount shall be estimated for the individual asset. If it is not possible to estimate the recoverable amount of the individual asset, the Group shall determine the recoverable amount of the asset group to which the asset belongs. If the recoverable amount of an asset is less than its carrying amount, the reduction is recognized as an impairment loss and charged to profit or loss for the current period. A provision for impairment loss of the asset is recognized accordingly. Goodwill arising in a business combination shall be tested for impairment annually, irrespective of whether there is any indication that the asset may be impaired. For the purpose of impairment testing, goodwill shall be considered together with the related asset groups or sets of asset groups. For the purpose of impairment testing, the carrying amount of goodwill shall, from the acquisition date, be allocated on a reasonable basis to each of the related asset groups. If the recoverable amount is less than the carrying amount, the Group shall recognize an impairment loss. The amount of impairment loss shall first reduce the carrying amount of any goodwill allocated to the asset group or set of asset groups, and then reduce the carrying amount of other assets (other than goodwill) within the asset group or set of asset groups, pro rata on the basis of the carrying amount of each asset. The recoverable amount of an asset is the higher of its fair value less costs of disposal and the present value of the future cash flows expected to be derived from the asset. An asset’s fair value is the price in a sale agreement in an arm’s length transaction. If there is no sale agreement but the asset is traded in an active market, fair value shall be determined based on the bid price. If there is neither sale agreement nor active market for an asset, fair value shall be based on the best available information. Costs of disposal are expenses attributable to disposal of the asset, including legal fee, relevant tax and surcharges, transportation fee and direct expenses incurred to prepare the asset for its intended sale. An impairment loss recognized shall not be reversed in a subsequent period. 116 3. Significant Accounting Policies and Estimates (continued) Financial liability At initial recognition, financial liabilities are classified either as “financial liabilities at fair value through profit or loss” or “other financial liabilities”. The financial liabilities of the Group are mainly other financial liabilities, which include payables, loans and debenture payables. Other financial liabilities are subsequently measured at amortized cost using the effective interest method. Gains or losses arising from derecognition or amortization is recognized in profit or loss for the period. Financial Guarantee Contract Financial guarantee contracts other than those designated as financial liabilities at fair value through profit or loss are initially recognized at fair value, and shall be subsequently measured at the higher of the following: (1) the amount determined in accordance with Accounting Standard for Business Enterprises No. 13 “Contingenciesٛ ; and (2) the amount initially recognized less cumulative amortization recognized in accordance with the principles set out in Accounting Standard for Business Enterprises No. 14 “Revenue”. Derivative Instruments Derivative instruments are initially recognized at fair value on the date on which a derivative contract is entered into and are subsequently measured at fair value. Any gains or losses arising from changes in fair value of derivatives are taken directly to profit or loss for the period, except for derivative instruments that are designated as hedging instruments and which are highly effective in hedging, gains or losses arising from changes in their fair value are taken to the profit or loss for the period in accordance with the hedge accounting requirement based on the nature of hedging relationships. Employee Benefits In the accounting period in which an employee has rendered services, the Group shall recognize the employee benefits payable as a liability. The Group participates in social security systems operated by the government. Payments of social security contributions for employees, such as premiums or contributions on pensions, medical insurance, payments of housing funds and other social welfare contributions shall be included in the cost of related assets or profit or loss for the period in which they are incurred. 117 3. Significant Accounting Policies and Estimates (continued) Employee Benefits (continued) When the Group terminates the employment relationship with employees before the expiry of the employment contracts or provides compensation as an offer to encourage employees to accept voluntary redundancy, if the Group has a formal plan for termination of employment relationship or has made an offer for voluntary redundancy, which will be implemented immediately, and the Group cannot unilaterally withdraw from the termination plan or the redundancy offer, a compensation liability arising from the termination of employment relationship with employees should be charged to the profit or loss for the current period. An internal retirement plan is accounted for using the same principles as described above. Salaries and social insurance contributions to be paid to the internally retired employees by the Group during the period from the date when the employee ceases to provide services to the normal retirement date are recognized in profit or loss for the period when the recognition criteria for provisions are met (termination benefits). Offset of Financial Assets and Financial Liabilities If the Group owns the legitimate rights of offsetting the recognized financial assets and financial liabilities, which are enforceable currently, and the Group plans to realize the financial assets or to clear off the financial liabilities by net amount method, the amount of the offsetting financial assets and financial liabilities shall be reported in the balance sheep. Otherwise, financial assets and financial liabilities are presented separately in the balance sheet without offsetting. Revenue recognition Revenue from sales of goods Revenue is recognized when the Company has transferred to the buyer the significant risks and rewards of ownership of the goods, retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold, will receive the economic benefits associated with the transaction, and can reliably measure the relevant amount of revenue and costs. Sales of electricity Sales of electricity are recognised when electricity are generated and transmitted to the power grid operated by the local electric power company. 118 3. Significant Accounting Policies and Estimates (continued) Revenue recognition (continued) Sales of steam Sales of steam are recorded based upon output delivered and capacity provided at rates specified under contract terms. Interest income Interest income is measured based on the length of time for which the Group’s cash is used by others and the effective interest rate. Government grant Government grants are transfer of monetary assets or non-monetary assets from the government to the Group at no consideration, excluding capital considerations from the government as an owner of the Group. Government grants are classified into government grants related to assets and government grants related to income. Government grant shall be recognized when, and only when the related criteria are met. If a government grant is in the form of a transfer of monetary asset, the item shall be measured at the amount received or receivable. If a government grant is in the form of a transfer of non-monetary asset, the item shall be measured at fair value. If fair value is not reliably determinable, the item shall be measured at a nominal amount and recognized immediately in profit or loss for the current period. A government grant related to an asset shall be recognized as deferred income, and evenly amortized to profit or loss over the useful life of the asset. For a government grant related to income, if the grant is a compensation for related expenses or losses to be incurred in subsequent periods, the grant shall be recognized as deferred income, and recognized in profit or loss over the periods in which the related costs are recognized; if the grant is a compensation for related expenses or losses already incurred, the grant shall be recognized immediately in profit or loss for the current period. For the repayment of a government grant already recognized, if there is any related deferred income, the repayment shall be off set against the carrying amount of the deferred income, and any excess shall be recognized in profit or loss for the current period; if there is no related deferred income, the repayment shall be recognized immediately in profit or loss for the current period. 119 3. Significant Accounting Policies and Estimates (continued) Borrowing costs Borrowing costs include interest, amortization of discounts or premiums related to borrowings, ancillary costs incurred in connection with the arrangement of borrowings, and exchange differences arising from foreign currency borrowings. For borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset, when expenditures for the asset and borrowing costs are being incurred, activities relating to the acquisition, construction or production of the asset that are necessary to prepare the asset for its intended use or sale have commenced, such borrowing costs shall be capitalized as part of the cost of that asset; and capitalization shall discontinue when the qualifying asset is ready for its intended use or sale. Other borrowing costs shall be recognized as expense in the period in which they are incurred. Where funds are borrowed for a specific purpose, the amount of interest to be capitalized shall be the actual interest expense incurred on that borrowing for the period less any bank interest earned from depositing the borrowed funds before being used into banks or any investment income on the temporary investment of those funds. Where funds are borrowed for general purpose, the Group shall determine the amount of interest to be capitalized on such borrowings by applying a capitalization rate to the weighted average of the excess amounts of cumulative expenditures on the asset over and above the amounts of specific-purpose borrowings. The capitalization rate shall be the weighted average of the interest rates applicable to the general-purpose borrowings. During the capitalization period, exchange differences related to the principal and interest on a specific purpose borrowing denominated in foreign currency shall be capitalized as part of the cost of the qualifying asset. Exchange differences related to the principal and interest on general-purpose borrowings denominated in foreign currency shall be included in profit or loss for the current period. Qualifying assets are assets (fixed assets, investment property, consumable biological assets, etc) that necessarily take a substantial period of time for acquisition, construction or production to get ready for their intended use or sale. Capitalization of borrowing costs shall be suspended during periods in which the acquisition, construction or production of a qualifying asset is interrupted abnormally, when the interruption is for a continuous period of more than 3 months, until the acquisition, construction or production of the qualifying asset is resumed. 120 3. Significant Accounting Policies and Estimates (continued) Income Tax Current income tax At the balance sheet date, current income tax liabilities (or assets) for the current and prior periods shall be measured at the amount expected to be paid (or recovered) according to the requirements of tax laws. Taxable profits, which are the basis for calculating the current income tax expense, are determined after adjusting the accounting profits before tax for the period in accordance with relevant requirements of tax laws. Deferred income tax assets and deferred income tax liabilities Temporary differences arising from the difference between the carrying amount of an asset or liability and its tax base, and the difference between the tax base and the carrying amount of those items that are not recognized as assets or liabilities but have a tax base that can be determined according to tax laws, shall be recognized as deferred income tax assets and deferred income tax liabilities using the balance sheet liability method. Deferred income tax liabilities are not recognized for taxable temporary differences related to: the initial recognition of goodwill; and the initial recognition of an asset or liability in a transaction which is neither a business combination nor affects accounting profit or taxable profit (or deductible loss) at the time of the transaction. In addition, the Group recognizes the corresponding deferred income tax liability for taxable temporary differences associated with investments in subsidiaries, associates and joint ventures, except when both of the following conditions are satisfied: the Group able to control the timing of the reversal of the temporary difference; and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred income tax assets are not recognized for deductible temporary differences related to the initial recognition of an asset or liability in a transaction which is neither a business combination nor affects accounting profit or taxable profit (or deductible loss) at the time of the transaction. In addition, the Group recognizes the corresponding deferred income tax asset for deductible temporary differences associated with investments in subsidiaries, associates and joint ventures to the extent that it is probable that taxable profits will be available against which the deductible temporary differences can be utilized, except when both of the following conditions are satisfied: it is not probable that the temporary difference will reverse in the foreseeable future; and it is not probable that taxable profits will be available in the future, against which the temporary difference can be utilized. The Company recognizes a deferred income tax asset for the carry forward of deductible losses and tax credits to subsequent periods, to the extent that it is probable that future taxable profits will be available against which the deductible losses and tax credits can be utilized. 121 3. Significant Accounting Policies and Estimates (continued) Income Tax (continued) Deferred income tax assets and deferred income tax liabilities (continued) At the balance sheet date, deferred income tax assets and deferred income tax 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, according to the requirements of tax laws. At the balance sheet date, the Company shall review the carrying amount of a deferred income tax asset. If it is probable that sufficient taxable profits will not be available in future periods to allow the benefit of the deferred income tax asset to be utilized, the carrying amount of the deferred income tax asset shall be reduced. Any such reduction in amount shall be reversed when it becomes probable that sufficient taxable profits will be available. Income tax expense Income tax expense comprises current income tax expense and deferred income tax expense. Current income tax expense (current income tax income) and deferred income tax expense (deferred income tax income) are included in profit or loss for the current period, except for: current income tax and deferred income tax related to transactions or events that are directly recognized in owners’ equity, which are recognized directly in owners’ equity, and deferred income tax arising from a business combination, which is adjusted against the carrying amount of goodwill. Offset of income tax After granted the legal rights of net settlement and with the intention to use net settlement or obtain assets, repay debt, the Group, at the same time, records the net amount after offsetting its current income tax assets and current income tax liabilities. The Group was granted the legal rights of net settlement of current income tax assets and current income tax liabilities. Deferred income tax assets and deferred income tax liabilities are related to income tax to be paid by the same entity liable to pay tax to the same tax collection and management authority or related to different entities liable to pay tax, but the relevant entity liable to pay tax is intended to apply net settlement of current income tax assets and liabilities or, at the same time, obtain assets, repay debt whenever every deferred income tax assets and liabilities with importance would be reversed in the future, the Group records the net amount after offsetting its current income tax assets and current income tax liabilities. 122 3. Significant Accounting Policies and Estimates (continued) Business combination Business combination refers the transaction or event to combine two or more independent entities into one reporting subject. Business combination is classified into business combination under common control and not under common control. The Group recognizes assets and liabilities obtained arising from business combination recognized on the date of merger or acquisition. The date of merger or acquisition means the date on which the controlling right of the entity being merged or of the acquiree is obtained, which is the date on which the control over the net assets or production and management decision is assigned to the Group. Business combinations and goodwill not involving entities under common control A business combination not involving entities under common control is a business combination in which all of the combining entities are not ultimately controlled by the same party or parties both before and after the business combination. For business combination not involving entities under common control, the acquirer is the entity that obtains control of the other entities participating in the combination at the acquisition date, and the other entities participating in the combination are the acquirees. For business combination not involving entities under common control, the cost of a 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 costs directly attributable to the business combination. When the business combination is achieved in stage, the cost of the combination is the aggregate cost of the individual transactions. 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 The acquiree’s identifiable assets, liabilities and contingent liabilities acquired from business combination not involving entities under common control are recognised at their fair values at the acquisition date if the recognition conditions are met. 123 3. Significant Accounting Policies and Estimates (continued) Business combination (continued) Business combinations and goodwill not involving entities under common control (continued) Where the cost of a business combination exceeds the acquirer’s interest in the fair value of the acquiree’s identifiable net assets, the difference is recognized as goodwill. Where the cost of a business combination is less than the acquirer’s interest in the fair value of the acquiree’s identifiable net assets, the acquirer reassesses the measurement of the fair values of the acquiree’s identifiable net assets, liabilities and contingent liabilities and the measurement of the cost of combinations. If after that reassessment, the cost of combination is still less than the acquirer’s interest in the fair value of the acquiree’s identifiable net assets, the difference is recognized in the profit or loss for the current period. Debt restructuring The term “debt restructuring” refers to an event in which the settlement of a debt is arrived in as a result of a mutual agreement between a debtor and a creditor or a judgment of a court when the debtor gets into a financial problem. Obligations to record debt restructuring as debtor When a debt is liquidated by cash, the debtor shall include the difference between the book value of the debt to be restructured and the actual payment into the current profits and losses. When a debt is liquidated by a non-cash asset, the debtor shall include the difference between the book value of the debt to be restructured and the fair value of the non-cash asset transferred into the current profits and losses. The difference between fair value of the non-cash asset transferred and its book value shall be included in the current profits and losses. When a debt is converted into capital, the debtor shall include the difference between the book value of the debt to be restructured and the fair value of shares to which the creditor becomes entitled for waiver of the credit into the current profits and losses. Where other terms of a debt are modified, the debtor shall regard the post-modification fair value of the debt as the entry value of the restructured debt, and shall include the difference between the book value of the debt to be restructured and the book value of the restructured debt in the current profits and losses. Where a debt restructuring is made by a combination of several methods, the debtor shall offset, one by one, the cash paid, the fair value of the non-cash asset transferred, and the fair value of the shares to which the creditor becomes entitled, against the book value of the debt to be restructured, then handle it in accordance with the aforesaid provisions of modification of other terms of a debt. 124 3. Significant Accounting Policies and Estimates (continued) Debt restructuring (continued) Obligations to record debt restructuring as creditor When a debt is liquidated by cash, the creditor shall include the difference between the book balance of the debt to be restructured and the cash received in the current profits and losses. When a debt is liquidated by a non-cash asset, the creditor shall include the difference between the book balance of the debt to be restructured and the fair value of the non-cash asset received in the current profits and losses. When a debt is converted into capital, the creditor shall include the difference between the fair value of the shares to which it becomes entitled as investment to the debtor and the book balance of the debt to be restructured into the current profits and losses. Where other terms of a debt are modified, the creditor shall regard the post-modification fair value of the debt as the book value of the restructured debt, and shall include the difference between the book balance of the debt to be restructured and the book value of the restructured debt in the current profits and losses. Where a debt restructuring is made by a combination of several methods, the debtor shall offset, one by one, the cash received, the fair value of the non-cash asset received, and the fair value of the shares to which the creditor becomes entitled to offset against the book balance of the debt to be restructured, then handle it in accordance with the aforesaid provisions of modification of other terms of a debt. If the creditor has made provision for the impairment of the debt to be restructured, it shall first offset the aforesaid difference against the impairment provision, and then include the shortfall in the current profits and losses. Lease Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. Title may or may not eventually be transferred. All other leases are classified as operating leases. Operating lease business with the Group recorded as lessee Lease payment for operating lease is recognized as related asset cost or profits and losses for the current period using the straight-line method over the lease term. The initial direct cost is directly accounted in profit or loss for the current period. Contingent rent is recognized as profit or loss for the current period upon occurrence. Operating lease business with the Group recorded as lessor Rental income is recognized in profit or loss for the current period using the straight-line method over the lease term. The initial direct cost where the amount is larger is capitalized when incurred, and accounted for as profit or loss for the current period on the same basis as recognition of rental income over the entire lease period. Contingent rental is accounted for as profit or loss for the period in which it is incurred. 125 3. Significant Accounting Policies and Estimates (continued) Basis for Preparation of Consolidated Financial Statements The scope of consolidated financial statements is determined on the basis of control. Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its operating activities. The Group recognizes the date when control of subsidiaries was substantially transferred as the date of acquisition or disposal. For disposal of subsidiaries, operating results and cash flows of such subsidiaries from the period beginning to the date of disposal are included into the consolidated income statement and consolidated cash flow statement; for disposal of subsidiaries during the reporting period, no adjustment shall be made to the opening balance of the consolidated balance sheet. For those subsidiaries acquired not controlled by the same parent, the operating results and cash flows after the acquisition date have been properly included in the consolidated income statements and consolidated cash flow statements. No adjustments shall be made to the opening balance of the consolidated balance sheet and the comparative consolidated financial statements amount. For those subsidiaries acquired or disposed controlled by the same parent company, the operating results and cash flows from the opening of the consolidation period to the consolidation date are also presented in the consolidated income statement and the consolidated cash flow statements. The comparative consolidated financial statements amount is also adjusted respectively. Major accounting policies and accounting periods adopted by the subsidiaries are defined according to the standardized accounting policies and accounting periods stipulated by the Company. All significant intra-group accounts and transactions between the parent company and its subsidiaries or between subsidiaries are eliminated on consolidation. The portion of a subsidiary’s equity that is not attributable to the parent is treated as minority interests and presented as “minority interest” in the consolidated balance sheet within owners’ equity. The portion of net profits or losses of subsidiaries for the period attributable to minority interests is presented in the consolidated income statement under the” net profit” line item as “minority interests”. When the amount of loss attributable to the minority shareholders of a subsidiary exceeds the minority shareholders’ portion of the opening balance of owners’ equity of the subsidiary, where the minority shareholders have a binding obligation under the articles of association or an agreement and are able to make an additional investment to cover the loss, the excess amount shall be allocated against minority interest; otherwise the excess amount shall be allocated against shareholders’ equity attributable to the parent. If the subsidiary subsequently reports profits, such profits shall be allocated to shareholders’ equity attributable to the parent until the minority shareholders’ share of losses previously absorbed by the parent has been recovered. 126 3. Significant Accounting Policies and Estimates (continued) Translation of Financial Statements Denominated in Foreign Currency The financial statements denominated in foreign currency of a foreign operation are translated to RMB in comply with the following requirement: assets and liabilities on the balance sheet are translated at the spot exchange rate prevailing at the balance sheet date; all equity items except for inappropriate profits are translated at the spot exchange rates at the dates on which such items arose; income and expenses in the income statement are translated at the spot exchange rate at the date of transaction; the inappropriate profits brought forward are reported at the prior year’s closing balance; the inappropriate profits carried forward are calculated, based on the translated amounts of profits and other profit appropriation items; and all exchange differences resulting from the translation are recognized separately as “translation reserve” in the shareholders’ equity on the balance sheet. On disposal of foreign operations, exchange differences arising from the translation of financial statements denominated in foreign currencies related to the disposed foreign operation which has been included in shareholders’ equity in the balance sheet, shall be transferred to profit or loss in whole or in proportionate share in the period in which the disposal took place. Cash flow dominated in foreign currency or from foreign subsidiaries shall be translated at the spot exchange rate when it incurs. Effects arising from changes of exchange rate of cash and cash equivalents shall be presented separately as “Effect of changes in exchange rates on cash and cash equivalents” in the cash flow statement. The opening balances and prior year’s figures are presented according to the translated amounts of the prior year. Related parties If a party has the power to control, jointly control or exercise significant influence over another party, they are regarded as related parties. Two or more parties are also regarded as related parties if they are subject to control, joint control or significant influence from the same party. 127 IV. Critical judgments based on Significant Accounting Policies and Key Assumptions and Uncertainties in Accounting Estimates In the application of the Group’s accounting policies, which are described in Note III, the Group is required to make judgments, estimates and assumptions about the carrying amounts of items in the financial statements due to the uncertainties associated with operating activities. These judgments, estimates and assumptions are based on historical experience of the Group’s management as well as other factors that are considered to be relevant. Actual results may differ from these estimates. The aforementioned judgments, estimates and assumptions are reviewed regularly by the Group on a going concern basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. Critical judgments in applying the Group’s accounting policies In the application of the Group’s accounting policies, management has made the following judgments that have the most significant effect on the amounts recognized in the consolidated financial statements: Timing of transfer of constructions in progress to fixed assets In determining the timing when the construction in progress, especially for large-scale paper manufacturing plant and machinery, is transferred to fixed assets requires the Group to determine whether all the activities necessary to bring fixed assets to be ready for their intended use are completed and related direct expenditure are included in the cost of asset. Such determination requires the use of management’s judgment and experience. Provision for bad debts The Group recognizes provision for bad debts according to the recoverability of receivables. When there is evidence indicating that a receivable item is not collectible, provision for bad debts will be recognized. Recognition of bad debts requires the use of judgments and estimates. If the result of new estimates differs from the original estimates, such difference will impact the carrying amount of receivables for the corresponding period. Provision for inventory impairment Provision for inventory impairment is recognized according to the net realizable value of the inventory. Provision for inventory impairment will be recognized when there is evidence indicating that the net realizable value is lower than the cost. Recognition of net realizable value involves the use of judgments and estimates. If the result of new estimates differs from the original estimates, such difference will impact the carrying value of inventory for the corresponding period. 128 IV. Critical judgments based on Significant Accounting Policies and Key Assumptions and Uncertainties in Accounting Estimates (continued) Recognition of deferred income tax assets The Group assesses whether recognition of deferred income tax assets is required at each balance sheet date. Deferred income tax assets relating to certain deductible temporary differences and tax losses are recognized when the Group considers it is probable that future deductible taxable profits will be available against which the temporary differences or tax losses can be utilized. In assessing whether it is probable that future deductible taxable profits will be available against which the temporary differences or tax losses can be utilized requires the use of appropriate judgments and estimates. Depreciation of fixed assets Fixed assets are provided and depreciated on a straight-line basis over their estimated useful lives, after taking into account their residual value. The Group assesses annually the residual value and the useful life of the fixed assets. If revaluation takes place, the expectation differs from the original estimate. Such difference will impact the book value of fixed assets in the year in which such estimate has been changed. Impairment of fixed assets The Group assesses annually whether fixed assets have any indication of impairment in accordance with the accounting policy. The recoverable amounts of fixed assets have been determined based on the higher of value-in-use calculations and fair value less cost to sell. These calculations require the use of judgment and estimates. Where the actual future cash flows are less than expected, a material impairment loss may arise. Impairment of goodwill When conducting goodwill impairment test, the present value of projected future cash flow of the underlying assets or portfolio of assets incorporating such goodwill will be calculated, and projection of the future cash flow of those assets or portfolio of assets will be made, and a pre-tax interest rate shall be determined which can properly reflect the prevailing time value of currency in the market as well as the specific risks relevant to such assets. If such estimated interest rate is lower than the actual interest rate or the actual cash flow is lower than the initial estimated cash flow, it is required to recognize additional impairment. Such impairment will impact the goodwill impairment during the period when such judgment was made. 129 V. Taxation Taxes that the Group is subject to include value added tax, enterprise income tax, business tax, and property tax and land use tax. Value Added Tax Value added tax (“VAT”) payable is the net difference between output VAT less deductible input VAT. The effective tax rates of output VAT and input VAT of the Group’s relevant VAT items are as follows: Item Tax rate % Product sold in the domestic market (output VAT) 17 Paper core sales, printing (output VAT) 17 Purchase of barley grass, pampas grass (input VAT) 13 Steam power for production use (input VAT) 13 Electric power for production use (input VAT) 17 Sodium silicate, paperboard for production use (input VAT) 17 Purchase of waste paper (input VAT) 10 Coal (input VAT) 13 Pursuant to Cai Shui [1995] No. 44 “Circular on VAT Exemption for Certain Products Applying Integrated Use of Resources” issued by the State Administration of Taxation（《國家稅務總局對部分資源綜合利用產 品免徵增值稅的通知》）, enterprises engaged in utilization of raw materials containing not less than 30% of coal gangue, stone coal, coal ash, bottom ash of coal boiler (excluding blast furnace water quenching residue) in the production of buildings products shall be exempted from VAT. Wuhan Chenjian New-style Wall Materials Co., Ltd.（武漢晨建新型牆體材料有限公司）, a subsidiary of the Company, utilizes raw materials containing above 30% of coal ash in its production. It is thus qualified as an enterprise engaged in the utilization of waste in production and is exempted from VAT in the latter half of 2008. Pursuant to Cai Shui [2001] No. 78 “Circular on the VAT Policy concerning Waste Collection Business” issued by the State Administration of Taxation（《國家稅務總局關於廢舊物資回收經營業務有關增值稅政策 的通知》）, since 2001, general taxpayers engaging in the sale of waste materials business will be exempted from VAT. Accordingly, Qihe Chenming Waste Collection Co., Ltd.（齊河晨鳴廢舊物資收購有限 公司）, Jilin Chenming Waste Collection Co., Ltd.（吉林晨鳴廢舊物資回收有限公司）and Shouguang City Run Sheng Wasted Paper Recycle Co., Ltd.（壽光市潤生廢紙回收有限責任公司）, subsidiaries of the Company, are covered by the preferential policy of VAT exemption. 130 V. Taxation (continued) Value Added Tax (continued) Pursuant to Cai Shui Zi [1995] No. 44 “Circular on VAT Exemption for Certain Products Applying Integrated Use of Resources” issued by the Ministry of Finance and the State Administration of Taxation （《財政部、國家稅務總局關於對部分資源綜合利用產品免徵增值稅問題的通知》）and the relevant requirements of Cai Shui Zi [2001] Document No. 72, Shandong Chenming Panels Co., Ltd.（山東晨鳴板材 有限責任公司）, Qihe Chenming Panels Co., Ltd.（齊河晨鳴板材有限公司）, Juancheng Chenming Panels Co., Ltd（鄄城晨鳴板材有限公司）and Heze Chenming Panels Co., Ltd.（菏澤晨鳴板材有限責任公司）, all being subsidiaries of the Company and produce products that applied integrated use of resources, are subject to an immediate VAT refund policy. Other Taxes Enterprise Income Tax Income tax rates applicable to the Company and its subsidiaries Hailaer Chenming Paper Co., Ltd.（海拉爾晨鳴紙業有限責任公司）, a subsidiary of the Company established in the Inner Mongolia Autonomous Region and covered by the preferential tax policy for industries encouraged by the State Government, enjoyed the preferential income tax rate of 15% from 2001 to 2010 pursuant to Guo Shui Fa (2002) Document No. 47 issued by the State Administration of Taxation. Pursuant to the Guo Xi Ban Zong [2001] Document No. 10 “Written Reply concerning the Application of the Preferential Tax Policies on Development of the Western Region in Yanbian Korean Autonomous Prefecture ” issued by the Office of the Leading Group for Western Region Development of the State Council（《國家稅西部開發辦關於延邊朝鮮族自治州參照報行國家西部大開發優惠政策的復函》）and Yanzhou local tax notice [2001] Document No. 99 “Letter confirming the entitlement of吉林晨鳴亞松漿紙有 限公司to preferential tax policy” issued by the local tax bureau of Yanbian Korean Autonomous Prefecture （《延邊州地方稅務局關於吉林晨鳴亞松紙有限公司享受稅收優惠政策承諾的函》）, Yanbian Chenming Paper Co., Ltd.（延邊晨鳴紙業有限公司）, a subsidiary of the Company, is covered by the preferential tax policies on development of the Western Region and thus enjoys preferential tax rate of 15% from 2001 to 2010. 131 V. Taxation (continued) Other Taxes (continued) Enterprise Income Tax (continued) Income tax rates applicable to the Company and its subsidiaries (continued) Shandong Chenming Xinli Power Co., Ltd.（山東晨鳴新力熱電有限公司）, a subsidiary of the Company, was established in 2001 as a Sino-foreign joint venture and engaged in the business of electric power and thermal power generation. Pursuant to Rule No. 73 of “Detailed Rules on the Implementation of the Income Tax Law of The People’s Republic of China for Enterprises with Foreign Investment and Foreign Enterprises”（《中華人民共和國外商投資企業和外國企業所得稅法實施細則》）and rules under the State Council’s Circular on Expanding Application Scope of Income Tax Preferential Treatment on Enterprises with Foreign Investment Engaged in Energy or Traffic Infrastructure Projects（《國務院關於擴大外商投資 企業從事能源交通基礎設施項目稅收優惠規定使用範圍的通知》）(Guo Fa [1999] No. 13), and Guo Shui Han [2002] Document No. 1032 “Written Reply on issues regarding the application of preferential enterprise income tax rate to Shandong Chenming Xinli Power Co., Ltd.” from the State Council（《國家稅務總局關於 山東晨鳴新力熱電有限公司適用企業所得稅率問題的批復》）, Shandong Chenming Xinli Power Co., Ltd. is subject to income tax rate of 15%. Pursuant to Guo Fa [2007] Document No. 39 “Circular on Transitional Preferential Enterprise Income Tax Policy” issued by the State Council（《國務院關於實施企業所得稅過渡 優惠政策的通知》）, the subsidiary was subject to the income tax rate of 18% in 2008. Wuhan Chenming Hanyang Paper Co., Ltd.（武漢晨鳴漢陽紙業股份有限公司）, a subsidiary of the Company, was transformed into an EFI in April 2005. Pursuant to the Income Tax Law of The People’s Republic of China for Enterprises with Foreign Investment and Foreign Enterprises and its implementation rules, and as approved by State Taxation Administration of Economic and Technological Development Zone of Wuhan City, the income tax for 2007 was reduced in half. Pursuant to Guo Fa [2007] Document No. 39 “Circular on Transitional Preferential Enterprise Income Tax Policy” issued by the State Council （《國務院關於實施企業所得稅過渡優惠政策的通知》）, the subsidiary was subject to income tax rate of 9% in 2008. Jiangxi Chenming Paper Co., Ltd.（江西晨鳴紙業有限責任公司）, a subsidiary of the Company, was transformed into an EFI in 2004. It engaged in production with a period of operation of more than 10 years as a foreign-investment enterprise. 2008 was the second year since it started to make profits. Pursuant to Guo Fa [2007] Document No. 39 “Circular on Transitional Preferential Enterprise Income Tax Policy” issued by the State Council（《國務院關於實施企業所得稅過渡優惠政策的通知》）, the subsidiary was exempt from the income tax this year. Except for the above preferential enterprise income tax policies, the Company and its remaining subsidiaries are subject to enterprise income tax rate of 25% in the reporting period. 132 V. Taxation (continued) Other Taxes (continued) Crediting Payment on Purchase of Domestically-Made Equipment as Investments Pursuant to the Circular on Several Issues concerning Crediting Payment on Purchase of Domestically-Made Equipment as Investments against Enterprise Income Tax by Foreign-invested Enterprises and Foreign Enterprises（《關於外商投資企業和外國企業購買國產設備投資抵免企業所得稅有 關問題的通知》）issued by the Ministry of Finance and the State Administration of Taxation (Cai Shui [2000] No. 49) and the Provisional Measures concerning Crediting Payment on Purchase of Technologically Improved Domestically-Made Equipment as Investments against Enterprise Income Tax（《技術改造國產 設備投資抵免企業所得稅暫行辦法》）(Cai Shui Zi [1999] No. 290), the 40 percent of the Group’s payments on domestically-made equipment is creditable against the increased amount in its enterprise income taxes in the year of purchase over that of the year before. The allowable tax credit of an enterprise shall not exceed its newly increased enterprise income tax for the year of purchase over that of the year before. If the amount of newly increased enterprise income tax is not sufficient for tax credit, the remaining part of the investment which exceeds the tax credit shall be refundable against the newly increased tax of the next year over that of the year before the year of purchase. However, the period for continuous tax credit shall not exceed five years. Pursuant to Guo Shui Fa [2008] Document No. 52 “Circular on Policy Question about Postponement to Implement to Set Off Enterprise Income Tax with Investment To Acquire Domestic Equipment by Enterprise” issued by State General Tax Bureau（《關於停止執行企業購買國產設備投資抵免企業所得稅政 策問題的通知》）, postponement to implement to the policy to set off enterprise income tax with investment to acquire domestic equipment by an enterprise has been carried out since 1 January 2008. Income tax credits in respect of investments in domestic-manufactured equipment as approved in prior years will continue to be credited within the extended period. Business tax Business tax is calculated and paid at 5% of the maintenance fee income and interest income, and at 3% of transportation fee income. 133 V. Taxation (continued) Urban maintenance and construction tax and educational surcharges The Company and certain of its subsidiaries, including Wuhan Chenming Hanyang Paper Co., Ltd., Shandong Chenming Xinli Power Co., Ltd., Jiangxi Chenming Paper Co., Ltd., and Jilin Chenming Paper Co., Ltd. are EFIs, and therefore are exempted from urban maintenance and construction tax and education surcharges. As for Shandong Chenming Paper Group Qihe Paperboard Co., Ltd., urban maintenance and construction tax and education surcharges are calculated and paid at 5% and 3%, respectively, on the total amount of VAT payable and business tax payable; while that for other subsidiaries of the Company are calculated and paid at 7% and 3%, respectively, on the total amount of VAT payable and business tax payable. Individual income tax Individual income tax payable by the Group’s employees is withheld and paid by the Group. Property tax and land use tax Property tax is levied based on 70% of the original cost of the building properties of the Group at the tax rate of 1.2%. Land use tax is calculated based on the actual area of land used by the Group and is levied in accordance with the stipulated tax rate. VI. The scope of consolidated financial statement and controlling subsidiaries The subsidiaries of the Company were established in the purpose of investment: The actual investment The The aggregate by the Group aggregate voting rights Enterprise Organization Legal Place of Principal Registered at the end shareholding held by Name type Code representative Incorporation activity capital of the year of the Group the Group (in ten (in ten (%) (%) thousand) thousand) 武漢晨鳴漢陽紙業 Foreign 27189235-4 譚道成 Wuhan City Manufacture and 21,136 20,283 50.93 50.93 股份有限公司 investment sales of paper (Wuhan Chenming enterprise products, the Hanyang Paper materials of Holdings Co., Ltd.) manufacture of paper and machinery 134 VI. The scope of consolidated financial statement and controlling subsidiaries (continued) The actual investment The The aggregate by the Group aggregate voting rights Enterprise Organization Legal Place of Principal Registered at the end shareholding held by Name type Code representative Incorporation activity capital of the year of the Group the Group (in ten (in ten (%) (%) thousand) thousand) 山東晨鳴紙業集團齊河 Limited liability 72074277-4 刑方同 Qihe, Manufacture, 37,620 37,620 100 100 板紙有限責任公司 company Shandong processing and (Shandong sales of paperboard Chenming Paper and packaging Group Qihe paper Paperboard Co., Ltd.) 山東晨鳴熱電股份 Limited liability 70620711-8 孫洪吉 Shouguang, Manufacture and 9,955 15,781 86.71 86.71 有限公司(Shandong company Shandong supply of Chenming Power electricity and Supply Holdings heat Co., Ltd.) 延邊晨鳴紙業有限 Limited liability 72958840-0 桑景高 Longjing, Mucilage glue 8,163.3 4,009 76.73 76.73 責任公司 (Yanbian company Jilin fiber pulp, Chenming Paper pulp and Co., Ltd.) machine-made paper 江西晨鳴紙業有限 Foreign 74426460-7 譚道成 Nanchang city Production and USD172,00 69,755 51 51 責任公司(Jiangxi investment sales of (in ten Chenming Paper enterprise high-grade thousand) Co., Ltd.) paper, paperboard (ex. newsprint) and homemade pulp 壽光市晨鳴天園 Limited liability 73925671-7 李德江 Shouguang, Development, 1,059 720 68 68 林業有限公司 company Shandong nurture of fast (Shouguang growth poplar, Chenming forest, vegetable Tianyuan and fruit Arboriculture Co., Ltd.) 135 VI. The scope of consolidated financial statement and controlling subsidiaries (continued) The actual investment The The aggregate by the Group aggregate voting rights Enterprise Organization Legal Place of Principal Registered at the end shareholding held by Name type Code representative Incorporation activity capital of the year of the Group the Group (in ten (in ten (%) (%) thousand) thousand) 海拉爾晨鳴紙業 Limited liability 70130836-6 高子偉 Hailare City Sales of 1,600 1,200 75 75 有限責任公司 company machine-made (Hailaer Chenming paper and pulp Paper Co., Ltd.) paper 赤壁晨鳴紙業 Limited liability 42203935-3 陳建明 Chibi, Hubei Production and 17,742 3,548 51 51 有限公司 company sales of paper (Chibi Chenming pulp, paper Paper Co., Ltd.) products and the materials of production of paper, and Production, processing, import and export of the machine of manufacture of paper 武漢晨鳴乾能熱電 Limited liability 72579372-2 張利平 Wuhan City Generation and sales 8,824 4,500 51 51 有限責任公司 company of electricity and (Wuhan Chenming heat Qianneng Electric Power Co., Ltd.) 武漢晨建新型牆體材料 Limited liability 74475404-0 呂學峰 Wuhan City Production, 1,000 510 51 51 有限公司 company operation and (Wuhan Chenjian sales of New-style Wall aerated fly ash Materials Co., ltd.) Concrete block 136 VI. The scope of consolidated financial statement and controlling subsidiaries (continued) The actual investment The The aggregate by the Group aggregate voting rights Enterprise Organization Legal Place of Principal Registered at the end shareholding held by Name type Code representative Incorporation activity capital of the year of the Group the Group (in ten (in ten (%) (%) thousand) thousand) 山東晨鳴新力熱電有限 Limited liability 72073121-5 孫洪吉 Shouguang, Generation and USD1,180 7,239 51 51 公司(Shandong company Shandong supply of (in ten Chenming Xinli electricity and thousand) Power Co., Ltd.) heat 壽光市晨鳴水泥有限 Limited liability 73720178-X 孫洪吉 Shouguang, Utilization of 700 700 100 100 公司(Shouguang company Shandong ash in the Chenming Cement production of Co., Ltd.) cement and sales of cement 山東晨鳴板材有限 Limited liability 73816170-8 劉樹森 Shouguang, Production, 3,000 3,000 100 100 責任公司(Shandong company Shandong processing and Chenming Panels sales of the Co., Ltd.) decorative board of the layer of laminated board, wooden products, laminated board, fortified wooden floorboard and impregnated paper 壽光晨鳴地板有限 Limited liability 76366212-5 劉樹森 Shouguang, Production, 50 50 100 100 責任公司 company Shandong processing and (Shouguang sales of fortified Chenming Floor wooden floorboard Board Co., Ltd.) and impregnated paper 137 VI. The scope of consolidated financial statement and controlling subsidiaries (continued) The actual investment The The aggregate by the Group aggregate voting rights Enterprise Organization Legal Place of Principal Registered at the end shareholding held by Name type Code representative Incorporation activity capital of the year of the Group the Group (in ten (in ten (%) (%) thousand) thousand) 齊河晨鳴板材 Limited liability 76001404-2 劉樹森 Qihe, Production, 4,082 4,082 100 100 有限公司(Qihe company Shandong processing and Chenming Panels sales of Co., Ltd.) high-density (medium-density) fiberboard, decorative panel, melamine impregnated paper and composite floor 菏澤晨鳴板材有限 Limited liability 75827615-8 劉樹森 Heze, Production, 3,000 3,000 67 67 責任公司(Heze company Shandong processing and Chenming Panels sales of Co., Ltd.) high-density (medium-density) fiberboard, decorative panel, melamine impregnated paper and composite floor 陽江晨鳴林業發展 Limited liability 78487434-6 尹同遠 Yangjiang, Cultivation and 100 100 100 100 有限公司(Yangjiang company Guangdong development Chenming forest, and Arboriculture technology Co., Ltd.) consultation of forestry 138 VI. The scope of consolidated financial statement and controlling subsidiaries (continued) The actual investment The The aggregate by the Group aggregate voting rights Enterprise Organization Legal Place of Principal Registered at the end shareholding held by Name type Code representative Incorporation activity capital of the year of the Group the Group (in ten (in ten (%) (%) thousand) thousand) 湛江晨鳴林業發展 Limited liability 78298807-5 王在國 Zhanjiang, Cultivation of 100 100 100 100 有限公司(Zhanjiang company Guandong forest, Chenming nutrition and Arboriculture sales of Co., Ltd.) seedling, processing and sales of timber and processing and sales of by-products of timber 吉林晨鳴紙業 Limited liability 78298556-0 王在國 Jilin City, Processing and 150,000 150,135 100 100 有限責任公司 company Jilin province sales of (Jilin Chenming machine-made Paper Co., Ltd.) paper, paperboard, paper product, paper pulp, machinery and equipment of manufacture of paper 鄄城晨鳴板材有限 Limited liability 77872435-X 侯煥才 Juancheng, Production and 1,500 1,500 100 100 公司(Juancheng company Shandong sales of particle Chenming Panels board, decorative Co., Ltd.) particle board and melamine impregnated paper 139 VI. The scope of consolidated financial statement and controlling subsidiaries (continued) The actual investment The The aggregate by the Group aggregate voting rights Enterprise Organization Legal Place of Principal Registered at the end shareholding held by Name type Code representative Incorporation activity capital of the year of the Group the Group (in ten (in ten (%) (%) thousand) thousand) 山東禦景大酒店有限 Limited liability 97529857-8 劉樹森 Shouguang, Restaurant USD1,391 8,050 70 70 公司(Shandong company Shandong and beverage (in ten Grand View Hotel services thousand) Co., Ltd.) 湛江晨鳴漿紙有限公司 Limited liability 77527884-1 馮新泉 Zhanjiang, Improvement of 50,000 50,000 100 100 (Zhanjiang company Guangdong plant fostering, Chenming Paper true planting Pulp Co., Ltd.) and soil, research of forestry, manufacture, production, processing and sales of paper pulp 晨鳴(香港)有限公司 Limited liability3734927300011088 魏克雨 Hong Kong, Export and USD10 78 100 100 (Chenming (HK) company China import trade (in ten Limited) of paper thousand) products and market research 壽光晨鳴現代物流 Limited liability 66015223-7 陳洪國 Shouguang, Transportation 1,000 1,000 100 100 有限公司 company Shandong of good (Shouguang Chenming Modern Logistic Co., Ltd.) 壽光市潤生廢紙回收 Limited liability 77316557-9 陳洪國 Shouguang, Purchase and 100 100 100 100 有限責任公司 company Shandong sales of waste (Shouguang City goods and materials Run Sheng Wasted Paper Recycle Co., Ltd.) 140 VI. The scope of consolidated financial statement and controlling subsidiaries (continued) The actual investment The The aggregate by the Group aggregate voting rights Enterprise Organization Legal Place of Principal Registered at the end shareholding held by Name type Code representative Incorporation activity capital of the year of the Group the Group (in ten (in ten (%) (%) thousand) thousand) 壽光晨鳴美術紙 Limited liability 79867677-0 尹同遠 Shouguang, Production of USD2,000# 11,362 75 75 有限公司 company Shandong art paper, and (in ten (Shouguang sales of the thousand) Chenming Art product which Paper Co., Ltd.) produced by the Company 齊河晨鳴廢舊物資 Limited liability 75825591-2 李峰 Qihe, Purchase and 50 50 98 98 收購有限公司 company Shandong sales of waste (Qihe Chenming and old material Waste Collection Co., Ltd.) 吉林晨鳴廢舊物資回收 Limited liability 77872731-5 張邦吉 Jilin Purchase and 100 100 100 100 有限公司(Jilin company sales of Chenming Waste waste and Collection old material Co., Ltd.) 吉林市晨鳴機械製造 Limited liability 66012410-5 張春林 Jilin Processing of 60 60 100 100 有限公司(Jilin company machinery, Chenming manufacture, Machinery installation Manufacturing and repair Co., Ltd.) of the equipment of machinery 南昌晨鳴林業發展 Limited liability 66204306-9 張國英 Nanchang, Processing and 1,000 1,000 100 100 有限公司 company Jiangxi sales of wood (Nanchang chips Chenming Arboriculture Co., Ltd.) 141 VI. The scope of consolidated financial statement and controlling subsidiaries (continued) The actual investment The The aggregate by the Group aggregate voting rights Enterprise Organization Legal Place of Principal Registered at the end shareholding held by Name type Code representative Incorporation activity capital of the year of the Group the Group (in ten (in ten (%) (%) thousand) thousand) 富裕晨鳴紙業 Limited liability 66389298-6 劉春山 Fuyu County, Production and 20,800 20,800 100 100 有限責任公司 company Qiqihar City sales of (Fuyu Chenming machine-made Paper Co., Ltd.) paper and paperboard 無錫松嶺紙業有限公司 Limited liability 76243145-6 劉春山 Wuxie City Sales, 501 — 100 100 (Wuxie Song Ling company cutting and Paper Co., Ltd.) processing of paper 黃岡晨鳴林業發展 Limited liability 67036898-X 王在國 Huanggang city Nutrition of 1,000 1,000 100 100 有限責任公司 company forest resources, (Huanggang cultivation, Chenming processing Arboriculture and sales Co., Ltd.) of forest 黃岡晨鳴漿紙有限公司 Limited liability 67976586-9 肖翔 Huanggang city, Operation and 2,000 2,000 100 100 (Huanggang company Hubei acquisition of Chenming Paper forest; Co., Ltd.) establishment of paper projects 咸甯晨鳴林業發展 Limited liability 67975036-8 王在國 Xianning, Plantation of forest, 1,000 1,000 100 100 有限責任公司 company Hubei processing and sales (Xianning Chenming Arboriculture development Co., Ltd. 142 VI. The scope of consolidated financial statement and controlling subsidiaries (continued) Note 1: Newly acquired subsidiaries which were consolidated in this year: 咸寧晨鳴林業發展有限責任公司(Xianning Chenming Arboriculture development Co., Ltd. The Company contributed capital to set up Xianning Chenming Arboriculture development Co., Ltd. on 1 September 2008, its registered capital amounts to RMB 10 million, wholly owned by Shandong Chenming Paper Holdings Limited. 黃岡晨鳴漿紙有限公司(Huanggang Chenming Paper Co., Ltd.) The Company contributed capital to set up Huanggang Chenming Paper Co., Ltd. on 26 September 2008, its registered capital amounts to RMB 20 million, wholly owned by Shandong Chenming Paper Holdings Limited. 黃岡晨鳴林業發展有限責任公司(Huanggang Chenming Arboriculture Co., Ltd.) The Company contributed capital to set up Huanggang Chenming Arboriculture Co., Ltd. on 23 January 2008, its registered capital amounts to RMB 10 million, wholly owned by Shandong Chenming Paper Holdings Limited. 無錫松嶺紙業有限公司(Wuxie Song Ling Paper Co., Ltd.) 富裕晨鳴紙業股份有限責任公司(Fuyu Chenming Paper Co., Ltd.), a subsidiary of the Company entered into the share transfer agreement with four natural persons of 無錫松嶺紙業有限公司 in June of 2008, according to which, 100% of equity interest of 無錫松嶺紙業有限公司 was transferred from such four natural persons to Fuyu Chenming Paper Co., Ltd.. Please refer to Note VII.58 for details of the operating results of 無錫松嶺紙業有限公 司 as at the acquisition date. 壽光市潤生廢紙回收有限責任公司(Shouguang City Run Sheng Wasted Paper Recycle Co., Ltd.) 壽光晨鳴現代物流有限公司(Shouguang Chenming Modern Logistic Co., Ltd.), a subsidiary of the Company entered into the share transfer agreement with shareholders of 壽光潤生廢紙回收有限公司 on 31 October 2008, according to which, 100% of equity interest of 壽光潤生廢紙回收有限公司 was transferred at the consideration of RMB 1 million. Please refer to Note VII.58 for details of the operating results of 壽光市潤生廢紙回收有限公司 as at the acquisition date. Note 2: Subsidiaries disposed of during the year: 襄樊晨嗚絧版紙有限責任公司(Xiangfan Chenming Copperplate Pater Co., Ltd) Xiangfan Chenming Copperplate Pater Co., Ltd completed cancellation of business registration on 11 April 2008. The specifics of its cancellation and its operating results from the beginning of the year to the date of cancellation are set out in Note VII.59. 143 VII. Notes to the financial statements 1. Cash & cash equivalents The Group Closing balance Opening balance Foreign Foreign current Exchange current Exchange The Group amount Rate RMB amount Rate RMB Cash RMB — — 1,341,632.42 — — 2,575,501.44 USD — — — 15,464.00 7.3046 112,958.33 Cash in Bank RMB — — 2,530,753,538.10 — — 480,381,438.50 HKD 595,685.04 0.8819 525,334.64 25,388.73 0.9347 23,730.85 USD 22,155,641.87 6.8346 151,424,949.93 17,855,321.74 7.3046 130,425,983.18 EURO 365,845.82 9.6590 3,533,704.76 30,586.86 10.0319 306,844.32 Other bank balances and cash RMB — — 162,711,256.24 — — 126,795,387.29 USD 457,629.12 6.8346 3,127,711.98 — — — Total 2,853,418,128.07 740,621,843.91 As at 31 December 2008, balance of other bank balances and cash contained bank acceptance deposit of RMB86,551,105.84, letter of credit deposit of RMB62,061,946.79 and covenants of deposits of RMB 17,225,915.59. 144 VII. Notes to the financial statements (continued) 1. Cash & cash equivalents (continued) The Company Closing balance Opening balance Foreign Foreign current Exchange current Exchange The Company amount Rate RMB amount Rate RMB Cash RMB — — 30,527.86 — — 11,938.36 USD — — — 15,464.00 7.3046 112,958.33 Cash in Bank RMB — — 2,060,669,780.07 — — 207,482,933.56 HKD 595,685.04 0.8819 525,334.64 — — — USD 2,747,651.12 6.8346 18,779,096.34 3,881,077.82 7.3046 28,349,721.04 EURO 92.71 9.6590 895.49 — — Other bank balances and cash RMB — — 62,434,105.11 — — 112,991,173.39 Total 2,142,439,739.51 348,948,724.68 As at 31 December 2008, the balance of other bank balances and cash contained bank acceptance deposit of RMB24,919,105.11 and letter of credit deposit of RMB37,515,000.00. 145 VII. Notes to the financial statements (continued) 2. Bills receivable The Group Closing balance Opening balance RMB RMB Bank acceptance 974,009,788.24 1,676,684,054.95 As at 31 December 2008, the following portion of bills receivable has used for pledged loads: Name of issuer Issue date Maturity date Amount RMB 江陰市西城鋼鐵有限公司 2008.07.30 2009.01.30 200,000.00 重慶賽迪重工設備有限公司 2008.09.25 2009.03.25 500,000.00 哈爾濱博鑫盛華紙業有限公司 2008.10.31 2009.04.30 570,000.00 天津國美電器有限公司 2008.10.23 2009.04.23 508,705.32 汕頭市建基發展有限公司 2008.10.30 2009.04.30 900,000.00 汕頭市永江貿易有限公司 2008.10.30 2009.04.30 500,000.00 Total 3,178,705.32 As at 31 December 2008, the bank acceptance of the Group (including bank acceptance discounted with recourse) amounts RMB401,110,381.77 (31 December 2007: RMB428,227,235.41). The Company Closing balance Opening balance RMB RMB Bank acceptance 465,681,067.32 998,809,409.00 As at 31 December 2008, the bank acceptance of the Company (including bank acceptance discounted with recourse) amounts RMB217,370,008.75 (31 December 2007: RMB 405,483,351.17) As at 31 December 2008, the Group and the Company had no outstanding amount within the notes receivable due from shareholders holding 5% or more (including 5%) in the shares. 146 VII. Notes to the financial statements (continued) 3. Accounts receivable The Group Aging analysis of accounts receivable is as follows: Closing balance Opening balance Bad debts Bad debts Amount Ratio provision Book value Amount Ratio provision Book value RMB (%) RMB RMB RMB (%) RMB RMB Within 1 year 1,829,658,612.65 95.31 (118,450,388.95 ) 1,711,208,223.70 1,787,271,407.44 95.10 (172,190,525.37 ) 1,615,080,882.07 1 to 2 years 37,381,104.32 1.95 (10,075,170.73 ) 27,305,933.59 45,856,276.10 2.44 (5,554,796.50 ) 40,301,479.60 2 to 3 years 19,485,384.07 1.02 (5,590,192.19 ) 13,895,191.88 6,830,375.88 0.36 (2,192,040.71 ) 4,638,335.17 3 to 4 years 6,219,182.05 0.32 (6,219,182.05 ) — 10,454,274.19 0.56 (10,454,274.19 ) — Over 4 years 26,893,037.29 1.40 (26,893,037.29 ) — 28,914,026.07 1.54 (28,914,026.07 ) — Total 1,919,637,320.38 100.00 (167,227,971.21 ) 1,752,409,349.17 1,879,326,359.68 100.00 (219,305,662.84 ) 1,660,020,696.84 The breakdown of accounts receivable according to customer's classifications is as follows: Closing balance Opening balance Bad debts Bad debts Amount Ratio provision Book value Amount Ratio provision Book value RMB (%) RMB RMB RMB (%) RMB RMB Single item with significant amount of money 1,624,743,533.96 84.64 (57,263,087.60 ) 1,567,480,446.36 1,582,443,231.69 84.20 (172,157,112.36 ) 1,410,286,119.33 Single item without significant amount of money but considered to be greater risks after arrived at by credit risk characteristics 35,390,449.48 1.84 (30,409,266.30 ) 4,981,183.18 38,553,985.25 2.05 (34,387,291.31 ) 4,166,693.94 Other items without significant amount of money 259,503,336.94 13.52 (79,555,617.31 ) 179,947,719.63 258,329,142.74 13.75 (12,761,259.17 ) 245,567,883.57 Total 1,919,637,320.38 100.00 (167,227,971.21 ) 1,752,409,349.17 1,879,326,359.68 100.00 (219,305,662.84 ) 1,660,020,696.84 The movements of the provision of the bad debts of accounts receivable see notes VII.18. 147 VII. Notes to the financial statements (continued) 3. Accounts receivable (continued) The Group (continued) As at 31 December 2008, information on single items recognized to be impaired of accounts receivable is as follows: 1. Payment for goods of RMB119,457,668.56 receivable by the Group from 佛山市順德星辰紙業有 限公司(Shunde Xing shen paape Co., Ltd.) on 31 December 2007, which was under the threat of bankruptcy due to poor management; therefore, RMB88,517,668.56 were provided as bad debts in 2007 after considering its collectability. During this year, the state of affairs in 順德星辰紙業有 限公司 (Shunde Xing shen paape Co., Ltd.) improved and it had repaid RMB39,718,405.84, the Company reversed corresponding amount originally provided as bad debts amounting to RMB39,718,405.84. 2. Save for designated customers who were given credit periods of over 90 days, other customers of the Group were generally given credit periods within 90 days. 3. According to past experience, receivables aged over three years are generally non-recoverable, for such portion of receivables, the Group and the Company had provided in full for bad debts. Apart from accounts receivable recognized as losses of bad debts, good subsequent repayments and other credit qualities were observed on the remaining receivables, therefore are deemed by the directors of the Company to be recoverable. As such, the Group had not provided for impairment of such overdue accounts receivable. Top five accounts receivable is as follows: Total balance of Top five balances of accounts receivable accounts receivable RMB % 214,662,074.18 11.18 At the end of the reporting period, top five balances of accounts receivable of the Group were related to sales of paper products. 148 VII. Notes to the financial statements (continued) 3. Accounts receivable (continued) The Group (continued) Ageing analysis of accounts receivable that were overdue but not provided for impairment: At the end At the beginning of the year of the year RMB RMB 0-90 days 224,355,326.78 63,604,915.22 91-180 days 11,626,631.11 15,387,866.75 181-365 days 104,986,895.58 54,812,296.84 1-2 years 27,305,933.59 40,301,479.60 2-3 years 13,895,191.88 4,638,335.17 Total 382,169,978.94 178,744,893.58 The Company Aging analysis of accounts receivable is as follows: Closing balance Opening balance Bad debts Bad debts Amount Ratio Provision Book value Amount Ratio Provision Book value RMB (%) RMB RMB RMB (%) RMB RMB Within 1 year 2,028,288,765.78 97.90 (113,715,919.27 ) 1,914,572,846.51 1,598,791,086.58 97.86 (153,712,615.62 ) 1,445,078,470.96 1 to 2 years 28,865,325.57 1.39 (9,455,622.85 ) 19,409,702.72 22,545,280.51 1.38 (2,254,528.05 ) 20,290,752.46 2 to 3 years 4,122,204.54 0.20 (824,440.91 ) 3,297,763.63 863,657.72 0.05 (123,292.54 ) 740,365.18 3 to 4 years 329,884.43 0.02 (329,884.43 ) — 3,877,308.99 0.24 (3,877,308.99 ) — Over 4 years 10,275,982.13 0.49 (10,275,982.13 ) — 7,603,430.23 0.47 (7,603,430.23 ) — Total 2,071,882,162.45 100.00 (134,601,849.59 ) 1,937,280,312.86 1,633,680,764.03 100.00 (167,571,175.43 ) 1,466,109,588.60 149 VII. Notes to the financial statements (continued) 3. Accounts receivable (continued) The Company (continued) The breakdown of accounts receivable according to customer's classifications is as follows: Closing balance Opening balance Bad debts Bad debts Amount Ratio provision Book value Amount Ratio provision Book value RMB (%) RMB RMB RMB (%) RMB RMB Single item with significant amount of money 1,851,137,454.18 89.34 (50,850,881.28 ) 1,800,286,572.90 1,415,437,242.18 86.65 (150,200,716.99 ) 1,265,236,525.19 Single item without significant amount of money but considered to be greater risks after arrived at by credit risk characteristics 8,260,094.93 0.40 (6,855,682.91 ) 1,404,412.02 6,611,676.72 0.40 (6,180,656.34 ) 431,020.38 Other items without significant amount of money 212,484,613.34 10.26 (76,895,285.40 ) 135,589,327.94 211,631,845.13 12.95 (11,189,802.10 ) 200,442,043.03 Total 2,071,882,162.45 100.00 (134,601,849.59 ) 1,937,280,312.86 1,633,680,764.03 100.00 (167,571,175.43 ) 1,466,109,588.60 Top five accounts receivable is as follows: Total balance of Top five balances of accounts receivable accounts receivable RMB % 550,097,638.72 26.55 Top five balances of accounts receivable of the Company are related to sales of paper products and sales of materials by the Company at the end of reported year. No outstanding amount within the accounts receivable due from shareholders holding 5% or more (including 5%) in the shares of the accounts receivable of the Company and the Group. 150 VII. Notes to the financial statements (continued) 4. Advance to suppliers The Group Aging Analysis of the advance to suppliers is as follows: Closing balance Opening balance Amounts Ratio Amounts Ratio RMB (%) RMB (%) Within 1 year 422,828,184.88 91.42 480,857,224.46 83.77 1 to 2 years 39,698,153.99 8.58 93,157,576.97 16.23 Total 462,526,338.87 100.00 574,014,801.43 100.00 The breakdown of advance to suppliers according to customer's classifications is as follows: Closing balance Opening balance Amounts Ratio Amounts Ratio RMB (%) RMB (%) Single item with significant amount of money 354,789,557.91 76.71 472,934,987.83 82.39 Other items without significant amount of money 107,736,780.96 23.29 101,079,813.60 17.61 Total 462,526,338.87 100.00 574,014,801.43 100.00 The Company Aging analysis of the advance to suppliers is as follows: Closing balance Opening balance Amounts Ratio Amounts Ratio RMB (%) RMB (%) Within 1 year 414,158,895.27 94.39 265,774,588.11 94.96 1 to 2 years 24,600,467.21 5.61 14,115,794.77 5.04 Total 438,759,362.48 100.00 279,890,382.88 100.00 151 VII. Notes to the financial statements (continued) 4. Advance to suppliers (continued) The Company (continued) The breakdown of advance to suppliers according to customer's classifications is as follows: Closing balance Opening balance Amounts Percentage Amounts Percentage RMB (%) RMB (%) Single item with significant amount of money 408,602,400.53 93.13 247,160,724.92 88.31 Other items without significant amount of money 30,156,961.95 6.87 32,729,657.96 11.69 Total 438,759,362.48 100.00 279,890,382.08 100.00 No outstanding amount within the advance to suppliers due from shareholders holding 5% or more (including 5%) in the shares of the Company and the Group at the end of the year. 5. Other receivables The Group Aging analysis of other receivables is as follows: Closing balance Opening balance Bad debts Bad debts Amounts Ratio provision Book value Amounts Percentage provision Book value RMB (%) RMB RMB RMB (%) RMB RMB Within 1 year 93,786,094.02 50.04 (3,872,487.84 ) 89,913,606.18 159,129,344.63 62.26 (2,771,058.73 ) 156,358,285.90 1 to 2 years 44,225,959.55 23.60 (3,729,817.78 ) 40,496,141.77 24,068,633.93 9.42 (3,573,370.18 ) 20,495,263.75 2 to 3 years 5,891,292.30 3.14 (411,427.32 ) 5,479,864.98 35,160,118.15 13.76 (15,850,995.69 ) 19,309,122.46 3 to 4 years 16,139,721.78 8.61 (16,139,721.78 ) — 8,383,711.19 3.28 (8,383,711.19 ) — Over 4 years 27,392,512.33 14.61 (27,392,512.33 ) — 28,825,828.19 11.28 (28,825,828.19 ) — Total 187,435,579.98 100.00 (51,545,967.05 ) 135,889,612.93 255,567,636.09 100.00 (59,404,963.98 ) 196,162,672.11 152 VII. Notes to the financial statements (continued) 5. Other receivables (continued) The Group (continued) The breakdown of other receivables according to customer's classifications is as follows: Closing balance Opening balance Bad debts Bad debts Amounts Ratio provision Book value Amounts Ratio provision Book value RMB (%) RMB RMB RMB (%) RMB RMB Single item with significant amount of money 103,576,084.49 55.26 (26,076,824.29 ) 77,499,260.20 166,845,002,20 65.29 (25,576,316.60 ) 141,268,685.60 Single item without significant amount of money but considered to be greater risks after arrived at by credit risk characteristics 32,720,842.25 17.46 (18,238,351.44 ) 14,482,490.81 52,450,199.27 20.52 (26,450,569.75 ) 25,999,629.52 Other items without significant amount of money 51,138,653.24 27.28 (7,230,791.32 ) 43,907,861.92 36,272,434.62 14.19 (7,378,077.63 ) 28,894,356.99 Total 187,435,579.98 100.00 (51,545,967.05 ) 135,889,612.93 255,567,636.09 100.00 (59,404,963.98 ) 196,162,672.11 The movements of the provision of the bad debts of other receivables see notes VII.18. As at 31 December 2008, there were overdue debt obligations from debtors amounting to RMB13,396,091.07 which had evidence showing debtors’ inability to repay and were determined to be impaired on individual basis. 153 VII. Notes to the financial statements (continued) 5. Other receivables (continued) The Group (continued) Top five other receivables is as follows: Top five balances of other receivables Total balance of other receivables RMB % 64,594,338.97 34.46 At the end of the year, top five other receivables to the Group include RMB 24,077,914.40 of prepaid tax to customs, RMB13,760,216.44 of electricity fee due from its associated company 阿爾諾維根斯 晨鳴特種紙有限公司(Arjo Wiggins Chenming Specialty Paper Co., Ltd.) and advance receivables. The Company Aging analysis of other receivables is as follows: Closing balance Opening balance Bad debts Bad debts Amounts Ratio provision Book value Amounts Ratio provision Book value RMB (%) RMB RMB RMB (%) RMB RMB Within 1 year 903,553,335.31 94.58 (3,538,709.30 ) 900,014,626.01 722,772,013.66 91.18 (1,960,790.29 ) 720,811,223.37 1 to 2 years 37,815,787.23 3.96 (3,577,895.16 ) 34,237,892.07 47,844,292.42 6.04 (1,299,726.66 ) 46,544,565.76 2 to 3 years 2,474,881.24 0.26 (258,884.60 ) 2,215,996.64 11,022,711.25 1.39 (1,857,351.93 ) 9,165,359.32 3 to 4 years 2,591,793.46 0.27 (2,591,793.46 ) — 2,848,382.90 0.36 (2,848,382.90 ) — Over 4 years 8,933,317.48 0.93 (8,933,317.48 ) — 8,174,993.62 1.03 (8,174,993.62 ) — Total 955,369,114.72 100.00 (18,900,600.00 ) 936,468,514.72 792,662,393.85 100.00 (16,141,245.40 ) 776,521,148.45 154 VII. Notes to the financial statements (continued) 5. Other receivables (continued) The Company(continued) The breakdown of other receivables according to customer's classifications is as follows: Closing balance Opening balance Bad debts Bad debts Amounts Ratio provision Book value Amounts Ratio provision Book value RMB (%) RMB RMB RMB (%) RMB RMB Single item with significant amount of money 903,048,155.67 94.52 (6,401,477.54 ) 896,646,678.13 748,545,105.73 94.43 (7,099,864.57 ) 741,445,241.16 Single item without significant amount of money but considered to be greater risks after arrived at by credit risk characteristics 12,054,200.78 1.26 (5,680,014.20 ) 6,374,186.58 11,805,959.28 1.49 (6,835,422.68 ) 4,970,536.60 Other items without significant amount of money 40,266,758.27 4.22 (6,819,108.26 ) 33,447,650.01 32,311,328.84 4.08 (2,205,958.15 ) 30,105,370.69 Total 955,369,114.72 100.00 (18,900,600.00 ) 936,468,514.72 792,662,393.85 100.00 (16,141,245.40 ) 776,521,148.45 Top five other receivables is as follows: Top five balances of other receivables Total balance of other receivables RMB % 780,425,815.83 81.69 All of the top five other receivables to the Company represented short-term loans due from subsidiaries of the Company at the end of the year. No outstanding amount within the other receivables due from shareholders holding 5% or more (including 5%) in the shares of the Company and the Group at the end of the year. 155 VII. Notes to the financial statements (continued) 6. Inventories and provision of inventories The Group Closing balance Opening balance Provision of Provision of Amounts impairment Book value Amounts impairment Book value RMB RMB RMB RMB RMB RMB Raw materials 1,617,795,107.45 (38,053,661.45 ) 1,579,741,446.00 1,113,790,466.49 — 1,113,790,466.49 Goods-in stock 1,837,434,737.58 (92,580,212.31 ) 1,744,854,525.27 564,307,993.16 (6,114,277.85 ) 558,193,715.31 Work-in-progress 77,369,465.81 (4,172,506.70 ) 73,196,959.11 72,508,430.56 — 72,508,430.56 Total 3,532,599,310.84 (134,806,380.46 ) 3,397,792,930.38 1,750,606,890.21 (6,114,277.85 ) 1,744,492,612.36 Provision of inventories is as follows: Opening Addition for Reversal for Closing balance the year the year balance RMB RMB RMB RMB During the year Raw materials — 38,053,661.45 — 38,053,661.45 Work-in-progress 6,114,277.85 93,523,466.33 (7,057,531.87) 92,580,212.31 Goods-in stock — 4,172,506.70 — 4,172,506.70 Total 6,114,277.85 135,749,634.48 (7,057,531.87) 134,806,380.46 In the prior year Goods-in stock 5,232,293.42 881,984.43 — 6,114,277.85 There was an increase in provision for impaired goods-in stock during the year, because壽光晨鳴現代 物流有限公司(Shouguang Chenming Modern Logistic Co., Ltd.), a subsidiary of the Company, acquired潤生廢紙回收有限責任公司(Run Sheng Wasted Paper Recycle Co., Ltd.), resulting in a rise of RMB943,254.02 in provision for impaired goods-in stock. 156 VII. Notes to the financial statements (continued) 6. Inventories and provision of inventories (continued) The Company Closing balance Opening balance Provision of Provision of Amounts impairment Book value Amounts impairment Book value RMB RMB RMB RMB RMB RMB Raw materials 598,215,785.94 — 598,215,785.94 417,274,191.57 — 417,274,191.57 Goods-in stock 1,124,422,916.85 (46,500,597.16 ) 1,077,922,319.69 301,748,451.47 (6,114,277.85 ) 295,634,173.62 Work-in-progress 6,518,968.88 — 6,518,968.88 8,446,384.35 — 8,446,384.35 Total 1,729,157,671.67 (46,500,597.16 ) 1,682,657,074.51 727,469,027.39 (6,114,277.85 ) 721,354,749.54 Provision of inventories is as follows: Opening Addition for Reversal Closing balance the year for the year balance RMB RMB RMB RMB During the year 6,114,277.85 46,500,597.16 (6,114,277.85) 46,500,597.16 In the prior year 5,232,293.42 881,984.43 — 6,114,277.85 As at 31 December 2008, the Company and the Group have not secured any inventories for any debts. 7. Entrusted loan The Company Closing balance Opening balance RMB RMB Entrusted loan made to subsidiaries － Due within in a year 982,000,000.00 1,864,000,000.00 － Due in a year later 965,000,000.00 625,000,000.00 Net value of entrusted loan 1,947,000,000.00 2,489,000,000.00 The Company entrusted banks to provide funds for its subsidiaries, the above terms of entrusted loan ranges from 1 to 10 years, and the interest rate ranges from 5.022% to 7.830%. 157 VII. Notes to the financial statements (continued) 8. Other current assets The Group At the end At the beginning of the year of the year RMB RMB Non-credited input tax amount in value added tax 124,905,083.61 — Prepaid enterprise income tax 27,087,962.34 — Total 151,993,045.95 — The Company At the end At the beginning of the year of the year RMB RMB Non-credited input tax amount in value added tax 39,110,582.59 — Prepaid enterprise income tax 13,636,622.39 — Total 52,747,204.98 — 158 VII. Notes to the financial statements (continued) 9. Long-term equity investment The Group (1) The details of long-term equity investments as follow: Equity Initial opening Additions adjustments Cash bonus Other Name of investee companies investment balance for the year for the year for the year deductions Closing balance RMB RMB RMB RMB RMB RMB RMB Equity method 阿爾諾維根斯晨鳴特種紙有限 公司(Arjo Wiggins Chenming Specialty Paper Co., Ltd.) 80,100,000.00 51,022,755.23 20,100,000.00 (22,643,889.73 ) — — 48,478,865.50 壽光麗奔制紙有限公司 (Shouguang Liben Paper Making Co., Ltd.) 19,550,000.00 18,867,181.20 — (523,739.49 ) — — 18,343,441.71 青州市晨鳴變性澱粉有限 責任公司(Qingzhou Chenming Denaturation Amylum Co., Ltd.) 540,000.00 900,000.00 — — — — 900,000.00 100,190,000.00 70,789,936.43 20,100,000.00 (23,167,629.22 ) — — 67,722,307.21 Cost method 濰坊創業投資有限公司 1,000,000.00 1,000,000.00 — — — — 1,000,000.00 泰山保險經紀有限公司 2,000,000.00 2,000,000.00 — — — — 2,000,000.00 山東紙業集團總公司 200,000.00 200,000.00 — — — — 200,000.00 浙江省廣育報業印務有限公司 2,000,000.00 2,000,000.00 — — — — 2,000,000.00 濟南商友商務有限公司 350,000.00 350,000.00 — — — — 350,000.00 上海林嘉紙電子商務有限公司 1,400,000.00 1,400,000.00 — — — — 1,400,000.00 壽光彌河水務有限公司 20,000,000.00 20,000,000.00 — — — — 20,000,000.00 26,950,000.00 26,950,000.00 — — — — 26,950,000.00 Total 127,140,000.00 97,739,936.43 20,100,000.00 (23,167,629.22 ) — — 94,672,307.21 Less : provision for impairment (1,450,000.00 ) (1,998,538.07 ) Net amount of long-tem equity investment 96,289,936.43 92,673,769.14 159 VII. Notes to the financial statements (continued) 9. Long-term equity investment (continued) The Group (continued) The movement of provision of impairment of long-term equity investment as follows: Retirements and Opening Additions disposals Name of investee companies balance for the period for the period Closing balance RMB RMB RMB RMB 青州市晨鳴變性澱粉有限 責任公司(Qingzhou Chenming Denaturation Amylum Co., Ltd.) 900,000.00 — — 900,000.00 山東紙業集團總公司 200,000.00 — — 200,000.00 濟南商友商務有限責任公司 350,000.00 — — 350,000.00 濰坊創業投資有限公司 — 80,385.84 — 80,385.84 上海林嘉紙電子商務有限公司 — 468,152.23 — 468,152.23 Total 1,450,000.00 548,538.07 — 1,998,538.07 (2) List of the associates and their financial information Total operation Total net Percentage of Percentage Total asset of Total liability of income of profit of the registered of the voting the investee the investee the investee the investee Registration Nature of Registered captial of the right of units in the end units in the end units in the end units in the end Name of investee units place business capital investee units investee units of the year of the year of the year of the year RMB % % RMB RMB RMB RMB 阿爾諾維根斯晨鳴特種紙 Shandong Manufacture 267,368,330.00 30 30 516,138,520.15 354,542,301.82 150,408,389.01 (75,479,632.43 ) 有限公司(Arjo Wiggins of paper Chenming Specialty Paper Co., Ltd.) 壽光麗奔制紙有限公司 Shandong Manufacture 74,070,000.00 26.4 26.4 78,281,498.26 8,798,764.52 92,921,716.83 (1,983,861.71 ) (Shouguang Liben Paper of paper Making Co., Ltd.) 160 VII. Notes to the financial statements (continued) 9. Long-term equity investment (continued) The Company (1) The details of long-term equity investments as follow: Investment Investment Equity Name of investee Initial addition deduction adjustment companies investment Opening balance for the year for the year for the year Closing balance RMB RMB RMB RMB RMB RMB Investment made to subsidiaries 武漢晨鳴漢陽紙業股份 有限公司(Wuhan Chenming Hanyang Paper Holdings Co., Ltd.) 202,824,716.34 202,824,716.34 — — — 202,824,716.34 山東晨鳴紙業集團 齊河板紙有限公司 (Shandong Chenming Paper Group Qihe Paperboard Co., Ltd.) 376,200,000.00 376,200,000.00 — — — 376,200,000.00 山東晨鳴熱電股份 有限公司(Shandong Chenming Power Supply Holdings Co., Ltd.) (note 1) 157,810,117.43 71,434,605.00 86,375,512.43 — — 157,810,117.43 赤壁晨鳴紙業有限公司 (Chibi Chenming Paper Co., Ltd.) 26,270,460.90 26,270,460.90 — — — 26,270,460.90 襄樊晨鳴銅版紙有限 公司(Xiangfan Chenming Copperplate Pater Co., ltd.) (note 7) 3,552,717.43 3,552,717.43 — (3,552,717.43 ) — — 延邊晨鳴紙業有限 責任公司(Yanbian Chenming Paper Co., Ltd.) 40,083,733.01 40,083,733.01 — — — 40,083,733.01 161 VII. Notes to the financial statements (continued) 9. Long-term equity investment (continued) The Company (continued) (1) The details of long-term equity investments as follow: (continued) Investment Investment Equity Name of investee Initial addition deduction adjustment companies investment Opening balance for the year for the year for the year Closing balance RMB RMB RMB RMB RMB RMB 海拉爾晨鳴紙業有限 責任公司(Hailaer Chenming Paper Co., Ltd.) 12,000,000.00 12,000,000.00 — — — 12,000,000.00 江西晨鳴紙業有限 責任公司(Jiangxi Chenming Paper Co., Ltd.) 697,548,406.40 697,548,406.40 — — — 697,548,406.40 壽光市晨鳴天園 林業有限公司 (Shouguang Chenming Tianyuan Arboriculture Co., Ltd.) 7,199,000.00 7,199,000.00 — — — 7,199,000.00 吉林晨鳴紙業有限 公司(Jilin Chenming Paper Co., Ltd.) (note 2) 1,501,350,000.00 401,350,000.00 1,100,000,000.00 — — 1,501,350,000.00 鄄城晨鳴板材有限 公司(Juancheng Chenming Panels Co., Ltd.) 15,000,000.00 15,000,000.00 — — — 15,000,000.00 山東禦景大酒店 有限公司 (Shandong Grand View Hotel Co., Ltd.) 80,500,000.00 80,500,000.00 — — — 80,500,000.00 162 VII. Notes to the financial statements (continued) 9. Long-term equity investment (continued) The Company (continued) (1) The details of long-term equity investments as follow: (continued) Investment Investment Equity Name of investee Initial addition deduction adjustment companies investment Opening balance for the year for the year for the year Closing balance RMB RMB RMB RMB RMB RMB 湛江晨鳴漿紙有限公司 (Zhanjiang Chenming Paper Pulp Co., Ltd.) (note 3) 500,000,000.00 20,000,000.00 480,000,000.00 — — 500,000,000.00 晨鳴（香港）有限公司 (Chenming (HK) Limited) 783,310.00 783,310.00 — — — 783,310.00 壽光晨鳴現代物流 有限公司(Shouguang Chenming Modern Logistic Co., Ltd.) 10,000,000.00 10,000,000.00 — — — 10,000,000.00 壽光晨鳴美術紙有限公司 (Shouguang Chenming Art Paper Co., Ltd.) 113,616,063.80 113,616,063.80 — — — 113,616,063.80 富裕晨鳴紙業股份有限 責任公司(Fuyu Chenming Paper Co., Ltd.) (note 4) 208,000,000.00 20,000,000.00 188,000,000.00 — — 208,000,000.00 咸寧晨鳴林業發展 有限責任公司 (Xianning Chenming Arboriculture development Co., Ltd.) (note 5) 10,000,000.00 — 10,000,000.00 — — 10,000,000.00 黃岡晨鳴漿紙有限公司 (Huanggang Chenming Paper Co., Ltd.) (note 5) 20,000,000.00 — 20,000,000.00 — — 20,000,000.00 黃岡晨鳴林業發展有限 責任公司(Huanggang Chenming Arboriculture Co., Ltd.) (note 5) 10,000,000.00 — 10,000,000.00 — — 10,000,000.00 Sub-total 3,992,738,525.31 2,098,363,012.88 1,894,375,512.43 (3,552,717.43 ) — 3,989,185,807.88 163 VII. Notes to the financial statements (continued) 9. Long-term equity investment (continued) The Company (continued) (1) The details of long-term equity investments as follow: (continued) Investment Investment Equity Name of investee Initial addition deduction adjustment companies investment Opening balance for the year for the year for the year Closing balance RMB RMB RMB RMB RMB RMB Investment made to associates 壽光麗奔制紙有限公司 (Shouguang Liben Paper Making Co., Ltd.) 19,550,000.00 18,867,181.20 — — (523,739.49 ) 18,343,441.71 阿爾諾維根斯晨鳴特種紙 有限公司(Arjo Wiggins Chenming Specialty Paper Co., Ltd.) (note 6) 80,100,000.00 51,022,755.23 20,100,000.00 — (22,643,889.73 ) 48,478,865.50 青州市晨鳴變性澱粉有限 責任公司(Qingzhou Chenming Denaturation Amylum Co., Ltd.) 540,000.00 900,000.00 — — — 900,000.00 Sub-total 100,190,000.00 70,789,936.43 20,100,000.00 — (23,167,629.22 ) 67,722,307.21 Other investments 濰坊創業投資有限公司 1,000,000.00 1,000,000.00 — — — 1,000,000.00 泰山保險經紀有限公司 2,000,000.00 2,000,000.00 — — — 2,000,000.00 山東紙業集團總公司 200,000.00 200,000.00 — — — 200,000.00 浙江省廣育報業印務有限公司 2,000,000.00 2,000,000.00 — — — 2,000,000.00 濟南商友商務有限責任公司 350,000.00 350,000.00 — — — 350,000.00 壽光彌河水務有限公司 20,000,000.00 20,000,000.00 — — — 20,000,000.00 上海林嘉紙電子商務有限公司 1,400,000.00 1,400,000.00 — — — 1,400,000.00 Sub-total 26,950,000.00 26,950,000.00 — — — 26,950,000.00 Impairment of provision of long-term investment — (1,450,000.00) (1,998,538.07 ) Total 4,119,878,525.31 2,194,652,949.31 4,081,859,577.02 164 VII. Notes to the financial statements (continued) 9. Long-term equity investment (continued) The Company (continued) (1) The details of long-term equity investments as follow: (continued) Note 1: According to the share transfer agreement entered into between the Company and the State Assets Administration Bureau of Shouguang city and the People’s Municipal Government of Shouguang city, the Company purchased 35.71% of equity interest in 山東晨鳴熱電股份有限公司 held by the State Assets Administration Bureau of Shouguang city at the consideration of RMB 86,375,512.43 in January 2008. Note 2: The Company contributed additional capital of RMB 1,100,000,000.00 to 吉林晨鳴紙業有限責任公 司, a wholly-owned subsidiary of the Company, on 6 August 2008. Note 3: The Company contributed additional capital of RMB480,000,000.00 to 湛江晨鳴漿紙有限公司, a wholly-owned subsidiary of the Company, on 15 October 2008. Note 4: The Company contributed additional capital of RMB188,000,000.00 to 富裕晨鳴紙業有限責任公司, a wholly-owned subsidiary of the Company, on 18 July 2008. Note 5: During 2008, the Company contributed capital to establish 黃岡晨鳴林業發展有限責任公司, 黃岡 晨鳴漿紙有限公司and咸寧晨鳴林業發展有限責任公司, details of which set out on annotation1of note 6 Note 6: According to resolutions passed by the tenth meeting of the fifth session of the board of directors on 28 August 2008, the Company and 阿爾諾維根斯香港有限公司contributed capital to their joint venture, 阿爾諾維根斯晨鳴特種紙有限公司, in the proportion of their shareholding. The Company contributed RMB20,100,000.00. After contribution, the shareholding of these two parties remains unchanged. Note 7: The Company and its subsidiary, 武漢晨鳴漢陽紙業股份有限公司, transferred their 51% equity interest in total of 襄樊晨鳴銅版紙有限責任公司 on 11 April 2008 (refer to annotation 2 of note 6). (2) There is no restriction on the ability of the investee in which the long-term equity investments are held by the Group and the Company as at 31 December 2008 to transfer capital to the Group. 165 VII. Notes to the financial statements (continued) 10. Investment Properties The Group and the Company Building RMB Original value Opening balance 38,291,395.70 Increased for the period — Closing balance 38,291,395.70 Accumulated depreciation Opening balance 8,388,415.51 Increased for the period 1,738,256.04 Closing balance 10,126,671.55 Net amount Opening balance 29,902,980.19 Closing balance 28,164,724.15 Properties held for investment represent part of the buildings of 北京數碼大廈(for lease out) as held by the Company. 166 VII. Notes to the financial statements (continued) 11. Fixed Assets The Group Machineny Electric appliance Buildings & Equipment Vehicles and others Total RMB RMB RMB RMB RMB Cost Opening balance 2,834,298,999.94 14,113,557,143.84 121,248,746.36 361,881,284.67 17,430,986,174.81 Increase due to acquisition of subsidiaries — — — 9,500.00 9,500.00 Decrease due to cancellation of subsidiaries (10,928,161.61 ) (18,526,210.32 ) (1,088,760.00 ) (1,067,421.01 ) (31,610,552.94 ) Additions 80,040,585.72 62,824,220.73 18,291,791.34 23,822,097.70 184,978,695.49 Transfers from construction in progress 410,303,663.81 1,388,699,791.71 7,771,938.66 132,346,169.39 1,939,121,563.57 Deductions (11,035,531.23 ) (13,132,471.04 ) (9,939,019.18 ) (1,213,621.06 ) (35,320,642.51 ) Closing balance 3,302,679,556.63 15,533,422,474.92 136,284,697.18 515,778,009.69 19,488,164,738.42 Accumulated depreciation Opening balance 458,971,467.09 3,461,553,778.37 52,068,227.45 207,162,373.08 4,179,755,845.99 Decrease due to cancellation of subsidiaries (4,800,216.58 ) (10,451,921.43 ) (681,519.16 ) (835,672.97 ) (16,769,330.14 ) Additions 108,187,414.79 987,242,642.41 8,883,682.16 18,984,884.71 1,123,298,624.07 Deductions (551,806.69 ) (6,993,158.22 ) (4,922,625.68 ) (890,567.84 ) (13,358,158.43 ) Closing balance 561,806,858.61 4,431,351,341.13 55,347,764.77 224,421,016.98 5,272,926,981.49 Impairment provision Opening balance 6,928,487.84 1,145,801.05 — — 8,074,288.89 Decrease due to cancellation of subsidiaries (6,928,487.84 ) (7,273,746.08 ) (407,240.84 ) (231,748.04 ) (14,841,222.80 ) Increased provision — 7,923,943.88 407,240.84 231,748.04 8,562,932.76 Reversals — — — — — Closing balance — 1,795,998.85 — — 1,795,998.85 Net value Opening balance 2,368,399,045.01 10,650,857,564.42 69,180,518.91 154,718,911.59 13,243,156,039.93 Closing balance 2,740,872,698.02 11,100,275,134.94 80,936,932.41 291,356,992.71 14,213,441,758.08 167 VII. Notes to the financial statements (continued) 11. Fixed Assets (continued) The Group (continued) Note 1: International Finance Corporation (“IFC”), Deutsche Bank AG (“DEG”) and China Construction Bank Nanchang Changbei Branch entered into an loan agreement with Jiangxi Chenming Paper Co., Ltd, a subsidiary of the Company, pursuant to which, secured loans of USD 40,000,000.00, USD 9,411,765.00 and USD 17,500,000.00 were provided to Jiangxi Chenming Paper Co., Ltd by the above financial institutions respectively. The collateral was the fixed assets and land use rights of Jiangxi Chenming Paper Co., Ltd. On 31 December 2008, RMB 10,918,791.23 of the above borrowed amount has been already repaid. On 31 December 2008, the net book value of the collateral with regard to fixed assets was RMB 1,144,235,273.50 and that with regard to the land use rights and intangible assets was RMB 74,653,598.66. Note 2: At as 31 December 2008, the Group had no fixed assets held under operation lease. Note 3: At as 31 December 2008, the net book value of the buildings without house property right certificates in the fixed assets of the Group was RMB 242,268,202.56 (2007: RMB253,656,589.82). The related house property right certificates were being applied. 168 VII. Notes to the financial statements (continued) 11. Fixed Assets (continued) The Company Buildings Machinery & Electric appliance equipment Vehicles and others Total RMB RMB RMB RMB RMB Cost Opening balance 972,211,978.91 7,999,338,053.06 31,396,652.54 31,464,803.11 9,034,411,487.62 Additions 2,271,437.73 20,475,450.48 5,916,223.58 3,935,580.90 32,598,692.69 Transfers from construction in progrees 40,189,947.33 279,701,782.77 870,443.00 776,711.20 321,538,884.30 Deductions (10,287,039.97 ) (6,204,169.84 ) (3,359,472.00 ) (631,678.48 ) (20,482,360.29 ) Closing balance 1,004,386,324.00 8,293,311,116.47 34,823,847.12 35,545,416.73 9,368,066,704.32 Accumulated depreciation Opening balance 186,778,016.25 2,258,838,541.75 14,814,444.14 18,212,612.16 2,478,643,614.30 Additions 38,865,679.27 590,859,911.77 2,859,790.96 4,279,789.67 636,865,171.67 Deductions (353,265.02 ) (3,251,517.25 ) (1,976,424.29 ) (479,425.62 ) (6,060,632.18 ) Closing balance 225,290,430.50 2,846,446,936.27 15,697,810.81 22,012,976.21 3,109,448,153.79 Net value Opening balance 785,433,962.66 5,740,499,511.31 16,582,208.40 13,252,190.95 6,555,767,873.32 Closing balance 779,095,893.50 5,446,864,180.20 19,126,036.31 13,532,440.52 6,258,618,550.53 Note 1: At as 31 December 2008, the Group had no fixed assets held under operation lease. Note 2: At as 31 December 2008, the net book value of the buildings without house property right certificates in the fixed assets of the Group was RMB 4,705,794.76 (2007: RMB5,988,190.06). The related house property right certificates were being applied. 169 VII. Notes to the financial statements (continued) 12 Construction in progress The Group Transfers to At Investment to Opening fixed assets the end of Sources Budgeted budgeted Items balance Additions during the year the year of funds costs costs RMB RMB RMB RMB RMB100 million % 98,000 ton waste paper 193,142,988.50 70,202,947.54 263,345,936.04 — Borrowings 3.66 71.95 de-inking project 200,000 ton ligh weight coated paper project 1,000,000.00 740,000.00 — 1,740,000.00 Self-owned funds 27.50 89.90 Grand View Hotel 181,059,912.64 78,284,956.35 259,344,868.99 — Self-owned funds 2.30 122.57 Technological improvement 6,880,933.81 15,925,215.78 4,550,120.61 18,256,028.98 Borrowings and N/A N/A to fixed asset Self-owned funds (Jilin Chenming) Zhanjiang pulp project 14,090,236.83 7,864,516.05 4,016,849.51 17,937,903.37 Borrowings and 58.22 0.31 120,000 ton cast coated fund raised paper project 218,289,301.08 564,736,044.28 783,025,345.36 — Self-owned funds 6.70 116.87 Transform of stove dilatation and evaporation stations — 13,010,968.26 — 13,010,968.26 Self-owned funds 0.22 59.14 Transform of de-inking with dispersing hot and recovery bleaching — 17,885,491.14 — 17,885,491.14 Self-owned funds 0.15 119.24 Transform project of desulphurization for coal powder stoves of power plants — 13,646,962.99 — 13,646,962.99 Self-owned funds 0.15 90.98 Handling of middle level of water by draining workshops — 35,159,901.70 — 35,159,901.70 Self-owned funds 0.39 90.87 Rubbish incineration 162,055.01 91,537,493.67 — 91,699,548.68 Borrowings and 0.87 104.86 stove project Self-owned funds Pulp board machine project — 30,973,725.01 — 30,973,725.01 Self-owned funds 1.20 25.81 Technological improvement to paper machine project — 32,808,843.00 — 32,808,843.00 Self-owned funds 0.32 102.21 Others 290,128,206.15 492,970,136.28 624,838,443.06 158,259,899.37 Self-owned funds N/A N/A Total construction in progress 904,753,634.02 1,465,747,202.05 1,939,121,563.57 431,379,272.50 Including: capitalized borrowing expenses from capitalization 1,794,383.80 24,043,281.70 24,051,702.20 1,785,963.30 Net construction in progress 904,753,634.02 1,465,747,202.05 1,939,121,563.57 431,379,272.50 170 VII. Notes to the financial statements (continued) 12 Construction in progress The Group (continued) As at 31 December 2008, closing balance of construction in progress of the Group included RMB1,785,963.30 of interest capitalized. Borrowing expense from capitalization for the year included RMB24,043,281.70 (the prior year: RMB30,470,011.03). The capitalizing rate to determine the general borrowing capitalized was 6.72% (the prior year: 6.14%). The Company Transfers to Investment to Opening fixed assets Closing Sources Budgeted budgeted Items balance Additions during the year balance of funds costs costs RMB RMB RMB RMB RMB100 million % 98,000 ton waste paper de-inking project 193,142,988.50 70,202,947.54 263,345,936.04 — Borrowings 3.66 71.95 Others 82,208,320.28 35,773,519.24 58,192,948.26 59,788,891.26 Self-owned funds N/A N/A Total 275,351,308.78 105,976,466.78 321,538,884.30 59,788,891.26 As at 31 December 2008, closing balance of construction in progress of the Company did not include interest capitalized (interest capitalized for the prior year: RMB11,879,372.75; the capitalizing rate was 6.07%). 171 VII. Notes to the financial statements (continued) 13. Intangible assets The Group Land use rights Software Total RMB RMB RMB Cost Opening balance 895,170,184.86 14,818,173.05 909,988,357.91 Additions 483,136,480.78 297,450.00 483,433,930.78 Deductions (3,874,161.38) — (3,874,161.38) Closing balance 1,374,432,504.26 15,115,623.05 1,389,548,127.31 Accumulated depreciation Opening balance 83,609,773.41 4,076,758.18 87,686,531.59 Additions 23,258,233.54 1,526,773.65 24,785,007.19 Closing balance 106,868,006.95 5,603,531.83 112,471,538.78 Net value Opening balance 811,560,411.45 10,741,414.87 822,301,826.32 Closing balance 1,267,564,497.31 9,512,091.22 1,277,076,588.53 Note 1: For the details of intangible assets—land use rights as collateral, please refer to notes VII.11. Note 2: As at 31 December 2008, the net book value of the buildings without house property right certificates in the intangible assets of the Group was RMB 147,502,707.53 (2007: RMB92,098,697.68). The related house property right certificates were being applied. 172 VII. Notes to the financial statements (continued) 13. Intangible assets (continued) The Company Land use rights Software Total RMB RMB RMB Cost Opening balance 390,308,640.44 14,787,993.05 405,096,633.49 Additions 553,275.00 — 553,275.00 Deductions (3,874,161.38) — (3,874,161.38) Closing balance 386,987,754.06 14,787,993.05 401,775,747.11 Accumulated depreciotion Opening balance 24,006,955.48 4,066,698.18 28,073,653.66 Additions 7,713,897.10 1,478,799.36 9,192,696.46 Closing balance 31,720,852.58 5,545,497.54 37,266,350.12 Net value Opening balance 366,301,684.96 10,721,294.87 377,022,979.83 Closing balance 355,266,901.48 9,242,495.51 364,509,396.99 Note 1: As at 31 December 2008, the net book value of the buildings without house property right certificates in the intangible assets of the Company was RMB 87,510,874.22 (2007: RMB92,098,697.68). The related house property right certificates were being applied. 173 VII. Notes to the financial statements (continued) 14. Goodwill The Group Accumulated for Accumulated for this year last year RMB RMB Cost 20,283,787.17 20,283,787.17 Opening balance Closing balance 20,283,787.17 20,283,787.17 Accumulated impaired loss — — Book value Opening balance 20,283,787.17 20,283,787.17 Closing balance 20,283,787.17 20,283,787.17 Goodwill of the Group arose from the acquisition of minority interests in prior year by a subsidiary of the Company. On balance sheet date, management of the Group assesses the recoverable amount of cash-generating unit which results goodwill, in order to determine whether to make provision for impairment loss accordingly. The recoverable amount of cash-generating unit is determined based on the estimated cash flow in financial budget of five years in the future by management, relying on the expected annual growth rate in GNP and the expected and steady annual growth rate in the industry by market players to calculate. Management of the Group expects no provision for impairment loss is necessary to be made for goodwill during the reporting period. 15. Long term expenses to be amortized The Group Closing Balance Opening balance RMB RMB Transforming expense on fixed assets held under operation lease 37,227,730.36 41,516,344.21 Equipment leasing expense — 14,996,890.54 Total 37,227,730.36 56,513,234.75 174 VII. Notes to the financial statements (continued) 16. Deferred income tax assets The Group Deductible temporary Deferred income tax Items difference and deductible loss assets Closing balance Opening balance Closing balance Opening balance RMB RMB RMB RMB Impairment provision 355,721,066.79 294,491,403.56 73,033,025.79 76,061,834.86 Prepaid salaries of senior management 105,199,345.76 76,615,517.52 22,754,863.62 18,278,879.38 Deductible tax loss 44,187,567.66 7,072,653.00 11,046,891.91 1,768,163.25 Unpaid payables 46,165,858.44 9,467,054.69 10,870,385.92 2,366,763.67 Preliminary expenses 9,423,741.50 15,375,578.23 1,177,967.69 1,177,967.69 Unrealized profit arising from intra-group transactions 2,043,549.51 14,831,852.54 510,887.38 3,707,963.13 Deferred income 44,248,375.23 — 8,522,343.81 — Total 606,989,504.89 417,854,059.54 127,916,366.12 103,361,571.98 According to the prediction result of future profit of the Company, it is very likely that the Company will generate sufficient taxable credit to set off deductible temporary difference and recognize the relevant deferred income tax to the extent of deductible loss. Deductible loss of unrecognized deferred income tax will expire by the following periods: Closing Balance Opening balance RMB RMB 2009 978,280.51 978,280.51 2010 45,659,451.85 45,659,451.85 2011 12,921,487.95 59,596,156.75 2012 60,209,847.95 60,209,847.95 2013 52,264,974.70 — Total 172,034,042.96 166,443,737.06 175 VII. Notes to the financial statements (continued) 16. Deferred income tax assets (continued) The Company Deductible temporary Deferred income tax Items difference and deductible loss assets Closing balance Opening balance Closing balance Opening balance RMB RMB RMB RMB Impairment provision 202,143,794.82 191,418,908.68 50,835,948.71 53,645,227.74 Prepaid salaries of senior management 69,343,461.44 67,424,634.80 17,335,865.36 16,856,158.70 Unpaid payables 36,198,088.68 8,060,172.84 9,049,522.17 2,015,043.21 Deferred income 5,537,541.95 — 1,384,385.49 — Total 313,222,886.89 266,903,716.32 78,605,721.73 72,516,429.65 17. Consumable biologcal assets The Group Closing Change in Fair Value at the Item Amount balance Purchase Breeding costs fair value Disposal end of the year (000’mu) RMB RMB RMB RMB RMB RMB Trees 335 92,159,871.29 95,238,808.73 113,091,127.38 918,451.60 (195,567.86) 301,212,691.14 On 31 December 2008, Consumable Biological assets held by Yangjiang Chenming Forestry Development Co., Ltd., Zhanjiang Chenming Forestry Development Co., Ltd. and Huanggang Chenming Arboriculture Co., Ltd., subsidiaries of the Company, were assessed to be RMB 301,212,691.14 in fair value by Jones Lang LaSalle Sallmanns Limited. 176 VII. Notes to the financial statements (continued) 18. Provision for impairment of assets The Group Charged during Other Opening balance the year Reversals write-offs Closing balance RMB RMB RMB RMB RMB Provisions for bad debts 278,710,626.82 25,330,768.69 (69,065,753.24 ) (16,201,704.01 ) 218,773,938.26 Of which: trade receivables 219,305,662.84 15,072,005.89 (56,577,200.37 ) (10,572,497.15 ) 167,227,971.21 other receivables 59,404,963.98 10,258,762.80 (12,488,552.87 ) (5,629,206.86 ) 51,545,967.05 Provisions for inventory impairment 6,114,277.85 135,749,634.48 (7,057,531.87 ) — 134,806,380.46 Impairment provisions for long-term equity investments 1,450,000.00 548,538.07 — — 1,998,538.07 Impairment provisions for held- fo- maturity investments 142,210.00 — — — 142,210.00 Impairment provisions for fixed assets 8,074,288.89 8,562,932.76 — (14,841,222.80 ) 1,795,998.85 Total 294,491,403.56 170,191,874.00 (76,123,285.11 ) (31,042,926.81 ) 357,517,065.64 The Company Charged during Opening balance the year Reversals Other write-offs Closing balance RMB RMB RMB RMB RMB Provisions for bad debts 183,712,420.83 17,963,503.38 (46,965,890.17) (1,207,584.45) 153,502,449.59 Of which, trade receivables 167,571,175.43 8,752,403.53 (40,915,575.33) (806,154.04) 134,601,849.59 Other receivables 16,141,245.40 9,211,099.85 (6,050,314.84) (401,430.41) 18,900,600.00 Provisions for inventory impairment 6,114,277.85 46,500,597.16 (6,114,277.85) — 46,500,597.16 Impairment provisions for long-term equity investments 1,450,000.00 548,538.07 — — 1,998,538.07 Impairment provisions for held- fo- maturity investments 142,210.00 — — — 142,210.00 Total 191,418,908.68 65,012,638.61 (53,080,168.02) (1,207,584.45) 202,143,794.82 177 VII. Notes to the financial statements (continued) 19. Short-term borrowings The Group Closing balance Opening balance RMB RMB Credit loans 1,055,569,455.58 3,045,252,736.25 Charged borrowings (Note 1) 57,086,500.00 120,520,085.62 Secured bill borrowings 3,178,705.32 — Discounted bills 401,110,381.77 428,227,235.41 Total 1,516,945,042.67 3,594,000,057.28 Note 1: Charged borrowings were guarantees provided by the Company to its subsidiaries for their long-term and short-term borrowings. For details please see Note VIII.(3)(e). Note 2: For types and amounts of secured assets under secured borrowings, please see Note VII.2. The Company Closing balance Opening balance RMB RMB Credit loans 926,698,296.93 2,944,937,040.00 Discounted bills 217,370,008.75 405,483,351.17 Total 1,144,068,305.68 3,350,420,391.17 As at 31 December 2008, none of the short-term borrowings of the Group and the Company were overdue. 178 VII. Notes to the financial statements (continued) 20. Financial liabilities held for trading (assets) The Group Closing balance Opening balance RMB RMB Financial liabilities held for trading － future pooling foreign exchange contracts 198,900.00 (5,955,480.00) 21. Bills payable The Group At the end At the beginning of the year of the year RMB RMB Bank acceptance 367,627,562.14 130,056,316.74 The Company At the end At the beginning of the year of the year RMB RMB Bank acceptance 210,151,045.59 121,487,222.14 As at 31 December 2008, the balance of the bills payable of the Group and the Company was not due to any shareholders holding over 5% (5% inclusive) of the Company’s shares. 179 VII. Notes to the financial statements (continued) 22. Accounts payable The Group Closing balance Opening balance Amount Precentage Amount Precentage RMB (%) RMB (%) Within 1 year 2,493,702,616.41 94.38 1,528,958,398.71 92.29 1-2 years 98,420,284.82 3.72 79,536,914.07 4.80 2-3 years 17,647,797.85 0.67 24,233,413.86 1.46 Over 3 years 32,537,486.82 1.23 23,978,253.98 1.45 Total 2,642,308,185.90 100.00 1,656,706,980.62 100.00 The Company Closing balance Opening balance Amount Precentage Amount Precentage RMB (%) RMB (%) Within 1 year 1,675,493,370.59 97.64 1,297,738,134.18 97.39 1-2 years 17,223,583.36 1.00 17,432,596.61 1.31 2-3 years 7,450,362.04 0.43 5,704,136.35 0.43 Over 3 years 15,864,479.18 0.93 11,677,464.56 0.87 Total 1,716,031,795.17 100.00 1,332,552,331.70 100.00 At the end of the year, the balance of the accounts payable of the Group and the Company was not due to any shareholders holding over 5% (5% inclusive) of the Company’s shares. As at 31 December 2008, the accounts payable of the Group and the Company aged over three years were insignificant. There was no significant payable amounts aged over three years. 180 VII. Notes to the financial statements (continued) 23. Advance receipts The Group Closing balance Opening balance Amount Precentage Amount Precentage RMB (%) RMB (%) Within 1 year 97,372,384.90 95.75 162,869,863.04 95.64 Over 1 year 4,321,193.67 4.25 7,416,766.17 4.36 Total 101,693,578.57 100.00 170,286,629.21 100.00 The Company Closing balance Opening balance Amount Precentage Amount Precentage RMB (%) RMB (%) Within 1 year 65,671,850.62 99.47 85,788,060.04 93.12 Over 1 year 347,607.25 0.53 6,338,827.45 6.88 Total 66,019,457.87 100.00 92,126,887.49 100.00 At the end of the year, the advance receipts of the Group and the Company were not received from any shareholders holding over 5% (5% inclusive) of the Company’s shares. At the end of the year, the advance receipts of the Group and the Company aged over one year were insignificant. There were no significant advance receipts aged over one year. 181 VII. Notes to the financial statements (continued) 24. Employee benefits payable The Group Accrued during Paid during Opening balance the year the year Closing balance RMB RMB RMB RMB Salaries, bonuses, allowance and subsidies 160,642,783.28 474,224,694.93 (517,879,300.80 ) 116,988,177.41 Staff welfare 7,030,517.94 48,215,018.01 (53,382,767.67 ) 1,862,768.28 Social insurance premiums 18,729,763.49 91,186,891.83 (90,192,838.33 ) 19,723,816.99 Of which: 1. Medical insurance premium 12,006,319.21 22,669,324.25 (22,295,488.06 ) 12,380,155.40 2. Pension insurance premium 4,030,183.45 58,229,302.01 (57,430,804.73 ) 4,828,680.73 3. Unemployment insurance premium 439,015.11 5,148,233.20 (5,346,073.93 ) 241,174.38 4. Work-related injury insurance premium 40.00 3,319,144.41 (3,303,120.38 ) 16,064.03 5. Maternity insurance premium 2,254,205.72 1,820,887.96 (1,817,351.23 ) 2,257,742.45 Housing provident funds 7,411,830.96 24,894,958.05 (21,002,683.84 ) 11,304,105.17 Union operation costs and employee education costs 20,968,998.24 13,342,382.84 (13,663,716.42 ) 20,647,664.66 Others 20,096,325.15 39,707.32 (453,497.85 ) 19,682,534.62 Of which: housing subsidies for Chinese employees 18,722,869.49 — — 18,722,869.49 Total 234,880,219.06 651,903,652.98 (696,574,804.91 ) 190,209,067.13 182 VII. Notes to the financial statements (continued) 24. Employee benefits payable (continued) The Company Accrued during Paid during Opening balance the year the year Closing balance RMB RMB RMB RMB Salaries, bonuses, allowance and subsidies 91,012,875.58 189,392,636.51 (209,420,321.50 ) 70,985,190.59 Staff welfare — 23,270,441.85 (23,270,441.85 ) — Social insurance premiums — 27,261,544.01 (27,261,544.01 ) — Of which: 1. Medical insurance premium — 6,136,716.95 (6,136,716.95 ) — 2. Pension insurance premium — 17,535,401.89 (17,535,401.89 ) — 3. Unemployment insurance premium — 1,563,732.06 (1,563,732.06 ) — 4. Work-related injury insurance premium — 1,149,676.18 (1,149,676.18 ) — 5. Maternity insurance premium — 876,016.93 (876,016.93 ) — Housing provident funds 301,429.93 8,184,585.51 (7,147,884.60 ) 1,338,130.84 Union operation costs and employee education costs 7,615,692.55 4,290,309.02 (4,063,832.89 ) 7,842,168.68 Others 20,294,434.36 — (1,571,564.87 ) 18,722,869.49 Of which: housing subsidies for Chinese employees 18,722,869.49 — — 18,722,869.49 Total 119,224,432.42 252,399,516.90 (272,735,589.72 ) 98,888,359.60 183 VII. Notes to the financial statements (continued) 25. Tax payables The Group Closing balance Opening balance RMB RMB Value added tax 10,700,714.79 (37,746,067.23) Business tax 8,328,952.19 8,857,642.18 Urban maintenance and construction tax 310,202.69 603,652.91 Corporate income tax 9,374,319.26 95,828,694.44 Individual income tax 663,205.18 9,884,850.76 Property tax 4,889,784.09 4,235,238.17 Stamp duty 4,259,535.24 3,377,040.15 Land use tax 10,025,255.88 12,020,128.08 Land appreciation tax — 4,286,153.00 Educational surcharges and others 1,414,013.02 1,097,118.40 Total 49,965,982.34 102,444,450.86 The Company Closing balance Opening balance RMB RMB Value added tax — 10,924,722.22 Business tax 7,376,897.19 8,695,193.52 Corporate income tax — 63,493,393.03 Individual income tax 415,724.04 9,111,505.66 Property tax 1,797,106.29 1,750,586.84 Stamp duty 2,834,609.11 1,889,696.53 Land use tax 3,731,843.88 4,286,153.00 Total 16,156,180.51 100,151,250.80 184 VII. Notes to the financial statements (continued) 26. Dividends payable The Group and The Company Closing balance Opening balance RMB RMB Legel person shares 36,089.31 36,075.17 27. Other payables The Group Closing balance Opening balance Amount Percentage Amount Percentage RMB (%) RMB (%) Within 1 year 205,978,354.37 59.49 107,189,167.02 35.14 1-2 years 23,880,416.86 6.90 121,510,348.87 39.83 2-3years 80,003,356.68 23.11 40,351,763.92 13.23 Over 3 years 36,364,114.15 10.50 35,998,736.57 11.80 Total 346,226,242.06 100.00 305,050,016.38 100.00 The Company Closing balance Opening balance Amount Percentage Amount Percentage RMB (%) RMB (%) Within 1 year 151,374,567.79 53.47 116,758,545.18 41.87 1-2 years 27,036,339.92 9.55 146,015,185.86 52.37 2-3years 91,357,173.17 32.27 9,606,328.08 3.45 Over 3 years 13,331,160.98 4.71 6,458,285.54 2.31 Total 283,099,241.86 100.00 278,838,344.66 100.00 The other payables of the Group and the Company at the end of the year were not due to any shareholders who holding over 5% (5% inclusive) of the Company’s shares. 185 VII. Notes to the financial statements (continued) 28. Non-current liabilities due within one year The Group Type Closing balance Opening balance RMB RMB Long-term borrowings due within one year 1,038,125,240.62 667,746,417.91 The Company Type Closing balance Opening balance RMB RMB Long-term borrowings due within one year 883,602,600.00 586,144,500.00 29. Short-term debentures payable The Group Type Closing balance Opening balance RMB RMB Short-term debeutures 1,941,874,444.43 506,212,916.67 The Company Type Closing balance Opening balance RMB RMB Short-term debeutures 1,941,874,444.43 — The Company was approved, by a circular issued by the People’s Bank of China (Yinfa [2007] No.427), to issue short-term debentures maturing in one year with aggregated par values of RMB700,000,000.00 and RMB1,200,000,000.00 on 10 June 2008 and 29 August 2008 respectively. The debentures are unsecured, bearing interest rate of 5.20% per annum and repayable on maturity with one-off interest payment. 186 VII. Notes to the financial statements (continued) 30. Long-term borrowings The Group Type Closing balance Opening balance Amounts in Exchange Amounl in Exchange original rate on original rate on currency translation RMB currency translation RMB Credit loans － RMB 3,120,692,035.94 1.0000 3,120,692,035.94 1,436,896,605.93 1.0000 1,436,896,605.93 Credit loans － USD 121,000,000.00 6.8346 826,986,600.00 280,500,000.00 7.3046 2,048,940,300.00 Secured borrowings － USD 55,992,973.77 6.8346 382,689,578.54 62,398,977.95 7.3046 455,799,574.33 Charged borrowings － RMB (Note 1) 715,047,300.00 1.0000 715,047,300.00 775,000,000.00 1.0000 775,000,000.00 Charged borrowings － USD (Note 1) 1,750,000.00 6.8346 11,960,550.00 1,000,000.00 7.3046 7,304,600.00 Total 5,057,376,064.48 4,723,941,080.26 Less:long-term borrowings due within one year 1,038,125,240.62 667,746,417.91 Including:Credit loans － RMB 330,000,000.00 1.0000 330,000,000.00 166,204,570.00 1.0000 166,204,570.00 Credit loans － USD 81,000,000.00 6.8346 553,602,600.00 57,500,000.00 7.3046 420,014,500.00 Secured borrowings ٛ USD 12,359,953.86 6.8346 84,475,340.62 6,369,595.58 7.3046 46,527,347.91 Charged borrowings ٛ RMB 70,047,300.00 1.0000 70,047,300.00 35,000,000.00 1.0000 35,000,000.00 Long-term borrowings due after one year 4,019,250,823.86 4,056,194,662.35 The above borrowings have maturities between 2009 and 2023, include floating-rate and fixed-rate borrowings at interest rates ranging from 5.32% to 7.70% per annum. Note 1: Guarantees provided by the Company to its subsidiaries, for specific amounts please see Note VIII.(3)(e). Note 2: For types and amounts of secured assets under secured borrowings, please see Note VII.11. 187 VII. Notes to the financial statements (continued) 30. Long-term borrowings (continued) The Company Type Closing balance Opening balance Amounts in Exchange Amounts in Exchange original rate on original rate on currency translation RMB currency translation RMB Credit loans － RMB 3,120,692,035.94 1.0000 3,120,692,035.94 1,436,822,035.94 1.0000 1,436,822,035.94 Credit loans － USD 121,000,000.00 6.8346 826,986,600.00 280,500,000.00 7.3046 2,048,940,300.00 Total 3,947,678,635.94 3,485,762,335.94 Less:long-term due within oneborrowings year 883,602,600.00 586,144,500.00 Including:Credit loans － RMB 330,000,000.00 1.0000 330,000,000.00 166,130,000.00 1.0000 166,130,000.00 Credit loans － USD 81,000,000.00 6.8346 553,602,600.00 57,500,000.00 7.3046 420,014,500.00 Long-term borrowings due after one year 3,064,076,035.94 2,899,617,835.94 The above borrowings have maturities between 2009 and 2013, include floating-rate and fixed-rate borrowings at interest rates ranging from 5.32% to 6.71% per annum. 188 VII. Notes to the financial statements (continued) 31. Deferred income The Group Type Increase Decrease Opening balance for the year for the year Closing balance RMB RMB RMB RMB Funds for three projects in connection with technology allocated by the local financial authority 80,000.00 — — 80,000.00 Special subsidy funds for environmental protection (1) 750,000.00 12,890,000.00 223,500.00 13,416,500.00 Project fund for National technological support scheme (2) — 1,790,900.00 59,696.67 1,731,203.33 Special subsidy fund for Songhuajiang environmental protection project (3) — 32,350,000.00 1,497,916.72 30,852,083.28 Modification of alkaline recycling system (4) — 1,500,000.00 43,750.00 1,456,250.00 Atmospheric pollution prevention and treatment subsidy fund (5) — 1,000,000.00 — 1,000,000.00 Sewage treatment and water conservation reconfiguration project (6) — 4,700,000.00 — 4,700,000.00 Financial grants for technological modification project (7) — 2,000,000.00 — 2,000,000.00 Others — 1,592,338.62 — 1,592,338.62 Total 830,000.00 57,823,238.62 1,824,863.39 56,828,375.23 189 VII. Notes to the financial statements (continued) 31. Deferred income (continued) The Company Increase Decrease Opening balance for the year for the year Closing balance Type RMB RMB RMB RMB Special subsidy funds for environmental protection — 2,760,000.00 46,000.00 2,714,000.00 Project fund for National technological support scheme — 1,790,900.00 59,696.67 1,731,203.33 Others — 1,092,338.62 — 1,092,338.62 Total — 5,643,238.62 105,696.67 5,537,541.95 (1) Pursuant to the “Notice Regarding Budget for Distribution of the 2007 Environmental Protection Special Subsidy Funds Issued by the Environmental Protection Bureau of Nanchang City” (《南昌市環境保護局關於 下達2007年環境保護專項資金預算的通知》), subsidiary of the Company Jiangxi Chenming Paper Co., Ltd. received special environmental protection subsidy fund of RMB5,000,000.00 in 2008, which was granted primarily for the construction work of mud burning facilities. Pursuant to the “Notice Regarding Distribution of 2008 Municipal Industrial Energy Conservation Special Subsidy Fund (First Batch)” 《關於下達2008年市工業 ( 節能專項資金計劃（第一批）的通知》) issued by the Financial Bureau of Wuhan City and the Economic Committee of Wuhan City, and pursuant to the “Notice Regarding Budget Indicators for Distribution of 2007 Energy Conservation and Technological Modification Financial Incentive Funds” (《關於下達2007年節能技術 改造財政獎勵資金預算指標的通知》) issued by the Financial Department of Hubei Province, subsidiary of the Company Wuhan Chenming Hanyang Paper Co. Ltd. Received special subsidy fund of RMB5,130,000.00 for energy conservation and technological modification. Pursuant to Shou Cai Yu Zhi Zi No. [2008] Document 254 (壽財預指字[2008]第254號文) issued by the People’s Government of Shouguang City, the Company received financial incentive fund of RMB2,760,000.00 in 2008 with respect to its energy conservation and technological modification. (2) Pursuant to the “Notice Regarding Budget Indicators for Distribution of 2007 National Technological Support Scheme Project Funds (Second Batch)” (《關於下達2007年度國家科技支撐計劃課題(第二批)預算指標的通 知 》 ) issued by the Financial Department of Shandong Province and the Science and Technology Department of Shandong Province, the Company received the 2007 National technological support scheme project fund of RMB1,790,000.00 in 2008. The accounts payable of such project were used mainly for the pulping project that uses mixed wide leaves for bleaching in a chemi-thermomechanical pulping process and used for the studies of critical technologies. 190 VII. Notes to the financial statements (continued) 31. Deferred income (continued) The Company (continued) (3) Pursuant to the “Notice Regarding the Distribution of the 6th Batch of 2007 Energy Conservation and Environmental Protection Project Funds in Line with the Investment Plans of the Central Government Budget Issued by the National Development and Reform Commission” 《國家發改委轉國家發展改革委關於下達2007 ( 年第六批資源詳約和環境保護項目中央預算內投資計劃的通知》), subsidiary of the Company Jilin Chenming Paper Co., Ltd. Received a special subsidy fund of RMB24,100,000.00 in 2008. Pursuant to the “Notice Regarding Distribution of First Batch of 2007 Energy Conservation and Environmental Protection Project Funds (Songhuajiang Stream Industrial Pollution Treatment Project 2007 First Batch) in Line with the Investment Plan of the Central Government Issued by Development and Reform Commission of Qiqihaer” (《齊齊哈爾市發展和改革委員會關於下達2007年第一批資源詳約和環境保護項目（松花江流域工業污染治理 項目2007年第一批）中央預算內投資計劃的通知》), subsidiary of the Company Fuyu Chenming Paper Co., Ltd. Received a special subsidy fund of RMB6,500,000.00 in 2008. Pursuant to the “Notice Regarding Budget for Distribution of 2007 Central Government Special Subsidy Funds for Water Pollution Prevention and Treatment in Songhuajiang Stream” 《關於下達2007年松花江流域水污染防治中央專項資金支出預算的通知》 ( ) issued by the Financial Department of Jilin Province, subsidiary of the Company Jilin Chenming Paper Co., Ltd. Received special subsidy fund of RMB1,750,000.00 in 2008. According to the above relevant documents, the aforementioned funds were used by the Group in the sewage treatment and processing work of Songhuajiang. (4) Pursuant to the “Notice Regarding the Plan for Distribution of First Batch of 2008 Environmental Protection Special Subsidy Fund” (《關於下達二零零八年第一批環保專項資金使用計劃的通知》) issued by the Environmental Protection Bureau of Jilin City and Financial Bureau of Jilin City, subsidiary of the Company Jilin Chenming Paper Co., Ltd. received special subsidy fund of RMB1,500,000.00. Such fund was used for the modification of alkaline recycling system. (5) Pursuant to “Supplementary Document for Atmospheric Pollution Prevention and Treatment Subsidy Fund” (《大氣污染防治補助資金補貼文件》) issued by the Financial Bureau of Qihe, subsidiary of the Company Shandong Chenming Paper Group Qihe Paperboard Co., Ltd. received special subsidy fund of RMB1,000,000.00 in 2008. Such fund was mainly used for desulphurization work in flue gas. 191 VII. Notes to the financial statements (continued) 31. Deferred income (continued) The Company (continued) (6) Pursuant to the “Notice Regarding Redistribution of 2008 Infrastructure Expenses Budget (Major Recycle Economy and Resources Saving Demonstration Project) under Budget of Central Government” (《關於轉發 2008年中央預算內基本建設支出預算（椒環經濟和資源詳約重大示範項目）的通知》) issued by Financial Bureau of Yanbian Korean Autonomous Prefecture and the “Notice Regarding Distribution of Third Batch of 2008 Environmental Protection Special Subsidy Fund” issued by the Financial Department of Jilin Province and the Environmental Protection Bureau of Jilin Province, subsidiary of the Company Yanbian Chenming Paper Co. Ltd. received special subsidy grant of RMB4,700,000.00 in 2008. Such fund was primarily used in construction of major demonstration structure for recycle economy and resources conservation. (7) Pursuant to the “Notice Regarding Distribution of 2008 Interest Discount Subsidy Fund Project Concerning Citywide Major Industrial Reconfiguration” (《關於下達2008年全市工業重大技術改造項目貼息補助資金計劃的 通知》) issued by the Economic Committee of Wuhan City and the Financial Bureau of Wuhan City, subsidiary of the Company Wuhan Chenming Hanyang Paper Co. Ltd. received interest discount financial subsidy of RMB2,000,000.00 in 2008 with respect to technological reconfiguration. 32. Deferred income tax liabilities The Group Temporary difference Taxable temporary difference Deferred income tax liabilities Closing balance Opening balance Closing balance Opening balance RMB RMB RMB RMB Changes in fair value of consumable biological assets 25,726,183.52 24,415,400.32 6,431,545.79 6,103,850.08 192 VII. Notes to the financial statements (continued) 33. Share capital The registered and paid-in share capital of the Company of RMB1 each amounted to RMB2,062,045,941.00 in total. The types and structure of shares are as follows: a. Changes of shareholdings of the Company during 2008: Increase / decrease during the period (share) Opening Lock-up of Closing balance New issue shareholdings Expiry balance (share) (Note 1) of directors of lock-up Share reform Others Sub-total (share) Restricted shares outstanding State-owned legal person shares 328,573,657 — — — — (35,570,000 ) (35,570,000 ) 293,003,657 Other domestic shares 10,926,796 — 176,774 (120,101 ) — — 56,673 10,983,469 Including: Domestic legal-person shares — — — — — — — — Domestic natural person shares 10,926,796 — 176,774 (120,101 ) — — 56,673 10,983,469 Total number of restricted shares outstanding 339,500,453 — 176,774 (120,101 ) — (35,570,000 ) (35,513,327 ) 303,987,126 Listed tradable shares RMB ordinary shares 809,348,003 — (176,774 ) 120,101 — — (56,673 ) 809,291,330 Domestic listed foreign shares (B share) 557,497,485 — — — — — — 557,497,485 Overseas listed foreign shares (H share) — 355,700,000 — — — 35,570,000 391,270,000 391,270,000 Total listed tradable shares 1,366,845,488 355,700,000 (176,774 ) 120,101 — 35,570,000 391,213,327 1,758,058,815 Total shares 1,706,345,941 355,700,000 — — — — 355,700,000 2,062,045,941 Note 1: As approved by the Stock Exchanges of Hong Kong Limited, the Company publicly offered 355,700,000 H shares in June 2008. Note 2: The shares transferred to the NSSF Council and converted into 35,570,000 overseas listed foreign shares (H shares) in connection with the reduction of holdings in state-owned shares by the relevant holders of state-owned shares of the Company. Increase in share capital in connection with the issuance of new shares mentioned above was reviewed by China Rightson Certified Public Accountants. A capital review report Zhong Rui Yue Hua Yan Zi No. [2008] 2189 (中瑞岳華驗字[2008]第2189號) was published for the certification of the review. 193 VII. Notes to the financial statements (continued) 33. Share capital (continued) b. Changes of shareholdings of the Company during 2007: Increase / decrease during the period (share) Conversion from Lock-up Opening convertible of new Closing balance bonds shareholdings Expiry balance (share) (Note 1) of directors of lock-up Share reform Others Sub-total (share) Restricted shares outstanding State-owned legal person shares 328,573,657 — — — — — — 328,573,657 Domestic non-state-owned legal person shares 9,517,139 — — (9,517,139 ) — — (9,517,139 ) — Other domestic shares 16,718,345 — 16,400 (5,807,949 ) — — (5,791,549 ) 10,926,796 Including: Domestic legal-person shares — — — — — — — — Domestic natural person shares 16,718,345 — 16,400 (5,807,949 ) — — (5,791,549 ) 10,926,796 Total number of restricted shares outstanding 354,809,141 — 16,400 (15,325,088 ) — — (15,308,688 ) 339,500,453 Listed tradable shares RMB ordinary shares 453,363,529 340,675,786 (16,400 ) 15,325,088 — — 355,984,474 809,348,003 Domestic listed foreign shares (B share) 557,497,485 — — — — — — 557,497,485 Total listed tradable shares 1,010,861,014 340,675,786 (16,400 ) 15,325,088 — — 355,984,474 1,366,845,488 Total shares 1,365,670,155 340,675,786 — — — — 340,675,786 1,706,345,941 The conversion period of Chenming convertible bonds issued by the Company started on 15 March 2005. Pursuant to the approval by the twenty-first meeting of the forth session of the Board of Directors, the Company early redeemed all the Company’s remaining convertible bonds on 14 May 2007. During the reporting period, a total of 340,675,786 shares were converted. Changes of the share capital as mentioned above were reviewed by China Rightson Certified Public Accountants. A capital review report Zhong Rui Hua Heng Xin Yan Zi No. II [2007] 018（中 瑞華囱信驗字II [2007]第018號）was published for the certification of the review. 194 VII. Notes to the financial statements (continued) 34. Capital reserves The Group 2008 Increase Opening balance for the year Closing balance RMB RMB RMB Premium of share capital Exercise of conversion rights in convertible bonds of the Company 2,018,215,301.98 — 2,018,215,301.98 Capital contribution from investors 1,754,786,187.93 2,355,491,895.71 4,110,278,083.64 Shares issued by way of capitalization of capital reserves (737,021,418.15 ) — (737,021,418.15 ) Other capital reserves Transfer from capital reserves under the original system 463,813,228.85 — 463,813,228.85 Provision for long-term equity investment 237,198,605.60 — 237,198,605.60 Others 1,000,000.00 — 1,000,000.00 Total 3,737,991,906.21 2,355,491,895.71 6,093,483,801.92 Increase in premium of share capital during the year was due to the increase of capital reserves of the Company by RMB2,355,491,895.71 through addition of proceeds of H share issuance after deducting issuing fees and share capital. 195 VII. Notes to the financial statements (continued) 34. Capital reserves (continued) The Group (continued) 2007 Increase for Decrease for Opening balance the year the year Closing balance RMB RMB RMB RMB Premium of share capital Exercise of conversion rights in convertible bonds of the Company 334,276,467.95 1,683,938,834.03 — 2,018,215,301.98 Capital contribution from investors 1,754,786,187.93 — — 1,754,786,187.93 Shares issued by way of capitalization of capital reserves (737,021,418.15 ) — — (737,021,418.15 ) Other capital reserves Equity compoent separable from the convertible bonds of the Company 195,402,946.14 61,687,883.12 (257,090,829.26 ) — Transfer from capital reserves under the original system 463,813,228.85 — — 463,813,228.85 Provision for long-term equity investment 237,198,605.60 — — 237,198,605.60 Others — 1,000,000.00 — 1,000,000.00 Total 2,248,456,018.32 1,746,626,717.15 (257,090,829.26 ) 3,737,991,906.21 Increase in premium of share capital of RMB1,426,848,004.77 during the year was mainly due to the conversion of the Company’s convertible bonds into RMB ordinary A shares. Increase in premium of share capital of RMB 257,090,829.26 was due to the completion of conversion of equity component in convertible bonds of the Company into shares. 196 VII. Notes to the financial statements (continued) 34. Capital reserves (continued) The Company 2008 Increase for Decrease for Opening balance the year the year Closing balance RMB RMB RMB RMB Premium of share capital Exercise of conversion rights in convertible bonds of the Company 2,018,215,301.98 — — 2,018,215,301.98 Capital contribution from investors 1,754,786,187.93 2,355,491,895.71 — 4,110,278,083.64 Shares issued by way of capitalization of capital reserves (737,021,418.15 ) — — (737,021,418.15 ) Other capital reserves Transfer from capital reserves under the original system 778,727,767.93 — — 778,727,767.93 Others 12,670,520.05 7,797,733.32 (6,452,000.00 ) 14,016,253.37 Total 3,827,378,359.74 2,363,289,629.03 (6,452,000.00 ) 6,184,215,988.77 Other reductions during the year in other capital reserves were attributable to the cancellation of subsidiary of the Company Xiangfan Chenming Copperplate Pater Co., Ltd during the year; therefore, investments in such entity in prior years in the form of license rights which caused increase of RMB6,452,000.00 was transferred out of other capital reserves. Increase during the year was attributable to loan extended to a subsidiary of the Group with terms over one year, the interests component of which was included in capital reserves. 197 VII. Notes to the financial statements (continued) 34. Capital reserves (continued) The Company (continued) 2007 Increase for Decrease for Opening balance the year the year Closing balance RMB RMB RMB RMB Premium of share capital Exercise of conversion rights in convertible bonds of the Company 334,276,467.95 1,683,938,834.03 — 2,018,215,301.98 Capital contribution from investors 1,754,786,187.93 — — 1,754,786,187.93 Shares issued by way of capitalization of capital reserves (737,021,418.15 ) — — (737,021,418.15 ) Other capital reserves Equity compoent separable from the convertible bonds of the Company 195,402,946.14 61,687,883.12 (257,090,829.26 ) — Transfer from capital reserves under the original system 778,727,767.93 — — 778,727,767.93 Others — 12,670,520.05 — 12,670,520.05 Total 2,326,171,951.80 1,758,297,237.20 (257,090,829.26 ) 3,827,378,359.74 198 VII. Notes to the financial statements (continued) 35. Surplus reserve The Group 2008 Statutory surplus reserve RMB Balance at the beginning of the year 723,742,920.58 Accruals of the year 101,733,929.95 Balance at the end of the year 825,476,850.53 2007 Statutory surplus reserve RMB Balance at the beginning of the year 642,691,568.68 Accruals of the year 81,051,351.90 Balance at the end of the year 723,742,920.58 The Company 2008 Statutory surplus reserve RMB Balance at the beginning of the year 711,553,338.67 Accruals of the year 101,733,929.95 Balance at the end of the year 813,287,268.62 199 VII. Notes to the financial statements (continued) 35. Surplus reserve (continued) The Company (continued) 2007 Statutory surplus reserve RMB Balance at the beginning of the year 630,501,986.77 Accrual of the year 81,051,351.90 Balance at the end of the year 711,553,338.67 36. Undistributed profits The Group Report year Previous year RMB RMB Undistributed profits at the beginning of the year 2,576,650,349.38 1,894,827,041.81 Add: Net profits of the year 1,075,291,741.53 967,636,172.39 Less: Appropriation of statutory surplus reserves (1) (101,733,929.95) (81,051,351.90) Profits available for distribution to shareholders 3,550,208,160.96 2,781,411,862.30 Less: Dividends payable － cash dividends 吷ith respect to last year/prior years 佧pproved on the general 卲hareholders’ meeting (2) (273,015,350.56) (204,761,512.92) Undistributed profits at the end of the year 3,277,192,810.40 2,576,650,349.38 Including: Cash dividends/profits resolved to be distributed after the balance sheet date (3) 103,102,297.05 273,015,350.56 200 VII. Notes to the financial statements (continued) 36. Undistributed profits (continued) The Company Report year Previous year RMB RMB Undistributed profits at the beginning of the year 1,509,756,228.39 985,055,574.16 Add: Net profits of the year 1,017,339,299.46 810,513,519.05 Less: Appropriation of statutory surplus reserves (1) (101,733,929.95) (81,051,351.90) Profits available for distribution to shareholders 2,425,361,597.90 1,714,517,741.31 Less: Dividends payable － cash dividends 吷ith respect to last year/prior years 佧pproved on the general 卲hareholders’ meeting (2) (273,015,350.56) (204,761,512.92) Undistributed profits at the end of the year 2,152,346,247.34 1,509,756,228.39 Including: Cash dividends/profits resolved to be distributed after the balance sheet date (3) 103,102,297.05 273,015,350.56 (1) Appropriation of statutory surplus reserves Pursuant to the Articles, statutory surplus reserves are appropriated as 10% of net profits, subject to a cap of accumulated statutory surplus reserves not exceeding 50% of the registered capital of the Company. (2) Cash dividends for the year approved on the general shareholders’ meeting Based on 1,706,345,941 shares of RMB1 each in issued capital of the Company, cash dividends of RMB1.6 for every 10 shares was distributed to all shareholders in 2007. 201 VII. Notes to the financial statements (continued) 36. Undistributed profits (continued) (3) Distribution of profits resolved after the balance sheet date Pursuant to the proposal of the Board, based on 2,062,045,941 shares of RMB1 each issued in 2008, it was proposed to distribute cash bonus of RMB0.5 for every 10 share to all shareholders. The above proposal of bonus distribution is pending approval of the general shareholders’ meeting. (4) Surplus reserves appropriated by subsidiaries On 31 December 2008, the balance of undistributed profits of the Group comprised surplus reserves appropriated by subsidiaries amounting to RMB310,216,818.12 (31 December 2007: RMB294,492,450.47). 37. Minority Interests Minority interests of the Group’s subsidiaries were as follows: Closing balance Opening balance RMB RMB Jiangxi Chenming Paper Co., Ltd. 815,713,717.19 752,507,449.34 Wuhan Chenming Hanyang Paper Co. Ltd. 538,016,783.48 530,295,583.65 Chibi Chenming Paper Co., Ltd. 157,339,051.39 172,783,706.32 Shandong Chenming Power Supply Holdings. Co., Ltd. 107,131,506.95 223,314,365.63 Yanbian Chenming Paper Co. Ltd. 59,855,122.25 60,196,511.59 Shandong Grand View Hotel Co., Ltd. 21,533,161.02 33,225,054.35 Shouguang Chenming Art Paper Co., Ltd. 34,455,133.14 37,162,604.18 Others 28,651,287.55 26,039,378.05 Total 1,762,695,762.97 1,835,524,653.11 202 VII. Notes to the financial statements (continued) 38. Operating Income The Group Accrued during Accrued during this year the previous year RMB RMB Principal operations Including: Machine-made paper 14,573,920,950.63 13,855,610,458.39 Electricity and steam supply 235,551,601.42 245,149,336.54 Building materials 512,594,168.67 869,909,623.83 Papermaking chemicals 88,639,870.79 92,004,112.10 Hotal income 24,148,863.00 — Others 8,637,234.46 10,209,545.15 Other business Including: Sales of raw materials and semi-finished products 67,340,417.99 80,128,973.80 Installation engineering and machine repair workshop 5,178,594.13 7,309,462.36 Rental income 4,523,895.02 3,319,551.29 Others 9,057,839.66 1,101,386.80 Total 15,529,593,435.77 15,164,742,450.26 (1) The following table sets forth the breakdown of the income from principal operations of paper products by geographical segments: Accrued during Accrued during this year the previous year RMB RMB PRC 12,632,916,470.61 11,550,360,152.02 United States 49,658,043.08 250,062,700.00 Hong Kong 207,129,713.98 303,260,738.83 Japan 146,670,066.70 334,189,414.51 South Africa 236,460,387.56 292,530,145.09 Other overseas countries 1,301,086,268.70 1,125,207,307.94 Total 14,573,920,950.63 13,855,610,458.39 203 VII. Notes to the financial statements (continued) 38. Operating Income (continued) The Group (continued) (2) Income from sales to the top 5 customers as a percentage of the total sales income: Accrued during Accrued during this year the previous year RMB RMB Total income from the top 5 customers 767,668,931.88 763,106,105.69 Percentage 4.94% 5.03% The Company Accrued during Accrued during this year the previous year RMB RMB Principal operations Including: machine-made paper 13,094,562,909.82 12,036,416,273.57 Electricity and steam supply 174,746,161.71 167,012,477.08 Other operations Including: Sales of raw materials and semi-finished products 280,625,675.72 343,032,764.09 Others 7,487,527.15 6,127,747.81 Total 13,557,782,274.40 12,552,589,262.55 204 VII. Notes to the financial statements (continued) 39. Cost of operations The Group Accrued during Accrued during this year the previous year RMB RMB Principal operations Including: Machine-made paper 11,814,955,646.90 11,040,079,368.04 Electricity and steam supply 199,485,256.28 183,564,081.98 Construction materials 444,273,179.83 727,363,739.74 Papermaking chemicals 36,970,588.86 45,891,476.41 Hotel costs 8,356,343.20 — Others 3,679,523.24 7,495,335.42 Other operations Including: Sales of raw materials and semi-finished products 44,323,831.54 67,980,732.21 Installation engineering and machine repair workshop 3,087,541.74 1,723,814.63 Rental expenses 61,605.68 72,238.81 Others 1,568,823.53 310,687.78 Total 12,556,762,340.80 12,074,481,475.02 The Company Accrued during Accrued during this year the previous year RMB RMB Principal operations Including: machine-made paper 11,534,107,290.70 10,429,603,365.23 Electricity and steam supply 143,771,971.54 116,062,112.00 Other operations Including: Sales of raw materials and semi-finished products 269,069,303.09 341,858,350.99 Others 2,974,132.70 77,560.13 Total 11,949,922,698.03 10,887,601,388.35 205 VII. Notes to the financial statements (continued) 40. Tax and levies on operations The Group Accrued during Accrued during this year the previous year RMB RMB Operating tax 3,036,742.52 498,439.94 Urban maintenances and construction tax 5,661,963.50 10,263,741.95 Educational surcharges 3,883,648.29 7,092,242.91 Total 12,582,354.31 17,854,424.80 The Company Accrued during Accrued during this year the previous year RMB RMB Operating tax 306,581.16 282,690.99 41. Finance costs The Group Accrued during Accrued during this year the previous year RMB RMB Interest expenses 462,613,466.68 555,690,734.09 Less: interest income (37,757,767.79) (11,145,945.64) Foreign exchange difference (157,411,894.21) (173,392,166.56) Handling charges by financial institutions 19,692,699.37 21,010,428.67 Total 287,136,504.05 392,163,050.56 206 VII. Notes to the financial statements (continued) 41. Finance costs (continued) The Company Accrued during Accrued during this year the previous year RMB RMB Interest expenses 373,230,062.16 452,093,348.72 Less: interest income (21,454,509.81) (12,604,855.41) Foreign exchange difference (163,932,858.44) (145,414,343.31) Handling charges by financial institutions 10,118,999.39 9,809,341.96 Total 197,961,693.30 303,883,491.96 42. Loss on impairment of assets The Group Accrued during Accrued during this year the previous year RMB RMB Provision of bad debt (43,734,984.55) 99,866,644.83 Provision of allowance for inventory 127,748,848.59 881,984.43 Provision of impairment on long-term investment 548,538.07 1,450,000.00 Provision of impairment on fixed assets 8,562,932.76 — Total 93,125,334.87 102,198,629.26 The Company Accrued during Accrued during this year the previous year RMB RMB Provision of bad debt (29,002,386.79) 2,576,681.68 Provision of allowance for inventory 40,386,319.31 881,984.43 Provision of impairment on long-term investment 548,538.07 1,450,000.00 Total 11,932,470.59 4,908,666.11 207 VII. Notes to the financial statements (continued) 43. Profit and loss on changes in fair values The Group Accrued during Accrued during this year the previous year RMB RMB Biological assets at fair value 918,451.60 24,415,400.31 Financial derivatives at fair value 1,738,200.00 5,955,480.00 Total 2,656,651.60 30,370,880.31 44. Investment income The Group Accrued during Accrued during this year the previous year RMB RMB Long-term equity investment gains Of which: profits distributed on invested entity validated using cost method 85,876.96 — Losses recognized using equity method (23,167,629.22) (9,461,550.75) Total (23,081,752.26) (9,461,550.75) The Company Accrued during Accrued during this year the previous year RMB RMB Long-term equity investment gains Of which: profits distributed on invested entity validated using cost method 168,201,020.17 101,488,000.00 Investment loss from disposal of long-term equity investments (3,552,717.43) — Losses recognized using equity method (23,167,629.22) (9,461,550.75) Gain on entrusted loans 161,487,208.39 130,859,318.51 Total 302,967,881.91 222,885,767.76 There are no significant restrictions on remittance of investment gains back to the Company. 208 VII. Notes to the financial statements (continued) 45. Non-operating income The Group Accrued during Accrued during this year the previous year RMB RMB Net income on disposal of assets 3,788,007.38 17,433,602.73 Insurance claims 12,888,742.85 7,929,504.36 Income from default penalty and fine 8,733,073.48 94,670.75 Income from debt reconstructing 103,365.66 1,088,135.44 Unpaid debts 7,188,103.61 3,483,335.36 Profit or loss arising from investment costs for acquisition of minority interests by the corporation being less than its share of fair value of identifiable net assets of the invested entity on acquisition 28,209,117.78 24,040,943.45 Profit or loss arising from investment costs for acquisition of a subsidiary by the corporation being less than its share of fair value of identifiable net assets of the invested entity on acquisition (Note VII. 58) 60,519.78 — Government grants (Note VII. 48) 211,936,111.85 177,377,455.16 Others 1,459,182.43 770,436.42 Total 274,366,224.82 232,218,083.67 The Company Accrued during Accrued during this year the previous year RMB RMB Net income on disposal of assets 1,966,033.29 4,003,506.13 Income from default penalty and fine 8,257,156.10 41,470.75 Unpaid debts 6,453,734.07 2,740,452.41 Government grants (Note VII. 48) 125,334,696.67 40,526,745.00 Others 681,773.53 191,091.91 Total 142,693,393.66 47,503,266.20 209 VII. Notes to the financial statements (continued) 46. Non-operating expenses The Group Accrued during Accrued during this year the previous year RMB RMB Net loss from disposal of assets 5,007,364.04 27,181,945.34 Donation expenses 5,629,166.60 — Fine payments 70,630.86 81,800.00 Others 1,091,450.14 462,135.81 Total 11,798,611.64 27,725,881.15 The Company Accrued during Accrued during this year the previous year RMB RMB Net loss from disposal of assets 1,388,338.83 10,400,342.17 Fine payments 8,923.91 — Donation expenses 4,586,626.60 — Others — 17,024.09 Total 5,983,889.34 10,417,366.26 210 VII. Notes to the financial statements (continued) 47. Income tax expenses The Group Accrued during Accrued during this year the previous year RMB RMB Income tax expenses for current year 319,575,675.05 314,278,016.08 Deferred income tax expenses (23,777,818.63) (43,483,002.81) Total 295,797,856.42 270,795,013.27 Reconciliation between income tax expenses and accounting profits is set out as follows: Accrued during Accrued during this year the previous year RMB RMB Profits before tax for the year 1,555,339,310.69 1,489,336,202.56 Income tax calculated at tax rate of 25% (2007: 24%) on the parent company 388,834,827.67 357,440,688.61 Tax deductions from purchase of domestic- manufactured equipment during the year (38,356,600.64) (49,706,706.79) Effect of non-taxable items (excluding temporary differences) (434,550.00) (1,428,931.53) Effect of non-withheld items (excluding temporary differences) 18,427,803.09 12,337,750.71 Effect of unrecognized taxation losses 13,066,243.68 14,450,363.51 Effect of waiver on extraordinary taxation items (65,397,167.80) (62,186,221.27) Effect of different tax rates of subsidiaries (8,887,432.67) (1,819,348.17) Tax credit for the year arising from taxation losses of previously unrecognized deferred tax assets (11,668,667.20) (1,904,847.01) Under-provision of income tax during the previous year 213,400.29 2,023,515.78 Changes on balance of deferred income tax assets at the beginning of the year caused by adjustment of tax rate — 1,588,749.43 Income tax for the year 295,797,856.42 270,795,013.27 211 VII. Notes to the financial statements (continued) 47. Income tax expenses (continued) The Company Accrued during Accrued during this year the previous year RMB RMB Income tax expenses for current year 277,468,037.20 215,688,385.76 Deferred tax expenses (6,089,292.08) (18,474,278.30) Total 271,378,745.12 197,214,107.46 Reconciliation between income tax expenses and accounting profits is set out as follows: Accrued during Accrued during this year the previous year RMB RMB Profit before tax for the year 1,288,718,044.58 1,007,727,626.51 Income tax calculated at tax rate of 25% (2007: 24%) on the parent company 322,179,511.15 241,854,630.36 Tax deductions from purchase of domestic- manufactured equipment during the year (26,945,499.64) (36,586,979.70) Effect of non-taxable items (excluding temporary differences) (36,420,014.73) (22,086,347.82) Effect of non-withheld items (excluding temporary differences) 12,564,748.34 2,843,145.52 Changes on balance of deferred income tax assets at the beginning of the year caused by adjustment of tax rate — 1,599,446.72 Effect of different tax rates of branch companies — 9,590,212.38 Income tax for the year 271,378,745.12 197,214,107.46 212 VII. Notes to the financial statements (continued) 48. Government grants The Group Accrued during Accrued during this year the previous year RMB RMB Government grants received in relation to assets Financial support fund 57,823,238.62 40,000.00 Total 57,823,238.62 40,000.00 Government grants received in relation to income Reversal of value-added tax (note 1) 33,851,926.78 75,372,967.36 Financial support fund (note 2) 176,259,321.68 97,104,487.80 Total 210,111,248.46 172,477,455.16 Government grants accounted for in profit or loss account of the current period 211,936,111.85 177,377,455.16 Government grants accounted for in deferred income 56,828,375.23 830,000.00 Note 1: Reversal of value-added tax was the value-added tax levied on products of the subsidiaries of the Company primarily made of the three remains and shoddy wood subject to the value-added tax benefit of levy-first-refund-immediately mainly in accordance with Cai Shui [2006] No 102 promulgated by the State Administration of Taxation in August 2006. Note 2: Financial support fund was the financial incentive fund and other support fund granted by the local governments to support the development of the Company and its subsidiaries. 213 VII. Notes to the financial statements (continued) 48. Government grants (continued) The Company Accrued during Accrued during this year the previous year RMB RMB Government grants received in relation to assets Financial support fund 5,643,238.62 — Government grants received in relation to income Financial support fund 125,229,000.00 40,526,745.00 Government grants accounted for in profit or loss account of the current period 125,334,696.67 40,526,745.00 Government grants accounted for in deferred income 5,537,541.95 — 49. Earnings per share Net profits for the period attributable to ordinary shareholders for the purpose of calculating earnings per share are as follows: Accrued during Accrued during this year the previous year RMB RMB Net profits for the period attributable to ordinary shareholders 1,075,291,741.53 967,636,172.39 214 VII. Notes to the financial statements (continued) 49. Earnings per share (continued) Net profits for the period attributable to ordinary shareholders for the purpose of calculating diluted earnings per share are as follows: Accrued during Accrued during this year the previous year RMB RMB Net profits for the period attributable to ordinary shareholders 1,075,291,741.53 967,636,172.39 Interests on dilutive potential ordinary shares for the period recognized as expenses attributable to ordinary shareholders after deducting the effect of income tax N/A 46,653,405.07 Effect of income tax attributable to ordinary shareholders N/A (11,198,124.23) Total N/A 1,003,091,453.23 For the purpose of calculating earnings per share, the denominator, being the weighted average of outstanding ordinary shares, is calculated as follows: Accrued during Accrued during this year the previous year RMB RMB Number of outstanding ordinary shares at the beginning of the year 1,706,345,941.00 1,365,670,155.00 Add: number of weighted ordinary shares issued during the period 191,456,010.93 246,109,034.73 Less: number of weighted ordinary shares repurchased during the period — — Number of outstanding weighted ordinary shares at the end of the year 1,897,801,951.93 1,611,779,189.73 215 VII. Notes to the financial statements (continued) 49. Earnings per share (continued) For the purpose of calculating diluted earnings per share, the number of outstanding weighted average ordinary shares is calculated as follows: Accrued during Accrued during this year the previous year RMB RMB Number of weighted average ordinary shares for the purpose of calculating basic earnings per share 1,897,801,951.93 1,611,779,189.73 Add: number of weighted average ordinary shares increased assuming dilutive potential ordinary shares were converted into issued ordinary shares N/A 94,668,092.54 Of which: number of weighted ordinary shares increased on conversion of convertible corporate bonds N/A 94,668,092.54 Number of weighted average ordinary shares for the purpose of calculating diluted earnings per share N/A 1,706,447,282.27 Earnings per share Accrued during Accrued during this year the previous year RMB RMB Calculated based on net profits attributable to shareholders of parent company: Basic earnings per share 0.57 0.60 Diluted earnings per share N/A 0.59 216 VII. Notes to the financial statements (continued) 50. Net profit after deducting extraordinary gains and losses Accrued during Accrued during this year the previous year RMB RMB Net profits 1,259,541,454.27 1,218,541,189.29 Add: items of extraordinary gains and losses Gains and losses generated from held for trading financial instatement (1,738,200.00) (5,955,480.00) Reversal of impairment provision on receivables tested for impairment on individual basis (39,718,405.84) — Net gains and losses from disposal of non-current assets 1,219,356.66 9,748,342.61 Government grants accounted for in profit and loss account of the current period (178,084,185.07) (102,004,487.80) Net gains and losses from debt restructuring (103,365.66) (1,088,135.44) Profit or loss arising from investment costs for acquisition of minority interests by the corporation being less than its share of fair value of identifiable net assets of the invested entity on acquisition (28,209,117.78) (24,040,943.45) Profit or loss arising from investment costs for acquisition of a subsidiary by the corporation being less than its share of fair value of identifiable net assets of the invested entity on acquisition (60,519.78) — Non-operating net gains and losses other than the above items (23,477,854.77) (11,734,011.08) Add: effect of extraordinary gains and losses on income tax 34,679,297.41 21,695,055.51 Net profits after deducting extraordinary gains and losses 1,024,048,459.44 1,105,161,529.64 Of which: net profits attributable to shareholders of parent company 854,268,917.39 878,418,573.66 Net profits attributable to minority interests 169,779,542.05 226,742,955.98 217 VII. Notes to the financial statements (continued) 51. Cash and cash equivalents The Group At the end of At the beginning the year of the year RMB RMB Cash 2,687,579,159.85 613,826,456.62 Of which: Treasury cash 1,341,632.42 2,688,459.77 Bank deposits repayable on demand 2,686,237,527.43 611,137,996.85 Balance of cash and cash equivalents 2,687,579,159.85 613,826,456.62 The Company At the end of At the beginning the year of the year RMB RMB Cash 2,080,005,634.40 235,957,551.29 Of which: Treasury cash 30,527.86 124,896.69 Bank deposits repayable on demand 2,079,975,106.54 235,832,654.60 Balance of cash and cash equivalents 2,080,005,634.40 235,957,551.29 218 VII. Notes to the financial statements (continued) 52. Supplementary information on cash flow statements The Group Accrued during Accrued during this year the previous year RMB RMB Reconciliation of net profits as cash flows from operating activities Net profits 1,259,541,454.27 1,218,541,189.29 Add: provision for impairment of assets 93,125,334.87 102,198,629.26 Depreciation of fixed assets 1,123,298,624.07 1,008,525,601.52 Depreciation of real estate held for investment 1,738,256.04 1,692,178.63 Intangible assets amortized 24,785,007.19 21,011,320.41 Amortisation of long-term expenses to be amortized 10,479,070.22 13,580,649.59 Inestment gains 23,081,752.26 9,461,550.75 Ne losses from disposal of fixed assets 1,219,356.66 9,748,342.61 Financial expenses 289,644,850.83 349,485,068.77 Decrease in stock (minus: increase) (1,971,610,816.00) (286,774,248.96) Decrease in consumable biological assets (minus: increase) (205,255,558.95) (48,230,037.74) Losses from change in fair value (minus: gains) (2,656,651.60) (30,370,880.31) Inecrease in deferred income tax assets (minus: increase) (24,105,514.34) (65,231,585.59) Increase in deferred income tax debt (minus: decrease) 327,695.71 6,103,850.08 Profit or loss arising from investment costs for acquisition of minority interests by the corporation being less than its share of fair value of identifiable net assets of the invested entity on acquisition (28,209,426.61) (24,040,943.45) Profit or loss arising from investment costs for acquisition of a subsidiary by the corporation being less than its share of fair value of identifiable net assets of the invested entity on acquisition (60,519.78) — 219 VII. Notes to the financial statements (continued) 52. Supplementary information on cash flow statements (continued) The Group (continued) Accrued during Accrued during this year the previous year RMB RMB Decrease in operating receivables (minus: increase) 631,971,826.80 (909,649,696.33) Increase in operating payables (minus: decrease) 706,826,061.40 (51,787,863.52) Net cash flows from operating activities 1,934,140,803.04 1,324,263,125.01 Major investments and financing activities not involving cash settlements Capital converted from debt — 1,815,151,440.06 Net change in cash and cash equivalents Cash balance at the end of the year 2,687,579,159.85 613,826,456.62 Less: cash balance at the beginning of the year 613,826,456.62 784,320,395.18 Net increase in cash and cash equiralents 2,073,752,703.23 (170,493,938.56) 220 VII. Notes to the financial statements (continued) 52. Supplementary information on cash flow statements (continued) The Company Accrued during Accrued during this year the previous year RMB RMB Reconciliation of net profits as cash flows from operating activities Net profits 1,017,339,299.46 810,513,519.05 Add: provision of impaired assets 11,932,470.59 4,908,666.11 Depreciation of fixed assets 636,865,171.67 597,047,915.21 Depreciation of real estate held for investment 1,738,256.04 1,692,178.63 Intangible assets amortized 9,192,696.46 8,535,125.98 Investment gains (302,967,881.91) (222,885,767.76) Net losses from disposal of fixed assets (577,694.46) 6,396,836.04 Financial expenses 202,715,131.70 285,151,322.33 Decrease in stock (minus: increase) (1,095,688,644.28) 45,452,211.35 Decrease in deferred income tax assets (minus: increase) (6,089,292.08) (34,129,708.29) Decrease in operating receivables (minus: increase) (331,577,867.42) (67,328,339.67) Increase in operating payables (minus: decrease) 418,589,550.86 116,327,723.65 Net cash flows from operating activities 561,471,196.63 1,551,681,682.63 Major investments and financing activities not involving cash settlements Capital converted from debt — 2,050,071,904.63 Net change in cash and cash equivalents Cash balance at the end of the year 2,080,005,634.40 235,957,551.29 Less: cash balance at the beginning of the year 235,957,551.29 431,939,246.80 Net increase in cash and cash equiralents 1,844,048,083.11 (195,981,695.51) 221 VII. Notes to the financial statements (continued) 53. Other cash received relating to operating activities The Group Accrued during Accrued during this year the previous year RMB RMB Finance support fund 176,259,321.68 102,004,487.80 Interest income 37,757,767.79 11,145,945.64 Income on default penalty and fine 8,733,073.48 — Other income 14,347,616.45 4,934,611.53 Total 237,097,779.40 118,085,044.97 The Company Accrued during Accrued during this year the previous year RMB RMB Finance support fund 125,229,000.00 40,526,745.00 Interest income 21,454,509.81 12,604,855.41 Repayments from subsidiaries — 479,183,735.05 Income on default penalty and fine 8,257,156.10 — Other income 8,481,240.92 6,976,521.20 Total 163,421,906.83 539,291,856.66 222 VII. Notes to the financial statements (continued) 54. Other cash paid relating to operating activities The Group Accrued during Accrued during this year the previous year RMB RMB Traffic expense 544,627,054.10 607,302,287.15 Hospitality expense 49,202,638.95 54,713,994.20 Rental expense 13,671,142.45 16,277,434.12 Travel expense 25,301,977.30 28,816,771.37 Office expense 12,761,302.18 15,213,790.85 Waste disposal expense 36,129,966.97 34,316,255.04 Insurance premium 23,239,270.90 19,504,157.26 Water and electricity expense 10,939,864.29 6,289,640.37 Repair expense 14,261,254.87 9,803,453.16 Advertising expense 2,112,057.69 2,806,430.72 Intermediary service expense 14,835,125.30 24,439,184.16 Quality compensation 2,773,156.98 27,709,692.63 Others 38,246,593.27 30,778,762.51 Total 788,101,405.25 877,971,853.54 223 VII. Notes to the financial statements (continued) 54. Other cash paid relating to operating activities (continued) The Company Accrued during Accrued during this year the previous year RMB RMB Traffic expense 248,702,474.08 269,118,918.26 Hospitality expense 31,582,129.33 37,863,687.39 Rental expense 2,851,015.68 4,715,600.85 Travel expense 19,203,629.01 21,006,486.39 Office expense 8,896,573.46 9,111,985.81 Waste disposal expense 11,570,374.63 11,808,733.56 Insurance premium 13,395,430.47 12,627,457.96 Water and electricity expense 1,652,643.85 1,388,764.66 Repair expense 4,177,890.34 3,336,530.15 Advertising expense 313,230.54 2,657,864.72 Intermediary service expense 12,186,981.90 22,345,609.23 Quality compensation 2,476,371.23 26,367,387.93 Payments to subsidiaries 131,773,856.61 — Research and development expense 10,731,981.19 5,681,395.78 Others 11,691,023.10 41,982,850.20 Total 511,205,605.42 470,013,272.89 224 VII. Notes to the financial statements (continued) 55. Cash received relating to other investment activities The Group Accrued during Accrued during this year the previous year RMB RMB Special subsidy funds received 57,823,238.62 — The Company Accrued during Accrued during this year the previous year RMB RMB Special subsidy funds received 5,643,238.62 — 56. Other cash received in relation to financing activities The Company Accrued during Accrued during this year the previous year RMB RMB Decrease in restricted bank deposits during the year 50,557,068.28 — 57. Other cash paid in relation to financing activities The Group Accrued during Accrued during this year the previous year RMB RMB Increase in restricted bank deposits during the period 39,043,580.93 84,845,990.79 Cash paid for redemption of convertible bonds by the Company — 577,766.86 Guarantee expense for convertible bonds — 3,722,552.40 Total 39,043,580.93 89,146,310.05 225 VII. Notes to the financial statements (continued) 57. Other cash paid in relation to financing activities (continued) The Company Accrued during Accrued during this year the previous year RMB RMB Increase in restricted bank deposits during the period — 112,991,173.39 Cash paid for redemption of convertible bonds by the Company — 577,766.86 Guarantee expense for convertible bonds — 3,722,552.40 Total — 117,291,492.65 58. Merger of entities The Group as a party in merger of non-jointly controlled entities: In 2008, the overview mergers of non-jointly controlled entities of the Group are set out below: (1) Shouguang Runsheng Waste Collection Co., Ltd. a. Overview of the acquired entity: During the year, subsidiary of the Company Shouguang Chenming Modern Logistic Co., Ltd. acquired 100% of equity interests in Shouguang Runsheng Waste Collection Co., Ltd. for a consideration of RMB1,000,000.00. As of 31 December 2008, such consideration had not been paid. The above acquired subsidiary had fair value basically consistent with its carrying amount, specifics are as follows: 226 58. Merger of entities (continued) (1) Shouguang Runsheng Waste Collection Co., Ltd. (continued) b. Important financial information of the acquired entity: Items Carrying amount on the acquisition date RMB Identifiable assets Current assets 20,086,539.98 Non-current assets 458,779.80 Sub-total 20,545,319.78 Identifiable liabilities Current liabilities 19,484,800.00 Sub-total 19,484,800.00 Total net assets 1,060,519.78 Less: consideration of acquisition 1,000,000.00 Discount on acquisition 60,519.78 Amount RMB Cash and cash equivalents used as consideration of merger — Less: cash and cash equivalents held by the merged subsidiary 505,574.07 Acquired cash and cash equivalents received by the subsidiary (505,574.07) 227 58. Merger of entities (continued) (2) Wuxi Songling Paper Co., Ltd. a. Overview of the acquired entity: In June 2008, subsidiary of the Company Fuyu Chenming Paper Co., Ltd. acquired the assets and liabilities of Wuxi Songling Paper Co., Ltd. for nil consideration. The above acquisition was classified as acquisition of assets and business operations, the difference between the consideration paid by the Group and the carrying amount was included in non-current assets of the Group. b. Important financial information of the acquired entity: Project Carrying amount on the acquisition date RMB Identifiable assets Current assets 42,541.96 Non-current assets 5,224,429.76 Sub-total 5,266,971.72 Identifiable liabilities Current liabilities 5,266,971.72 Sub-total 5,266,971.72 Amount RMB Cash and cash equivalents used as consideration of merger — Less: cash and cash equivalents held by the merged subsidiary 39,780.38 Acquired cash and cash equivalents received by the subsidiary (39,780.38) The acquisition date is the date when the acquiring entity obtains actual control of the acquired entity, which is the date on which the ownership of net assets and control of decisions in business operations of the acquired entity are transferred to the acquiring entity. 228 VII. Notes to the financial statements (continued) 59. Disposal of subsidiaries Upon approval by shareholders’ general meeting of Xiangfan Chenming Copperplate Pater Co., Ltd (hereinafter referred to as “Xiangfan Chenming”), the Group cancelled its subsidiary Xiangfan Chenming during the year. Xiangfan Bailan Group Co., Ltd., a minority shareholder of Xiangfan Chenming, was allocated ownership of the then existing plants and copperplate paper machines of Xiangfan Chenming and assumed liabilities thereof. The Company and Wuhan Chenming Hanyang Paper Holdings Co., Ltd., a subsidiary of the Company, gave up their respective claims on the debts of Xiangfan Chenming. As the cleaning up of assets and liabilities in Xiangfan Chenming was completed at the date of cancellation, therefore it was not including in the scope of consolidation in the combined balance sheet of the Group as of 31 December 2008; however, the operating results of such entity prior to cancellation were reflected in the combined income statement for 2008. The operating results of the cancelled subsidiary during the period from 1 January 2008 up to the date of cancellation are set out as follows: Period from 1 January 2008 up to date of cancellation RMB Non-operating income 3,847,724.51 Provision for impairment of assets (6,766,933.91) Net profits (2,919,209.40) 229 VII. Notes to the financial statements (continued) 60. Segment reporting Apart from machine made-paper business income from business segments and geographical segments of the Group accounted for less than 10% of all respective segment income. Information on related segments of the Group is summarized below. Segment result Accrued during Accrued during this year the previous year RMB RMB Segment result 1,606,436,083.27 1,234,994,916.80 Unallocated corporate expenses (213,411,044.10) (33,283,195.76) Unallocated corporate income 207,308,263.05 454,386,000.00 Investment gains (23,081,752.26) (9,461,550.75) Profit and loss on change in fair value 2,656,651.60 30,370,880.31 Finance expense (287,136,504.05) (392,163,050.56) Non-operating income 274,366,224.82 232,218,083.67 Non-operating expenses (11,798,611.64) (27,725,881.15) Profits before tax 1,555,339,310.69 1,489,336,202.56 Income tax (295,797,856.42) (270,795,013.27) Net profits 1,259,541,454.27 1,218,541,189.29 Segment assets Closing balance Opening balance RMB RMB Segment assets 22,940,152,881.56 20,712,446,123.40 Non-allocated assets 3,359,342,863.45 1,298,662,133.89 Total assets 26,299,495,745.01 22,011,108,257.29 230 VII. Notes to the financial statements (continued) 60. Segment reporting (continued) Segment liabilities Closing balance Opening balance RMB RMB Segment liabilities 3,433,285,494.11 1,975,867,134.27 Non-allocated liabilities 8,844,435,585.94 9,454,681,458.06 Total liabilities 12,277,721,080.05 11,430,548,592.33 VIII. Related party relations and transactions (1) Save for subsidiaries set out in note VI, information on the first major shareholder is set as follows: Name of Place of Principal Relation with Economic Legal related party incorporation operations the Company nature or type representative Shouguang Chenming Shouguang City Investments in The first major Limited liability Chen Hongguo Holdings Co., Ltd papermaking, shareholder company electricity, coal, forestry projects Shouguang Chenming Holdings Co., Ltd (hereafter referred to as“Shouguang Chenming Holdings”) was established on 30 December 2005 by Shouguang SASAC which contributed its state-owned shares to set up the Company. The China Securities Regulatory Commission finally approved the change in the holder of state-owned Shares of Chenming Paper and the change in nature of its equity interests arising from the establishment of Shouguang Chenming Holdings on 14 August 2006 ( Guo Zi Chan Quan [2005] No. 1539) . Since then, the first major shareholder of the Company was changed from State-owned Assets Supervision and Administration Commission of Shouguang City to Shouguang Chenming Holdings . 231 VIII. Related party relations and transactions (continued) (2) Other related parties which entered into transactions with the Group but without controlling relation are as follows: Organization Code Related party relation Shouguang Liben Paper 61358854-8 Associated corporation Making Co., Ltd. Qingzhou Chenming 16937769-8 Associated corporation Denaturation Amylum Co., Ltd. Arjo Wiggins Chenming Specialty 78233868-9 Associated corporation Paper Co., Ltd. (3) Major related transactions entered into between the Company and related parties during the year are as follows: (a) Sale and purchase Details of sales and purchases of goods to and from related parties by the Company are as follows: Accrued during this year Accrued during the previous year Amount Percentage Amount Percentage RMB % RMB % Sales － subsidiaries of the Company 1,001,223,140.56 95.89 1,062,798,846.87 99.29 ٛ ٛ associated corporations of the Company 42,959,570.88 4.11 7,579,571.34 0.71 1,044,182,711.44 100.00 1,070,378,418.21 100.00 Purchases － subsidiaries of the Company 6,581,078,483.39 100.00 5,520,741,792.55 100.00 6,581,078,483.39 100.00 5,520,741,792.55 100.00 The Company sells and purchases to and from related parties at prices negotiated between both parties. 232 VIII. Related party relations and transactions (continued) (3) Major related transactions entered into between the Company and related parties duri (Continued) (b) Lending and borrowing Details of lending and borrowing between the Company and related parties are as follows: Amount Amou incurred incurre Name of Annual during Balance for durin subsidiaries rate this year this year Proportion the previous ye % RMB RMB % RM Jilin Chenming Paper Co., Ltd. 6.723 (1,150,000,000.00) 80,000,000.00 4.11 510,000,000.0 Shandong Chenming Panels Co., Ltd. 5.000 (40,000,000.00) 37,000,000.00 1.90 (34,000,000.0 Wuhan Chenming Hanyang Paper Co., Ltd. 5.022-6.723 (30,000,000.00) 550,000,000.00 28.25 (120,000,000.0 Wuhan Chenming Qianneng Electric Power Co., 6.723 (20,000,000.00) 35,000,000.00 1.80 — Shandong Chenming Paper Group Qihe Paperboard Co., Ltd. 6.723 (120,000,000.00) — — 107,000,000.0 Jiangxi Chenming Paper Co., Ltd. 6.723-7.830 400,000,000.00 700,000,000.00 35.95 (10,000,000.0 Heze Chenming Panels Co., Ltd. 5.022-6.723 15,000,000.00 71,000,000.00 3.65 31,000,000.0 Hailaer Chenming Paper Co., Ltd 5.022-6.723 (10,000,000.00) 19,000,000.00 0.98 29,000,000.0 Qihe Chenming Panels Co., Ltd 5.022-6.723 (7,000,000.00) 15,000,000.00 0.77 22,000,000.0 Juancheng Chenming Panels Co., Ltd. 5.022-6.723 20,000,000.00 40,000,000.00 2.05 20,000,000.0 Shandong Chenming Grand View Hotel Co., Ltd. 5.022-6.723 110,000,000.00 110,000,000.00 5.65 — Shouguang Chenming Art Paper Co., Ltd. 6.723 290,000,000.00 290,000,000.00 14.89 — Total (542,000,000.00) 1,947,000,000.00 100.00 555,000,000.0 233 VIII. Related party relations and transactions (continued) (c) Balance of credit and debt Item Closing balance Opening balance RMB RMB Accounts receivable － between subsidiaries of the Company 525,597,011.45 178,881,249.80 ٛ between associated corporations of the Company 10,744,498.96 — Total 536,341,510.41 178,881,249.80 Other receivables - between subsidiaries of the Company 840,005,604.20 627,427,338.67 ٛ between associated corporations of the Company 14,678,824.86 14,824,065.87 Total 854,684,429.06 642,251,404.54 Prepayments － between subsidiaries of the Company 270,455,992.44 14,186,653.54 Accounts payable － between subsidiaries of the Company 826,483,624.07 562,460,992.26 ٛ between associated corporations of the Company — 176,409.70 Total 826,483,624.07 562,637,401.96 Other payables － between subsidiaries of the Company 109,518,990.30 138,875,798.30 Dividends receivable － between subsidiaries of the Company 164,874,997.10 42,933,862.14 Bills payable － between subsidiaries of the Company 3,260,000.00 — 234 VIII. Related party relations and transactions (continued) (d) Senior executive’s remuneration Accrued during Accrued during this year the previous year RMB’000 RMB’000 Senior executive’s remuneration 7,989.20 8,888.02 Senior executives include the Company’s directors, supervisors, general managers, deputy general managers, secretary of the board of directors and financial officers. (e) Guarantee provided for subsidiaries As at 31 December 2008, guarantee provided for subsidiaries by the Company to secure lending is as follows: Name of Subsidiaries Amount under guarantee RMB Jiangxi Chenming Paper Co., Ltd. 345,000,000.00 Jilin Chenming Paper Co., Ltd. 268,795,150.00 Wuhan Chenming Hanyang Paper Co., Ltd. 43,417,300.00 Zhanjiang Chenming Paper Pulp Co., Ltd. 106,834,600.00 Heze Chenming Panels Co., Ltd. 20,047,300.00 Total 784,094,350.00 235 IX. Financial instruments and risk management Major financial instruments of the Group include borrowings, receivables and accounts payables, etc. Detailed descriptions of these financial instruments are set out in Note 7. Below are the risks associated with such financial instruments and the risk management policies adopted by the Group to mitigate such risks. The management of the Group manages and monitors such risk exposures to ensure such risks are contained within a prescribed scope. 1. Objective and measures of risk management The Group engages in risk management with the aim of achieving an appropriate balance between risk and return, where the negative effects of risks against the Group’s operating results are minimized, in order to maximize the benefits of shareholders and other stakeholders. Based on such objective in risk management, the underlying strategy of the Group’s risk management is to ascertain and analyze all types of risks exposures of the Group, establish appropriate risk tolerance thresholds, carry out risk management procedures and perform risk monitoring on all kinds of risks in a timely and reliable manner, thus containing risk exposures within a prescribed scope. 236 IX. Financial instruments and risk management (continued) 1. Objective and measures of risk management (continued) 1.1. Market risks 1.1.1 Foreign exchange risk Foreign exchange risk represents risks of loss incurred as a result of changes in exchange rate. The Group is mainly exposed to foreign exchange risks in connection with USD; except for certain subsidiaries of the Company which effect purchases and sales in USD, all the business activities of the remaining principal operations of the Group are settled with Renminbi. On 31 December 2008, except for the USD balances in assets and liabilities, odd monies in EUR and balances in HKD as set out below, all the balances of assets and liabilities of the Group were denominated in Renminbi. The foreign exchange risk arising from assets and liabilities in such foreign currency balances could affect the operating results of the Group. Closing balance Opening balance RMB RMB Cash and cash equivalents 151,424,949.93 130,538,941.51 Other bank balances and cash 3,127,711.98 — Accounts receivables 383,790,184.17 760,734,927.92 Accounts payable (451,290,912.64) (259,852,046.39) Other receivables 2,537,036.67 — Other payables — (5,947,322.49) Short-term borrowings (58,773,955.58) (542,239,343.22) Long-term borrowings due within one year (638,077,940.62) (466,541,847.91) Long-term borrowings (583,558,787.92) (2,045,502,626.41) Total (1,190,821,714.01) (2,428,809,316.99) The Group closely monitors changes in foreign exchange rates as to their effects to the Group’s exposure in foreign exchange risk. Currently, the Group has not adopted other policies to circumvent foreign exchange risks. 237 IX. Financial instruments and risk management (continued) 1. Objective and measures of risk management (continued) 1.1. Market risks (continued) 1.1.2 Interest rate risk － risk in change of liquidity positions The risk that changes in interest rate lead to changes in cash flow of the financial instruments of the Group is mainly associated with floating-rate bank borrowings (details set out in Note VII.30). The Group’s policy is to maintain these borrowings in floating rates, so as to eliminate fair value risks arising from changes in interest rate. 1.2 Credit risk On 31 December 2008, the most significant credit risk exposure that might incur financial losses on the Group was mainly attributable to a contractual counterparty’s failure to perform its obligations, the effects of which could lead to losses in financial assets of the Group and financial guarantee undertaken by the Group, specific details are set out as follows: The carrying amount of financial assets recognized in the combined balance sheet: in respect of financial instruments carried at fair value, the carrying amount reflects the risk exposure; however, such amount does not represent the maximum credit exposure which changes in line with future changes in fair value. In order to mitigate credit risk, the Group established a committee to be responsible for determining credit limits, approving credit applications and carrying out other monitoring procedures to ensure necessary actions are taken to collect debts as they fall due. Besides, the Group reassesses the collectability of each amount receivable on an individual basis at each balance sheet date, in order to ensure sufficient provision is allocated for amounts that are not recoverable. As such, the management of the Group believes the credit risk assumed by the Group has been significantly reduced. The Group places its liquidity funds in banks with higher credit ratings; therefore, the credit risk with respect to liquidity funds is low. Since the Group’s risk exposures are distributed among various contractual parties and various customers, the Group has not significant concentration risk. 238 IX. Financial instruments and risk management (continued) 1. Objective and measures of risk management (continued) 1.3 Liquidity risk In managing liquidity risk, the Group maintains cash and cash equivalent at a level deemed sufficient by the management and carry out monitoring, in order to satisfy the operating needs of the Group and lower the effects of fluctuations in cash flows. The management of the Group monitors the utilization of bank borrowings and makes sure the related borrowing agreements are complied with. The primary source of funding for the Group is bank borrowings. On 31 December 2008, the Group had outstanding bank facilities of RMB13,854,080,000. Maturity analysis of financial assets and financial liabilities of the Group at undiscounted remaining contractual obligations are set out as follows: 1 to 3 months 3 to 12 months 1 to 5 years Over 5 years Total RMB RMB RMB RMB RMB Bank balances and cash 2,853,418,128.07 — — — 2,853,418,128.07 Bills receivable 731,953,547.10 242,056,241.14 — — 974,009,788.24 Accounts receivable 1,154,591,244.89 597,818,104.28 — — 1,752,409,349.17 Other receivable 90,041,676.35 45,847,936.58 — — 135,889,612.93 Debts (1,021,445,495.13 ) (1,778,277,523.63 ) (4,234,899,487.09 ) (236,472,560.60 ) (7,271,095,066.45 ) Bills payable (167,536,872.23 ) (200,090,689.91 ) — — (367,627,562.14 ) Accounts payable (2,217,100,498.83 ) (425,207,687.07 ) — — (2,642,308,185.90 ) Other payables (49,527,882.03 ) (296,698,360.03 ) — — (346,226,242.06 ) Short-term debentures payable — (1,998,800,000.00 ) — (1,998,800,000.00 ) Dividends payable (36,089.31 ) — — — (36,089.31 ) Total 1,374,357,758.88 (3,813,351,978.64 ) (4,234,899,487.09 ) (236,472,560.60 ) (6,910,366,267.45 ) 239 IX. Financial instruments and risk management (continued) 1. Objective and measures of risk management (continued) 2. Sensitivity analysis The Group adopts sensitivity analysis techniques to analyze the possible effects of rational and probable changes in risk variables to profit and loss for the current period or to the beneficial interests. Since risk variables seldom change on a stand-alone basis, while the correlation between variables has significant influence to the ultimate amount of change effected by the change in a single risk variable; therefore, the below analysis is based on the assumption that the changes in each variable occurred separately. 2.1 Foreign exchange risk Holding all other variables constant, the effects of probable and rational changes in exchange rate to the profit and loss for the period and after-tax consequences of interests are set out below: Current year Previous year Effects on Effects on Change in Effects on shareholders’ Effects on shareholders’ Item exchange rate net profits interests net profits interests % RMB ‘000 RMB ‘000 RMB ‘000 RMB ‘000 US dollar Appreciate 5% relative to Renminbi (49,345 ) (49,345 ) (87,228 ) (87,228 ) US dollar Depreciate 5% relative to Renminbi 49,345 49,345 87,228 87,228 The possible occurrence of rational changes in exchange rates of Hong Kong dollar and Euro has relatively small influence on profit and loss for the current period and pre-tax consequences of interests. 240 IX. Financial instruments and risk management (continued) 1. Objective and measures of risk management (continued) 2. Sensitivity analysis (continued) 2.2 Sensitivity analysis of interest rate risk Sensitivity analysis of interest rate risk is based on the below assumptions: ● Changes in market rate affects the interest income or expense of floating-rate financial instruments; ● Change in fair value of derivative financial instruments and other financial assets and liabilities are calculated using discounted cash flow method at market rate at the balance sheet date. Based on the above assumptions, holding all other variables constant, the effect of possible occurrence of rational changes in interest rate to the profit and loss for the period and after-tax consequences of interests are set out below: Current year Previous year Effects on Effects on Change in Effects on shareholders’ Effects on shareholders’ Item interest rate net profits interests net profits interests % RMB ‘000 RMB ‘000 RMB ‘000 RMB ‘000 Floating-rate borrowings Increased by 1% (38,720 ) (38,720 ) (44,809 ) (44,809 ) Floating-rate borrowings Decreased by 1% 38,720 38,720 44,809 44,809 241 X. Commitment (1) Capital committments Closing balance Opening balance RMB RMB Contracted but not yet recognized in the financial statements - Commitments in relation to acquisition and construction of long-term assets 291,332,151.32 362,388,255.96 (2) Operating lease commitments Until the balance sheet date, the Group entered into irrevocable operating lease contracts with non-group companies as follows: Closing balance Opening balance RMB RMB Minimum lease payments under irrevocable operating leases The first year after balance sheet date 49,278,297.28 15,744,593.37 The second year to fifth year after balance sheet date 27,355,917.46 26,274,043.94 The sixth year after balance sheet date and thereafter 56,189,228.75 38,077,285.14 Total 132,823,443.49 80,095,922.45 242 XI. Non-adjustment matters included in post balance sheet events 1. Profit distribution proposal On 8 April 2009, the twelfth meeting of the fifth session of the Board of the Company approved the profit distribution proposal for 2008. It is proposed that based on 2,062,045,941 shares in total at the end of the 2008, RMB0.5 cash bonus per 10 shares (tax included) will be distributed to all shareholders out of undistributed profit, in total amounting to RMB103,102,297.05 of profit distribution. 2. Issuance of medium-term notes proposal The twelfth meeting of the fifth session of the Board of the Company approved the proposal concerning issuance of medium-term notes. It was approved that medium-term notes of total principal amount not exceeding RMB2.3 billion may be issued in tranche with terms ranging from three to five years. The proceeds from issuance of medium-term notes would be used to supplement the working capital of the Company and repay bank borrowings. The interest rate of the medium-term notes issued would be determined according to the market conditions prevailing at the time of issue, but in no event higher than the best rate for bank loans quoted by the People’s Bank of China for the corresponding period. There is no guarantee provided by the Company on the medium-term notes issued. 3. Repurchase of H shares proposal The twelfth meeting of the fifth session of the Board of the Company approved the proposal concerning the granting of a general mandate to the Board for repurchase of a portion of H shares of the Company. The Board proposes to the shareholders’ meeting that the Board and Mr. Chen Hongguo, the chairman of the Board, authorized by, and on behalf of, the Board, be authorized to repurchase a portion of H shares not exceeding 10% of the aggregate nominal value of H shares in issue of the Company as at the time of passing of the relevant resolution at the shareholders’ meeting. The above proposals are pending for approval at the shareholders’ meeting of the Company. XII. Approval of the financial statements These financial statements were approved by the Board of Directors of the Company on 8 April 2009. 243 X Domestic Auditors’ Report and Financial Statements and Notes thereto Prepared in Accordance with Accounting Standards for Business Enterprises SUPPLEMENTARY INFORMATION PROVIDED BY THE MANAGEMENT FOR 2008 1. DIFFERENCES BETWEEN FINANCIAL STATEMENTS PREPARED IN ACCORDANCE WITH INTERNATIONAL FINANCIAL REPORTING STANDARDS AND FINANCIAL STATEMENTS PREPARED IN ACCORDANCE WITH RELEVANT CHINA ACCOUNTING STANDARDS This reconditioning of differences between the financial statements prepared domestically and overseas was prepared by Shandong Chenming Paper Holdings Limited in accordance with the relevant requirements of the “Compilation Rules for Information Disclosures by Companies that Offer Securities to the Public (No. 15) - General Requirements for Financial Reports” (as amended in 2007) issued by the China Securities Regulatory Commission. The financial statements of the Group for 2008 ware prepared in accordance with the PRC Accounting Standards of Business Enterprises (ASBEs) which set out net profits and net assets of RMB1,259,541,454.27 and RMB14,021,774,664.96 respectively. These figures are different from those reported in the financial statements prepared in accordance with the International Financial Reporting Standards in the following material aspects: 31 December For the year 2008 2008 Net assets Net profit RMB RMB Amount presented per IFRS 13,656,968,902.24 1,294,998,937.34 Special fund for treasury bond received and special accounts payable 344,948,245.89 (32,490,567.06) Capitalization of foreign exchange gains and losses on project loans 19,857,516.83 (2,966,916.01) Amount presented per PRC ASBES 14,021,774,664.96 1,259,541,454.27 The reason of such differences is as follows: In years prior to 2006, according to the principles of the PRC Accounting Standards of Business Enterprises (ASBEs) , the Group will receive special fund for treasury bond received and special accounts payable related to construction of relevant fixed assets which are included in capital reserve. However; according to IAS, the Group will account for special fund for treasury bond received and special accounts payable under deferred income and be amortized by installments over the useful lives of fixed assets.The above differences were all incurred in years prior to 2006, the management believes such differences in accounting principles will gradually be eliminated in future years. 244 2. RETURN ON NET ASSETS AND EARNINGS PER SHARE ON FULLY DELUTED AND WEIGHTED AVERAGE BASIS This calculation of return on net assets and earnings per was prepared by Shandong Chenming Paper Holdings Limited (hereinafter referred to as the “Company”) in accordance with the relevant requirements of the spare “Compilation Rules for Information Disclosures by Companies that Offer Securities to the Public (No. 09) － Calculations and disclosures for the return on net assets and earnings per share” (as amended in 2007) issued by the China Securities Regulatory Commission. Calculated in accordance with the net profits Calculated in accordance attributable to holders of with the net profits ordinary shares in the attributable to Company, after Profits during the holders of the ordinary deducting extraordinary reporting period shares in the company gains and losses Return on net assets Fully diluted basis 8.77% 6.97% Weighted average basis 10.24% 8.13% Earnings per shareÊ Basis earnings per share 0.57 0.45 Diluted earnings per share N/A N/A 245 3. ANALYSIS ON CHANGES OF ITEMS IN THE FINANCIAL STATEMENTS The following analysis on changes of items in the financial statements was prepared by Shandong Chenming Paper Holdings Limited in accordance with the relevant requirements of the “Compilation Rules for Information Disclosures by Companies that Offer Securities to the Public (No. 15) - General Requirements for Financial Reports” (as amended in 2007) issued by the China Securities Regulatory Commission. Range of Reason for the Items in balance sheet 2008 2007 change difference RMB RMB % Bank balances and cash 2,853,418,128.07 740,621,843.91 285 (1) Financial assets held for trading — 5,955,480.00 (100) (2) Bills receivable 974,009,788.24 1,676,684,054.95 (42) (3) Accounts receivable 1,752,409,349.17 1,660,020,696.84 6 (4) Inventories 3,397,792,930.38 1,744,492,612.36 95 (5) Other current assets 151,993,045.95 — 100 (14) Fixed assets 14,213,441,758.08 13,243,156,039.93 7 (6) Projects under construction 431,379,272.50 904,753,634.02 (52) (6) Intangible assets 1,277,076,588.53 822,301,826.32 55 (7) Long-term expenses to be amortized 37,227,730.36 56,513,234.75 (34) (8) Consumable biological assets 301,212,691.14 92,159,871.29 227 (9) Short-term borrowings 1,516,945,042.67 3,594,000,057.28 (58) (10) Bills payable 367,627,562.14 130,056,316.74 183 (11) Accounts payable 2,642,308,185.90 1,656,706,980.62 59 (12) Advance receipts 101,693,578.57 170,286,629.21 (40) (13) Tax payables 49,965,982.34 102,444,450.86 (51) (14) Non-current liabilities due within one year 1,038,125,240.62 667,746,417.91 55 (15) Other current liabilities 1,941,874,444.43 506,212,916.67 284 (16) Long-term borrowings 4,019,250,823.86 4,056,194,662.35 (1) (17) Deferred income 56,828,375.23 830,000.00 6,747 (18) Share capital 2,062,045,941.00 1,706,345,941.00 21 (19) Capital reserves 6,093,483,801.92 3,737,991,906.21 63 (20) 246 3. ANALYSIS ON CHANGES OF ITEMS IN THE FINANCIAL STATEMENTS (continued) Items in income Range Reason for the statement 2008 2007 of change difference RMB RMB % Operating income 15,529,593,435.77 15,164,742,450.26 2 (21) Operating expenses 12,556,762,340.80 12,074,481,475.02 4 (22) Tax and added tax on principal operations 12,582,354.31 17,854,424.80 (30) Selling expenses 705,595,565.95 783,289,341.85 (10) (23) Administrative expenses 561,194,537.62 530,820,858.29 6 (24) Finance expenses 287,136,504.05 392,163,050.56 (27) (25) Losses from impairment of assets 93,125,334.87 102,198,629.26 (9) (26) Investment gains (23,081,752.26) (9,461,550.75) 144 (27) Non-operating income 274,366,224.82 232,218,083.67 18 (28) (1) Bank balances and cash of the Group as at 31 December 2008 increased by 285% over 31 December 2007, mainly due to the issuance of H-shares of the Group in June 2008, raising proceeds and receipt of interests. (2) Financial assets held for trading for the year reduced by RMB5,955,480.00, due to the future pooling foreign exchange contracts entered into in 2007 by subsidiary Jiangxi Chenming Paper Co., Ltd expiring successively during the year. (3) Bills receivable for the year decreased by 42%, primarily due to the Group making sales on credit more frequently and requiring repayments from sales contractors within a credit period, in a way gradually reducing settlement by bills receivable and causing the balance to shrink significantly. (4) Accounts receivable for the year increased by 6%, mainly due to the increase in income for the year. (5) Stock increased by 95% during the year, primarily due to the drop in market price of paper products and slump in demand resulted by the financial crisis during the year, leading to period-on-period declines in sales of all four quarters.In view of this, the management had allocated sufficient provision for the drop in price of stock. (6) Fixed assets increased by 7% during the year, projects under construction reduced by 52%, mainly because: (a) a 120,000-tonne coated paper project, construction work in Grand View Hotel and a 98,000-tonne waste paper de-inking project were transferred to fixed assets; (b) Fuyu Chenming Paper Co., Ltd., a subsidiary of the Company, acquired the entire fixed assets of 黑龍江斯達紙業有限 公 司 (Heilongjiang Xida Paper Company Limited) and 黑 龍 江 造 紙 廠 (Heilongjiang Paper Plant), therefore increasing amounts in fixed assets. 247 3. ANALYSIS ON CHANGES OF ITEMS IN THE FINANCIAL STATEMENTS (Continued) (7) Intangible assets increased by 55% during the year, mainly due to subsidiary Zhanjiang Chenming Paper Pulp Co., Ltd. commenced preparation work for construction during the year, which increased land use rights. (8) Long-term expenses to be amortized reduced by 34% during the year, primarily attributable to the completion of assets acquisition by subsidiary Fuyu Chenming Paper Co., Ltd. during the year, where the payments on land and equipment leases originally required to be paid were reduced. (9) Consumable biological assets increased by 227% during the year, mainly due to purchase, growing and fair value change of forestry by subsidiaries of the Company, i.e. Zhanjiang Chenming Arboriculture Co., Ltd., Yangjiang Chenming Arboriculture Co., Ltd., Nanchang Chenming Arboriculture Co., Ltd. and Huanggang Chenming Arboriculture Co., Ltd. (10) Short-term borrowings were reduced by 58%, mainly because of repayment of a portion of short-term borrowings falling due, since sales of paper products in the first half of 2008 was favorable and the Company had adequate liquidity due to customers making timely payments; as a result, the growth of amount in borrowings was lowered. (11) Bills payable increased by 183% during the year, mainly because the Group expanded the usage of payable bills instruments in 2008, where an increased number of bills payable were used to settle purchases of raw materials and equipment. (12) Accounts payable increased by 59%, primarily attributable to the Group’s extension of payment period on external purchases in view of the impact of the financial crisis. (13) Advance receipts for the year dropped by 40%, mainly because overseas sales dropped during the year under the effects of the financial crisis, which caused the advance receipts by the Group’s subsidiary Chenming (HK) to reduce compared with last year. (14) Tax payables dropped by 51% and other current assets increased by 100% during the year, mainly because certain subsidiaries of the Group paid income tax in advance, which formed credit balances in income tax. Meanwhile, subsidiary Jilin Chenming Paper Co., Ltd. enjoyed the policy of input tax deduction on acquisition of fixed assets creating a larger amount of input tax credits. The balances of income tax paid in advance and not yet credited input tax deduction were reclassified to other current assets at the end of the year. 248 3. ANALYSIS ON CHANGES OF ITEMS IN THE FINANCIAL STATEMENTS (Continued) (15) Non-current liabilities due within one year increased by 55% during the year, mainly because a portion of the Group’s long-term liabilities were falling due in a short period, therefore transferred to ‘current liabilities due within one year’. (16) Short-term debentures payable increased by 284% during the year. Short-term debentures issued by subsidiary Jiangxi Chenming matured in September 2007 and the Group issued RMB1.9 billion short-term debentures in 2008. (17) Long-term borrowings reduced by 1%, primarily attributable to the transfer of a portion of long-term borrowings due in 2009 into “non-current liabilities due within one year” and early repayment of a portion of borrowings. (18) Deferred income increased by 6,747% during the year, mainly because the Group received substantial grants from the government with respect to its assets during the year. (19) Share capital increased by 21% during the year, mainly because the Company issued 355,700,000 H-shares in June 2008 which increased share capital. (20) Capital reserves increased by 63% for the year, primarily because the Company received proceeds in connection with the issuance of H-shares, such amount net of issuance expenses was credited into capital reserves. (21) Operating income increased by 2% during the year, mainly due to a rise in average sales price during the year. (22) Operating costs rose by 4% during the year, mainly because the average purchase price of raw materials increased as well as higher average cost per unit during the year. (23) Sales expenses for the year reduced by 10%, mainly because sales volume decreased in the fourth quarter under the impact of financial crisis, allowing more room for lowering of transportation expenses. (24) Administrative expenses increased by 6% during the year, mainly due to loss from production interruption arising from suspension of panel production lines because of the impact of the financial crisis. 249 3. ANALYSIS ON CHANGES OF ITEMS IN THE FINANCIAL STATEMENTS (Continued) (25) Finance costs decreased by 27% during the year, mainly because the Group issued H-shares in June 2008, the proceeds collected therefrom increased interests income, while the Group reduced short-term borrowings and repaid certain long-term borrowings during the year; and no provision for interest of the convertible bonds was made, thus reducing interest expenses in 2008. (26) Losses from impairment of assets during the year was reduced by 9%, primarily due to the Group’s receipt of goods payment by 順德星辰(Shunde Xingchen) which was recognized as impaired during the year, therefore, the Group reversed a bad debt fully provided for in the previous year. (27) Investment losses for the year increased by 144%, mainly due to the exacerbation of losses in associated corporations during the year. (28) Non-operating income increased by 18% during the year, primarily attributable to the increase in government grants and negative goodwill arising from purchase of minority interests during the year. The supplementary information provided by the management was signed by the responsible personnel of Shandong Chenming Paper Holdings Limited as shown below on 8 April 2009: Head of Corporation: Chen Hongguo Chief Financial Officer: Liu Junwu Head of finance section: Wang Chunfang 8 April 2009 250 XII Documents Available for Inspection 1. They include the financial statements which is signed and sealed by the legal representative, financial controller and head of the financial department of the Company. 2. They include the original copy of the auditors’ report which is sealed by the accounting firm and signed by the certified public accountant. 3. They include the original copies of all of the documents and announcements of the Company which have been disclosed in the designated newspaper and website as approved by China Securities Regulatory Commission during the reporting period. Shandong Chenming Paper Holdings Limited 8 April 2009 251