粤华包Ｂ(200986)2008年年度报告（英文版）

佛山华新包装股份有限公司 FOSHAN HUAXIN PACKAGING CO., LTD ANNUAL REPORT 2008 Mar. 26, 2009 1 I. Important notes and contents Important notes: The Board of Directors, the Supervisory Committees well as directors, supervisors and senior executives of Foshan Huaxin Packaging Co., Ltd (hereinafter referred to as “the Company”) hereby confirm that there are no important omissions, fictitious statements or serious misleading information carried in this report, and shall take all responsibilities, individually and/or jointly, for the authenticity, accuracy and completeness of the whole contents. This Report is prepared in both Chinese and English versions. Should there be difference in understanding the two versions, the Chinese version shall prevail. Chairman of the Board Mr. Tong Laiming, General Manager Mr. Wang Qi and Chief Financial Officer Mr. Ji Xiangdong hereby declare that the financial report enclosed in this Annual Report 2008 is authentic and complete. Guangdong Dahua Delu Certified Public Accountants Co., Ltd issued Audit Report for the Company with unqualified opinion. 2 Contents I. Important Notes and Contents………………………………………...…………2 II. Company Profile……………………………………………………………..….4 III. Abstract of Accounting Data and Business Data …………….………………….5 IV. Changes in Shares Capital and Particulars about Shareholders………...……..7 V. Directors, Supervisors and Senior Executives and Employees………..……10 VI. Corporate Governance Structure…………………………………………..…16 VII. Brief Introduction of Shareholders’ General Meeting……………………….24 VIII. Report of the Board of Directors……………………………………………25 IX. Report of the Supervisory Committee…………………………………..……41 X. Significant Events…………………………………………………………44 XI. Financial Report……………………………………………………………51 XII. Documents Available for Inspection………………………………………….51 3 II. Company Profile 1. Legal Name in Chinese: 佛山华新包装股份有限公司 Legal Name in English: Foshan Huaxin Packaging Co., Ltd 2. Legal Representative: Tong Laiming 3. Secretary of the Board: Zhou Qihong Address: the 18th Floor, Jinghua Bldg., Jihua Rd., Foshan Tel: 0757-83981729, 83992076 Fax: 0757-83992026 E-mail: hf_zhouqh@fshxp.com 4. Registered Address: No. 18, the 5th Jihua Road, Foshan Office Address: 18th Floor, Jinghua Building, the 5th Jihua Road, Foshan Post Code: 528000 Website: http://www.fshxp.com E-mail: hejf@fshxp.com 5. Newspapers Designated for Disclosing the Information: Securities Times and Ta Kung Pao (HK) Internet Website Designated by China Securities Regulatory Commission: http://www.cninfo.com.cn Place Where the Annual Report is Prepared and Placed: Office of the Board 6. Stock Exchange Listed with: Shenzhen Stock Exchange Short Form of the Stock: Foshan Huaxin Packaging B Code of the Stock: 200986 7. Other Relevant Information (1) Date of first registration: Jun. 21, 1999 Registration with: Guangdong Municipal Administration for Industry and Commerce (2) Business License No.: 19035257-5 (3) Taxation Registration No.: NTZi No. 440601707682279 (4) Certified public accountants engaged: Domestic certified public accountants: Guangdong Dahua Delu Certified Public Accountants Co., Ltd Address: No.16, 18, Kangning Road, Zhuhai, Guangdong Tel.: (0756) 2114788 Fax: (0756) 2217643 4 III. Abstract of Accounting Data and Business Data I. Main accounting data and business data of fiscal year of 2008 Index Business data (Unit: RMB) Operating profit 40,124,340.05 Total profit 40,073,062.15 Total profit attributable to shareholders of listed company 42,588,844.36 Total profit after deducting non-recurring gains and losses attributable to shareholders of listed company 36,900,782.27 Net cash flow from operating activities -27,817,792.61 Items deducting non-recurring gains and losses and its amount Index Business data (Unit: RMB) Gains and losses on disposal of non-current assets 12,680.80 Government subsidy measured into gains and losses of current period 225,000.00 Capital occupied from non-financial enterprise recorded into current gains and losses 5,774,689.89 Net other non-operation income/expense -288,958.70 Less: Impact on enterprise income tax 26,923.35 Quotient of shares held by minority shareholders 8,426.55 Net amount of non-recurring gains and losses 5,688,062.09 II. Main accounting data and financial indices in the past three years 1. Main accounting data Unit: RMB Yuan Increase/decrease 2008 2007 compared with last 2006 year (%) Operating Income 1,412,674,165.82 1,269,510,406.95 11.28% 673,543,663.61 Total Profit 40,073,062.15 119,215,623.37 -66.39% 94,664,715.47 Net profit attributable to the listed companies’ 42,588,844.36 110,720,644.39 -61.53% 92,048,266.31 shareholders Net profit after deducting non-recurring gains and losses attributable to shareholders of 36,900,782.27 105,023,467.91 -64.86% 89,690,699.03 listed company Net cash flow from operating activities -27,817,792.61 67,039,489.50 -141.49% -133,179,152.28 Increase/decrease By the end of 2008 By the end of 2007 compared with last By the end of 2006 year (%) Total assets 3,425,460,446.52 3,015,150,085.88 13.61% 2,760,133,721.03 Owners’ equity (or shareholders’ equity) 1,269,218,639.42 1,226,629,795.06 3.47% 1,137,884,150.67 Capital stock 505,425,000.00 505,425,000.00 0.00% 439,500,000.00 5 2. Main financial index Unit: RMB Yuan Increase/decrease compared 2008 2007 2006 with last year (%) Basic earnings per share (Yuan/share) 0.08 0.22 -63.64% 0.18 Diluted earnings per share (Yuan/share) 0.08 0.22 -63.64% 0.18 Basis earnings per share after deducting 0.07 0.21 -66.67% 0.177 non-recurring gains and losses (Yuan/share) Fully diluted return on net assets (%) 3.36% 9.03% -5.67% 8.09% Weighted average return on net assets (%) 3.41% 9.37% -5.96% 8.43% Fully diluted return on net assets after deducting 2.91% 8.56% -5.65% 7.88% non-recurring gains and losses (%) Weighted average return on net assets after 2.96% 8.88% -5.92% 8.21% deducting non-recurring gains and losses (%) Net cash flow per share arising from operating -0.06 0.13 -146.15% -0.30 activities (Yuan/share) Increase/decrease compared By the end of 2008 By the end of 2007 By the end of 2006 with last year (%) Net assets per share attributable to shareholders 2.51 2.43 3.29% 2.59 of listed company (Yuan/share) 6 IV. Changes in Share Capital and Particulars about the Shareholders I. Changes in share capital (I). Statement of changes in share capital of the Company Unit: Share Before the change Increase/decrease in the change (+,-) After the change Capitalization Proportio Issuance of Bonus Proporti Amount of public Other Subtotal Amount n (%) new shares shares on (%) reserve fund I. Unlisted tradable shares 333,500,000 65.98% 333,500,000 65.98% 1. Sponsor’s share 333,500,000 65.98% 333,500,000 65.98% Including: State-owned shares Shares held by domestic corporation 333,500,000 65.98% 333,500,000 65.98% Shares held by foreign corporation Others 2. Raised corporation shares 3. Employee shares 4. Preference shares or others II. Listed tradable shares 171,925,000 34.02% 171,925,000 34.02% 1. RMB ordinary shares 2. Domestically listed foreign shares 171,925,000 34.02% 171,925,000 34.02% 3. Overseas listed foreign shares 4. Others III. Total shares 505,425,000 100.00% 505,425,000 100.00% (II). Issuance and listing of stocks 1. The Company hadn’t issued or listed any new shares in past three years. 2. The Company has no employees’ shares II. Introduction to shareholders 1. Particulars about shares held by the top ten shareholders and the top ten shareholders holding tradable shares Unit: Share Total shareholders 19,336 Shares held by the top ten shareholders Proportion of Total shares Non-tradable shares Shares pledged or Name of shareholders Nature of shareholder shares held held held frozen Foshan Huaxin Development Co., Ltd State-owned corporation 65.20% 329,512,030 329,512,030 0 WU HAO YUAN Foreign natural person 0.32% 1,602,541 0 0 PANG,KWOK SHI Foreign natural person 0.14% 730,605 0 0 PIAO JOY GUANGSHI Domestic natural person 0.13% 639,289 0 0 LIN QING LE Foreign natural person 0.13% 635,800 0 0 LIN CHU BIN Domestic natural person 0.12% 613,134 0 0 LIN QIONG ZHI Domestic natural person 0.12% 585,580 0 0 Guangdong Technology Reform State-owned corporation 0.11% 569,710 569,710 0 7 Investment Co., Ltd China Material Development and State-owned corporation 0.11% 569,710 569,710 0 Investment General Corporation Foshan Assets Management Center State-owned corporation 0.11% 569,710 569,710 0 Shares held by the top ten shareholders holding tradable share Name of shareholders Tradable shares held Variety of shares WU HAO YUAN 1,602,541 Domestically listed foreign shares PANG,KWOK SHI 730,605 Domestically listed foreign shares PIAO JOY GUANGSHI 639,289 Domestically listed foreign shares LIN QING LE 635,800 Domestically listed foreign shares LIN CHU BIN 613,134 Domestically listed foreign shares LIN QIONG ZHI 585,580 Domestically listed foreign shares ZHAN CHANG CHENG 567,595 Domestically listed foreign shares CHEN PING HUA 531,000 Domestically listed foreign shares CAO SHENGCHUN 487,945 Domestically listed foreign shares TANG YI 472,122 Domestically listed foreign shares ① China Material Development and Investment General Corporation is the controlling shareholder of the principal shareholder of the Company, Foshan Huaxin Development Co., Ltd., therefore China Material Development and Investment General Corporation has associated relationships with the Company and the controlling shareholders of the Company, Foshan Explanation on associated relationship Huaxin Development Co., Ltd. among the top ten shareholders or ② The Company is not aware of whether other shareholders exists related relationship or acting-in-concert whether they belong to action-in-concert regulated in Administrative Measures on Information Disclosure of Changes in Shareholding of Listed Companies. ③ In the report period, the shares held by shareholders of the Company holding over 5% (including 5%) were not pledged or frozen. 2. The introduction of the controlling shareholder of the Company: About the Company’s controlling shareholder: Foshan Huaxin Development Co., Ltd (hereinafter referred to as “FHD”) holds 329,512,030 of the Company’s state-owned corporate shares (non-tradable), taking 65.2% of the total share capital. FHD was incorporated on May 27, 1993; its legal representative is Tong Laiming; its registered capital is RMB 457.93 million; its business scope: production, manufacture and distribution of packing materials, papermaking, cable, wire, new materials; distribution of packing machinery and repairing services, amplifiers and fittings, decoration materials, and drinks; information consulting, etc. Foshan Huaxin Development Co., Ltd. has 4 corporate shareholders, of which China Material Development and Investment Corporation holds 66.7874% of the registered capital in FHD; China Material Development and Investment Company registered through State Administrative Bureau in June, 1988 and now is wholly state-owned enterprise of China Chengtong Holding Group. China Chengtong Holding Group (hereinafter refer to as “China Chengtong”) was China Chengtong Group formerly and was set up in accordance with the admission ticket NMHE Zi (1998) Document No.189 issued by State Administration for Domestic Trade on Jan. 22, 1998 as a large scale logistic 8 enterprise group approved by State Administration for Industry and Commerce Bureau and managed by SASAC. China Chengtong owned the largest chain logistic distribution and allotment network and metal distribution network in the mainland and transportation net combining seas, railways, highway and airlines. In accordance with the Circular on Establishing and Perfecting the Pilot Work of Board of Directors in State-owned Companies by Central Enterprises promulgated by SASAC in June 2004, China Chengtong is selected by the SASAC as the pilot standard Board of Directors in the first seven pilot enterprises for establishing and perfecting the Board of Directors. China Chengtong has been on a rapid developing way and move towards the goal of international modern enterprises. The registered capital of the Chengtong is RMB1, 546,950,000 and Legal Representative is Mr. Ma Zhengwu, the registered address is Northern Yuetan Street No. 25, Western District of Beijing. The registered number of business license is 1000001002867. The major business of the Company is storage logistic and metal trade, etc. Relationship of Ownership and Shareholding between the Company and its actual controller: SASAC 100% China Chengtong Holding Group Co., Ltd 100% 78.26% China Materials Development Investment General Corporation Jiacheng Enterprise Development Co., Ltd 66.79% Foshan Huaxin Development Co., Ltd 6.62% 65.2% 0.11% Foshan Huaxin Packaging Co., Ltd 9 V. Directors, Supervisors and Senior Executives and Employees I. Directors, supervisors and senior executives (I) Basic information Total Remuneration Shares remuneration drawn from Shares held at drawn from the shareholder Name Position Gender Age Office term held at year-beg Company in the entities or other year-end in reporting period related parties (RMB’0000) or not Tong Laiming Chairman of the Board Male 39 2008.05-2011.05 0 0 Yes Vice Chairman of the Wang Qi Male 55 2008.05-2011.05 0 0 Yes Board Tan Shanghui Director Male 58 2008.05-2011.05 0 0 No Yan Su Director Male 38 2008.05-2011.05 0 0 Yes Huang Xin Director Male 46 2008.05-2011.05 0 0 6.00 Yes Yang Weixing Director Male 38 2008.05-2011.05 0 0 Yes Zhu Zhengfu Independent Director Male 44 2008.05-2011.05 0 0 2.53 No Zhong Liuhan Independent Director Male 55 2008.05-2011.05 0 0 3.8 No Ge Yun Independent Director Female 46 2008.05-2011.05 0 0 3.8 No Sun Sheng’ai Independent Director Male 60 2005.06-2008.05 0 0 1.58 Zhou Qihong Secretary of the Board Male 41 2008.05-2011.05 0 0 25.53 No Chairman of the Male 2008.05-2011.05 Yes Hong Jun 49 0 0 0.00 Supervisory Committee Huang Jianrong Supervisor Male 52 2008.05-2011.05 0 0 0.00 Yes Peng Danhong Supervisor Female 37 2008.05-2011.05 0 0 0.00 Yes Wang Qi General Manager Male 55 2008.05-2011.05 0 0 25.87 Yes Executive Deputy General Tan Shanghui Male 58 2008.05-2011.05 0 0 30.16 No Manager Chen Haiyan Deputy General Manager Male 43 2008.05-2011.05 0 0 26.07 No Chen Jiali Deputy General Manager Male 51 2008.05-2011.05 0 0 0.00 Yes Lu Liang Deputy General Manager Male 36 2008.05-2011.05 0 0 25.23 No Ji Xiangdong CFO Male 34 2008.05-2011.05 0 0 27.54 No Total - - - - 178.11 Note: The Company hadn’t carried out Equity Incentive Plan till now. None of directors, supervisors, and senior executives held the stock option and shares subject to moratorium in the reporting period. Post held by directors, supervisors and senior executives of the Company in Shareholders’ Companies Name Company Position Engagement duration Wang Qi Foshan Huaxin Development Co., Ltd Vice Chairman of the Board From Feb. 2000 up to now Tong China Material Development and Investment General General Manager From Apr. 2005 up to now Laiming Corporation Yan Su China Material Development and Investment General Chief Accountant From 2006 up to now 10 Corporation Yang Foshan Chan Ben De Development Co., Ltd General Manager From Jun. 2007 up to now Weixing Huang Xin Foshan Huaxin Development Co., Ltd Vice General Manager From May 2008 up to now China Material Development and Investment General Secretary and Vice Hong Jun From Sep. 2007 up to now Corporation Secretary of the CPC Huang Director of Administration Foshan Huaxin Development Co., Ltd From 2002 to May 2008 Jianrong Office Post held by directors, supervisors and senior executives of the Company in other units except Shareholders’ Companies Name Company Position Engagement duration Zhu Zhengfu Kunlun Law Firm Director From 1998 up to now Zhong Liuhan Foshan Dongjian Group Co., Ltd Chairman of the Board From Jul. 2001 up to now Ge Yun Guangdong Institute of Certified Public Accountant Deputy Secretary-General From Sep. 2004 up to now (II) The main work experience of current directors, supervisors and senior executives and the posts or concurrent posts held by them at the units other than corporate shareholders Chairman of the Board: Tong Laiming, born in 1969, is a master of economics and certified public accountant. From May 2000 to Sep. 2001, he held a post as Manager in Beijing Diweilepu Science-Trading Co., Ltd; from Sep. 2001 to Apr. 2005, he has hold posts in China Material Development and Investment General Corporation as the Assistant General Manager and concurrently Manager of Financial Management Department, Deputy General Manager and CFO. He has served as General Manager as well as Legal Representative in China Material Development and Investment General Corporation from April 2005 up to now; from Feb. 2006 up to now, has been acting as Chairman of the Board in Foshan Huaxin Development Co., Ltd; He has been acting as Chairman of the Boar in Foshan Huaxin Packaging Co., Ltd. Vice Chairman of the Board & General Manager: Wang Qi, born in 1953, was a MBA degree holder and economist. From Jan. 1995 to May 2008, he hold posts in Foshan Huaxin Development Co., Ltd as the Chairman of the Board, Vice Chairman of the Board and General Manager; from Jun. 1999 to May 2008, he served in Foshan Huaxin Packaging Co., Ltd as Chairman of the Board. From May 2008 up to now, he has been taking the posts of Vice Chairman and General Manager of China Material Development and Investment General Corporation. From Jul. 2008 up to now, he has been taking the post of Foshan Huaxin Packaging Co., Ltd as Vice Secretary of the CPC. Director & Executive Deputy General Manager: Tan Shanghui, born in 1950, is an MBA degree holder and senior engineer. He once served as General Manager in Foshan Huafeng Paper Co., Ltd from 1999 to May 2008; From 2004 to Jun. 2006, he held a concurrent post as General Manager in Foshan Huafeng Paper Co., Ltd. He is serving as Executive Deputy General Manager in Foshan Huaxin Packaging Co., Ltd since May 2008. Director: Yan Su, born in 1970, is an MBA degree holder, senior accountant, CPA and CTA. From Aug. 2000 to Apr. 2006, successively held posts in Huaxing Import & Export Co., Ltd as Manager of Financing Department, Chief Economist and Deputy 11 General Manager; From Apr. 2006 up to now, he took post in China Material Development and Investment General Corporation as Assistant of General Manager, Chief Financial Officer, now also as Chief Accountant. He acted as Vice Secretary of Party Committee of Foshan Huaxin Development Co., Ltd from Jun. 2007 to Jul.2008. Director: Huang Xin, born in 1962, master degree holder. From Dec. 1993 to Mar. 2006, he successively served as Deputy General Manager, Manager of Operation Dept. Ⅱ, Manager of Industrial Dept, Deputy Manager of Stratagem Investment Dept. and Manager of Asset Management Dept. in China Material Development Investment Corporation. He held a post in Foshan Huaxin Packaging Co., Ltd as a Deputy General Manager from Mar. 2006. He has been acting as Deputy General Manager in Foshan Huaxin Development Co., Ltd since May 2008. Director: Yang Weixing, born in 1970, is a bachelor degree holder and economist. From Dec. 1999 to Aug. 2006, he sucessively took posts as Vice Director of Assets Operation Department in Foshan Industry Investment Holding Co., Ltd, Manager of Property Management Department, Assistant of General Manager and Deputy General Manger in Foshan Chan Ben De Development Co., Ltd and Deputy General Manager in Foshan Taiji Wine Co., Ltd; He has been acting as General Manager in Foshan Chan Ben De Development Co., Ltd since Jun. 2007. Independent Director, Zhu Zhengfu, born in 1964, is a doctoral degree holder and lawyer. Since 1993, he had successively worked as Director of Finance & Property Department in Guangdong Economic and Trade Law Firms, partner of Guangdong Dalu Law Firm; Deputy Director of Land Law Advisory Services Center of Guangdong, which belongs to Guangdong Provincial Department of Land and Resources. He has been acting as director and practice partner of Guangdong Kunlun Law Firm since 1998. Independent Director: Zhong Liuhan, born in 1953, is an economist. He served as Chairman of the Board in Foshan Dongjian Group Company from Oct. 1994 to Jun. 2001. He has been holding a post in Foshan Dongjian Group Co., Ltd as the Chairman of the Board and concurrently Secretary of the Party Committee since July 2001. Independent Director: Ge Yun, born in 1962, is an master in economics and CPA. She served as director of Operation Regulations Department and director of Training Department in Association of Public Accountants Guangdong Province from Feb. 1997 to Sep. 2004. She has been holding a post in Association of Public Accountants Guangdong Province as Deputy Secretary-General since Sep. 2004. Chairman of the Supervisory Committee: Hong Jun, born in 1959, is a postgraduate degree holder and senior economist. From 1992 to Sep. 2007, he successively took posts as Vice Chief of Appointment & Dismission Office, Personnel Division in Materials Department, Vice Chief of Cadre Office of Personnel Organ in Domestic Trade Department and General Manager of Human Resource Department in China Chengtong Holding Group Co., Ltd; he has been holding a post as Secretary and Vice Secretary of the CPC in China Material Development and Investment General Corporation since Sep. 2007; Concurrently he has been acting as Secretary of the CPC in Foshan Huaxin Packaging Co., Ltd since Jul. 2008 as well as Chairman of the 12 Board of Foshan Huaxin Packaging Co., Ltd since May 2008. Supervisor: Huang Jianrong, born in 1956, is a MBA degree holder and Senior Political Worker. From May 1990 to May 2008, he successively acted as Deputy Director General of Foshan Secrecy Bureau, Vice Secretary of the CPC and Deputy General Manager in Foshan Petroleum Chemical Industry Co., Ltd, Secretary of Enterprise Management Department as well as Secretary of Discipline Inspection Committee in Foshan Zhongli Management Co., Ltd, Director of Administration Office, Director of the Party Committee Office and Vice Secretary of Discipline Inspection Committee in Foshan Huaxin Development Co., Ltd; he has been holding posts as the Chairman of the Supervisory Committee in Foshan Huaxin Development Co., Ltd since May 2008; Concurrently, he has been holding posts as Manager of Human Resource Department since Mar. 2008 and Vice Secretary of Discipline Inspection Committee and Director of Communist Party Office in Foshan Huaxin Packaging Co., Ltd. Supervisor: Peng Danhong, born in 1971, postgraduate degree holder, is industrial economist and Human Resource Specialist. From Jun. 1999 to Mar. 2008, she was clerk of Development Planning Department and Human Resource Department as well as Deputy Manager and Manager in Foshan Huaxin Packaging Co., Ltd; from Aug. 2006 to Jul. 2008, acted as Manager of Human Resource Department, Director of General Manager Office and Assistant of General Manager in Foshan Huafeng Paper Co., Ltd; She has been holding a post in Foshan Huafeng Paper Co., Ltd as Deputy General Manager since Jul. 2008 and Vice Secretary of the CPC since Dec. 2008. Secretary of the Board: Zhou Qihong, was born in 1967, master degree, engineer. He ever took the post of Deputy General Manager in Foshan Huaxin Packing Co., Ltd from Jul. 1999 to Aug. 2004; He sucessively served as General Manger in Foshan Huafeng Paper Co., Ltd from Mar. 2001 to May 2004 and as Deputy General Manger in Foshan Huaxin Development Co., Ltd from Aug. 2004 to Jul. 2006. He has been serving as Secretary of the Board in Foshan Huaxin Packing Co., Ltd since Sep. 2006. Deputy General Manager: Chen Haiyan, born in1965, is a postgraduate and MBA degree holder, and engineer. He once took the post of Secretary of the Board in Foshan Huaxin Packing Co., Ltd from July 1999 to Sep. 2006.He has been holding post in Foshan Huaxin Packing Co., Ltd as Deputy General Manger since Jul. 2002. He ever took the post of Chairman of the Board and concurrently General Manager in Huaxin (Foshan) Color Printing Co., Ltd from Nov. 2003 to Jul. 2006. He has been concurrently acting as General Manger in Foshan Huafeng Paper Co., Ltd since Jul. 2006. Deputy General Manager: Chen Jiali, born in 1957, is a junior college graduate and engineer. He has been serving as Deputy General Manager in Huaxin Tetra (Foshan) Packaging Co., Ltd since Feb. 1997; He has been ascting as Deputy General Manager in Foshan Huaxin Packing Co., Ltd since July 1999. He now concurrently serves as Chairman of the Board in Huaxin (Foshan) Color Printing Co., Ltd. Deputy General Manager: Lu Liang, born in 1972, MBA and economist. He once served as Assistant to General Manager as well as Head of Investment Development Dept. in Foshan Industrial Investment Co., Ltd. from Aug. 1998 to Dec. 2003. He has been serving as Deputy General Manager in Foshan Huaxin Packing Co., Ltd since Jan. 2004. He concurrently took the Secretary of CPC in Foshan Huafeng Paper Co., 13 Ltd from Jul. 2006 to Jun. 2008. He now serves as Vice Secretary of CPC in Foshan Huaxin Packing Co., Ltd since Jul. 2008. Chief Financial Officer: Ji Xiangdong, born in 1974, a MBA degree holder and CPA. He has served as Deputy Manager of Auditing Dept. in Beijing Zhong Tian Hua Zheng Certified Public Accountants from Sep. 2002 to Jul. 2004. He held the posts in China Materials Development Investment Corporation as Deputy Manger and Manager of Financial Dept from Aug. 2004 to May 2007. he has been serving as Chief Financial Officer in Foshan Huaxin Packing Co., Ltd since May 2007. (III) Annual remuneration 1. Remuneration of directors, supervisors and senior executives of the Company was fixed on according to the plan determined by shareholders’ general meeting and the board of directors and implemented annual salary system according to the operating results of the Company. The total annual remuneration of the current directors, supervisors and senior executives of the Company is RMB 178.11 million. 2. In the reporting period, allowance for an independent director was RMB 38,000 per year. The expenses of performance of their duties were borne by the Company. 3. Current Chairman of Board Tong Laiming, Vice Chairman of Board Wang Qi (from Jan. to Jun. 2008) and directors, namely Yan Su, Yang Weixing and Huangxin (from Jul. to Dec. 2008) didn’t draw remuneration from the Company. Supervisors, namely Hong Jun and Peng Danhong did not draw remuneration from the Company. The above personnel drew remuneration from the units they served. (IV) Directors, supervisors and senior executives leaving their posts in the reporting period In the report period, proposal on reelection of the Board of Directors and the Supervisory Committee was reviewed and approved on Shareholder’s General Meeting 2007 dated 20 May 2008. Director He Jichang and independent director Sun Sheng’ai resigned from their posts due to expiration of office term; supervisors Chen Zeqing, Chen Ming, Huang Dabiao and Huang Weiji resigned from their posts due to expiration of office term. In the report period, the 1st Meeting of the 4th Board of Directors 2008 was held on 20 May 2008, at which reviewed and approved the new executives. Huang Xin resigned from Deputy General Manager of the Company due to job transfer. II. Employees of the Company Employees of the Company and professional structure: The Company has 2,162 in-service employees, including 972 production staff, 136 sales staff, 166 technical staff, 45 financial staff, 1026 administrative staff and 741 other staff. Classified according to education background, 218 employees hold bachelor degree or above, 292 employees have college diploma and 1652 employees are of or under degree of secondary technological school, senior middle school or technical school. There are 3 retired employees whom the Company will bear the expenses while 17 14 retired staff the Company won’t bear. The staff above included staff from subsidiary holding company. 15 Ⅵ Corporate Governance 1. Overall Status of Corporate Governance Under the guidance of China Securities Regulatory Commission Official Bulletin No. 27 ﹝2008﹞ and related documents of CSRC Guangdong Regulatory Bureau, the Company, on the basis of consolidating the achievements of the special campaign for corporate governance in 2007, continued to step up the campaign in 2008. According to requirements of the said documents, the Company conducted a self-inspection regarding the rectifying progress of the to-be-rectified issues in the Report on Corporate Governance Rectification published by the Company on 13 Oct. 2007. And then the Company disclosed its Report on Rectifying Progress Concerning Corporate Governance on 30 Jul. 2008. During the reporting period, the Company continuously perfected its corporate governance structure, built up a modern enterprise system, and regulated its operation in accordance to Company Law, Securities Law and other relevant laws and regulations. In view of this, the Board of Directors believes that the actual situation of the Company’s corporate governance is basically in line with the requirements of the Code of Corporate Governance for Listed Companies, which is detailed as follows: (Ⅰ) About shareholders and Shareholders’ General Meeting: according to the Regulatory Opinions of Shareholders’ General Meeting of Listed Companies, the Company further standardized the convening of the Shareholders’ General Meeting, so as to ensure the full exercise of all shareholders’ legal rights and interests, as well as the fair treatment for all shareholders, especially minority shareholders. (Ⅱ) About the controlling shareholders and the listed Company: the controlling shareholders acted according to rules, and did not go beyond the Shareholders’ General Meeting for direct or indirect interference in the Company’s decisions and business activities; the Company was separated from its controlling shareholders in such aspects as personnel, assets, financial affairs, organs and business activities. The Board of Directors, the Board of Supervisors and the Company’s other internal organs worked independently; the transactions between the Company and its controlling shareholders, as well as other related parties, were conducted in a fair and just way. (Ⅲ) About the directors and the Board of Directors: directors of the Company were elected in strict compliance with the stipulation in the Company Law and the Articles of Association of the Company. And the number of directors and the structure of the Board of Directors were in accordance to the requirements of laws and regulations. In addition, all directors of the Company, according to Rules of Procedures for the Board, attended the Board meetings in a conscientious and responsible manner. (Ⅳ) About supervisors and the Board of Supervisors: the number of supervisors and 16 the structure of the Board of Supervisors were in line with the requirements of laws and regulations. And all the supervisors of the Company conscientiously performed their duties by supervising the legitimacy of duty performance of the directors, managers and other senior management personnel. (Ⅴ) About the performance appraisal system and the incentive & restraining mechanism: the performance appraisal system and the incentive & restraining mechanism were established in the Company to work impartially and transparently. (Ⅵ) About information disclosure and transparency: the Secretary of the Board of Directors was assigned by the Company to take charge of information disclosure. In strict compliance with relevant laws and regulations, as well as the Information Disclosure Rules, relevant information was disclosed in time with authenticity, accuracy and completeness. And it was made sure that all shareholders were fairly treated in terms of information disclosure. (Ⅶ) About interested parties: the Company fully respected and protected the legal rights and interests of its interested parties, and managed to reach a balance among interests of its shareholders, employees, the society and other interested parties, so as to promote the Company’s continuous and healthy development. (Ⅷ) About management of the relationship with investors: the Company had specially-appointed staff to manage the relationship with investors, and established a platform of communication with investors. And the phones calls and letters from investors were carefully answered and replied in details. Meanwhile, the investors visiting the Company in person were well received. 2. Particulars about duty performance of independent directors (Ⅰ) Attendance of independent directors at the Board meetings During the reporting period, the independent directors of the Company, in strict compliance with stipulations in the Working System for Independent Directors, earnestly and honestly performed their duties by attending relevant meetings, understanding in depth the Company’s operation status and progress of major issues, providing professionally rational suggestions concerning the Company’s operation and development, and expressing their independent opinions regarding the Company’s related transactions, external guaranty affairs and fund transfer with associated parties. As independent directors, they played a positive role in promoting a scientific decision-making mechanism in the Board of Directors, stimulating the Company’s development and protecting the interests of the Company and the investors. 17 Names of The supposed Attendance Entrusted Absence Remarks independent times of in person attendance (times) directors attendance in this (times) (times) period Sun Sheng’ai 5 5 0 0 Left the post upon expiration of the term of office on May, 2008 Zhu Zhengfu 8 7 1 0 Elected as Independent Director on May, 2008 Zhong Liuhan 13 13 0 0 Re-elected as Independent Director on May, 2008 Ge Yun 13 13 0 0 Re-elected as Independent Director on May, 2008 (Ⅱ) Objection made by independent directors During the reporting period, the independent directors of the Company did not make any objection to the proposals of the Board of Directors or other important issues of the Company. 3. Relationship between the Company and its controlling shareholder Foshan Huaxin Development Co., Ltd. was the largest shareholder of the Company, from which the Company was completely separated in such aspects as business, personnel, assets, organs and financial affairs. The Company was fully capable of running its independent and complete business. (Ⅰ) In terms of business, the Company was completely independent from its controlling shareholder and was fully capable of running its completely independent business. (Ⅱ) In terms of personnel, the Company was also independent from its controlling shareholder. Its General Manager, Deputy General Manager, Secretary of the Board of Directors and financial personnel all received remuneration from the Company, who also did not hold any important position in the controlling shareholder entity. (Ⅲ) In terms of assets, the assets invested by the controlling shareholder in the Company were independent and complete with a clear indication of ownership. The controlling shareholder did not misappropriate or control the Company’s assets, or interfere with the Company’s management of such assets. (Ⅳ) In terms of organs, the Company’s organizational structure was completely 18 independent from its controlling shareholder. The Company’s Board of Directors, Board of Supervisors and other internal organs worked independently according to the Company Law, Securities Law and other relevant laws and regulations. The largest shareholder behaved according to rules, and did not go beyond the Company’s Shareholders’ General Meeting for direct or indirect interference in the Company’s decision-making and business activities. (Ⅴ) In terms of financial affairs, the Company maintained its own accounts. Its controlling shareholder did not interfere with the Company’s accounting activities. And the Company operated, carried out accounting and paid taxes in an independent manner. 4. Implementation of appraisal and incentive mechanisms for senior executives in the reporting period During the reporting period, according to the principles concerning remuneration and equity incentives formulated at the Shareholders’ General Meeting in the year 2004, as well as other relevant rules approved by the Board of Directors and the Remuneration Committee, the Company conducted a performance appraisal of its senior executives and set the range of incentive remuneration for senior executives based on the appraisal results. 5. Self-evaluation of the Company’s internal control (Ⅰ) Overview of the Company’s internal control during the reporting period During the reporting period, in accordance with the Company Law, Securities Law, Code of Corporate Governance for Listed Companies, Internal Control Guide for Listed Companies and other relevant laws and regulations, the Company continuously perfected its corporate governance, standardized the relationship with its controlling shareholder, and enhanced its control of routine associated transactions. Meanwhile, the Company also endeavored to improve the documents concerning the internal control system, and promote standardized operation, which basically guaranteed the effective execution of the internal control of the Company as a listed company, and laid a solid foundation for the Company’s long-term development. During the reporting period, according to relevant regulations of China Securities Regulatory Commission and Shenzhen Stock Exchange, the Company further improved its existing rules and regulations by formulating new rules and regulations such as Working System of Independent Directors’ Annual Report, Work Rules for General Manager, Working Regulation of the Audit Committee’s Annual Audit and System for Protecting Inside Information. And the mentioned rules and regulations were put into practice after the review and approval of the Board of Directors. 19 The Board of Directors believed that the Company’s existing internal control system and its relevant systems were basically established and effectively executed, that they were able to meet the requirements of the Company’s management and development, that they could reasonably guarantee true and fair financial statements, and that they could ensure the healthiness of the Company’s business activities and the Company’s control of operational risks. (Ⅱ) Major activities of internal control The organizational structure of internal control of Foshan Huaxin Packaging Co., Ltd is demonstrated as follows. The internal auditing division was specially established by the Company to independently conduct the internal audit and supervision according to laws and the Company’s relevant regulations, under the direct leadership of the Audit Committee of the Board. Specifically speaking, the division was mainly responsible for irregularly auditing the income and expenditure of all departments, supervising production and operation, providing reasonable assessment on the authenticity, legitimacy and rationality of the Company’s economic performance, and supervising the Company’s internal control as well as its execution. 20 1. The control and management of the Company’s shareholding subsidiaries: ① the Company appointed the directors, supervisors and other senior executives to its shareholding subsidiaries with their responsibilities and power clearly stated. ② the Company convened regularly to analyze the business performance of its shareholding subsidiaries, and examined their monthly, quarterly and annual financial reports. ③ the Company, through budget management, carried out an effective performance assessment of its subsidiaries. 2. The internal control over related transactions: According to the Management Rules for Related Transactions, the Company made specific stipulation in terms of the principles of related transactions, related parties, association relationship, decision-making procedures of associated transactions as well as the procedure of disclosing information concerned. Besides, the Company annually submitted to the Board and the Shareholders’ General Meeting the “Proposal on Routine Related Transactions” according to its need of operation and development. The Company’s related transactions every year was strictly in line with the Management Rules for Related Transactions. 3. The internal control on providing external guaranty: The Company’s internal control over the provision of external guaranty was in line with the principles of legality, prudence, mutual benefit and safety. And the independent directors adequately performed their duties through expressing their independent opinions concerning the Company’s provision of guaranty to any other party. 4. The internal control on the use of raised capital: In the reporting period, the Company did not raise and use capital. The Management Rules for the Use of Raised Capital was established to further regulate the use and management of the raised capital. 5. The internal control over major investments: The Company established the Management Rules for External Investment, in which specific rules were made on the basic principles of external investment, and the procedure of examination, approval and management for external investment. All investment decisions of the Company followed the procedure of examination and approval in strict compliance with relevant laws, regulations, Articles of Association and other relevant rules of the Company. 6. The internal control over information disclosure: The Management Rules for Information Disclosure was established in the Company. According to the Rules, the Secretary of the Board of Directors was the person in charge of information disclosure. And the Office of the Board served as the department in charge of information disclosure, which was under the direct leadership of the Board Secretary. With a thorough and deep knowledge of the Company’s operation, performance and development strategies, the Board Secretary was responsible for managing the 21 relationship with investors. (Ⅲ) Problems existing in the internal control and rectification plan Currently, the Company enjoys a sound internal control system. Still, along with the Company’s growth, its internal control system should be constantly perfected, with special attention paid to the management of subsidiaries and the contract management system. In terms of the execution of the internal control system, the Company needs to enhance the education and training on internal control, so as to increase the staff’s, especially the management team’s awareness of risks control; it also needs to give fuller play to such organs as the special committees of the Board and the legal advising department. In view of the said deficiencies in the Company’s internal control, the following measures are to be taken for improvement by the Company in the year 2009: 1. To further strengthen the internal audit department, and ensure the department’s control and supervision of all business activities, so as to establish a coherent, systematic and effective internal control system. 2. To update and improve the Company’s management of subsidiaries and its contract management system, so as to meet the needs of the Company’s development; to constantly improve the authorization mechanism and scope of the Board and other management personnel on major issues, and better the supervision mechanism to regulate the decision-making; to pay attention to bettering the Nomination Committee, Strategic Planning Committee, Remuneration and Appraisal Committee and Audit Committee, and refining the work, so as to ensure the Board’s effective supervision on the managers and to give full play to all the said Committees. 3. To continuously strengthen internal control according to the Guideline for Internal Control from Shenzhen Stock Exchange and CSRC; to enhance training for the directors, supervisors, other senior executives and staff, so as to perfect the corporate governance structure and improve the operation. (Ⅳ) Overall self-evaluation of the Company’s internal control During the year 2008, in accordance with the Company Law, Securities Law, Code of Corporate Governance for Listed Companies, Internal Control Guide for Listed Companies and other relevant laws and regulations, the Company continuously perfected its corporate governance, standardized the relationship with its controlling shareholder, and enhanced its control of routine associated transactions. Meanwhile, the Company also endeavored to improve the documents concerning the internal control system, and promote standardized operation, which basically guaranteed the effective execution of the internal control of the Company as a listed company, and 22 laid a solid foundation for the Company’s long-term development. The packaging and paper-making industry is currently experiencing a rising competition, which has a direct impact on the Company’s internal control environment. Along with the growth of the Company, as well as its expansion of market, scale and business, new challenges are posed on the Company’s internal control. In view of that, the Company is to, through innovation in systems, management, working methods and ideas, and according to the requirements of regulatory authorities and the actual needs of the Company’s development, continue to promote all the work concerning internal control, and constantly increase the efficiency and effectiveness of the Company’s internal control. (Ⅴ) Opinions from the Supervisory Board on the Company’s self-evaluation of its internal control For details, please refer to Section Ⅸ Report of the Supervisory Board of this annual report. (Ⅵ) Independent opinions from independent directors on the Company’s self-evaluation of its internal control According to the requirements of the Circular of the Shenzhen Stock Exchange on 2008 Annual Reports of Listed Companies, Foshan Huaxin Packaging Co., Ltd. conducted a self-evaluation concerning the Company’s internal control. As independent directors of the Company, we hereby expressed our opinion on the Company’s self-evaluation of its internal control as follows: The Company’s internal control and management system had been established, basically covering every link of its operation. In compliance with relevant laws and regulations, as well as the requirements of supervisory authorities, the Company adequately and effectively controlled and managed its major activities such as related transactions, provision of external guaranty, major investments and information disclosure, which guaranteed the Company’s normal operation and management. To sum up, we were of the opinion that the report on the Company’s self-evaluation of its internal control was a true and objective reflection of the actual situation of the Company’s internal control. 23 Ⅶ Brief Introduction to Shareholders’ General Meeting Ⅰ. Annual Shareholders’ General Meeting The Shareholders’ General Meeting 2007 was held at the meeting room of the Company on 20 May 2008, of which the resolutions were published on Securities Times and Ta Kung Pao (HK) dated 21 May 2008. Ⅱ Provisional Shareholders’ General Meetings 1. The 1st Provisional Shareholders’ General Meeting 2008 was held at the meeting room of the Company on 5 Jun. 2008, of which the resolutions were published in Securities Times and Ta Kung Pao (HK) dated 6 Jun. 2008. 2. The 2nd Provisional Shareholders’ General Meeting 2008 was held at the meeting room of the Company on 15 Aug. 2008, of which the resolutions were published in Securities Times and Ta Kung Pao (HK) dated 16 Aug. 2008. 3. The 3rd Provisional Shareholders’ General Meeting 2008 was held at the meeting room of the Company on 15 Dec. 2008, which was a combination of attendance voting and internet voting. And the resolutions of the meeting were published on Securities Times and Ta Kung Pao (HK) dated 16 Dec. 2008. 24 Ⅷ Report of the Board of Directors Ⅰ. Review of the Company’s operating status during the reporting period (Ⅰ) Overview of the Company’s performance during the reporting period The year 2008 saw a slowdown of the Chinese economy. With a looming international financial crisis, and a general recession in the world’s major economies such as the US, Europe and Japan, China maintained a steady economic performance with a mild slowdown. According to the preliminary statistics released by the National Bureau of Statistics, in 2008, China achieved a year-on-year GDP growth of 9.0%, a marked decrease compared to the growth of 13% in 2007. In the year, the GDP growth rate showed a gradual decrease from the first quarter to the fourth quarter, with the growth rate of the fourth quarter reaching a sever-year low. The market demand of the paper-making industry is closely related to the situation of the national economy. Consequently, due to the economic prosperity in the first half of 2008, the Company experienced a booming market with a sharp rise of cost. However, the Company encountered a rapidly falling market with a considerable price decrease of the bulk raw materials in the second half of the year, mainly because of the significant economic slowdown and the international financial tsunami during the period. The year 2008 witnessed the ups and downs of China’s macro-economy, as well as the Company’s passing through a period of critical challenge. In the face of a complex and changeable international and domestic economic situation, the Company’s management team, under the leadership of China Chengtong Group and China Material Development and Investment General Corporation, actively dealt with the crisis, overcame a series of difficulties, and tried its best to maintain the Company’s steady development. In spite of the Company’s efforts, its business performance in the year still showed a decline due to an especially harsh external environment as a whole. During the reporting period, the Company achieved an operation revenue of RMB 1,412,674,200, a increase of 11.28% over last year; an operating profit amounting to RMB 40,124,300, decreasing by 65.24% over last year; a net profit attributable to the shareholders of the parent company reaching RMB 42,588,800, down by 61.53% from the previous year; and a net profit after deducting the non-recurring gains and losses amounting to RMB 36,900,800, a drop of 64.86% over last year. (Ⅱ) Scope of main operation and its operating status 1. Scope of main operation The Company is engaged in the paper-making, printing and packaging industry. It mainly produces and sells high-class and high-quality packaging materials and packaging products including high-class coated white board, soft packaging boxes for liquid food (tetra pack), color-printed packaging products, etc.. Among them, the main products of the Company are high-quality coated white board and color-printed 25 packaging products. 2. Income and profit of main business （1） According to products Profit Increase/decrease Increases/decrease Increases/decrease Income from main Cost of main ratio of of operation of main operation of profit ratio of Industry operation (Unit: operation (Unit: main income over last cost over last year main operation Yuan) Yuan) operation year (%) (%) over last year (%) (%) White 1,281,092,076.57 1,116,491,374.52 12.85% 11.78% 9.66% 1.69% board paper Printing 128,846,302.87 100,609,048.22 21.92% 8.33% 6.59% 1.28% products (2) According to regions Main business income Increase/decrease of main business income Regions (Unit: Yuan) over last year (%) Domestic 1,167,771,719.93 55.92% Foreign 244,902,445.89 ___-52.95% (Ⅲ) Main suppliers and customers During the reporting period, the combined amount of sales to the top five customers reached RMB 150,552,495.16, taking up 10.66% of the Company’s total sales. And the combined purchase from the top five suppliers amounted to RMB 328,878,212.01, accounting for 19.55% of the Company’s total purchase. (Ⅳ) Assets composition of the Company and its changes during the reporting period Unit: (RMB) Yuan 2008 2007 Increase/decrease Items over last year (%) Proportion in Proportion in Amount Amount total assets total assets 3,425,460,446.52 Total Assets 100 3,015,150,085.88 100 13.61% Currency capital 208,091,895.59 6.08 63,767,336.50 2.12 226.33% Prepayment 70,122,453.30 2.05 3,637,855.82 0.12 1,827.58% 26 Inventory 335,648,893.09 9.80 186,800,021.23 6.20 79.69% Construction in progress 1,176,195.54 0.04 39,423,119.78 1.31 -97.02% Engineer material - - 13,629,040.02 0.46 -100.00% Notes payable 54,510,322.25 1.60 9,155,830.91 0.31 495.37% Interest payable 11,681,609.01 0.35 1,391,185.09 0.05 739.69% Other payables 22,664,445.76 0.67 36,286,574.75 1.21 -37.54% Long-term borrowings 440,000,000.00 12.85 179,334,850.00 5.95 145.36% Notes: 1. The currency capital increased by 226.33% compared to last year, mainly because the Company collected more loans and did not use all of the expanded bank loans. 2. The prepayment increased by 1,827.58% over last year, mainly due to the large amount of prepayment caused by the purchase of raw materials by Foshan Huafeng Paper Co., Ltd.. 3. The inventory increased by 79.69%, mainly due to the inventory increase by Foshan Huafeng Paper Co., Ltd. and a declining demand on the market. 4. The construction in progress decreased by 97.02%, mainly because most of the constructions in progress were completed and turned into the fixed assets at the end of this period. 5. The engineer material decreased by 100.00%, mainly because the constructions were completed and the surplus material was turned into inventory. 6. The notes payable increased by 495.37%, mainly because the amount of undue banker’s acceptance bills held by Foshan Huafeng Paper Co., Ltd. was large. 7. The interest payable increased by 739.69%, mainly due to a large amount of interest withdrawal caused by the Company’s short-term debt of RMB 500 million. 8. Other payables decreased by 37.54%, mainly because the Company paid off more debts to the parent Company—Foshan Huaxin Development Co., Ltd.. 9. The long-term borrowings increased by 145.36%, mainly because of the Company’s increased ability to handle long-term borrowings. (Ⅴ) Significant changes of major financial data in the reporting period Unit: (RMB) Yuan Increase/decrease over Items Y2008 Y2007 last year (%) Sales expenses 47,231,627.31 31,760,154.87 48.72% 27 Administrative expenses 79,378,739.61 54,659,328.20 45.23% Financial expenses 82,182,027.50 47,324,512.88 73.66% Assets impairment loss 11,136,522.26 6,439,391.28 72.95% Income from investments 58,258,692.68 95,306,219.03 -38.88% Notes: 1. The sales expenses increased by 48.72% over last year, mainly because the high-class coated white board project of Foshan Huafeng Paper Co., Ltd. with an annual production of 300,000 tons was formally put into operation in Zhuhai in the second half of the year 2007, which expanded the sales expenses. 2. The administrative expenses increased by 45.23% from the previous year, mainly because the high-class coated white board project of Foshan Huafeng Paper Co., Ltd. with an annual production of 300,000 tons was formally put into operation in Zhuhai in the second half of the year 2007, which expanded the administrative expenses. 3. The financial expenses increased by 73.66% compared to last year, mainly because the high-class coated white board project of Foshan Huafeng Paper Co., Ltd. with an annual production of 300,000 tons was formally put into operation in Zhuhai in the second half of the year 2007. And its interest expenses were included in the administrative expenses, which naturally expanded the administrative expenses. 4. The assets impairment loss increased by 72.95% over last year, mainly due to the increasing inventory of Foshan Huafeng Paper Co., Ltd. and the significant price decrease of the company’s products caused by market factors. 5. The income from investments decreased by 38.88% over last year, mainly because Tetra Pak Huaxin (Foshan) Packaging Co., Ltd., the Company’s affiliated company, was affected by the Melamine Incident in the market, which led to poor sales of its products in the fourth quarter. (Ⅵ) Cash flow structure of the Company in the reporting period Unit: (RMB) Yuan Items Y2008 Y2007 Increase/decrease Net cash flow caused by operation activities -27,817,792.61 67,039,489.50 -141.50% Net cash flow caused by investment activities -404,549.41 -197,504,757.64 99.80% Net cash flow caused by financing activities 172,546,901.11 81,332,883.33 112.15% Net increase in cash and cash equivalents 144,324,559.09 -49,132,384.81 393.74 Notes: 1. The net cash flow caused by operation activities decreased by 141.50% over last year, mainly due to a significant price decrease of the products of Foshan Huafeng 28 Paper Co., Ltd caused by a falling market demand. 2. The net cash flow caused by investment activities increased by 99.80% from the previous year, mainly because the high-class coated white board project of Foshan Huafeng Paper Co., Ltd. with an annual production of 300,000 tons was formally put into operation in Zhuhai in the second half of the year 2007, which led to a significant decrease of fixed assets and other long-term assets purchased and constructed during this period. 3. The net cash flow caused by financing activities increased by 112.15% compared to last year, mainly because of the Company’s increased bank loans. 4. The net increase in cash and cash equivalents increased by 393.74% from the previous year, mainly because the Company collected more loans and did not use all of the expanded bank loans. (VII) Operation and Performance Analysis of Major Holding Subsidiaries and Joint Stock Subsidiaries of the Company 1. Foshan Huafeng Paper Co., Ltd: this enterprise has a registration capital of USD 121,390,000, with coated white board as its major product. The Company holds 75% equities of this enterprise. At the end of the reporting period, total assets of this enterprise was RMB 2,943,973,100. In this year, the Company’s business revenue was RMB 1,290,298,400, with an operating profit of RMB -11,322,500 and a net profit of RMB -10,160,300. In 2008, Foshan Huafeng Paper Co., Ltd experienced a sharp decrease in profit, which was mainly attributed to the drastic fluctuation of the papermaking industry’s market. In the first half year of 2008, due to the factor of Olympic Games and a good market expectation, the market demand for white boards was over enlarged, boosting a rise in the price of various papers to different degrees, and resulting in prosperity of both production and sales. Yet since Jun. of 2008, the export processing industry shrank substantially, with a slow decline in market demand and a decrease in price, as a result of the adjustment of the state industrial policy, the implementation of tight monetary policy and the new Labor Law, as well as the appreciation of RMB. As it gradually became clear that the foreign market demand decreased, the backlogs hoarded by customers could not be cleared up quickly. Moreover, with the pressure of newly increased 800,000 tons capacity in 2007, the situation of supply exceeding demand induced great backlog pressure on the white board industry, with price of products gradually decreasing and sales substantially shrinking. On the other hand, the major raw materials such as petrol, waste paper, and coal experienced substantial increase in price in the first half year, inducing the cost of production remained high for a long time. In Oct., the international financial crisis further deteriorated, causing a shape decrease in price of bulk commodity globally. The price of paper, together with the price of raw materials like nonferrous metals and waste paper, dropped nearly 50% in only a month. However, the decrease of paper price failed to stimulate an effective increase in sales volume, as the distributors of this enterprise held a pessimistic attitude towards future demand. It is obvious that, a shape decrease in demand for 29 white broads both at home and abroad caused by the international financial crisis in 2008 is the major reason for the business decrease of Foshan Huafeng Paper Co., Ltd. 2. Huaxin (Foshan) Color Printing Co., Ltd: this enterprise has a registration capital of USD 6,600,000 with presswork as its major product. The Company holds 75% equities of this enterprise. At the end of the reporting period, total assets of this enterprise was RMB 240,429,100. In this year, the Company’s business revenue was RMB 130,679,400, with an operating profit of RMB 3,712,800 and a net profit of RMB3, 420, 600. The enterprise’s business of color printing remained stable in a fluctuating/vibrating market. In the first half year of 2008, the price of raw materials for printing climbed up continuously and imposed great cost pressure on Huaxin (Foshan) Color Printing Co., Ltd. In the second half year, the price of paper products dropped substantially, easing the cost pressure and increasing the gross margin. As the customers of Huaxin (Foshan) Color Printing Co., Ltd mainly faced to domestic market, they did not suffer from the direct impact of the financial crisis, with little influence on the business. At the same time, the enterprise took the lead in developing the business of Bar Code printing of food and medicine, becoming one of the few enterprises controlling the business of Bar Code printing of food and medicine. This business has become a new growth point, ensuring a stable operation of the enterprise. 3. Tetra Pak Huaxin (Foshan) Packaging Co., Ltd: this enterprise has a registration capital of USD 67,000,000, with Tetra packaging material as its major product. The Company holds 25% equities of this enterprise. At the end of the reporting period, total assets of this enterprise was RMB 1,252,410,700. In this year, the Company’s business revenue was RMB 1,224,560,600, with a net profit of RMB 233,034,800. In 2008, the joint stock subsidiaries of the Company, Tetra Pak Huaxin (Foshan) Packaging Co., Ltd, experienced a slight decrease in profit compared to that of 2007, which was mainly attributed to the event of melamine milk. In recent years, dairy product market witnessed rapid development and flourished even further in the year of Olympic Games. From Jan. to Aug. in 2008, the sales of Tetra Huaxin packaging paper for liquors, showed a momentum of stable growth in sales volume. But in late Sep., under the influence of Sanlu Milk Powder Event, in which poisonous material melamine was found added in the milk powder, China milk industry was put under query of customers both at home and abroad, triggering trust crisis of China milk industry and a plunge of dairy products sales volume. The sales of Tetra Pak, which is the most common used packaging material for liquor milks, dropped substantially, corresponding to the decrease in liquor milks sales volume. Moreover, the slowdown of state economic growth weakened the consumption power of the residents, exerting a relatively big influence on the operating performance of Tetra Pak Huaxin (Foshan) Packaging Co., Ltd in 2008. 30 II. Development and Future Outlook (I) Development Trend of This Industry and Market Structure Faced by the Company 1. Development Trend of This Industry: Currently, China papermaking industry is now experiencing a critical period of transition, with sharp contradictions between supply and demand of medium and high grade commodities. A Policy for the Development of Paper Industry released by National Development and Reform Commission has pointed out the direction of future development for the papermaking industry, which mainly includes: (1) Longitudinal development, which means to improve the self-supply capability of fiber resources, promote the integrated project of forest and paper as the major direction of industrial development, expand the scale of forestry business, as well as restructure the non-wood fiber resources, so as to establish a smooth upstream link, break through the bottleneck of domestic raw materials supply and break the pattern of depending on the foreign supply of wood pulp, relying on its own capability. (2) Horizontal integration, which means to develop the Company into a large-scale pulp-making and papermaking enterprise group with strong international competitiveness, as well as improve the concentration degree of the industry, so as to realize scale effect. (3) Introduction of recycling economy, which means to reduce the consumption of fiber resources and the emission of pollutants, and pay special attention to improve the economic effectiveness and environment quality of the Company. 2. Market Competition Pattern Faced by the Company The Company belongs to light manufacturing industry, and its business mainly involves coated white board industry, package printing industry and soft package for liquid food (Tetra Pak) industry. Papermaking industry is one of the major basic raw material industries of national economy, with high degree of industrial relevancy. With the change of domestic economic environment, papermaking industry was confronted with a situation that the price of both raw materials and products decreased sharply, presenting a critical challenge to the profitability of papermaking enterprises. According to the statistics released by China Paper Association , for the first time a negative growth appeared in China papermaking industry in Sep. 2008, revealing a change of the situation that the productivity of paper could not measure up to the demand, which had persisted since the foundation of the country. With the influence of the international financial crisis and the factor of supply and demand, especially the gloomy economy of downstream export enterprises, it is forecasted that, in the next two or three years, the white board industry is unlikely to recover to its boom in 2007 and 2008. However, with the focus 31 of the national economic policy shifting to stimulate domestic demand, especially a series of measures taken to guide the continuously increasing consumption power of rural residents, a new period of boom will occur in rural market, with the increasing demand for bulk commodities and consumer goods, including big or small electrical household appliances, toys, food and drinks etc.. As a result, productivity of consumer goods manufacturing industry, which was to satisfy the export market, would shift quickly to the domestic market, which no doubt will have a positive effect on the development of coated white board market. In package printing industry, due to the continuous development of our country’s economy and improvement of people’s living standard, package printing industry has developed rapidly. With little pollution yet large-scale employment of labor force, package printing industry has bright outlook of development. Huaxin (Foshan) Color Printing Co., Ltd locates on the printing industry belt of the Pearl River Delta, with Guangdong Province as its center. Therefore, its major customers mainly face to domestic market. Since 2008, the color printing industry has been put under the influence of the international financial crisis, the adjustment of national export policy, and the sharp decrease in foreign demand, causing many export-oriented printing companies in Guangdong province shifting to develop domestic market vigorously, and as a result making the competition fiercer in color printing industry in the Pearl River Delta. In such keen competition environment, Huaxin (Foshan) Color Printing Co., Ltd, relying on advanced equipments and technologies, as well as mature management system, has acquired strong competitiveness and bright market outlook in package printing industry. In soft package for liquid food (Tetra Pak) industry, the joint stock subsidiaries of the Company, Tetra Pak Huaxin (Foshan) Packaging Co., Ltd has particular competitive edges with its products ranking among the top globally. Tetra Pak produced by the enterprise is with high technological content and high added value, thus possesses huge market potential and enormous room for growth in domestic market. Its products are widely applied to drinks produced by many well-known enterprises both at home and abroad, as well as exported to Hong Kong and Southeast Asia. Currently the production scale of its products has reached above 6,500,000,000. Since the influence of Melamine Milk Event may last for some time, and the slowdown of national economy will weaken the consumption power of residents, such situations will exert some negative influence on the production and operation of Tetra Pak Huaxin (Foshan) Packaging Co., Ltd in 2009. (II) Opportunities and Strategies for Future Development of the Company 1. Opportunities for Future Development (1) The price of such raw materials as pulps, waste paper etc. gradually decreases. Besides, the decline of crude oil price will enable the cost of chemical raw materials and transport to maintain at a relatively low level for some time, releasing the cost pressure on papermaking industry; 32 (2) To make great efforts to improve the level of export commodities’ packaging, and develop vigorously new materials for package; to develop green package, which is the development trend of papermaking and packing industry in the future; (3) Such external factors as the financial crisis etc. leads to more and more fierce competition in the market, speeds up the process of industry shakeout and provides a rare opportunity for integration of papermaking industry; (4) With the appreciation of RMB, the purchase cost of the raw materials in domestic papermaking enterprises will decrease, so will the cost of production. 2. Strategies for Future Development (1) Through integration of upstream resources, reduction of costs, as well as establishment of a smooth and complete industrial chain combining planting, pulp-making, papermaking, printing, and packaging, to form special competitive edges of its own, and acquire the leading or even the leadership position in planting, pulp-making and papermaking, as well as printing and packaging industry. (2) To implement industrial upgrade strategy, enter the field of food packaging paper, which is still blank in domestic market, through merging and recombination as well as utilizing particular resources, so as to occupy the domestic market of food packaging paper. (3) To try to make the capital market perform its best function in financing, laying a resource foundation for the implementation of next strategy; (4) To speed up the resources distribution of the food package manufacturing in developed cities of China, forming a network all over the country, offering services to complete package, offering comprehensive and all-directional services to customers. Moreover, to develop together with customers by helping customers to achieve, as well as to further strengthen the core competitiveness and profitability of the Company by establishing strategic partnership with customers. (III) Work Plan of the Company in 2009 1. To renew the management concepts and methods, according to the change of the market, develop new products, optimize the product mix, and improve profitability; 2. To enhance the implementation of paper packaging industry strategy, paying special attention to speed up the promotion of liquor packaging paper project; 3. To expand financing channels, conduct capital operation actively, and ensure that the investment projects of the Company are implemented as scheduled; 4. To establish and implement risk management system, so as to conduct prevention 33 of relevant risk points; 5. To adjust and optimize the operation and management mode of the Group, as well as the functional localization of headquarters; 6. To innovate the safety management work, and enhance safety, management and supervision through administrative means. (IV) Future Fund Requirement and Application Plan The Company belongs to capital intensive industry and resource-constrained industry, and the development of Company is accompanied by starting new projects as well as increasing demands for capital. If the important assets reorganization project of increasing funds to control Zhuhai Hongta Renheng Paper Co., Ltd can be successfully implemented, the business scale and productivity of the Company will be further expanded, and fund requirement will also be increased. According to fund requirement of strategies for future development, the Company will adopt measures as follow to ensure sufficient funding: 1. To make reasonable use of self-own capital, expand sales channel actively, so as to speed up the recovery of funds, and improve asset liquidity of the Company; 2. To actively establish favorable communication and cooperation relationships with local financial institutes and seek loan support from commercial banks; 3. To enhance the track and study of capital market policies as well as monetary market policies, try to realize refinancing in capital market to raise fund, by issuing corporate bond, short-term financing bonds and increasing issues in stocks. (V) Major Risks and Countermeasures 1. The Risk of Macroeconomic Fluctuation The market demand of papermaking industry is closely related to the degree of prosperity of national economy, which will exert great influence on the supply and demand relation of papermaking industry. Last year, the international financial crisis deteriorated, leading to economic declines in major economies. The economy of our country generally maintained stable with a slight tendency towards decline, and the influence of the international financial crisis will last for a long time to come. Under such situations, the Chinese government has duly adopted a positive fiscal policy and a relatively loose monetary policy, but whether such measures can reverse economy transition and maintain a rapid and continuous growth of economy remains uncertain. If the economy growth slowed down, it would definitely restrain the demand for packaging paper boards, and as a result, have a negative effect on the papermaking industry. In order to avoid the influence of macroeconomic fluctuation, the Company intends to 34 expand production scale on the one hand, and at the same time, focus will be placed on the development of advanced packaging paper for liquor foods, with high technological content and high added value, so as to change the current simple product mix. The Company will acquire and control relevant industrial resources quickly and effectively, upgrade the industry and further consolidate its position in green package market, by means of industrial investment combined with capital operation, as well as merging, joint-stock and reorganization etc.. The expansion of production scale will lay a solid foundation for implementing the integrated project of forest, pulp and paper, controlling upstream resources, as well as establishing a complete industrial chain, so as to improve the capability of the Company to operate sustainably as well as withstand risks. 2. The Risk of Market Competition In recent years, with the continuous expansion of domestic papermaking productivity, in 2007, for the first time, total production exceeded total consumption, with the total production of papermaking industry reaching 73,500,000 tons in 2007, up by 13.08% compared with 65,000,000 tons of last year, and the total consumption reaching 72,900,000 tons, up by 10.45% compared with 66,000,000 tons of last year. Although market competition varies according to different kinds of papers, yet in general, the market competition is becoming fiercer. Especially, a considerable part of downstream customers of packaging paper are export-oriented enterprises, which have suffered great impact from the economic restructuring. Such impacts on them will inevitably be conducted to upstream packaging papermaking enterprises, bringing about fierce competition in packaging paper industry, which induces pressure on business performance of the Company. With the impact of the financial crisis on export market and relevant industries, and with the increasingly saturated market of coated white boards in the Pearl River Delta, to develop new market space has become a necessary path for the Company to seek further growth. In order to do so, the Company will focus on exploring white board market in mainland with domestic sales as major target, based on the state’s new approach of stimulating domestic demands and transforming ways to achieve economic growth. On the one hand, the Company will reinforce the momentum to develop customers in other provinces, develop the business into neighboring provinces and areas by means of direct sales, as well as consolidate and expand the sales area in South China market. On the other hand, the Company will develop vigorously its distributor’s team in key provinces or cities of mainland, foster a distributor’s team with qualification, capability and credibility, establish more marketing channels, so as to further expand its market share. Moreover, logistics distribution centers in other provinces as well as logistics distribution transfer centers with relatively large scale and radiation scope will be established to make the Company’s products more responsive to the local markets. III. Investment 35 (I) Utilization of Raised Proceeds The Company had not raised any proceeds in the report period, nor was there any proceeds raised in previous periods and still used in the reporting period. (II) Important Investment Projects with Non-Raised Proceeds The Company had not invested any important project with non-raised proceeds. IV. Significant Accounting Mistakes in Previous Period The joint-stock subsidiary of the Company, Tetra Pak Huaxin (Foshan) Packaging Co., Ltd restated its intangible assets and other intangible assets at the end of 2007. After restatement, the intangible assets should be amortized before the end of 2007. After restatement and correction, the 2007 annual net profit increased by RMB 1,067,246.92, the 2008 retained earnings decreased by RMB 6,591,819.25, including a decrease of undistributed profits by RMB 5,932,637.32 and a decrease of surplus reserves by RMB 659,181.93. V. Routine Work of the Board of Directors (I) Meetings and Resolutions in the reporting period In the reporting period, the Company held 13 meetings: 1. The 1st meeting of the 3rd Board of Directors was held in manner of voting by correspondence on Jan. 14, 2008, and notice on resolutions of this meeting was published on Securities Times and Ta Kung Pao on Jan. 15, 2008. 2. The 2nd meeting of the 3rd Board of Directors was held in manner of present voting on Mar. 25, 2008, and notice on resolutions of this meeting was published on Securities Times and Hong Kong Ta Kung Pao on Mar. 27, 2008. 3. The 3rd meeting of the 3rd Board of Directors was held in manner of voting by correspondence on Apr. 21, 2008, and notice on resolutions of this meeting was published on Securities Times and Hong Kong Ta Kung Pao on Apr. 22, 2008. 4. The 4th meeting of the 3rd Board of Directors was held in manner of present voting on Apr. 23, 2008, and notice on resolutions of this meeting was published on Securities Times and Hong Kong Ta Kung Pao on Apr. 25, 2008. 5. The 5th meeting of the 3rd Board of Directors was held in manner of voting by correspondence on May 12, 2008, and notice on resolutions of this meeting was published on Securities Times and Ta Kung Pao on May 13, 2008. 6. The 1st meeting of the 4th Board of Directors was held in manner of present voting on May 20, 2008, and notice on resolutions of this meeting was published on Securities Times and Hong Kong Ta Kung Pao on May 21, 2008. 7. The 2nd meeting of the 4th Board of Directors was held in manner of voting by 36 correspondence on Jun. 12, 2008, and notice on resolutions of this meeting was published on Securities Times and Hong Kong Ta Kung Pao on Jun. 13, 2008. 8. The 3rd meeting of the 4th Board of Directors was held in manner of voting by correspondence on Jul. 29, 2008, and notice on resolutions of this meeting was published on Securities Times and Hong Kong Ta Kung Pao on Jul. 30, 2008. 9. The 4th meeting of the 4th Board of Directors was held in manner of voting by correspondence on Jul. 31, 2008, and notice on resolutions of this meeting was published on Securities Times and Hong Kong Ta Kung Pao on Aug. 1, 2008. 10. The 5th meeting of the 4th Board of Directors was held in manner of voting by correspondence on Aug. 12, 2008, on which the semi-annual report and summery were approved. 11. The 6th meeting of the 4th Board of Directors was held in manner of present voting on Oct. 8, 2008, and notice on resolutions of this meeting was published on Securities Times and Hong Kong Ta Kung Pao on Oct. 27, 2008. 12. The 7th meeting of the 4th Board of Directors was held in manner of voting by correspondence on Oct. 22, 2008, on which the third quarterly report was approved. 13. The 8th meeting of the 4th Board of Directors was held in manner of voting by correspondence on Nov. 20, 2008, and notice on resolutions of this meeting was published on Securities Times and Hong Kong Ta Kung Pao on Nov. 27, 2008. (II) Implementation of the Resolutions of the Shareholders' General Meeting by the Board of Directors In 2008, the Board of Directors was able to implement the resolutions of the Shareholders' General Meeting seriously, according to its duties stipulated by the Articles of Association, as well as modify the Articles of Association, determine the auditing charge of accountants, in accordance with the authority delegated to the Board of Directors by the Shareholders’ General Meeting. VI. Summary Report on the Performance of the Remuneration Committee under the Board of Directors The Remuneration Committee’s Opinions on the remuneration of Directors and Senior Executives of the Company in the reporting period: The disclosed annual remuneration of Directors and Senior Executives of the Company in the reporting period was checked and approved by the Remuneration and Appraisal Committee. All members of the Committee agree that in 2008, the Company executed the previously formulated Remuneration Rules for Directors and Senior Executives as well as relevant Appraisal and Incentive Rules strictly, and the procedures of formulating mechanism as well as Appraisal and Incentive Rules, and the procedure of compensation management were in accordance with the provisions 37 of related laws, regulations and the Articles of Association. VII. Performance of the Audit Committee under the Board of Directors Tremendous work has been done on auditing by the Audit Committee in 2008, with the formation of Execution of the Audit Committee Plus/and Annual Summary Report on Audit Work of Guangdong Dahua Delv Certified Public Accountants Co., Ltd in 2008 : According to relevant requirements in Notice of the China Securities Regulatory Commission on Properly Handling the 2008 Annual Reports of Listed Companies and the Related Work as well as Notice on Promulgating the Standards Concerning the Contents and Formats of Information Disclosure by Companies Offering Securities to the Public No.2 — Contents and Formats of Annual Reports (Revised in 2007), the annual auditing of the Company in 2008 by Guangdong Dahua Delv Certified Public Accountants Co., Ltd (hereinafter called the Certified Public Accountants) was concluded as follows: (1) Determination of the General Auditing Plan Before the Certified Public Accountants conducted auditing, through consultation with the Certified Public Accountants, the Audit Committee drew out a plan for auditing of the Company in 2008, and submitted the relevant materials about the plan for auditing of the Company in 2008 to Independent Directors, via Chief Financial Officer of the Company. (2) Check and Approval of the Financial Statements Prepared by the Company On Jan. 15, 2009, the 1st meeting of the Audit Committee in 2009 was held in the Company Boardroom, on which the Financial Statements in 2008 prepared by the Company was examined and approved. After comparing such financial data as total assets, prime operating revenues, net profits, operating expenses, administrative expenses, and financial expenses etc. with that in 2007 Annual Report, the meeting agreed that the relevant data in the financial statements prepared by the Company reflected the assets and liabilities of the Company by Dec. 31, 2008 as well as the production and operation achievement in 2008, and that the 2008 annual financial auditing of the Company should be carried out, based on the financial statements prepared by the Company, providing relevant written approval opinions. (3) The Certified Public Accountants provided the preliminary audit opinions, and the Audit Committee examined and approved the financial statements, as well as provided opinions in written form. On Mar. 9, 2009, the Certified Public Accountants issued the preliminary audit opinion on the Financial Statements as scheduled in the general auditing plan. The 2nd meeting of the Audit Committee in 2009 was held on Mar. 9, 2009, on which the financial statements with the preliminary audit opinion was examined and approved 38 again. The meeting agreed that the relevant data in the 2008 financial statements of the Company reflected the assets and liabilities of the Company by Dec. 31, 2008 as well as the production and operation achievement in 2008, and that the 2008 annual report and annual report summary of the Company should be prepared, based on the financial statements. Meanwhile, the Audit Committee required the Certified Public Accountants should finish auditing as soon as possible, according to the general auditing plan, so as to ensure the Company discloses the 2008 annual report as scheduled. (4) The final version of the auditors’ report on the 2008 annual financial statements of the Company was finished, and other relevant documents about the 2008 annual audit were issued by the Certified Public Accountants, drawing a successful conclusion to the 2008 annual audit of the Company. On Mar. 16, 2009, the Certified Public Accountants accomplished the final version of the auditors’ report as scheduled in the general audit plan, and issued the Special Statement on Fund Appropriation and Fund Transfer among the Affiliated Parties of Foshan Huaxin Packing Co., Ltd, based on Notice on Promulgating the Standards Concerning the Contents and Formats of Information Disclosure by Companies Offering Securities to the Public No.2 — Contents and Formats of Annual Reports (Revised in 2007) as well as relevant requirements of the Company. (5) General Comments on Annual Audit Conducted by the Certified Public Accountants In the Audit Committee’s opinion, Guangdong Dahua Delv Certified Public Accountants Co., Ltd designated by the Company strictly followed the Practice Guideline of independent, objective and fair in conducting audit of the Company, scrupulously fulfill its duty and favorably accomplished the auditing about the 2008 annual report. (6) Review of proposals related with the Proposal on Renewed Employment of Certified Public Accountants by the Audit Committee The 3rd meeting of the Audit Committee for the year 2009 was held on 18 Mar. 2009, at which the following proposals were examined and approved with 4 votes in favor, 0 against and 0 abstention: ①. Financial Final Report of the Company 2008 ②. Proposal on Engagement of Certified Public Accountants for 2009 Given the relatively favorable operation and the service lever of Guangdong Dahua Delu Certified Public Accountants Co., Lt, the Company continued to engage Guangdong Dahua Delu Certified Public Accountants Co., Lt as auditor, offering the auditing service for the financial statements of the Company and other related consulting service for one year. ③. Work Assignment Report of Audit Committee and Summary Report 2008 for Auditing Work of Guangdong Dahua Delu Certified Public Accountants Co., Ltd. 39 VIII. Profit distribution preplan for 2007 As audited by Guangdong Dahua Delu Certified Public Accountants Co., Ltd, the Company achieved the net profit of RMB 42,588,844.36 for 2008. As a result, the profit available for distribution to the whole shareholders was RMB 384,755,182.00. In view of that the materials assets reorganization project is in examination by CSRC, if such project was implemented smoothly, the Company’s operation scale and production capacity would be further expanded, resulting in increase of fund demand, therefore, the Company would need to financing by loan and other ways. The Company would plan to not distribute profit for the year 2008 in order to strive for stable, healthy and fast development of the Company. The retained profit of the Company would be used to supplement of the working capital. IX. Other matters Securities Times and Hong Kong Ta Kung Pao are respectively designated as the domestic and overseas newspapers by the Company for information disclosure. 40 IX Report of the Supervisory Board I. Work of the Supervisory Board in the reporting period: In the reporting period, the Company’s Supervisory Board performed their responsibilities of supervision in accordance with the Company Law, Securities Law and Articles of Association of the Company and on behalf of all shareholders. The supervisors attended all Board Meetings and Shareholders’ General Meeting held by the Company, conducted efficient supervision on the holding procedure of meeting, decision-making procedure, resolution, information disclosure and status of implementation of the resolutions of the Shareholders’ General Meeting by the Board of Directors as well as the lawfulness and legal compliance of the duty performance of the Company’s directors, managers and other senior executives. They have played their due role to supervise the standard operation and healthy development of the Company and protected legal rights of the Company and the shareholders. The Company’s Supervisory Board held all together six meetings in 2008, with the details as follows: (1) On March 25, 2008, the 1st meeting of the 3rd Supervisory Board 2008 was held. 5 supervisors were supposed to attend the meeting and 3 actually present. Supervisors Chen Ming and Mi Baogang failed to attend the meeting for business reasons and authorized Supervisors Chen Zeqing and Huang Dabiao in writing the full power to vote instead respectively. The relevant resolutions were published in Securities Times and Ta Kung Pao on March 27, 2008. (2) On April 21, 2008, the 2nd meeting of the 3rd Supervisory Board 2008 was held by voting in correspondence, at which 5 supervisors were present, meeting the requirement. The Company’s First Quarterly Report 2008 was examined and approved at the meeting. (3) On April 23, 2008, the 3rd meeting of the 3rd Supervisory Board 2008 was held by voting in correspondence. 5 supervisors were supposed to attend the meeting and 3 actually present. Supervisors Chen Ming and Mi Baogang failed to attend the meeting for business reasons and authorized Supervisors Chen Zeqing and Huang Dabiao in writing the full power to vote instead respectively. The relevant resolutions were published in Securities Times and Ta Kung Pao on April 25, 2008. (4) On May 20, 2008, the 1st meeting of the 4th Supervisory Board was held. The three Supervisors supposed to attend the meeting were all present. The relevant resolutions were published in Securities Times and Ta Kung Pao on May 21, 2008. (5) On August 12, 2008, the 2nd meeting of the 4th Supervisory Board was held by voting in correspondence. The three Supervisors supposed to attend the meeting were all present. The Interim Report 2008 was examined and approved at the meeting. 41 (6) On October 22, 2008, the 3rd meeting of the 4th Supervisory Board was held by voting in correspondence. The three Supervisors supposed to attend the meeting were all present. The Company’s Third Quarterly Report 2008 was examined and approved at the meeting. Ⅱ. Independent opinions of the Supervisory Board In accordance with the Company Law and Articles of Association, the Company’s Supervisory Board expressed the following independent opinions on the related particulars: (1) Lawful operation of the Company: In 2008, the Company’s Supervisory Board conducted supervision through the whole course on the Company’s lawful operation. The Board believed that the Company’s decision-making procedure complies with the provisions of the Company Law, the Securities Law and the Articles of Association, and that the Company had established a relatively complete internal control system. The Company’s Directors, Independent Directors, managers and other senior executives performed their duties honestly and exercised strict self discipline and made persistent efforts to promote the development of the Company. When performing their duties, there were no such things as violating laws, regulations and the Articles of Association, or harming the interests of the Company and its shareholders. (2) Opinions on the inspection of the financial status of the Company The Supervisory Board believed that the Company had sound financial system and standardized financial management. The standard unqualified auditor's reports on the Company's financial status for 2008 and the statements on relevant matters respectively issued by Guangdong Dahua Delu Certified Public Accountants Co., Ltd., the Company’s domestic auditing agency, objectively, fairly and truly reflected the Company's financial status and operating achievement. (3) Opinions on the capital raised and its utilization The Supervisory Committee had checked the utilization of the capital raised. The Company had no new capital raised in the reporting period and investment of non-raised capital complied with the interest of the Company’s shareholders and its long-term development. (4) Opinions on the related transaction In the reporting period, the related transactions existing between the Company and the related parties were equal with fair value, which did not harm the interest of the Company and its shareholders. (5) Opinions on purchase and sales of assets In the reporting period, neither did the Company have any purchase and sales of assets, nor did it provide guarantee in any way for the shareholders and the related 42 parties or any natural person. (6) Opinions on Self-evaluation for internal control 1. The Company established and perfected the internal control system for all departments in the Company in accordance to the related regulations from CSRC and Shenzhen Stock Exchange, the basic principle of the internal control and its real condition, assuring the normal business operation and the safety and integrity of the Company’s assets. 2. The integrity of the organization structure of the internal control, the internal audit department and the staffing of the Company assured the implementation and supervision of the key campaign for the internal control of the Company to be fully efficient. 3. In 2008, the Company had no affair which disobeyed Guidelines of Shenzhen Stock Exchange for the Internal Control and the internal control system of the Company. To sum up, the Supervisory Board believed that the self-evaluation on internal control of the Company reflected the actual status of the Company’s internal control all-sidedly, truly and accurately. 43 X Significant Events 1. Significant lawsuits and arbitrations Basic detail on the dispute case of transfer agreement, in which the Company’s holding subsidiary Foshan Huafeng Paper Co., Ltd (hereinafter refer to as Huafeng Paper) appeals Stora Enso Packing Boards Asia Oy (hereinafter refer to as Stora Enso), has already been fully disclosed in the previous periodical report. By this report the case moves as follows: In November 2008, the Company received the notice of respondence to action from Zhuhai Intermediate People’s Court, informing that the court had accepted the dispute case of transfer agreement in which Huafeng Paper indicts Stora Enso as defendant, and that the Company should participate in this case as co-defendant. The process how the Company becomes co-defendant is as follows: In October 2005, the Company and Stora Enso signed Joint Venture Contract, in which the two sides promised to set up Stora Enso Huaxin (Zhuhai) Packing Board Company Limited (hereinafter refer to as Joint Venture Corporation) through joint venture. Stora Enso also signed the Agreement on Assets Acquisition with Huafeng Paper in the name of Joint Venture Company. Stora Enso then withdrew from the joint venture project, causing a failure to the implementation and fulfillment of the Agreement on Assets Acquisition. In August 2007, Huafeng Paper brought an accusation against Stora Enso in Zhuhai Intermediate People’s Court, and demanded a rescission of agreement and economic loss compensation of over 58 million yuan. During the proceeding, the defendant, Stora Enso applied to Zhuhai Intermediate People’s Court Company for adding the Company as co-defendant. Among the civil bills the Company receives, there is no accusation from the plaintiff Huafeng Paper against the Company. On Dec. 31, 2008, the Company received a notice from Zhuhai Intermediate People’s Court which approved Stora Enso’s application on proof postponement and the proof providing date would be put off till on Feb. 5, 2009. Because the lawsuit above needs to be tried according to the procedure, it entails substantial degree of uncertainty that whether compensation can be received through judicial process as sentence and execution of the case above. The Company therefore cannot make accurate judgment on how this case will influence it. The Company will timely disclose, in pace with the case, the relevant progress and whether it will affect the Company’s profit. The Company’s business operation is so far normal. II. Other investments of the Company (1) Investment in securities of the Company In the reporting period, the Company did not conduct investment in securities. 44 (2) Equity of other listed companies held by the Company In the reporting period, the Company did not hold equity of any other listed companies. (3) Equity of non-listed financial enterprises and companies to be listed held by the Company Unit: RMB Yuan Name Initial Number Equity Book Profit Changes in Accounting Source of investment of proportion value at and the title shares amount shares in the loss owners’ held that of period-end in the equity in this report the report company period period Xinjiang 100,00.00 0 0.08% 0 0.00 0.00 Long-term Investment Sub-branch, equity by Commercial investment establishment Bank of Foshan Commercial 3,000,000.00 0 2.50% 0 0.00 0.00 Long-term Investment Bank equity by of Foshan investment establishment Guangdong 113,558.00 0 0.32% 113,558.00 0.00 0.00 Long-term Investment Development equity by Bank investment establishment Total ,212,558.00 0 - 113,558.00 0.00 0.00 Long-term - equity investment Note: Provision for asset impairment is already included in the book value. Ⅲ. Significant events on asset purchase and sales and the reorganization of assets In order to enlarge the production scale of the Company and focus on developing advanced base board for liquid food packaging which yields a high added value and produced with advanced technology, and optimize the single product mix, the 45 Company intends to establish a holding subsidiary, Zhuhai Hongta Renheng Paper Co., Ltd. (hereinafter refer to as “Hongta Renheng”). The project belongs to material asset reorganization event of the Company and the briefing and process of the project is as follows: The original shareholder of Hongta Renheng gave up the preemptive right for the newly issued capital, as a result of which the Company and the related party Longbang International Co., Ltd. (hereinafter refer to as “Longbang International”) could have subscribed the increase capital, paid with their respective equity of Foshan Huafeng Paper Co., Ltd., and thus becoming new shareholders of the company. After this increase capital, the Company and Longbang International own 40.18% and 13.39% equity of Hongta Renheng respectively. The Company will become the first major shareholder of Hongta Renheng, owning the controlling interest. According to the 12th calculating standard in the Administrative Measures for the Material Asset Reorganizations of Listed Companies (hereinafter refer to as “Measures for Reorganizations”), the total amount of this transaction is RMB 2,774,390,100, with an operation revenue of RMB 1,659,508,300 and a net asset of RMB 1,036,173,000. All the indications above meet the 11th provision on standard of material asset reorganization in the Measures for Reorganizations. The transaction belongs to expanding reorganization of the Company and complies with the Company’s strategic planning and interests of the shareholders. Controlling subsidiary Hongta Reheng helps to improve the Company’s productivity and long-term growth potential, which conforms to the country’s industrial policies and the development tendency of the industry. It also favors the enterprise resource optimization, achievement of scale economies, promotion in the market position and a rapid development of the enterprise. The transaction does no harm to the continuity of the Company’s operation business and the stability of the management staff, and the interests of the minority shareholders are fully expressed and guaranteed as well. On December 15, 2008, the 3rd interim Shareholders’ General Meeting 2008 of Huaxin Packaging was held, at which the plan on the material reorganization and relevant resolution was deliberated. Relevant reporting documents were then submitted to CSRC, and the material asset reorganization is presently under discussion of CSRC. There exist uncertainties on the ratification and approval by the related government departments on this material asset reorganization and its time. The exact value date cannot be confirmed as relevant procedures are needed for this transaction even if the material asset reorganization is approved. Ⅳ. The implementation of the share incentive plan in the reporting period In the reporting period, there was no implementation of the share incentive plan. V. Events on significant related transaction of the Company in the reporting period Related transaction concerning the Company’s daily operation: 46 In the reporting period, the Company conducted related transaction with the related party Qingdao Chengtong Fuel Co., Ltd. (hereinafter refer to as Chengtong Fuel). For details of the related transaction please refer to the Financial Statements Appended Note. 1. About the related party The main business scope of Qingdao Chengtong Fuel Co., Ltd. was storage services, technical service in transportation and wholesale of coal, of which the registered capital was RMB 10 million. The Company and Chengtong Fuel were controlled by Chinese Material Exploitation and Investment Parent Company as Chengtong Fuel was the holding subsidiary of Chinese Material Exploitation and Investment Parent Company and 66.7874% equity of the Foshan Huaxin Development Co., Ltd was held by Chinese Material Exploitation and Investment Parent Company. Chengtong Fuel was the related legal party for the Company based on the second item in 10.1.3 of the Rules for Listing of Stocks. 2. Transaction content and amount By Dec0 31, 2008, the Company’s holding subsidiary, Foshan Huafeng Paper Co., Ltd. had purchased totally 144,000 tons of bituminous coal and white coal. The transaction amounts to RMB 90,862,800, taking up 52.67% of the amount in transaction of the same type. 3. Pricing policy and way of payment The transaction price was based on the market price and in line with the fair and reasonable pricing principal. The two parties fixed transaction price through negotiation and paid by bank bill and by giro. 4. To explain necessity and persistence for related transaction Transaction between the Company and Chengtong Fuel was necessary as it allowed the Company to make good use of the resources and advantages of the related party, strengthen the advantage of concentrative purchase and enhance efficiency, thus reducing the purchase cost, realize the resource optimization distribution and maximize economic efficiency. In order to ensure the persistence and timeliness of coal supply to Huafeng Paper and reduce purchase cost, the related transaction of purchasing coal from Chengtong Fuel by Huafeng Paper was a continuous business in the daily operation, which was expected to exist in a certain period of time. 5. Impact of the related transaction on the independence of the listed Company The transaction was necessary for the normal business of the holding subsidiary Huafeng Paper. The transaction was fair and favorable to each other, which would not harm the benefit of the Company or affect the in independence of the listed company, nor would the Company rely greatly on the related party due to such transaction. 47 VI. Significant contract and its execution (1) In the reporting period, there were no such events as significant financing trust, entrustment, contracting, lease of other companies’ assets by the Company and vice versa. (2) In the report period, significant guarantee of the Company By Dec. 31, 2007, the external guarantee balance that the Company did not free from the guarantee responsibility was RMB 451,998,500, which was all used for guarantee to the holding subsidiaries, RMB 412,998,500 for Foshan Huafeng Paper Co., Ltd. and RMB 39 million for Huaxin (Foshan) Color Printing Co., Ltd.. The two guarantees are both joint guarantee. The Company did not have overdue external guarantee. Unit: RMB’0000 External guarantee from the Company（not including the guarantee for subsidiaries） Amount Period Type of Executed For the related Guarantee party Date of signing for of guarantee or not party or not guarantee guarantee No Total guarantee amount in the report period 0.00 Total guarantee balance at the end of the report period 0.00 Guarantee for the subsidiaries from the Company Total guarantee amount for the subsidiaries in the report period 106,874.79 Total guarantee balance for the subsidiaries at the end of the 45,199.85 report period Total guarantee amount from the Company（including the guarantee for the subsidiaries） Total guarantee amount 45,199.85 The proportion of the total guarantee amount in the net asset of 35.62% the Company Including: Guarantee amount offered to shareholders, actual controllers and 0.00 related parties Guarantee amount for debt offered to the guarantee party whose 3,900.00 asset-liability ratio was over 70% directly or indirectly Part of the amount of the total guarantee over 50% 0.00 Total guarantee for the above 3,900.00 All external guarantees of the Company are guarantees for subsidiaries. The subsidiaries Possible joint liability for guarantee undue of Company are so far operating normally and bear no risk of failing to pay up. Ⅶ. Events of commitment In the reporting period, neither the Company nor the shareholders holding over 5% shares of the Company made or had ever made any commitment that would influence the operation achievement and financial status of the Company. 48 Ⅷ. Engagement or dismissal of certified public accounts’ firm and payment of remuneration: In the reporting period, with the approval of the Shareholders’ General Meeting 2007, the Company engaged Guangdong Hengxin Delu Certified Public Accountants Co., Ltd. as its accounting agency for 2008. This accounting agency has provided the Company auditing services for 3 year in succession. Guangdong Hengxin Delu Certified Public Accountant Co., Ltd. was acquired and merged by Shenzhen Dahua Tiancheng Certified Public Accountants Co., Ltd. and renamed as “Guangdong Dahua Delu Certified Public Accountants Co., Ltd.”. In order to ensure the continuity of the auditing business, the 1st interim Shareholders’ General Meeting 2009 approved to engage Guangdong Dahua Delu Certified Public Accountants Co., Ltd. as the Company’s financial auditing agency in 2009 to provide auditing services for the Company. The Shareholders’ Meeting authorized the Board of Directors on the decision-making procedure concerning the remuneration for the certified public accountants’ firm. The Board of Directors determined the limit of remuneration according to relevant charging standards and amount of work. The audit fee paid for Guangdong Dahua Delu Certified Public Accountants Co., Ltd. is RMB 500,000 in 2008. Ⅸ. Denouncement from CSRC and Stock Exchange in the reporting period In the reporting period, none of the Company, its Directors, Supervisors, Senior Executives, shareholders’ actual controllers as well as the buyers received any inspection from authorities, enforcement measure from judicial discipline inspection departments, transfer to judicial organs, prosecution for criminal liability, inspection from CSRC, or administrative punishment and circulated a notice of criticism from CSRC and be banned from securities market, or cognizance of unsuitable persons, punishment from other administrative and public denouncement from Stock Exchange. Ⅹ. Other significant events On Sept. 2, 2008, the Company succeeded in its first issue of short-term financing bills in 2008 with a total actual issuance of RMB 500 million. The capital would mainly be used for complementing the Company’s current capital, improving capital structure and reducing capital cost. Ⅺ. Interview and visits in the reporting period In the reporting period, according to the requirement of Guidelines on Fair Information Disclosure of Listed Companies, the Company and related information disclosure obligor strictly obeyed the principle of fair information disclosure without discriminatory behavior or spilling non-public information selectively and privately to specified person in advance. The Company received visitors by two ways, namely phone call and interview with shareholders. Over the year, the Company patiently answered the questions of the shareholders during reception and provided them the relevant public disclosure information. 49 Interviews and visits in the reporting period Way of Topics discussed and information Date Location Visitor reception provided Wang Rongxuan from Major business and operation of May 20, 2008 The Company Field research Securities Daily the Company Director Xue Jing from Guotai Junan (Hong Meeting room Kong)Capital Limited, Major business and operation of Sept. 9, 2008 Field research of the Company Chen Hua from Beijing the Company Headquarter, Guotai Junan Securities Huo Yuli and He Jing Major business and operation of Dec. 15, 2008 The Company Field research from Shanghai the Company and significant asset Securities News reorganization Major business and operation of Wu Yin from Securities Dec.22, 2008 The Company Field research the Company and significant asset Daily reorganization 50 Section XI Financial Report The financial report is attached hereinafter Section XII List of Documents Available for Inspection Investors and relevant departments may consult the following documents at the office of the board of directors of the Company: 1. The financial statements bearing the seal and signature of the Company's legal representative, financial controller and the person in charge of the accounting organ. 2. The auditor's report bearing the seal of the certified public accountants and the signature of C.P.A. 3. The original of all the Company's documents and the original manuscripts of announcements publicly disclosed on the newspapers designated by China Securities Regulatory Commission in the report period. 4. The original of 2008 annual report bearing the signature of the chairman of the board of directors of the Company. By order of Board of Directors of Foshan Huaxin Packaging Co., Ltd. Chairman of the Board: Tong Laiming 26March 2009 51 Auditors’ Report HDGSZ[2009] No. 48 To the Shareholders of Foshan Huaxin Packaging Co., Ltd: We have audited the financial statements of Foshan Huaxin Packaging Co., Ltd (the Company) which comprise the Balance sheet and consolidated Balance Sheet as at 31 December 2008, and the Income Statement and Consolidated Income Statement, Statement of Changes in Equity and Consolidated Statement of Changes in Equity, as well as Cash Flow Statement and Consolidated Cash Flow Statement for the year then ended, and a summary of significant accounting policies and other explanatory notes. I. The management level’s responsibility for the financial statements The management level is responsible for the preparation and the true and fair presentation of these financial statements in accordance with Accounting Standards for Business Enterprises of the People’s Republic of China. These responsibilities include designing, implementing and maintaining internal control relevant to the preparation and the true and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. II. Auditor’s responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Independent Audit Standards promulgated by the Chinese Institute of Certified Public Accountants. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance as to whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and true and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. III Audit opinion In our opinion, the accompanying consolidated financial statements give a true and fair view of the financial position of the Group as of 31 December 2008, and of the results of its operations and cash flows for the year then ended in accordance with International Financial Reporting Standards. 52 Guangdong Da Hua De Lu Certified Public Accountants CPA: Du Xiaoqiang Zhuhai ·China CPA: Yu Donghong 26 March 2009 53 Consolidated Balance Sheet As at 31 Dec. 2008 Prepared by Foshan Huaxin Packaging Co., Ltd Liabilities and owner’s Assets Note Closing balance Beginning balance No equity Current Assets: Current liabilities: Monetary funds V.(1) 208,091,895.59 Short-term borrowings V.( 63,767,336.50 Transaction financial Transaction financial asset - - liabilities Notes receivable V.(2) 47,440,393.16 Notes payable V.( 59,669,620.10 Account receivable V.(3) 238,416,506.08 263,746,811.88 Account payable V.( Account paid in Account received in V.(4) 70,122,453.30 V.( advance 3,637,855.82 advance Employee’s compensation Interest receivable V.( - - payable Dividend receivable V.(5) Tax payable V.( - 34,140,000.00 Other account V.6) 36,934,269.64 Interest payable V.( receivable 21,060,306.72 Inventories V.(7) 335,648,893.09 186,800,021.23 Dividend payable V.( 54 Non-current assets due Other account payable V.( within 1 year - - Non-current liabilities due Other current assets V.( - - within 1 year Total current assets 936,654,410.86 632,821,952.25 Other current liabilities V.( Non-current assets: Total current liabilities Available for sale Non-current liabilities: financial assets - - Held to maturity Long-term borrowings V.( investments - - Long-term account Bonds payable receivable - - Long-term equity V.(8) 198,070,534.49 159,799,644.88 Long-term payables investment Investing property V.(9) 11,025,316.46 Specific payables 11,478,231.26 Fixed assets V.(10) 2,195,528,165.59 2,084,520,822.42 Accrued liabilities Construction in V.(11) Deferred tax liabilities progress 1,176,195.54 39,423,119.78 Other non-current Engineering material V.(12) V.( - 13,629,040.02 liabilities Disposal of fixed assets Total non-current liabilities - - 55 Production biological Total liabilities assets - - Oil-gas assets Owner’s equity: - - Intangible assets V.(13) 62,775,368.64 Share capital V.( 64,221,719.36 Development expense V.(14) Capital reserves V.( 7,748,092.27 - Goodwill Less: Treasury stock - - Long-term deferred V.(15) Surplus reserves V.( expenses 6,895,053.00 5,087,221.02 Deferred tax assets V.(16) Retained profits V.( 5,587,309.67 4,168,334.89 Other non-current Foreign exchange assets - - difference Total owners' equity Total of non-current assets 2,488,806,035.66 2,382,328,133.63 attributable to parent company Minority interest Total owner’s equity Total liabilities and owner’s Total assets 3,425,460,446.52 3,015,150,085.88 equity Legal representative: Chief Financial Officer: Accounting Manager: 56 Balance Sheet 31 Dec. 2008 Prepared by Foshan Huaxin Packaging Co., Ltd Liabilities and owner’s Assets Note Closing balance Beginning balance Not equity Current Assets: Current liabilities: Monetary funds 30,851,611.31 24,921,687.13 Short-term borrowings Transaction financial Transaction financial asset - - liabilities Notes receivable Notes payable - - Account receivable Account payable - - Account received in Account paid in advance 6,149,168.11 - advance Employee’s compensation Interest receivable - - payable Dividend receivable 124,931,529.10 Tax payable - Other account receivable VI.(1) 1,417,257,518.46 910,387,437.97 Interest payable Inventories Dividend payable 57 - - Non-current assets due Other account payable within 1 year - - Non-current liabilities due Other current assets - - within 1 year Total current assets 1,454,258,297.88 1,060,240,654.20 Other current liabilities Non-current assets: Total current liabilities Available for sale Non-current liabilities: financial assets - - Held to maturity Long-term borrowings investments - - Long-term account Bonds payable receivable - - Long-term equity VI.(2) 988,083,927.13 946,813,037.52 Long-term payables investment Investing property Specific payables - - Fixed assets 1,610,873.38 1,100,792.04 Accrued liabilities Construction in progress Deferred tax liabilities - - Other non-current Engineering material - - liabilities Disposal of fixed assets Total non-current liabilities - - 58 Production biological Total liabilities assets - - Oil-gas assets Owner’s equity: - - Intangible assets Share capital - - Development expense Capital reserves - - Goodwill Less: Treasury stock - - Long-term deferred Surplus reserves expenses - - Deferred tax assets Retained profits - - Other non-current assets Total owner’s equity - - Total of non-current assets 989,694,800.51 947,913,829.56 Total liabilities and owner’s Total assets 2,443,953,098.39 2,008,154,483.76 equity Legal representative: Chief Financial Officer: Accounting Manager: 59 Consolidated Income Statement Prepared by Foshan Huaxin Packaging Co., Ltd Year 2008 Unit: RMB Yuan Items Note Amount in 2008 Amount in 2007 I. Operating income V.(35) 1,412,674,165.82 1,269,510,406.95 Less: Operating cost V.(35) 1,210,189,228.55 1,109,026,954.79 Sales Tax and Extra Charges V.(36) 690,373.22 184,977.83 Selling and distribution expenses V.(37) 47,231,627.31 31,760,154.87 Administrative expenses V.(38) 79,378,739.61 54,659,328.20 Financial expenses (“-” means loss) V.(39) 82,182,027.50 47,324,512.88 Loss on assets impairment V.(40) 11,136,522.26 6,439,391.28 Add: Gain/(loss) from change in fair value (“-” - - means loss) Gain/(loss) from investment (“-” means loss) V.(41) 58,258,692.68 95,306,219.03 Including: income form investment on affiliated 58,258,692.68 95,306,219.03 enterprise and jointly enterprise II. Operating profit (“-” means loss) 40,124,340.05 115,421,306.13 Add: non-operation income V.(42) 425,582.49 4,200,863.52 Less: non-business expense V.(43) 476,860.39 406,546.28 Including: loss from non-current asset disposal 20,131.95 305,600.88 III. Total profit (“-” means loss) 40,073,062.15 119,215,623.37 Less: Income tax expense V.(44) -829,059.80 759,434.35 IV. Net profit (“-” means loss) 40,902,121.95 118,456,189.02 Of which: Attributable to parent company 42,588,844.36 110,720,644.39 Minority interests -1,686,722.41 7,735,544.63 V. Earnings per share (I) basic earnings per share 0.08 0.22 (II) diluted earnings per share 0.08 0.22 Legal representative: Chief Financial Officer: Accounting Manager: 60 Income Statement Year 2008 Prepared by Foshan Huaxin Packaging Co., Ltd KH Table 2 Unit: RMB Yuan Items Note Amount in 2008 Amount in 2007 I. Operating income - 242,154.18 Less: Operating cost - 234,829.23 Sales Tax and Extra Charges - - Selling and distribution expenses - - Administrative expenses 8,430,025.40 8,535,868.05 Financial expenses (“-” means loss) 2,131,845.94 -993,115.25 Loss on assets impairment -42,443.85 139,878.63 Add: Gain/(loss) from change in fair value (“-” means - - loss) Gain/(loss) from investment (“-” means loss) VI.(3) 77,679,461.10 96,255,737.47 Including: income form investment on affiliated 58,258,692.68 95,306,219.03 enterprise and jointly enterprise II. Operating profit (“-” means loss) 67,160,033.61 88,580,430.99 Add: non-operation income 362.24 - Less: non-business expense 121,000.00 945.40 Including: loss from non-current asset disposal - - III. Total profit (“-” means loss) 67,039,395.85 88,579,485.59 Less: Income tax expense - - IV. Net profit (“-” means loss) 67,039,395.85 88,579,485.59 V. Earnings per share (I) basic earnings per share × × (II) diluted earnings per share × × Legal representative: Chief Financial Officer: Accounting Manager: 61 Consolidated Cash Flow Statement Year 2008 KH Table 03 Prepared by Foshan Huaxin Packaging Co., Ltd Unit: RMB Yuan Items Note Amount in 2008 Amount in 2007 I. Cash flows from operating activities: Cash received from sale of commodities and rendering of service 1,705,971,627.58 1,239,147,166.94 Tax refunds received - 115,326.09 Other cash received relating to operating activities V.(45) 8,147,648.96 4,258,183.58 Subtotal of cash inflows from operating activities 1,710,229,811.16 1,247,410,141.99 Cash paid for goods and services 1,522,990,342.15 1,048,622,333.37 Cash paid to and for employees 67,493,605.65 88,858,905.60 Various taxes paid 19,274,397.67 33,401,760.55 Payment of cash relating to operating activities V.(45) 44,980,315.80 92,796,595.47 Subtotal of cash outflows from operating activities 1,738,047,603.77 1,180,370,652.49 Net cash flows from operating activities -27,817,792.61 67,039,489.50 II. Cash Flows from investment activities: Cash received from return of investments - - Cash received from investment income 113,462,814.19 54,127,803.00 Net cash received from disposal of fixed assets, intangible assets 38,000.00 and other long-term assets 43,800.00 Net cash received from disposal of subsidiary or other operating - - business units Other cash received relating to investment activities - - Subtotal of cash inflows from investment activities 113,500,814.19 54,171,603.00 Cash paid to acquire fixed assets, intangible assets and other 311,005,571.83 long-term assets 51,768,652.41 Cash paid to investment - - Net cash paid by subsidiaries and other operating business units - - Payment of cash relating to other investment activities - 2,807,500.00 Subtotal of cash outflows from investment activities 311,005,571.83 54,576,152.41 Net cash flows from investment activities -197,504,757.64 -404,549.41 62 III. Cash Flows from Financing Activities: Cash received from absorbing investment - 61,767,285.22 Including: Cash received from increase in minority interest - 61,767,285.22 Cash received from borrowings 1,875,770,887.53 1,115,959,191.72 Other cash received relating to financing activities - - Subtotal of cash inflows from financing activities 1,937,538,172.75 1,115,959,191.72 Cash repayments of amounts borrowed 1,680,276,674.99 983,561,253.39 Cash paid interest expenses and distribution of dividends or 51,065,055.00 profit 82,714,596.65 Including: dividends or profit paid to minority interest - - Other cash payments relating to financing activities - 2,000,000.00 Sub-total of cash outflows from financing activities 1,764,991,271.64 1,034,626,308.39 Net cash flow from financing activities 81,332,883.33 172,546,901.11 IV. Effect of foreign exchange rate changes on cash and cash - - equivalents V. Increase in cash and cash equivalents -49,132,384.81 144,324,559.09 Add : Cash and cash equivalents at year-begin 112,899,721.31 63,767,336.50 VI. Cash and cash equivalents at the end of the year 63,767,336.50 208,091,895.59 Legal representative: Chief Financial Officer: Accounting Manager: 63 Consolidated Cash Flow Statement Year 2008 KH Table 03 Prepared by Foshan Huaxin Packaging Co., Ltd Unit: RMB Yuan Items Amount in 2008 Amount in 2007 I. Cash flows from operating activities: Cash received from sale of commodities and - - rendering of service Tax refunds received - - Other cash received relating to operating activities 8,315,818.31 19,144,805.91 Subtotal of cash inflows from operating activities 8,315,818.31 19,144,805.91 Cash paid for goods and services - - Cash paid to and for employees 5,098,959.84 9,654,158.68 Various taxes paid 391,958.13 49,863.74 Payment of cash relating to operating activities 502,176,716.75 214,363,155.26 Subtotal of cash outflows from operating activities 507,667,634.72 224,067,177.68 Net cash flows from operating activities -499,351,816.41 -204,922,371.77 II. Cash Flows from investment activities: - - Cash received from return of investments - - Cash received from investment income 164,340,100.59 113,462,814.19 Net cash received from disposal of fixed assets, - - intangible assets and other long-term assets Net cash received from disposal of subsidiary or - - other operating business units Other cash received relating to investment - - activities Subtotal of cash inflows from investment 164,340,100.59 113,462,814.19 activities Cash paid to acquire fixed assets, intangible assets 720,860.00 724,008.00 and other long-term assets Cash paid to investment 3,000,000.00 - Net cash paid by subsidiaries and other operating - - business units Payment of cash relating to other investment 2,807,500.00 - activities Subtotal of cash outflows from investment activities 6,528,360.00 724,008.00 Net cash flows from investment activities 157,811,740.59 112,738,806.19 III. Cash Flows from Financing Activities: - - Cash received from absorbing investment - - Cash received from borrowings 1,362,200,000.00 652,990,000.00 Other cash received relating to financing activities - - 64 Subtotal of cash inflows from financing activities 1,362,200,000.00 652,990,000.00 Cash repayments of amounts borrowed 1,012,730,000.00 557,765,000.00 Cash paid interest expenses and distribution of 21,991,612.22 dividends or profit Other cash payments relating to financing 2,000,000.00 - activities Sub-total of cash outflows from financing activities 1,014,730,000.00 579,756,612.22 Net cash flow from financing activities 347,470,000.00 73,233,387.78 IV. Effect of foreign exchange rate changes on cash - - and cash equivalents V. Increase in cash and cash equivalents 5,929,924.18 -18,950,177.80 Add : Cash and cash equivalents at year-begin 24,921,687.13 43,871,864.93 VI. Cash and cash equivalents at the end of the year 30,851,611.31 24,921,687.13 Legal representative: Chief Financial Officer: Accounting Manager: 65 66 Consolidated Statement of Change in Owners’ Equity Year 2008 Prepared by Foshan Huaxin Packaging Co., Ltd 2008 Owners’ equity attributable to parent company Owners’ equity attributable Items Paid-up capital Lessen: Total of owners’ Paid-up capital Lessen: Surplus public Retained Minority equity S (or share Capital reserve treasury Others equity (or share Capital reserve treasury reserve profits capital) stock capital) stock I. balance at the end of last 505,425,000.00 253,763,982.00 - 118,570,535.83 348,870,277.23 - 190,224,007.16 1,416,853,802.22 439,500,000.00 253,763,982.00 - 11 year Add: Change of accounting - - - - - - - - - - - -7 policy Correction of errors in - - - - - - - - - - - -7 previous period II. balance at the beginning 505,425,000.00 253,763,982.00 - 118,570,535.83 348,870,277.23 - 190,224,007.16 1,416,853,802.22 439,500,000.00 253,763,982.00 - 1 of this year III. Increase/ decrease of - - - 6,703,939.59 35,884,904.77 - 62,384,730.68 104,973,575.04 65,925,000.00 - - 8 amount in this year (“-” 67 means decrease) (I) Net profit - - - - 42,588,844.36 - -1,686,722.41 40,902,121.95 - - - (II)Gain/loss listed to - - - - - - - - - - - - owners’ equity directly 1. Net amount on changes in book value of financial - - - - - - - - - - - - assets available for sale 2. Effect on changes in other owners’ equity of - - - - - - - - - - - - invested units under equity method 3. Effect on income tax related to - - - - - - - - - - - - items listed to owners’ equity 68 4. Others - - - - - - - - - - - Subtotal of - - - - 42,588,844.36 - -1,686,722.41 40,902,121.95 - - - - (I)and (II) (III) Input an reduced - - - - - - 70,580,696.21 70,580,696.21 - - - - capital of owners 1. Input capital of - - - - - - 70,580,696.21 70,580,696.21 - - - - owners 2. Amount of Shares included in - - - - - - - - - - - - the owners’ equity 3. Others - - - - - - - - - - - (IV) Profit - - - 6,703,939.59 -6,703,939.59 - -6,509,243.12 -6,509,243.12 - - - 8 distribution 1. Withdrawing - - - 6,703,939.59 -6,703,939.59 - - - - - - 8 surplus public reserve 2. Distribution to all owners - - - - - -6,509,243.12 -6,509,243.12 - - - - (shareholders) 3. Other - - - - - - - - - - - - 69 (V)Internal carrying - - - - - - - - 65,925,000.00 - - - forward of owners’ equity 1. New increase of capital (share - - - - - - - - - - - - capital) from capital reserves 2. Convert surplus reserves to - - - - - - - - - - - - capital(share capital) 3. Surplus reserves - - - - - - - - - - - - make up losses 4. Others - - - - - - - - 65,925,000.00 - - - IV. Balance at the end of this 505,425,000.00 - 125,274,475.42 384,755,182.00 - 252,608,737.84 1,521,827,377.26 505,425,000.00 253,763,982.00 - 11 period Legal representative: Chief Financial Officer: Accounting Manager: 70 Consolidated Statement of Change in Owners’ Equity Year 2008 Prepared by Foshan Huaxin Packaging Co., Ltd 2008 Paid-up capital Lessen: Paid-up capital L Items Surplus public Retained Total of owners’ (or share Capital reserve treasury (or share Capital reserve t reserve profits equity capital) stock capital) I. balance at the end 505,425,000.00 250,531,482.00 - 118,570,535.83 325,874,423.10 1,200,401,440.93 439,500,000.00 253,763,982.00 of last year Add: Change of - - - - - - -3,232,500.00 accounting policy - Correction of errors - - - - - - - in previous period - II. balance at the beginning of this 505,425,000.00 250,531,482.00 - 118,570,535.83 325,874,423.10 1,200,401,440.93 439,500,000.00 250,531,482.00 year III. Increase/ decrease of amount - - - 6,703,939.59 60,335,456.26 67,039,395.85 65,925,000.00 - in this year (“-” means decrease) (I) Net profit - - - - 67,039,395.85 67,039,395.85 - - (II)Gain/loss listed to owners’ equity - - - - - - - - directly 71 1. Net amount on changes in book value of financial - - - - - - - - assets available for sale 2. Effect on changes in other owners’ equity of invested - - - - - - - - units under equity method 3. Effect on income tax related to items - - - - - - - - listed to owners’ equity 4. Others - - - - - - - Subtotal of (I)and (II) - - - - 67,039,395.85 67,039,395.85 - - (III) Input an reduced - - - - - - - - capital of owners 1. Input capital of - - - - - - - - owners 2. Amount of Shares included in the - - - - - - - - owners’ equity 3. Others - - - - - - - - (IV) Profit distribution - - - 6,703,939.59 -6,703,939.59 - - - 1. Withdrawing - - - 6,703,939.59 -6,703,939.59 - - - 72 surplus public reserve 2. Distribution to all owners - - - - - - - (shareholders) 3. Other - - - - - - - - (V)Internal carrying forward of owners’ - - - - - - 65,925,000.00 - equity 1. New increase of capital (share - - - - - - - capital) from capital reserves 2. Convert surplus reserves to - - - - - - - - capital(share capital) 3. Surplus reserves - - - - - - - - make up losses 4. Others - - - - - - 65,925,000.00 - IV. Balance at the 505,425,000.00 250,531,482.00 - 125,274,475.42 386,209,879.36 1,267,440,836.78 505,425,000.00 250,531,482.00 end of this period Legal representative: Chief Financial Officer: Accounting Manager: 73 FOSHAN HUAXIN PACKAGING CO., LTD. NOTE TO FINANCIAL STATEMENT As of the year 2008 （All amounts in RMB Yuan unless otherwise stated） [English version for reference only] I. Company profiles Foshan Huaxin Packing Co., Ltd. (hereinafter referred to as the Company) was promoted by Foshan Huaxin Development Co., Ltd., as a main sponsor, under approval of People’s Government of Guangdong Province with YBH (1999) No. 297 document and Economic System Reform Committee of Guangdong Province with YTG (1999) No. 032 document, and jointly invested by seven shareholders such as Foshan Municipal Investment General Corporation, Foshan Xinhui Industrial Development Co., Ltd., China Packaging General Corporation, China Material Development & Investment General Corporation, Guangdong Technical Reforming & Investment Co., Ltd., China Chemistry & Light Industry General Corporation, and Foshan Light Industry Company by promotion with total share capital of RMB 290,000,000 at par value of RMB 1 per share. The Company is joint-stock company who was registered in Administration Bureau for Commerce & Industry of Guangdong Province on June 21, 1999. (Business License No. 40000000005147). In the year of 2000, the Company successfully placed domestically listed foreign shares (B shares) amounting to 149,500,000 by mean of private placing, which was listed in Shenzhen Stock Exchange for trade. After offering, the Company’s total share capital was increased to RMB 439,500,000.00. In June 2007, the Company distributed dividends of 65,925,000 shares, thus, the total share capital was changed into RMB 505,425,000.00. The Company is engaged in paper making, paper package and printing industry and mainly manufactures (operated by subsidiary companies under the Company) and sells packaging materials, and packaging products, materials for decoration and aluminum and plastic compound materials; sells and maintains package machinery; invests in industry in terms of package and printing. The Company is located in No. 18, Jihua 5th Road, Foshan, Guangdong. Foshan Huafeng Paper Co., Ltd and Huaxin (Foshan) Color Printing Co., Ltd. are two shareholding subsidiaries of the Company, of which main products include high-class coated white board and color printed packaging products. II. Main accounting policies and accounting estimates adopted by the Company The financial statements prepared by the Company comply with the requirement of the Accounting Standard for Business Enterprises, and had truly and completely reflected the Company’s financial status, operation results and cash flow. (II) Preparation basis for the financial statements With sustaining operation as a premise, the Company prepares the financial statement. (III) Fiscal year 74 -- The fiscal year of the Company is the solar calendar year, which is from January 1 to December 31. (IV) Standard currency of accounts The Company adopts Renminbi as a standard currency of accounts. (V) Accounting measurement attribute Items in financial statements shall be accorded based on historical cost. Financial assets and financial liabilities which are measured at their fair values, of which the variation is recorded into the profits and losses of the current period, financial assets available for sale, derivative financial instruments shall be measured in the light of fair value; inventories which are delayed in payment over the normal credit condition when purchased and fixed assets shall be accorded with present value of purchase price; inventories which impairment loss occurred shall be measured by net realizable value; other assets depreciation shall be measured by recoverable amount (which higher between fair value and present value); inventory surplus assets shall be measured by replacement cost. The accounting measurement attribute remained unchanged. (VI) Recognition standard for cash equivalents Cash equivalents of the Company refer to short-term (usually due within 3 months since the day of purchase) and high circulating investments, which are easily convertible into known amount of cash and whose risks in change of value are minimal. (VII) Foreign current translation For a foreign currency occurred, the amount in the foreign currency shall be translated into the amount in the functional currency at an approximate exchange rate with the spot exchange rate of the transaction date. For the balance of foreign currency at the period-end in various foreign currency accounts, the foreign currency monetary items shall be translated at the spot exchange rate on the balance sheet date, the balance of exchange shall be recorded into the profits and losses at the current period; except that the balance of exchange arising from foreign currency borrowings for the purchase and construction or production of assets eligible for capitalization shall be measured in the light of capitalization principle. The foreign currency non-monetary items measured at the historical cost shall still be translated at the spot exchange rate on the transaction date; the foreign currency non-monetary items measured at the fair value shall be translated at the spot exchange rate on the fair value confirming date, the difference is taken as the changes in the profit and loss of fair value. (VIII) Recognition and measurement of financial instruments 1. Classification of financial assets and financial liabilities Financial assets shall be classified into the following four categories when they are initially recognized: (1) the financial assets which are measured at their fair values and the variation of which is recorded into the profits and losses of the current period, including transactional financial assets and the financial assets which are measured at their fair values and of which the variation is included in the current profits and losses; (2) the investments which will be held to their maturity; (3) loans and the account receivables; and (4) financial assets available for sale. 75 -- Financial liabilities shall be classified into the following two categories when they are initially recognized: (1) the financial liabilities which are measured at their fair values and of which the variation is included in the current profits and losses, including transactional financial liabilities and the designated financial liabilities which are measured at their fair values and of which the variation is included in the current profits and losses; and (2) other financial liabilities. 2. Recognition basis and measurement method When the Company becomes a party to a financial instrument, it shall recognize a financial asset or financial liability. The financial assets and financial liabilities initially recognized by the Company shall be measured at their fair values. For the financial assets and liabilities measured at their fair values and of which the variation is recorded into the profits and losses of the current period, the transaction expenses thereof shall be directly recorded into the profits and losses of the current period; for other categories of financial assets and financial liabilities, the transaction expenses thereof shall be included into the initially recognized amount. The Company shall make subsequent measurement on its financial assets according to their fair value; the Company shall make subsequent measurement on its financial assets according to their fair values, and may not deduct the transaction expenses that may occur when it disposes of the said financial asset in the future. However, those under the following circumstances shall be excluded: (1) The investments held until their maturity, loans and accounts receivable shall be measured on the basis of the post-amortization costs by adopting the actual interest rate method; (2) The equity instrument investments for which there is no quotation in the active market and whose fair value cannot be measured reliably, and the derivative financial assets which are connected with the said equity instrument and must be settled by delivering the said equity instrument shall be measured on the basis of their costs. The Company shall make subsequent measurement on its financial liabilities on the basis of the post-amortization costs by adopting the actual interest rate method, with the exception of those under the following circumstances: (1) For the financial liabilities measured at their fair values and of which the variation is recorded into the profits and losses of the current period, they shall be measured at their fair values, and none of the transaction expenses may be deducted, which may occur when the financial liabilities are settled in the future; (2) For the derivative financial liabilities, which are connected to the equity instrument for which there is no quotation in the active market and whose fair value cannot be reliably measured, and which must be settled by delivering the equity instrument, they shall be measured on the basis of their costs. (3) For the financial guarantee contracts which are not designated as a financial liability measured at its fair value and the variation thereof is recorded into the profits and losses of the current period, and for the commitments to grant loans which are not designated to be measured at the fair value and of which the variation is recorded into the profits and losses of the current period and which will enjoy an interest rate lower than that of the market, a subsequent measurement shall be made after they are initially recognized according to the higher one of the following: i. the best estimated amount as outgone due to performing the relevant current obligation; or ii. the surplus after accumulative amortization as determined according to the effective interest method is subtracted from the initially recognized amount. 3. Recognition and measurement of transfer of financial assets 76 -- Where the Company has transferred nearly all of the risks and rewards related to the ownership of the financial asset to the transferee, it shall stop recognizing the financial asset. If it retained nearly all of the risks and rewards related to the ownership of the financial asset, it shall continue to recognize the entire financial asset to be transferred and shall recognize the consideration it receives as a financial liability. Where the Company does not transfer or retain nearly all of the risks and rewards related to the ownership of a financial asset, it shall deal with it according to the circumstances as follows, respectively: (1) If it gives up its control over the financial asset, it shall stop recognizing the financial asset; (2) If it does not give up its control over the financial asset, it shall, according to the extent of its continuous involvement in the transferred financial asset, recognize the related financial asset and recognize the relevant liability accordingly. If the transfer of an entire financial asset satisfies the conditions for stopping recognition, the difference between the amounts of the following 2 items shall be recorded in the profits and losses of the current period: (1) The book value of the transferred financial asset; (2) The sum of consideration received from the transfer, and the accumulative amount of the changes of the fair value originally recorded in the owner's equities. If the transfer of partial financial asset satisfies the conditions to stop the recognition, the entire book value of the transferred financial asset shall, between the portion whose recognition has been stopped and the portion whose recognition has not been stopped, be apportioned according to their respective relative fair value, and the difference between the amounts of the following 2 items shall be included into the profits and losses of the current period: (1) The book value of the portion whose recognition has been stopped; (2) The sum of consideration of the portion whose recognition has been stopped, and the portion of the accumulative amount of the changes in the fair value originally recorded in the owner's equities which is corresponding to the portion whose recognition has been stopped. 4. Determination of the fair value of financial assets and financial liabilities As for the financial assets or financial liabilities for which there is an active market, the quoted prices in the active market shall be used to determine the fair values thereof. Where there is no active market for a financial instrument, the enterprise concerned shall adopt value appraisal techniques (the value appraisal techniques mainly include the prices adopted by the parties, who are familiar with the condition, in the latest market transaction upon their own free will, the current fair value obtained by referring to other financial instruments of the same essential nature, the cash flow capitalization method and the option pricing model, etc.) to determine its fair value. As for the financial assets initially obtained or produced at source and the financial liabilities assumed, the fair value thereof shall be determined on the basis of the transaction price of the market. 5. Impairment inspection and withdrawal method of impairment provision for financial assets and financial liabilities The Company shall carry out an inspection, on the balance sheet day, on the carrying amount of the financial assets other than those measured at their fair values and of which the variation is recorded into the profits and losses of the current period. An impairment test shall be made on the financial assets with significant single amounts. With regard to the financial assets with insignificant single amounts, it shall be included in a combination of financial assets with similar risk features so as to conduct another impairment test. Where, upon independent test, the financial 77 -- asset (including those financial assets with significant single amounts and those with insignificant amounts) has not been impaired, it shall be included in a combination of financial assets with similar risk features so as to conduct another impairment test. Where a financial asset which is measured on the basis of post-amortization costs and for which there is any objective evidence proving that the impairment occurred, the impairment losses shall be recognized in accordance with the balance between book value and the current value of the predicted future cash flow. Where there is a very small gap between the predicted future cash flow of a short-term account receivable item and the current value thereof, the predicted future cash flow is not required to be capitalized when determining the relevant impairment-related losses. Where an equity instrument investment for which there is no quoted price in the active market and whose fair value cannot be reliably measured, or a derivative financial asset which is connected with the equity instrument and which must be settled by delivering the equity instrument, suffers from any impairment, the gap between the carrying amount of the equity instrument investment or the derivative financial asset and the current value of the future cash flow of similar financial assets capitalized according to the returns ratio of the market at the same time shall be recognized as impairment-related losses. Where a fair value of financial assets available for sale drops by a big margin or not contemporarily in anticipation, its impairment losses shall be recognized, the accumulative losses arising from the decrease of the fair value of the owner’s equity which was directly included shall be transferred out and recorded into impairment losses. (IX) Withdrawal method for reserve for bad debts of accounts receivable A reserve for bad debts shall, in accordance with the balance of its current value of future cash flow’s lowering than its book value, be withdrawn on accounts receivable (including accounts receivable and other receivables) with significant single amounts and that there is any objective evidence shows that it has been impaired and ones with insignificant single amounts but with the greater risk after combination based on credit risk features; A withdrawal proportion for bad debts reserve shall, based on the actual loss rate of accounts receivable combination with same aging and combining the present situation, be confirmed on accounts receivable (including accounts receivable and other receivables) with insignificant single amounts and those with significant single amounts and there has not been impaired after independent test, Withdrawal proportions of bad debts reserve are as follows: Aging Withdrawal proportion ==================== ================= 1-3 months - 4-12 months 5% 1-2 years 10% 2-3 years 20% Over 3 years 50% ==================== ================= (X) Recognition and measurement of inventories 1. The term "inventories" refers to finished products or merchandise possessed by an enterprise for sale in the daily of business, or work in progress in the process of production, or materials and 78 -- supplies to be consumed in the process of production or offering labor service. 2. The sending out inventories shall be measured by planned cost. 3. On the date of balance sheet, the inventories shall be measured whichever is lower in accordance with the cost and the net realizable value. The Company shall make provision for loss on decline in value of inventories on the ground of the balance of the cost of inventories is higher than the net realized value. Such merchandise inventory for sale directly as finished goods inventories, merchandise and materials for sale, their net realizable value shall be the amount after deducting estimated sale expense and relevant taxes from the estimated sale price of the inventories in course of normal production and operation; the net realizable value of materials inventories for processing shall be the amount after deducting the estimated cost of completion, estimated sale expense and the relevant taxes from the estimated sale price of finished products in course of normal production and operation; on the balance sheet date, for inventories with the contract price and inventories without the contract price in the same inventories, their net realizable value shall be measured separately, and comparing with their corresponding costs, their amounts of provision for loss on decline in value of inventories withdrawn or carried forward shall be confirmed respectively. 4. Inventory system for inventories: Perpetual inventory system shall be adopted. 5. The Company shall amortize the easily consumed products of low value and packing articles and supplies by employing the one-off write-off method. (XI) Recognition and measurement of long-term equity investment 1. Recognition of initial investment cost of long-term equity investment (1) For the merger of enterprises under the same control, if the consideration of the merging enterprise is that it makes payment in cash, transfers non-cash assets or bear its debts or issue equity securities, it shall, on the date of merger, regard the share of the book value of the owner's equity of the merged enterprise as the initial cost of the long-term equity investment. The difference between the initial cost of the long-term equity investment and the book value of merger consideration paid or the total amount of the par value of share issued shall offset against the capital reserve. If the capital reserve is insufficient to dilute, the retained earnings shall be adjusted. (2) For the merger under different control, the Company, on the date of merger, regards the fair value of the merger consideration paid and various direct costs as the initial cost of the long-term equity investment. (3) Besides the long-term equity investments formed by the merger of enterprises, the initial cost of a long-term equity investment obtained by making payment in cash shall be the purchase cost which is actually paid; the initial cost of a long-term equity investment obtained on the basis of issuing equity securities shall be the fair value of the equity securities issued; the initial cost of a long-term equity investment of an investor shall be the value stipulated in the investment contract or agreement except the unfair value stipulated in the contract or agreement. 2. A long-term equity investment that is controlled by the Company shall be accounted by 79 -- employing the cost method, and shall be made an adjustment by employing the equity method when it works out consolidated financial statements. A long-term equity investment that does not do joint control or does not have significant influence on the Company, and entity, and has no offer in the active market and its fair value cannot be reliably measured, shall be measured by employing the cost method. A long-term equity investment that does joint control or significant influences over the Company shall be accounted by employing the equity method. 3. Recognition measurement for income from long-term equity investment The price of a long-term equity investment measured by employing the cost method shall be included at its initial investment cost. If there are additional investments or disinvestments, the cost of the long-term equity investment shall be adjusted. The dividends or profits declared to distribute by the invested entity shall be recognized as the current investment income. The investment income recognized by the investing enterprise shall be limited to the amount received from the accumulative net profits that arise after the invested entity has accepted the investment. Where the amount of profits or cash dividends obtained by the investing entity exceeds the aforesaid amount, it shall be regarded as recovery of initial investment cost. The price of a long-term equity investment measured by employing the equity method shall, in accordance with the attributable share of the net profits or losses of the invested entity, recognize the investment profits or losses and adjust the book value of the long-term equity investment. The investing enterprise shall, in the light of the profits or cash dividends declared to distribute by the invested entity, calculate the proportion it shall obtain, and shall reduce the book value of the long-term equity investment correspondingly. Where any change is made to the owner's equity other than the net profits and losses of the invested entity, the book value of the long-term equity investment shall be adjusted and be included in the owner's equity. When disposing of a long-term equity investment, the difference between its book value and the actual purchase price shall be included in the current profits and losses. If any change other than the net profits and losses of the invested entity occurs and is included in the owner's equity, the portion previously included in the owner's equity shall, when disposing of a long-term equity investment measured by employing the equity method, be transferred to the current profits and losses according to a certain proportion. 4. On the balance sheet date, where an long-term equity investment for which it is measured by employing the cost method, there is no quoted price in the active market and whose fair value cannot be reliably measured, there is any objective evidence proving that such long-term equity investment has been impaired, shall be withdrawn provision for impairment of long-term equity investment in the light of the gap between the book value of long-term equity investment and current value of the future cash flow of similar investment according to the return ratio of the market at the same time,. Where other investment for which there exist impairment signs, shall be withdrawn provision for impairment of long-term equity investment in the light of the method mentioned in II (XVI) in the Notes to the Financial Statement. 5. Recognition basis of joint control and significant influences over the investing enterprises: the joint control shall be recognized in the light of the control over an economic activity in accordance with the contracts and agreements, which does not exist unless the investing parties of the economic activity with one an assent on sharing the control power over the relevant important financial and operating decisions. Significant influences shall be recognized in the light of the 80 -- power to participate in making decisions on the financial and operating policies of an enterprise, but not to control or do joint control together with other parties over the formulation of these policies. Where an investing enterprise is able to have significant influences on an invested entity, the invested entity shall be its associated entity. (XII) Recognition and measurement of investment real estates 1. Investment real estates include: the right to use any land which has already been rented; the right to use any land which is held and prepared for transfer after appreciation; and the right to use any building which has already been rented. 2. The initial measurement of the investment real estate shall be made at its cost. The Company shall make a subsequent measurement to the investment real estate through the cost pattern 3. An investment real estates measured through the cost pattern shall be withdrawn a depreciation and made an amortization by employing the same method with fixed assets and intangible assets. 4. Where an investment real estates measured through the cost pattern for which there exist impairment signs on the balance sheet, shall be withdrawn provision for impairment of investment real estates in the light of the method mentioned in II (XVI) in the Notes to the Financial Statement. (XIII) Recognition and measurement of fixed assets 1. Fixed assets refers to the tangible assets that simultaneously possess the features as follows: (1) they are held for the sake of producing commodities, rendering labor service, renting or business management; and (2) their useful life is in excess of one fiscal year. 2. No fixed assets may be recognized unless it simultaneously meets the conditions as follows: (1) the economic benefits pertinent to the fixed assets are likely to flow into the enterprise; and (2) the cost of the fixed assets can be measured reliably. Where the subsequent expenditure related with fixed assets, meeting the aforesaid recognition condition, shall be measured into the cost of the fixed assets, while not meeting the aforesaid recognition condition, it shall be measured into the profits and losses of the current period. 3. The initial measurement of fixed assets shall be made at its cost. 4. The Company shall account the depreciation of the fixed assets by employing the straight-line method. Expected net Annual depreciation Category of fixed asset Useful life salvage value rate (%) ================== =============== =========== =============== House and building 40 years 10% 2.25% Machinery equipment 20-30 years 10% 3-4.50% Transport equipment 8 years 10% 11.25% Other 5 -10 years 10% 9-18% ================== ============== =========== =============== 5. A fixed assets, for which it is stopped to use for six months in succession due to running under its production capacity or natural disasters, shall be recognized idle fixed assets. The Company shall withdraw depreciation of idle fixed assets by employing the method with other fixed assets. 81 -- 6. On the balance sheet date, where a fixed assets for which there exist impairment signs, shall be withdrawn provision for impairment of fixed assets in the light of the method mentioned in II (XVI) in the Notes to the Financial Statement. (XIV) Recognition and measurement of construction in progress 1. No construction in progress may be recognized unless it simultaneously meets the conditions as follows: a. the economic benefits are likely to flow into the Company, and b. the cost of the construction in progress can be measured reliably. The construction in progress shall be measured in the light of the actual cost when the assets complete and achieve estimated usable status. 2. Constructions in progress are carried down to fixed assets according to their actual costs when completing and achieving estimated usable status. The fixed assets that have been completed and reached estimated usable status but have not yet been through completion and settlement procedures are charged to an account according to their estimate values; adjustment will be conducted upon confirmation of their actual values. 3. On the balance sheet date, where a construction in progress for which there exist impairment signs, shall be withdrawn provision for impairment of the construction in progress in the light of the method mentioned in II (XVI) in the Notes to the Financial Statement. (XV) Recognition and measurement of intangible assets 1. The intangible assets shall be initially measured according to its cost. 2. In accordance with such integrative factors as intangible asset’s contractual right or other statutory rights, same industry situation, historical experience as well as expert discussion, if it is able to forecast the period when the intangible assets can bring economic benefit to the Company, it shall be regarded as an intangible asset with certain service life; if it is unable to forecast the period when the intangible assets can bring economic benefit to the Company, it shall be regarded as an intangible asset with uncertain service life. 3. With regard to intangible assets with limited useful life, the following factors shall be considered when the useful life is estimated: (1) general life cycle of products manufactured with the said assets, information of useful life of similar assets obtained; (2) estimation over the present phase and future development tendency in the respect of technology and technics; (3) market demand of products manufactured with the said assets and of labor service provided by the said assets; (4) action taken by present or potential competitor; (5) expected maintain expenditure for which it keeps economic benefit capacity brought by the said assets, and expenditure capacity paid in advance by the Company; (6) such laws, regulations or the similar restriction related with control period of the said assets, i.e. concession period and tenancy duration; and (7) relevance of useful life of other assets held by the Company. 4. With regard to intangible assets with limited service life shall be amortized reasonably in accordance with the expected realization pattern of the economic benefits which relevant to the intangible assets within the service life, if it is unable to determine the expected realization pattern reliably, intangible assets shall be amortized by the straight-line method. Intangible assets with uncertain service life may not be amortized, but the Company shall check the service life of the said intangible assets for every year, and make impairment testing. 82 -- 5. On the balance sheet date, the Company shall check future economic benefit capacity is expected to be brought by the intangible asset to it. And the said intangible assets shall be withdrawn provision for impairment in the light of the method mentioned in II (XVI) in the Notes to the Financial Statement. 6. The research expenditures for its internal research and development projects of the Company shall be recorded into the profit or loss for the current period. The development expenditures for its internal research and development projects of the Company may be confirmed as intangible assets when they satisfy the following conditions simultaneously:(1)It is feasible technically to finish intangible assets for use or sale;(2)It is intended to finish and use or sell the intangible assets;(3)The usefulness of methods for intangible assets to generate economic benefits shall be proved, including being able to prove that there is a potential market for the products manufactured by applying the intangible assets or there is a potential market for the intangible assets itself or the intangible assets will be used internally;(4)It is able to finish the development of the intangible assets, and able to use or sell the intangible assets, with the support of sufficient technologies, financial resources and other resources; and (5)The development expenditures of the intangible assets can be reliably measured. (XVI) Impairment of assets 1. The Company shall, on the balance sheet date, make a judgment of assets (excluding inventories, equity instrument investment without quoted price in the active market and whose fair value cannot be reliably measured, investment real estates measured by fair value pattern, consumptive biological assets, assets formed by construction contracts, deferred income tax assets, unsecured residual value of the lessor in a financial leasing and assets out of financial assets) on whether there is any sign of possible assets impairment. With there is any evidence indicating a possible impairment of assets, the Company shall, on the basis of single item assets, estimate the recoverable amount. Where it is difficult to do so, it shall determine the recoverable amount of the group assets on the basis of the asset group to which the asset belongs. 2. The recoverable amount shall be determined in light of the higher one of the net amount of the fair value of the single item assets, assets group, or combination of group assets minus the disposal expenses and the current value of the expected future cash flow of the single item assets, assets group, or combination of group assets. 3. Where the recoverable amount of the single assets is lower than its book value, its corresponding provision for impairment of assets shall be recognized shall be withdrawn in according to the balance of the book value of the single assets and the recoverable amount. Where the recoverable amount of an asset group or a combination of asset groups is lower than its book value, it shall be recognized as the corresponding impairment loss. The amount of the impairment loss shall first charge against the book value of the headquarter' assets and goodwill which are apportioned to the asset group or combination of asset groups, then charge it against the book value of other assets in proportion to the weight of other assets in the asset group or combination of asset groups with the goodwill excluded. The charges against the book value of the assets above shall be treated as the impairment loss of the assets (including the goodwill) and shall be withdrawn the provision for impairment of single assets. 83 -- 4. Once any loss of asset impairment is recognized, it shall not be switched back in the future accounting period. (XVII) Recognition and measurement of borrowing costs 1. Recognition principle for capitalization of borrowing costs Where the borrowing costs incurred to the Company can be directly attributable to the acquisition and construction or production of assets eligible for capitalization, it shall be capitalized and recorded into the costs of relevant assets. Other borrowing costs shall be recognized as expenses on the basis of the actual amount incurred, and shall be recorded into the current profits and losses. The term "assets eligible for capitalization" shall refer to the fixed assets, investment real estate, inventories and other assets, of which the acquisition and construction or production may take quite a long time to get ready for its intended use or for sale. 2. Period of capitalization of borrowing costs (1) The borrowing costs shall not be capitalized unless they simultaneously meet the following requirements:(1)The asset disbursements have already incurred; (2) The borrowing costs has already incurred; and (3)The acquisition and construction or production activities which are necessary to prepare the asset for its intended use or sale have already started. (2) Suspension of capitalization: Where the acquisition and construction or production of a qualified asset is interrupted abnormally and the interruption period lasts for more than 3 months, the capitalization of the borrowing costs shall be suspended. The borrowing costs incurred during such period shall be recognized as expenses, till the acquisition and construction or production of the asset restarts. (3) Ceaseing of capitalization: When the qualified asset under acquisition and construction or production is ready for the intended use or sale, the capitalization of the borrowing costs shall be ceased. 3. Capitalized amount of borrowing costs As for specifically borrowed loans for the acquisition and construction or production of assets eligible for capitalization, the to-be-capitalized amount of interests shall be determined in light of the actual cost (including amortization of depreciation or premium recognized by the actual rate method) incurred of the specially borrowed loan at the present period minus the income of interests earned on the unused borrowing loans as a deposit in the bank or as a temporary investment; Where a general borrowing is used for the acquisition and construction or production of assets eligible for capitalization, the Company shall calculate and determine the to-be-capitalized amount of interests on the general borrowing by multiplying the weighted average asset disbursement of the part of the accumulative asset disbursements minus the general borrowing by the capitalization rate (weighted average rate) of the general borrowing used. During the period of capitalization, the amount of interest capitalized during each accounting period shall not exceed the amount of interest actually incurred to the relevant borrowings in the current period. During the period of capitalization, the exchange balance on foreign currency borrowings shall be capitalized, and shall be recorded into the cost of assets eligible for capitalization. For the ancillary expense incurred to a specifically borrowed loan, those incurred before a qualified asset 84 -- under acquisition, construction or production is ready for the intended use or sale shall be capitalized at the incurred amount when they are incurred; those incurred after a qualified asset under acquisition and construction or production is ready for the intended use or sale shall be recorded into the profits and losses of the current period. The ancillary expenses arising from a general borrowing shall be recognized as expenses at their incurred amount when they are incurred, and shall be recorded into the profits and losses of the current period. (XVIII) Recognition principle of revenue 1. Selling goods No revenue from selling goods may be recognized unless the following conditions are met simultaneously: a. The significant risks and rewards of ownership of the goods have been transferred to the buyer by the enterprise; b. The enterprise retains neither continuous management right that usually keeps relation with the ownership nor effective control over the sold goods; c. The relevant amount of revenue can be measured in a reliable way; d. The relevant economic benefits may flow into the enterprise; and e. The relevant costs incurred or to be incurred can be measured in a reliable way. 2. Providing labor services If the Company can, on the date of the balance sheet, reliably estimate the outcome of a transaction concerning the labor services it provides (The outcome of a transaction concerning the providing of labor services can be measured in a reliable way, means that the following conditions shall be met simultaneously: a. The amount of revenue can be measured in a reliable way; b. The relevant economic benefits are likely to flow into the enterprise; c. The schedule of completion under the transaction can be confirmed in a reliable way; and d. The costs incurred or to be incurred in the transaction can be measured in a reliable way), it shall recognize the revenue from providing services employing the percentage-of-completion method. And the Company shall ascertain the schedule of completion under the transaction concerning the providing of labor services in accordance with the measurement of the work completed. If an enterprise can not, on the date of the balance sheet, measure the result of a transaction concerning the providing of labor services in a reliable way, it shall be conducted in accordance with the following circumstances, respectively: a. If the cost of labor services incurred is expected to be compensated, the revenue from the providing of labor services shall be recognized in accordance with the amount of the cost of labor services incurred, and the cost of labor services shall be carried forward at the same amount; or b. If the cost of labor services incurred is not expected to compensate, the cost incurred should be included in the current profits and losses, and no revenue from the providing of labor services may be recognized. 3. Abalienating the right to use assets No revenue from abalienating of right to use assets may be recognized unless the following conditions are met simultaneously: a. the relevant economic benefits are likely to flow into the enterprise; and b. the amount of revenues can be measured in a reliable way. The amount of interest revenue should be measured and confirmed in accordance with the length of time for which the enterprise's cash is used by others and the actual interest rate; or the amount of royalty revenue should be measured and confirmed in accordance with the period and method of charging 85 -- as stipulated in the relevant contract or agreement. (XIX) Recognition and measurement of income taxes 1. Where there is difference between the book value of the assets or liabilities and its tax base (As for an item that has not been recognized as an asset or liability, if its tax base can be determined in light of the tax law, the difference between the tax base and its book value), the deferred income tax assets or the deferred income tax liabilities shall be determined according to the applicable tax rate in the course of prospective recovering assets or discharging liabilities. 2. The Company shall recognize the deferred income tax assets in accordance with the extent of the amount of the taxable income which it is most likely to obtain and which can be deducted from the deductible temporary difference. On the balance sheet date, where there is any exact evidence showing that it is likely to acquire sufficient amount of taxable income tax in a future period to offset against the deductible temporary difference, the deferred income tax assets unrecognized in prior periods shall be recognized. 3. The carrying amount of deferred income tax assets shall be reexamined on balance sheet day. If it is unlikely to obtain sufficient taxable income taxes to offset the benefit of the deferred income tax assets, the carrying amount of the deferred income tax assets shall be written down. When it is probable to obtain sufficient taxable income taxes, such write-down amount shall be subsequently reversed. 4. On the basis of measuring and recognizing income taxes of the current period (income taxes payable of the current period) and deferred income tax (or income), the summation of both the income taxes of the current period and deferred income tax of an enterprise shall be recognized as income tax expenses or incomes in the income statement, but excluding influence on income tax due to the transactions or events directly recognized as the owner's rights and interests. (XX) Preparation method of the consolidated financial statement Parent company shall bring all subsidiaries under its control into the consolidation scope of consolidated financial statement. In line with the Accounting Standard for Business Enterprise No. 33 – Consolidated Financial Statement, the consolidated financial statement shall be prepared by parent company on the basis of the both financial statement of parent company and its subsidiaries after adjusting long-term equity investment over its subsidiaries based on equity method in accordance with other relevant information. (XXI) Explanation on change in accounting policies and accounting estimates There was no change in accounting policies and accounting estimates during the reporting period. (XXI) Explanation on prior-period corrections of significant accounting errors The joint-stock subsidiary of the Company, Tetra Pak Huaxin (Foshan) Packaging Co., Ltd restated its intangible assets and other intangible assets at the end of 2007. After restatement, the intangible assets should be amortized before the end of 2007. After restatement and correction, the 2007 annual net profit increased by RMB 1,067,246.92, the 2008 retained earnings decreased by RMB 6,591,819.25, including a decrease of undistributed profits by RMB 5,932,637.32 and a decrease of surplus reserves by RMB 659,181.93. 86 -- III. Taxes Main taxes types and tax rate are applicable to the Company as follows: 1. Value-added tax (VAT) VAT was paid based on tax rate of 17%. 2. Business tax Business tax was paid based on tax rate of 5% of taxable income payable. 3. City maintenance and construction tax City maintenance and construction tax was based on tax rate of 7% of turnover tax payable. 4. Educational surtax Education surtax was based on tax rate of 3% of turnover tax payable. 5. Embankment protection cost Embankment protection cost was based on tax rate of 3% of turnover tax payable. 6. Income tax Income tax was paid based on 25% of taxable income. On 29 July 2003, as approved by Department of Foreign Trade and Economic Cooperation of Guangdong Province with the Reply on Supplementary Contract and Supplementary Articles of Association of Foshan Huafeng Paper Co., Ltd. by the Joint Venture (YWJMZ Zi[2003]No. 432 document), the total investment in Foshan Huafeng Paper Co., Ltd., the shareholding subsidiary of the Company, has increased to USD 239.57 million from USD 95 million, with a registered capital increasing to USD 121.39 million from USD 73.2 million. Such increased investment was used for establishing a subbranch in Zhuhai. On 13 May 2008, receiving the Reply on Foshan Huafeng Paper Co., Ltd. Enjoying Preferential CIT Policies on Additional Investment (YGSH [2008] No.236 document) from the State Tax Bureau of Guangdong Province, in accordance with provision stated in Supplementary Circular of the Ministry of Finance, the State Administration of Taxation of the People's Republic of China, on Issues Relevant to Enjoyment by Foreign-invested Enterprises of Preferential CIT Policies on Additional Investments (GSH [2003] No. 368 document) and Notice of the State Administration of Taxation on Issues concerning the Time Limits for Handling the Examination and Approval Matters as Set out in the Income Tax Law of the People’s Republic of China for Foreign-Invested Enterprises and Foreign Enterprises (GSH [2008] No. 213 document) , the additional investment in Foshan Huaxin Paper Co., Ltd. shall be calculated separately and enjoy the regular exemption from or reduction of income tax stipulated in the Clause 1 of the Article 8 of Income Tax Law of The People's Republic of China for Foreign-Invested Enterprises with and Foreign Enterprise. Year 2007 was the first profit-making year for the subsidiary, therefore, the CIP was exempted between 2007 and 2008, and CIT should be half reducted from 2009 to 2011. As approved by the State Tax Bureau of Foshan Chancheng District, Huaxin (Foshan) Color Printing Co., Ltd., a shareholding subsidiary of the Company, enjoyed preferential taxation policies of “two-year CIT exemption and three-year 50% CIT reduction” since year 2006, that is to say, the CIP was exempted between 2006 and 2007, and CIT should be half reducted from 2008 to 2010. 87 -- IV. Enterprise combination and consolidated financial statement (I) Subsidiary company 1. Subsidiaries obtained through enterprise combinations under the same control Actual Real net Proportion of Full name of units Registration Organization Registered Natural of business and investment investment shares held by the amount up balance Company invested place code capital business scope to the over --------- year-end subsidiaries directly indirectly ============= ====== ======== ======== ================ ======= ========= ==== ==== = === Foshan Huafeng Foshan 61762142-1 USD121.39 Manufacturing and 746190500 --- 75% --- Paper Co., Ltd. million selling of high-class paper and paper board Huaxin (Foshan) Foshan 72111733-X USD6.6 Process and printing of 40936500 --- 75% --- Color Printing million packaging or Co., Ltd. decorating printing products sold in both domestic and overseas market ============= ====== ======== ======== ================ ======= ========= ==== ==== = === 2. Subsidiaries obtained through enterprise combinations not under the same control Actual Real net Proportion of Full name of units Registration Organization Registered Natural of investment investment shares held by the business and amount up balance Company invested place code capital business scopeto the over --------- year-end subsidiaries directly indirectly ============ ====== ========= ======== ============ ========= ========== ==== ==== == == Foshan Huazhi Foshan 77620148-3 CNY5 Purchasing 5 million --- --- 100% Wasted Paper million and selling Recycling Co., wasted Ltd. paper, wasted newspaper Foshan Foshan 70817367-9 CNY1.5 Other printing, 1.5 million --- --- 100% Chancheng million advertisement Zhujiang Color designing and Printing Co., Ltd. releasing Foshan Huaxin Foshan 67889495-X CNY3 Investing 3 million --- 100% --- Jinfeng Industrial million industrial Co., Ltd. ============ ====== ========= ======== ============ ========= ========== ==== ==== == == (II) Change in scope of the consolidated financial statement during the reporting period Foshan Huaxin Jinfeng Industrial Co., Ltd. was brought into the scope of consolidated statement, which was set up by the Company on 12 Sep. 2008. (III) Minority interests 88 -- Amount of Balance of losses as of this period minority borne by minority shareholder of shareholder’s gains subsidiaries exceeding share name of subsidiaries Minority interests and losses offset enjoyed by minority shareholders from minority in owner’s equity at the shareholders’ period-begin offset from owner’s equity equity of parent company ========================= ============ ========== ================= === == = Foshan Huafeng Paper Co., Ltd. 236,906,618.06 --- --- Huaxin (Foshan) Color Printing Co., Ltd. 15,702,119.78 --- --- ========================= ============ ========== ================= === == = V. Notes to the consolidated financial statement Unless otherwise noted in the following items, amount at the year-end refers to date as at Dec. 31, 2008, amount at the year-begin refers to date as at Dec. 31, 2007, amount in this year refers to data from Jan. 1, 2008 to Dec. 31, 2008, amount in last year refers to data from Jan. 1, 2007 to Dec. 31, 2007. (1) Monetary fund 31 Dec. 2008 31 Dec. 2007 Items ------------------------------ --------------------------------- Amount Amount Original Rate of Rate of converted into Original currency converted into currency exchange exchange RMB RMB ================== =========== ======== =========== ============= ========= ============ Cash — CNY --- --- 172,923.47 --- --- 60,788.71 Bank deposit—HKD 1,676,974.72 0.8819 1,478,923.46 3,893,171.64 0.93638 3,602,221.99 Bank deposit—USD 1,733,606.72 6.8346 11,848,508.49 356,991.94 7.3046 2,602,498.08 Bank deposit—CNY --- --- 178,636,818.67 --- --- 51,829,566.17 Other monetary fund —CNY --- --- 15,954,721.50 --- --- 5,672,261.55 ------------ ------------ Total 208,091,895.59 63,767,336.50 =========== ============ 1. Monetary fund as at the year-end has increased by RMB 144,324,559.09 than the year-begin, up by 226.33%, which was mainly due to expediting recycle of payment for goods, as well as unused payment from added capital from bank loan. 89 -- 2. Other monetary fund as at the year-end was RMB 15,954,721.50, of which RMB 15,947,959.77 was margin deposited with the bank when Foshan Huafeng Paper Co., Ltd. treated bank acceptance bill and credit letter, others was Credit Card Deposit. 3. Except for statement mentioned in above “2”, there was no payment with restricted realization due to mortgage or freezing or deposited in overseas as well as with potential risk. (2) Notes receivable Type 31 Dec. 2008 31 Dec. 2007 ================================ ============= ============= Bank Acceptance Bill 47,440,393.16 59,669,620.10 Other ------------- ------------- Total 47,440,393.16 59,669,620.10 ============= ============= 1. By the year-end, notes receivable of RMB 11.50 million has been used to impawn for bank acceptance bill of Foshan Huafeng Paper Co., Ltd., the subsidiary of the Company. 2. By the year-end, RMB 163,761,791.93 is the notes that the endorsement has been made but not yet due; maturity date related to such notes would be 1 Jan. 2009 to 25 Jun. 2009. (3) Accounts receivable 1. Composing of accounts receivable 31 Dec. 2008 31 Dec. 2007 ---------------------------------- ---------------------------------- Items Reserve for proportio Reserve for bad Book balance proportion Book balance bad debts n debts ================ =========== ====== ========= ========== ===== =========== Accounts receivable with significant single 66,675,677.28 26.19% --- --- --- --- amounts Accounts receivable with insignificant 17,141,297.26 6.73% 14,343,445.33 16,005,413.21 5.73% 13,795,939.14 single amounts but with significant credit risk Other insignificant 170,808,858.34 67.08% 1,865,881.47 263,337,107.66 94.27% 1,799,769.85 -------------- ------ ------------- -------------- ------ ------------- Total 254,625,832.88 100% 16,209,326.80 279,342,520.87 100% 15,595,708.99 =========== ====== ========== ========== ===== =========== 90 -- 2. Aging analysis 31 Dec. 2008 31 Dec. 2007 Aging ---------------------------------- ---------------------------------- Reserve for bad Reserve for bad Book balance proportion debts Book balance proportion debts ============= ============ ====== =========== ============ ===== ============ 1-3 months 211,371,115.90 83.01% --- 236,686,069.49 84.73% --- 4-12 months 20,841,635.30 8.19% 1,042,081.76 19,535,695.48 6.99% 976,784.78 1-2 years 2,305,571.68 0.91% 230,557.17 6,000,834.64 2.15% 600,083.46 2-3 years 2,966,212.74 1.16% 593,242.54 1,114,508.05 0.40% 222,901.61 Over 3 years 17,141,297.26 6.73% 14,343,445.33 16,005,413.21 5.73% 13,795,939.14 -------------- ------ ------------- -------------- ------ ------------- Total 254,625,832.88 100% 16,209,326.80 279,342,520.87 100% 15,595,708.99 ============ ====== ============ ============ ====== ============ 3. Accounts receivable with significant single amounts Name of debtor Amount Proportion of Reason provision withdrawn ================================ ============== ============================ Hang Fung (Hong Kong) Co., Ltd. 27,076,634.90 --- Aging within 3 months Foshan Shunde District Ronggui Yongfa Trade Co., Ltd 15,384,632.93 --- Aging within 3 months Foshan Shunde District Kangsong Paper Trade Co., Ltd. 13,829,341.38 --- Aging within 3 months Xiamen Jinyi Trade Co., Ltd. 10,385,068.07 --- Aging within 3 months ================================ ============== ============================ 4. By the year-end, there is no arrearage due to shareholders which holding over 5% (including 5%) of shares with voting right. 5. The top 5 arrearage in accounts receivable at the year-end Proportion in Term limit of Name of debtor Arrearage total accounts arrearage receivable =============================== ============ ========= =========== Hang Fung (Hong Kong) Co., Ltd. 27,076,634.90 Within 3 months 10.63% Foshan Shunde District Ronggui Yongfa Trade Co., Ltd 15,384,632.93 Within 3 months 6.04% 91 -- Foshan Shunde District Kangsong Paper Trade Co., Ltd. 13,829,341.38 Within 3 months 5.43% Xiamen Jinyi Trade Co., Ltd. 10,385,068.07 Within 3 months 4.08% Shantou Yongjiang Trade Co., Ltd. 8,503,033.19 Within 3 months 3.34% =============================== ============ ========= =========== 6. Accounts receivable – foreign currency balance 31 Dec. 2008 31 Dec. 2007 ---------------------------------- ----------------------------------- Type Amount Amount Rate of Rate of Original currency converted into Original currency converted into exchange exchange RMB RMB ===== ============ ======= ============= ============= ======= ============= USD 3,181,558.12 6.8346 21,744,677.11 2,861,351.57 7.3046 20,859,252.94 HKD 61,309,109.52 0.8819 54,067,890.59 18,744,016.04 0.93638 17,431,934.96 ------------- ------------- Total 75,812,567.70 38,291,187.90 ============= ============= (4) Prepayments 1. Aging analysis 31 Dec. 2008 31 Dec. 2007 Aging ------------------------- ------------------------- Book balance Proportion Book balance Proportion =============== ============= ======= ============= ======= Within 1 year 68,510,649.26 97.70% 2,886,461.82 79.35% 1-2 years 1,433,783.39 2.04% 751,394.00 20.65% 2-3 years 178,020.65 0.26% --- --- ---------------- ------- ---------------- ------- Total 70,122,453.30 100% 3,637,855.82 100% ============= ======= ============= ======= 2. Prepayments that are material in amount Name of debtor Amount Nature or Contents ============================================= ============== =========== Viridor Resource Management Ltd（CELLMARK） 5,483,731.60 Payment for goods 92 -- Peute Papierrecycling B.V. 4,735,473.27 Payment for goods A PENTERPRISES(MACAO) COMMERCIAL 4,548,427.88 Payment for goods ADVANCE AGRO 3,912,118.35 Payment for goods (ISR INTERSEROH Rohstoffe GmbH 3,590,076.52 Payment for goods INDO CHINA EUROPE BVBA 3,352,119.17 Payment for goods ============================================= ============== =========== 3. By the year-end, there is no arrearage due to shareholders which holding over 5% (including 5%) of shares with voting right. 4. Prepayments – foreign currency balance 31 Dec. 2008 31 Dec. 2007 ---------------------------------- ----------------------------------- Type Amount Amount Rate of Rate of Original currency converted into Original currency converted into exchange exchange RMB RMB ===== ============ ======= ============= ============= ======= ============= USD 7,501,156.28 6.8346 51,267,402.74 --- --- --- HKD 31,137.90 0.8819 27,460.20 --- --- --- EURO 2,900.00 9.6590 28,011.10 --- --- --- ------------- ------------- Total 51,322,874.04 --- ============= ============= (5) Dividends receivable Items 31 Dec. 2008 31 Dec. 2007 ================================ ============= ============= Dividends receivable with aging within one year --- 34,140,000.00 ---------------- ---------------- Total --- 34,140,000.00 ============= ============= (6) Other receivables 1. Composing of other receivables 31 Dec. 2008 31 Dec. 2007 --------------------------------- ---------------------------------- Items Reserve for Reserve for bad Book balance Proportion Book balance Proportion bad debts debts ================ =========== ====== ========== =========== ====== =========== 93 -- Significant single amounts 21,461,155.04 56.72% --- --- --- --- Insignificant single 655,113.80 1.73% 376,124.39 875,040.08 3.93% 437,520.05 amounts but with significant credit risk Other insignificant 15,719,495.56 41.55% 525,370.37 21,363,856.95 96.07% 741,070.26 ------------- ------ ------------ ------------- ------ ------------- Total 37,835,764.40 100% 901,494.76 22,238,897.03 100% 1,178,590.31 =========== ====== ========== =========== ====== =========== 2. Aging analysis 31 Dec. 2008 31 Dec. 2007 Items -------------------------------- -------------------------------- Reserve for bad Reserve for bad Book balance Proportion Book balance Proportion debts debts ============= =========== ====== ============ =========== ====== ============ 1-3 months 18,279,147.31 48.31% --- 8,015,736.04 36.05% --- 4-12 months 9,179,665.11 24.26% 38,128.70 8,633,045.39 38.82% 421,136.17 1-2 years 8,694,565.36 22.98% 281,786.91 847,101.87 3.81% 83,210.19 2-3 years 1,042,273.82 2.75% 205,454.76 1,183,619.54 5.32% 236,723.91 Over 3 years 640,112.80 1.70% 376,124.39 3,559,394.19 16.00% 437,520.04 ------------- ------ ------------ ------------- ------ ------------ Total 37,835,764.40 100% 901,494.76 22,238,897.03 100% 1,178,590.31 =========== ====== ============ =========== ====== ============ 3. By the year-end, there is no arrearage due to shareholders which holding over 5% (including 5%) of shares with voting right. 4. The top 5 arrearage in other receivables at the year-end Proportion in Term limit of Name of debtor Amount Nature or Contents total other arrearage receivables ========================= ============= ============== ========= =========== Hang Fung (Hong Kong) Co., Ltd. Within 2 Payment for freights 12,308,872.88 years 32.53% Dragon State International Limited 9,152,282.16 Compensatory Within 2 24.19% payment years Commission Within 3 Nien-Yi Industrial Corp. 2,379,823.79 months 6.29% Transferring OCC Sanshui Lubao Paper Plant 789,817.89 waster paper 1-2 years 2.09% Fenglinian (Hong Kong) Ltd. 200,000.00 Come-and-go money Over 3 years 0.53% 94 -- (Huashan) ========================= ============= ============== ========= =========== (7) Inventory 1. Composing of inventory 31 Dec. 2008 31 Dec. 2007 ------------------------- ------------------------- Items Reserve for Reserve for Book balance Book balance falling price falling price =================== ============== ========== =============== ========== Raw materials 152,661,518.86 30,029.46 104,451,088.47 276,234.72 Goods in production 3,840,896.77 --- 5,052,462.19 135,151.19 Finished product 190,468,328.20 11,750,282.15 77,520,733.43 568,925.70 Packing and Low-value 458,460.87 --- 756,048.75 --- consumption goods -------------- ------------- -------------- ------------- Total 347,429,204.70 11,780,311.61 187,780,332.84 980,311.61 ============== ========== =============== ========== 2. Reserve for falling price of inventory Decrease in 2008 Book balance as Withdrawal in Book balance as Items ----------------------- at 31 Dec. 2007 2008 at 31 Dec. 2008 Switching back Writing off ========== ========== ========== ========== ========== ========== Raw materials 276,234.72 --- 246,205.26 --- 30,029.46 Goods in 135,151.19 --- 135,151.19 --- --- production Finished product 568,925.70 11,181,356.45 --- --- 11,750,282.15 ----------- ------------- ----------- ----------- ------------- Total 980,311.61 11,181,356.45 381,356.45 --- 11,780,311.61 ========== ========== ========== ========= ========== Note: As at the year-end, if the cost of inventories is higher than its net realizable value, the reserve for falling price of inventories shall be made. The net realizable value is recognized that in the daily business activity the amount after deducting the estimated cost of completion, estimated sale expense and relevant taxes from the estimated sale price of inventories. 3. Inventories as at the year-end has increased by RMB 148,848,871.86 than the year-begin, up by 79.68%, which was mainly due to increase of normal storage quantity of inventories of Foshan Huafeng Paper Co., Ltd. and demand reduction from influence to market. 95 -- (8) Long-term equity investment 31 Dec. 2008 31 Dec. 2007 -------------------------- ------------------------ Items Reserve for Reserve for Book balance Book balance impairment impairment ================== ============== ============ ============== ========== Investing in affiliated 197,956,976.49 --- 159,686,086.88 --- enterprises Other equity investment 3,213,558.00 3,100,000.00 3,213,558.00 3,100,000.00 -------------- ------------ -------------- ------------ Total 201,170,534.49 3,100,000.00 162,899,644.88 3,100,000.00 ============== ============ ============== ========== 1. Long-term equity investment measured based on cost method Name of invested Proportion of Initial investment Balance as at 31 Increase Decrease Balance as at enterprise shares held amount Dec. 2007 in 2008 in 2008 31 Dec. 2008 ============= ====== ============ =========== ===== ===== =========== 2.583% 3,100,000.00 3,100,000.00 --- --- 3,100,000.00 96 -- Guangdong 0.32% 113,558.00 113,558.00 --- --- 113,558.00 Development Bank ------------ ------------ ----- ----- ------------ Total 3,213,558.00 3,213,558.00 --- --- 3,213,558.00 ============ =========== ===== ===== =========== 2. Long-term equity investment measured based on equity method Increase/decrease in 2008 ----------------------------- Name of Initial Net gains and Additional Balance as at Balance as at invested investment losses Other investment 31 Dec. 2007 Cash dividends 31 Dec. 2008 enterprise amount adjusted equity distributed based on change equity method =========== ========== ==== ========== ========= ========== ===== ========== Affiliated enterprise: Tetra Huaxin 145,945,947.55 --- 159,686,086.88 58,258,692.68 19,987,803.07 --- 197,956,976.49 (Foshan) Packaging Co., Ltd. ----------- ---- ----------- ----------- ----------- ------ ----------- Total 145,945,947.55 --- 159,686,086.88 58,258,692.68 19,987,803.07 --- 197,956,976.49 ========== ==== ========== ========= ========== ===== ========== Name of invested Registration Business Proportion Voting Total net assets as Total operating Net profit in 2008 enterprise place nature of shares right at 31 Dec. 2008 income in 2008 97 -- held by proportions the in invested Company enterprise =============== ====== ======== ====== ======== ============== ================ ============== Affiliated enterprise: Tetra Huaxin Foshan Sino-foreign 25% 25% 791,827,905.98 1,224,560,556.08 233,034,770.73 (Foshan) Packaging joint Co., Ltd. venture =============== ====== ======== ====== ======== ============== ================ ============== 3. Reserve for impairment of long-term equity investment 31 Dec. Decrease in Reason for Name of invested enterprise Increase in 2008 31 Dec. 2008 2007 2008 withdrawal =============== ========= ============ ========= ============ ========= Foshan 3,100,000.00 --- --- 3,100,000.00 Insolvency Urban Coope rative Bank Co., Ltd. ------------ ---------- ---------- ------------ Total 3,100,000.00 --- --- 3,100,000.00 ========= ============ ========= ============ (9) Investment real estate Balance as at 31 Balance as at 31 Items Increase in 2008 Decrease in 2008 Dec. 2007 Dec. 2008 =================== =========== =========== =========== =========== Original price House and building 18,670,864.52 --- --- 18,670,864.52 ------------- ------------ ------------ ------------- Total 18,670,864.52 --- --- 18,670,864.52 ------------- ------------ ------------ ------------- Accumulative depreciation House and building 7,192,633.26 452,914.80 --- 7,645,548.06 ------------ ------------ ------------ ------------- Total 7,192,633.26 452,914.80 --- 7,645,548.06 ------------- ------------ ------------ ------------- Accumulative amount of 98 -- reserve for impairment House and building --- --- --- --- ------------- ------------ ------------ ------------- Total --- --- --- --- ------------- ------------ ------------ ------------- Book value House and building 11,478,231.26 --- --- 11,025,316.46 ------------ ------------ ------------ ------------- Total 11,478,231.26 --- --- 11,025,316.46 =========== =========== =========== =========== (10) Fixed assets 1. Original price of fixed assets Type 31 Dec. 2007 Increase in 2008 Decrease in 2008 31 Dec. 2008 ========== ============== ============== =========== ============== House and building 667,672,656.43 81,432,587.01 9,954,861.34 739,150,382.10 Machinery equipment 1,787,426,664.13 113,246,065.00 282,600.00 1,900,390,129.13 Transportation equipment 22,485,477.98 1,078,387.80 264,728.49 23,299,137.29 Other 27,940,903.95 23,684,661.15 13,880.00 51,611,685.10 ---------------- ---------------- ------------- ---------------- Total 2,505,525,702.49 219,441,700.96 10,516,069.83 2,714,451,333.62 ============== ============== =========== ============== Of which, original price of project in construction transferring fixed assets was RMB 88,346,389.93 in 2007. 2. Accumulative depreciation Type 31 Dec. 2007 Increase in 2008 Decrease in 2008 31 Dec. 2008 ============ ================ ============== ============== ============== House and building 47,749,541.59 17,912,373.59 282,680.07 65,379,235.11 Machinery 351,109,061.35 73,957,718.17 233,120.94 424,833,658.58 equipment Transportation 11,484,892.12 3,175,303.61 155,360.49 14,504,835.24 equipment Other 10,460,051.64 3,556,999.95 12,945.86 14,004,105.73 ---------------- --------------- -------------- --------------- 99 -- Total 420,803,546.70 98,602,395.32 684,107.36 518,721,834.66 ================ ============== ============== ============== Note: Between November and December 2008, the new factory building of Huaxin (Foshan) Color Printing Co., Ltd., a subsidiary of the Company, was closed an account, as a result, the Company made reclassification to payment for construction estimated tentatively under house and building. The original price of RMB 9,838,661.34 has decreased from house and building, as well as accumulative depreciation of RMB 225,469.32 to other equipment. 3. Reserve for impairment of fixed assets Type 31 Dec. 2007 Increase in this year Decrease in this year 31 Dec. 2008 ============ ================ ============== ============== ============== Machinery 201,333.37 --- --- 201,333.37 equipment ---------------- -------------- -------------- -------------- Total 201,333.37 --- --- 201,333.37 ================ ============== ============== ============== Note: The Reserve for impairment of fixed assets was withdrawn by Huaxin (Foshan) Color Printing Co., Ltd. in accordance with expected recoverable amount of single fixed assets as at the end of 2005 lower than its book value. 4. Book value of fixed assets Type 31 Dec. 2008 31 Dec. 2007 =================================== ============== ================ House and building 673,771,146.99 619,923,114.84 Machinery equipment 1,475,355,137.18 1,436,116,269.41 Transportation equipment 8,794,302.05 11,000,585.86 Other 37,607,579.37 17,480,852.31 ---------------- ---------------- Total 2,195,528,165.59 2,084,520,822.42 ============== ================ Note: The workshop of Foshan Huafeng Paper Co., Ltd. totaling to 38,124.91 sq.m. (original value: RMB 146,759,239.84; net value as at 31 Dec. 2008: RMB 109,723,388.31) , which was located in No. 17, Hebin Road, Foshan, and the land use right of such plot, have been used as a mortgage for loan, and relevant certificate of the other rights of land has been handled. The righter is China Construction Bank Corporation Foshan Branch. The debt maturity is to be Dec. 31, 2009. By the end of 2008, the aforesaid borrowing has been repaid but not discharging from pledge. 5. By the year-end, the property right certificate for workshop (original value: RMB 508,968,794.94) of Foshan Huafeng Paper Co., Ltd. Zhuhai Branch Company is under handle. 100 -- 6. Foshan Huafeng Paper Co., Ltd. Zhuhai Branch Company’s production line on annual output of 300,000-ton high-class coated white board and relevant infrastructure projects have not yet been handled final account. The expenditure involved in the construction is expected in accordance with budgetary estimate and actual situation incurred, while the final engineering cost will be adjusted based on the settlement. (11) Construction in progress 1. Classification of projects Decrease in 2008 Budget Increase in ----------------------- Resource of Name of projects 31 Dec. 2007 31 Dec. 2008 (RMB’000) 2008 Transferring into Other funds fixed assets decrease ================ ====== ============ =========== ============ ========= ========== ========= Expansion of 147,300 21,305,158.35 30,610,415.22 51,915,573.57 --- --- Borrowing 300,000-ton project from financial institution and self-financing Renovation project of 190 1,727,316.27 3,786,548.28 5,108,704.62 --- 405,159.93 Self-financing production line Desulfurization project 450 4,569,234.49 1,203,368.68 5,772,603.17 --- --- Self-financing Construction of new 510 4,135,082.30 4,354,531.14 8,107,683.58 381,929.86 --- Borrowing warehouse from financial institution and self-financing Production line of 930 5,485,725.36 1,419,028.56 6,904,753.92 --- --- Borrowing eight-color flexo from financial printing institution and self-financing Renovation project of 260 2,024,996.50 53,128.14 397,069.59 1,681,055.05 --- Borrowing post working procedure from financial of offset printing institution and self-financing Other 175,606.51 1,781,774.88 1,186,345.78 --- 771,035.61 Self-financing Preparation of new --- 8,961,635.62 8,953,655.70 7,979.92 --- Self-financing projects ---------- ----------- ----------- --------- --------- Total 39,423,119.78 52,170,430.52 88,346,389.93 2,070,964.83 1,176,195.54 101 -- ============ =========== ============ ========= ========== 2. Construction in progress refers to an unfinished project under construction. As reviewed to the actual construction of each project, there is no situation on reserve for impairment. 3. Capitalization of borrowing cost measured into project cost Transferring into Other Name of projects 31 Dec. 2007 Increase in 2008 fixed assets in 31 Dec. 2008 decrease 2008 ============= ============= ============= ============ ======= ========== Construction of new --- 75,973.02 --- --- 75,973.02 warehouse Renovation project of post 81,725.21 --- 81,725.21 --- --- working procedure of offset printing Production line of 33,020.36 --- 33,020.36 --- --- eight-color flexo printing ------------- --------- ------------ --------- --------- Total 190,718.59 --- 190,718.59 --- --- ============= ============= ============ ======= ========== (12) Project material Type 31 Dec. 2008 31 Dec. 2007 =================================== ============== ============== Wool cloth and netting --- 4,925,829.50 Machinery component --- 3,917,324.97 Electric materials --- 1,249,640.99 Water-heating --- 1,135,611.80 Bearing --- 959,698.40 Steels --- 758,174.09 Other --- 682,760.27 -------------- -------------- Total --- 13,629,040.02 ============== ============== (13) Intangible assets 1. Original value of intangible assets Original value as at Original value as at Items Increase in 2008 Decrease in 2008 31 Dec. 2007 31 Dec. 2008 102 -- =============== ============= ============= ============= ============= Land use right of 42,392,255.88 --- --- 42,392,255.88 Huafeng Co. Land use right of 29,367,297.44 --- --- 29,367,297.44 Huaxin Color Printing Other 477,810.10 84,840.00 --- 562,650.10 ------------- ------------- ------------- ------------- Total 72,237,363.42 84,840.00 --- 72,322,203.42 ============= ============= ============= ============= 2. Accumulative amortization Amortization in Items 31 Dec. 2007 Decrease in 2008 31 Dec. 2008 2008 =============== ============= ============= ============= ============= Land use right of 5,884,643.08 847,845.12 --- 6,732,488.20 Huafeng Co. Land use right of 2,080,228.00 587,346.00 --- 2,667,574.00 Huaxin Color Printing Other 50,772.98 95,999.60 --- 146,772.58 ------------- ------------- ------------- ------------- Total 8,015,644.06 1,531,190.72 --- 9,546,834.78 ============= ============= ============= ============= 3. Book value of intangible assets Items 31 Dec. 2007 Increase in 2008 Decrease in 2008 31 Dec. 2008 =============== ============= ============= ============= ============= Land use right of 36,507,612.80 --- 847,845.12 35,659,767.68 Huafeng Co. Land use right of 27,287,069.44 --- 587,346.00 26,699,723.44 Huaxin Color Printing Other 427,037.12 84,840.00 95,999.60 415,877.52 ------------- ------------- ------------- ------------- Total 64,221,719.36 84,840.00 1,531,190.72 62,775,368.64 ============= ============= ============= ============= Note: a. The land use right of Foshan Huafeng Paper Co., Ltd., which was located in No. 17, Hebin Road, Foshan, has been used as a mortgage for loan (see the Note V (10) for detail). By the end of 2008, the original value is RMB 32,978,923.04, as well as net value is RMB 103 -- 26,528,834.85. b. The land use right certificate of Foshan Huafeng Paper Co., Ltd. Zhuhai Branch Company is under transaction. By the end of 2008, the original value is RMB 9,413,332.84, as well as net value is RMB 9,130,932.83. (14) Development expense Amortization Accounting Items 31 Dec. 2007 Increase in 2008 31 Dec. 2008 in 2008 treatment =============== ========= ============= ========= ============= ========== Development expense --- 7,748,092.27 --- 7,748,092.27 Expenditure during on coating craft paper the development phase, capitalization --------- ------------- --------- ------------- Total --- 7,748,092.27 --- 7,748,092.27 ========= ============= ========= ============= (15) Long-term deferred expense Items 31 Dec. 2007 Increase in 2008 Decrease in 2008 31 Dec. 2008 ============ ============= ============= ============= ============= Expenditures incurred on 5,087,221.02 6,102,446.57 4,294,614.59 6,895,053.00 major repair and improvement of the rented fixed assets ------------- ------------- ------------- ------------- Total 5,087,221.02 6,102,446.57 4,294,614.59 6,895,053.00 ============= ============= ============= ============= (16) Deferred income tax assets 31 Dec. 2008 31 Dec. 2007 ----------------------------------- ---------------------------------- Items Deductible Deferred income tax Deferred income tax Deductible temporary assets assets temporary difference difference =================== =============== ============= ============= ============== Provision for assets 5,587,309.67 25,685,665.72 4,168,334.89 19,709,298.21 impairment ------------ ------------ ------------ ------------ Total 5,587,309.67 25,685,665.72 4,168,334.89 19,709,298.21 104 -- ============ ============ ============ ============ (17) Provision for assets impairment Decrease in 2008 Book balance as at Withdrawal in --------- Book balance as at Items 31 Dec. 2007 2008 Switching Writing 31 Dec. 2008 back off ==================== ============= ============ ===== ===== ============= Provision for bad debt 16,774,299.30 336,522.26 --- --- 17,110,821.56 Provision for falling price of 980,311.61 11,181,356.45 381,356.45 --- 11,780,311.61 inventory Provision for impairment of 3,100,000.00 --- --- --- 3,100,000.00 long-term equity investment Provision for impairment of 201,333.37 --- --- --- 201,333.37 fixed assets ------------- ------------- --------- ----- ------------- Total 21,055,944.28 11,517,878.71 381,356.45 --- 32,192,466.54 ============= ============ ===== ===== ============= (18) Short-term loan Type 31 Dec. 2008 31 Dec. 2007 ==================================== =============== ================ Guaranteed loan 617,488,134.71 481,839,691.89 --------------- --------------- Total 617,488,134.71 481,839,691.89 =============== ================ Of which: (1) The foreign currency loans as at 31 Dec. 2008 include USD 1,936,133.19, converting into RMB 13,224,594.30, as well as HKD 6,194,020.00, converting into RMB 5,450,737.60. (2) No overdue short-term loan. China Chengtong Holding Group Co., Ltd., China Materials Development Investment General Corporation, Foshan Huaxin Development Co., Ltd. provide the joint responsibility guarantee for the guaranteed loan of the Company, Foshan Huafeng Paper Co., Ltd and Huaxin (Foshan) Color Printing Co., Ltd. (both subsidiaries of the Company). The Company provide the joint responsibility guarantee for the loan of Foshan Huafeng Paper Co., Ltd and Huaxin (Foshan) Color Printing Co., Ltd.. Please see the Note VII (IV) 3 for details. (19) Notes payable Type 31 Dec. 2008 31 Dec. 2007 =================================== ============= ============= Bank acceptance bill 54,510,322.25 9,155,830.91 105 -- ------------- ------------- Total 54,510,322.25 9,155,830.91 ============= ============= Note: Bank acceptance bill as at 31 Dec. 2008 is that China CITIC Bank Foshan Branch drew to Foshan Huafeng Paper Co., Ltd., the said company deposited into 30% of margin deposit, for which the Company and China Chengtong Holding Group Co., Ltd. jointly provide the responsibility guarantee. (20) Accounts payable 1. By the year-end, there is no arrearage due to shareholders which holding over 5% (including 5%) of shares with voting right. 2. No account payable with aging over one year at the year-end. 3. Accounts payable included the following foreign currency balance 31 Dec. 2008 31 Dec. 2007 ---------------------------------------- ----------------------------------------- Type Rate of Converting into Rate of Converting into Original currency Original currency exchange RMB exchange RMB ==== ============= ======= ============= ============= ======= ============= USD 3,599,800.83 6.8346 24,603,198.75 1,125,652.87 7.3046 8,206,009.34 HKD 25,876,102.97 0.8819 22,819,876.45 41,430,050.97 0.93638 38,529,947.38 EURO 3,377.00 9.6590 32,618.44 -20,235.00 10.6669 -215,705.10 ------------- ------------- Total 47,455,693.64 46,520,251.62 ============= ============= (21) Account received in advance 1. By the year-end, there is no arrearage due to shareholders which holding over 5% (including 5%) of shares with voting right. 2. No account payable with aging over one year at the year-end. 3. Account received in advance included the following foreign currency balance 31 Dec. 2008 31 Dec. 2007 ---------------------------------------- ----------------------------------------- Type Rate of Converting into Rate of Converting into Original currency Original currency exchange RMB exchange RMB ==== ============= ======= ============= ============= ======= ============= USD 29,974.06 6.8346 204,722.90 687,590.25 7.3046 5,012,532.94 HKD 1,080,013.60 0.8819 950,411.90 4,977,400.00 0.93638 4,628,981.98 EURO 773.54 9.6590 7,743.13 --- ------------- ------------- 106 -- Total 1,162,877.93 9,641,514.92 ============= ============= (22) Employees pay payable Items 31 Dec. 2007 Increase in this year Payable in this year 31 Dec. 2008 ========================= ======= ============= ============= ============ Wage, premium, allowance and subsidy 3,664,209.55 80,653,819.77 73,874,557.38 10,443,471.94 Employee benefits/welfare --- 2,851,354.55 2,851,354.55 --- Social insurance --- 9,454,488.22 9,215,483.22 239,005.00 Housing provident fund -14,314.00 618,136.70 600,499.27 3,323.43 Labor union expenditure and employee 377,673.27 2,358,686.93 2,317,011.18 419,349.02 education expenses ----------- ------------- ------------- ------------ Total 4,027,568.82 95,936,486.17 88,858,905.60 11,105,149.39 ======= ============= ============= ============ (23) Taxes payable Type of taxation 31 Dec. 2008 31 Dec. 2007 =================================== ============== =============== VAT -27,559,665.85 -1,400,902.03 City maintenance and construction tax 10,318.83 10,611.24 Business tax 229,754.14 170,788.42 Enterprise income tax -5,857,183.09 -1,343,547.25 Individual income tax 155,808.86 42,179.44 Stamp tax 4,172.06 2,832.21 Tenure tax 729,523.32 --- Housing property tax 105,402.36 --- Embankment protection expense 35,017.63 30,642.11 Educational surtax 4,422.36 4,547.68 --------------- --------------- Total -32,142,429.38 -2,482,848.18 ============== =============== (24) Interests payable Items 31 Dec. 2008 31 Dec. 2007 =================================== ============== ============== Interests payable with aging within one year 11,681,609.01 1,391,185.09 -------------- -------------- Total 11,681,609.01 1,391,185.09 107 -- ============== ============== (25) Dividend payable Name of investors 31 Dec. 2008 31 Dec. 2007 =================================== ============== ============== Foshan Xinhui Industrial Development Co., Ltd. 54,494.00 54,494.00 Foshan Light Industry Company 79,264.00 79,264.00 -------------- -------------- Total 133,758.00 133,758.00 ============== ============== (26) Other payables Items 31 Dec. 2008 31 Dec. 2007 =================================== ============== ============== Loan of Foshan Huaxin Development Co., Ltd. 2,705,000.00 23,235,000.00 Margin and guarantee deposit 4,080,000.00 1,003,135.90 Temporary accounts payable 4,559,870.71 7,963,668.49 Other 11,319,575.05 4,084,770.36 -------------- -------------- Total 22,664,445.76 36,286,574.75 ============== ============== 1. By the year-end, RMB 2,794,874.48 is an arrearage that the Company owed shareholders which holding over 5% (including 5%) of shares with voting right. The creditor is Foshan Huaxin Development Co., Ltd.. Please refer to Note VII (IV) 5 for details. 2. Other payables with the greater amount as at the year-end Name of creditors Amount Contents ========================= ============= =============== Zhuhai Xinhe Logistical Co., Ltd. 5,407,404.27 Cost of logistics Foshan Huaxin Development Co., Ltd. 2,794,874.48 Borrowing and come-and-go money Guangxi Heda Paper Co., Ltd. 1,631,621.60 Transportation charges ========================= ============= =============== (27) Non-current liabilities due within one year Items 31 Dec. 2008 31 Dec. 2007 =================================== ============== ============== Long-term loan due within one year --- 258,481,674.99 -------------- -------------- Total --- 258,481,674.99 108 -- ============== ============== Long-term loan due within one year Type of Bank Terms of loans 31 Dec. 2008 31 Dec. 2007 currency ======================== ====== ========== ============== ============== Agricultural Bank Of China, Foshan Huada CNY Guarantee --- 110,000,000.00 Sub-Branch China Construction Bank Corporation, EURO Guarantee and --- 58,481,674.99 Foshan Branch mortgage Industrial Bank, Guangzhou Branch CNY Guarantee --- 90,000,000.00 ----------------------- ----------------------- Total --- 258,481,674.99 ============== ============== (28) Other current liabilities Items and contents 31 Dec. 2008 31 Dec. 2007 =================================== ============== ============== Principal of short-term financing bills for 2008 500,000,000.00 420,000,000.00 Less: discount amount --- 17,010,000.00 Real financing amount 500,000,000.00 402,990,000.00 Add: discount amortization --- 9,922,500.00 Less: balance of offering fee 1,333,333.32 --- -------------- -------------- Total 498,666,666.68 412,912,500.00 ============== ============== Note: The Company issued RMB 500 million worth of one-year short-term financing bills of Foshan Huaxin Packing Co., Ltd. on 2 Sep. 2008 with par value of RMB 100 for every 100 Yuan. The interest period is from 4 Sep. 2008 to 3 Sep. 2009. (29) Long-term Loan Type of Terms of Units 31 Dec. 2008 31 Dec. 2007 Remark currency loans =================== ====== ==== =========== =========== ========================= Agricultural Bank Of CNY Guarantee 380,000,000.00 10,000,000.00 Joint Liability Guarantee is provided China, Foshan Huada Sub-Branch by China Materials Development Investment General Corporation Foshan Huaxin CNY Credit --- 100,000,000.00 Development Co., Ltd. China Construction Bank CNY Guarantee 60,000,000.00 69,334,850.00 Joint Liability Guarantee is provided 109 -- Corporation, Foshan by the Company for the loan of its Branch subsidiary, Foshan Huafeng Paper Co., Ltd. ----------- ----------- Total 440,000,000.00 179,334,850.00 =========== =========== Note: Long-term loan as at 31 Dec. 2008 has increased by RMB 260,665,150.00, up by 145.35%, which was mainly due to enhancement of long-term financing function. (30) Other non-current liabilities Items 31 Dec. 2008 31 Dec. 2007 =================================== ============== ============== Deferred income 1,320,000.00 1,320,000.00 -------------- -------------- Total 1,320,000.00 1,320,000.00 ============== ============== (31) Share capital 31 Dec. 2007 Increase/decrease in 2008 (+,-) 31 Dec. 2008 --------------- ----------------------------------- --------------- Items Issuance Capitalization Bonus Number Proportion of new of share Other Subtotal Number Proportion shares share capital ================== ======== ===== ==== ======== ====== ==== ======== ======== ===== I. Unlisted shares 1. Sponsor’s shares 333,500,000 65.99% --- --- --- --- --- 333,500,000 65.99% Including: Shares held by the State --- --- --- --- --- --- --- --- --- Shares held by domestic 333,500,000 65.99% --- --- --- --- --- 333,500,000 65.99% legal person Shares held by foreign --- --- --- --- --- --- --- --- --- legal person Other --- --- --- --- --- --- --- --- --- 2. Raised legal person’s --- --- --- --- --- --- --- --- --- shares 3. Inner employee shares --- --- --- --- --- --- --- --- --- 4、Preferred shares or other --- --- --- --- --- --- --- --- --- Including: transferred --- --- --- --- --- --- --- --- --- allotted shares 110 -- --------- ----- ---- ------ ------ ---- ---- --------- ----- Total unlisted shares 333,500,000 65.99% --- --- --- --- --- 333,500,000 65.99% --------- ----- ---- ------ ------ ---- ---- --------- ----- II. Listed shares 1. RMB ordinary shares ---- --- --- --- --- --- --- --- --- 2. Domestically listed 171,925,000 34.01% --- --- --- --- --- 171,925,000 34.01% foreign shares 3. Overseas listed foreign --- --- --- --- --- --- --- --- --- shares 4. Other --- --- --- --- --- --- --- --- --- --------- ----- ---- -------- ------ ---- ---- --------- ----- Total listed shares 171,925,000 34.01% --- --- --- --- --- 171,925,000 34.01% --------- ----- ---- -------- ------ ---- ---- --------- ----- III. Total shares 505,425,000 100% --- --- --- --- --- 505,425,000 100% ======== ===== ==== ======== ===== ==== ======== ======== ===== Note: The above-mentioned paid-in capital has been inspected and verified by Guangdong Hengxin Delu Certified Public Accountants Co., Ltd., issuing the Capital Verification Report with (2007) HDZY No. 25. (32) Capital reserve Items 31 Dec. 2007 Increase in 2008 Decrease in 2008 31 Dec. 2008 =============== ============== ============= ============= ============= Share premium 250,531,482.00 --- --- 250,531,482.00 Other capital reserve 3,232,500.00 --- --- 3,232,500.00 -------------- ------------- ------------- -------------- Total 253,763,982.00 --- --- 253,763,982.00 ============== ============= ============= ============= (33) Surplus reserve Items 31 Dec. 2007 Increase in 2008 Decrease in 2008 31 Dec. 2008 =============== ============== ============= =========== ============== Statutory surplus public 118,570,535.83 6,703,939.59 --- 125,274,475.42 reserve -------------- ------------- ----------- -------------- Total 118,570,535.83 6,703,939.59 --- 125,274,475.42 ============== ============= =========== ============== (34) Retained profit Items Amount 111 -- ========================================== =============== Retained profit as at 31 Dec. 2007 before the adjustment 354,802,914.55 Modulation (+,-) -5,932,637.32 Retained profit as at 31 Dec. 2007 348,870,277.23 Add: net profit as of this year 42,588,844.36 Less: withdrawing statutory surplus public reserve 6,703,939.59 Withdrawing arbitrary surplus public reserve --- Distributing dividend of common shares --- Transferring into capital --- Retained 384,755,182.00 profit as at 31 Dec. 2008 ========================================== =============== Note: Ten percent of net profit shall, in accordance with the Articles of Association of the Company and resolutions made by the Board, be withdrawn as statutory surplus public reserve. For modulation on retained profit as at 31 Dec. 2007, please see Note II (XXII) for details. (35) Operating income and operating cost 1. Operating income Items Amount in 2008 Amount in 2007 =================================== ================ ============== Income from main operation 1,401,634,821.48 1,258,781,957.97 Other operating income 11,039,344.34 10,728,448.98 ---------------- ---------------- Total 1,412,674,165.82 1,269,510,406.95 ================ ============== Sales revenue from the top five customers Items Amount in 2008 Amount in 2007 =================================== ============== ============== Total sales revenue from the five customers 150,552,495.16 161,650,200.71 Proportion in total sale revenue (%) 10.66% 12.73% =================================== ============== ============== 2. Operating cost Items Amount in 2008 Amount in 2007 =================================== ================ ============== Cost of main operation 1,208,796,864.78 1,106,281,858.19 112 -- Other business expenditure 1,392,363.77 2,745,096.60 ---------------- ---------------- Total 1,210,189,228.55 1,109,026,954.79 ================ ============== 3. Classification of main operation income and cost Amount in 2008 Amount in 2007 ------------------------------- --------------------------- Items Income from main Cost of main operation Income from main Cost of main operation operation operation ========= ============== ============== ============= ============= White board paper 1,281,092,076.57 1,116,491,374.52 1,146,100,378.29 1,018,154,035.72 Printing 128,846,302.87 100,609,048.22 118,940,095.65 94,386,338.44 Offsetting each other -8,303,557.96 -8,303,557.96 -6,258,515.97 -6,258,515.97 among industries within the Company ---------------- ---------------- ---------------- ---------------- Total 1,401,634,821.48 1,208,796,864.78 1,258,781,957.97 1,106,281,858.19 ============== ============== ============= ============= (36) Business tax and extra Items Amount in 2008 Amount in 2007 =================================== ============== ============== Embankment protection cost 690,373.22 184,977.83 ---------------- ---------------- Total 690,373.22 184,977.83 ============== ============== (37) Sales expense Items Amount in 2008 Amount in 2007 =================================== ============== ============== Sales expense 47,231,627.31 31,760,154.87 =================================== ============== ============== Note: Sales expense for the year 2008 has increased by RMB 15,471,472.44 than last year, up by 48.71%, which was mainly because that Foshan Huafeng Paper Co., Ltd. Zhuhai Branch Company’s project with annual output of 300,000-ton high-class coated white board has been put into production formally in the second half year 2007, as a result, difference in the scope of sales expense between year 2007 and 2008 (38) Administrative expense 113 -- Items Amount in 2008 Amount in 2007 =================================== ============== ============== Administrative expense 79,378,739.61 54,659,328.20 =================================== ============== ============== Note: Administrative expense for the year 2008 has increased by RMB 24,719,411.41 than last year, up by 45.22%, which was mainly because that Foshan Huafeng Paper Co., Ltd. Zhuhai Branch Company’s project with annual output of 300,000-ton high-class coated white board has been put into production formally in the second half year 2007, as a result, difference in the scope of administrative expense between year 2007 and 2008 (39) Financial expense Type Amount in 2008 Amount in 2007 =================================== ============== ============== Interest expense 93,005,020.57 42,624,773.87 Less: interest revenue 2,293,343.19 4,145,108.33 Exchange loss 2,563,918.06 6,898,508.47 Less: exchange revenue 16,817,185.79 46,419.12 Other 5,723,617.85 1,992,757.99 -------------- -------------- Total 82,182,027.50 47,324,512.88 ============== ============== Note: Financial expense for the year 2008 has increased by RMB 34,857,514.62 than last year, up by 73.66%, which was mainly because that Foshan Huafeng Paper Co., Ltd. Zhuhai Branch Company’s project with annual output of 300,000-ton high-class coated white board has been put into production formally in the second half year 2007, as a result, interests expense is recorded into the subject for 2008, as well as the difference in the scope of financial expense between year 2007 and 2008 (40) Loss on assets impairment Items Amount in 2008 Amount in 2007 =================================== ============== ============== Loss on bad debt 336,522.26 2,893,882.11 Loss on falling price of inventories 10,800,000.00 445,509.17 Loss on impairment of long-term investment --- 3,100,000.00 -------------- -------------- Total 11,136,522.26 6,439,391.28 ============== ============== (41) Investment income 114 -- Items Amount in 2008 Amount in 2007 =================================== ============== ============== Attributable share of the net profits and 7losses 58,258,692.58 95,306,219.03 recognized under equity method of the invested entity -------------- -------------- Total 58,258,692.58 95,306,219.03 ============== ============== Note: a. There was no significant restriction to investment income transfer in the Company. b. Investment income for the year 2008 has reduced by RMB 37,047,526.45, a drop of 38.87%, which was mainly because that the performance of Tetra Huaxin (Foshan) Packing Co., Ltd. (an affiliated company of the Company) in the 4th quarter has decreased by a big margin due from the “Melamine Event”. (42) Non-operating income Items Amount in 2008 Amount in 2007 =================================== ============== ============== Income from disposal of fixed assets 32,812.75 386,412.71 Payment be failed to pay --- 3,261,280.81 Capital for technology renovation from government 225,000.00 525,000.00 subsidies Insurance indemnity 80,000.00 --- Other 87,769.74 28,170.00 -------------- -------------- Total 425,582.49 4,200,863.52 ============== ============== (43) Non-operating expense Items Amount in 2008 Amount in 2007 =================================== ============== ============== Loss from disposal of fixed assets 20,131.95 305,600.88 Penalties --- 100,000.00 Donations contributed 124,000.00 --- guarantee fund for the disabled 157,656.45 --- Other 175,071.99 945.40 -------------- -------------- Total 476,860.39 406,546.28 115 -- ============== ============== (44) Income tax expense Items Amount in 2008 Amount in 2007 =================================== ============== ============== Income tax expense of the current period 589,914.98 1,171,948.65 Deferred income tax expense -1,418,974.78 -412,514.30 -------------- -------------- Total -829,059.80 759,434.35 ============== ============== (45) Notes to cash flow statement 1. Other cash received related with operating activities Items Amount in 2008 Amount in 2007 =================================== ============== ============== Total 4,258,183.58 8,147,648.96 ============== ============== Including: Interest revenue 2,293,343.19 1,175,933.00 Margin received 1,700,000.00 1,400,000.00 Government subsidy 225,000.00 --- ============== ============== 2. Other cash paid related with operating activities Items Amount in 2008 Amount in 2007 ============================================== ============== ============== Total 92,796,595.47 44,980,315.80 ============== ============== Including: transportation expense for products 30,291,545.50 18,988,321.73 Bank charges 5,056,951.18 2,806,661.07 Car-road toll 4,738,948.34 4,422,529.55 Property management fees 4,152,573.05 858,486.22 Entertainment expenses 4,080,036.12 2,653,735.53 Export expenses 2,233,286.76 876,749.59 Office expenses 2,221,504.59 2,237,423.53 ============== ============== 3. Supplemental information of cash flow statement 116 -- Supplemental information Amount in 2008 Amount in 2007 ================================================ =============== ============== 1. Transferring net profit into cash flows of operating activities: Net profit 40,902,121.95 118,456,189.02 11,136,522.26 6,439,391.28 Add: Reserve for impairment of assets Depreciation of fixed assets, oil and gas assets and productive biological 98,829,840.80 68,425,425.35 assets Amortization of intangible assets 1,531,190.72 1,513,492.75 Amortization of long-term deferred expenses 4,294,614.59 842,952.18 Loss for disposal of fixed assets, intangible assets and other -12,680.80 -80,811.83 long-term assets (income is listed as “-”) Losses on scrapping of fixed assets (income is listed as “-”) --- --- Losses on change in fair value (income is listed as “-”) --- --- Financial expense (income is listed as “-”) 93,933,520.57 40,127,178.77 Losses arising from investment (income is listed as “-”) -58,258,692.68 -95,306,219.03 Decrease of deferred income tax assets (increase is listed as “-”) -1,418,974.78 -412,514.30 Increase of deferred income tax liabilities (decrease is listed as “-”) --- --- Decrease of inventories (increase is listed as “-”) -159,648,871.86 -50,516,935.39 Decrease in operating receivables (increase is listed as “-”) -45,135,549.92 -148,811,969.66 Increase in operating payables (decrease is listed as “-”) -13,970,833.46 126,363,310.36 Other --- --- Net cash flows arising from operating activities -27,817,792.61 67,039,489.50 (2) Investing and financing activities that do not involving significant cash receipts and payments Conversion of debt into capital --- --- Reclassify convertible bonds to be expired within one year as current --- --- liabilities Fixed assets financed by financing leases --- --- (3) Change in cash and cash equivalents Balance of cash at the end of the period 208,091,895.59 63,767,336.50 Less: Balance of cash at the beginning of the period 63,767,336.50 112,899,721.31 Add: Balance of cash equivalents at the end of the period --- --- Less: Balance of cash equivalents at the beginning of the period --- --- 117 -- Net increase in cash and cash equivalents 144,324,559.09 -49,132,384.81 ================================================ =============== =============== 4. Cash and cash equivalent Items Amount in 2008 Amount in 2007 ============================================== ============== ============== 208,091,895.59 63,767,336.50 I. Cash 172,923.47 60,788.71 Including: Cash on hand 191,964,250.62 58,034,286.24 Bank deposit used for payment at any moment 15,954,721.50 5,672,261.55 Other monetary funds used for payment at any moment (2) Cash equivalents --- --- Of which: Bonds investment due within three months --- --- (3) Balance of cash and cash equivalents at the end of the period 208,091,895.59 63,767,336.50 Of which: Cash and cash equivalents restricted when parent --- --- company and the Group ============================================== ============== ============== (46) Segment reporting 1. Main report --- business segment (1) Segment information for the year 2008 White board Items Printing Other offset Total paper ==================== ============= =========== ============= ============= ============= I. Operating income 1,290,298,373.83 130,679,349.95 --- -8,303,557.96 1,412,674,165.82 Of which: income from 1,281,994,815.87 130,679,349.95 --- --- 1,412,674,165.82 foreign trading Income from 8,303,557.96 --- --- -8,303,557.96 --- among segments II. Sales expense 42,905,005.85 4,326,621.46 --- --- 47,231,627.31 III. Operating profit/(loss) -11,322,476.87 3,712,821.23 67,154,764.11 -19,420,768.42 40,124,340.05 IV. Total assets 2,943,973,121.81 240,429,074.76 2,446,953,712.89 -2,205,895,462.94 3,425,460,446.52 V. Total liabilities 1,964,762,840.31 177,470,595.64 1,176,518,145.61 -1,415,118,512.30 1,903,633,069.26 VI. Supplemental --- --- --- --- --- information 1. Expense of depreciation 95,829,711.47 8,615,155.98 210,778.66 --- 104,655,646.11 118 -- and amortization 2. Capital expenditure 165,987,799.42 20,649,843.63 720,860.00 --- 187,358,503.05 ==================== ============= =========== ============= ============= ============= (2) Segment information in 2007 White board Items Printing Other offset Total paper ==================== ============= =========== ============= ============= ============= I. Operating income 1,153,821,732.18 121,705,036.56 242,154.18 -6,258,515.97 1,269,510,406.95 Of which: income from 1,147,563,216.21 121,705,036.56 242,154.18 --- 1,269,510,406.95 foreign trading Income from 6,258,515.97 --- --- -6,258,515.97 --- among segments II. Sales expense 27,676,129.10 4,084,025.77 --- --- 31,760,154.87 III. Operating profit/(loss) 22,915,838.70 4,874,554.88 87,513,184.07 -949,518.44 114,354,059.21 IV. Total assets 2,557,504,473.15 233,622,654.03 2,014,746,303.01 -1,784,131,525.06 3,021,741,905.13 V. Total liabilities 1,612,820,230.20 174,077,585.05 807,753,042.83 -996,354,574.42 1,598,296,283.66 VI. Supplemental --- --- --- --- --- information 1. Expense of depreciation 61,885,356.67 8,799,189.51 97,324.10 --- 70,781,870.28 and amortization 2. Capital expenditure 155,684,279.74 30,944,540.18 724,008.00 --- 187,352,827.92 ==================== ============= =========== ============= ============= ============= 2. Secondary report --- region segment Income from foreign trading Items Amount in 2008 Amount in 2007 =================================== ================ ================ Domestic 1,167,771,719.93 748,941,780.36 Overseas 244,902,445.89 520,568,626.59 ---------------- ---------------- Total 1,412,674,165.82 1,269,510,406.95 ================ ================ VII. Notes to the financial statement of parent company (I) Other receivables 1. Composing of other receivable 119 -- 31 Dec. 2008 31 Dec. 2007 --------------------------------- ---------------------------------- Items Reserve for Reserve for bad Book balance Proportion Book balance Proportion bad debts debts ================ =========== ====== ========== =========== ====== =========== Significant single 1,417,255,533.89 99.99% --- 904,350,280.37 99.32% --- amounts Insignificant single 97,135.97 0.01% 97,135.97 278,983.25 0.03% 139,491.63 amounts but with significant credit risk Other insignificant 2,283.38 --- 298.81 5,898,052.98 0.65% 387.00 ---------------- ------ ----------- --------------- ------ ----------- Total 1,417,354,953.24 100% 97,434.78 910,527,316.60 100% 139,878.63 =========== ====== ========== =========== ====== =========== 2. Aging analysis 31 Dec. 2008 31 Dec. 2007 Items -------------------------------- -------------------------------- Reserve for bad Reserve for bad Book balance Proportion Book balance Proportion debts debts ============= =========== ====== ============ =========== ====== ============ 1-3 months 247,665,910.72 17.47% --- 114,771,132.38 12.61% --- 4-12 months 253,550,411.48 17.89% 288.21 344,088,760.76 37.79% 237.00 1-2 years 494,286,845.69 34.87% 10.60 244,458,498.08 26.85% 150.00 2-3 years 244,456,998.08 17.25% --- 126,323,425.90 13.87% --- Over 3 years 177,394,787.27 12.52% 97,135.97 80,885,499.48 8.88% 139,491.63 --------------- ------ ---------- -------------- ------ ---------- Total 1,417,354,953.24 100% 97,434.78 910,527,316.60 100% 139,878.63 =========== ====== ============ =========== ====== ============ 3. Other receivables with significant single amounts Name of debtor Amount Proportion Reason of provision withdrawn ========================== ================ ======== ========================= Foshan Huafeng Paper Co., Ltd. 1,285,468,048.72 --- Subsidiary companies that can be controlled, and with normal production and operation, a little probability for loss of bad debts Huaxin (Foshan) Color Printing Co., Ltd. 122,635,203.01 --- Subsidiary companies that can be controlled, and with normal 120 -- production and operation, a little probability for loss of bad debts Dragon State International Limited 9,152,282.16 --- Related company, a little probability for loss of bad debts =========================== ================ ======== ========================= 4. By the year-end, there is no arrearage due to shareholders which holding over 5% (including 5%) of shares with voting right. 5. The top 5 arrearage in other receivables at the year-end Term limit Proportion in total Name of debtor Amount Nature or Contents of arrearage other receivables ========================= ================ ============== ======== ============ Foshan Huafeng Paper Co., Ltd. 1,285,468,048.72 Fund appropriation Rolling for 90.70% many years Huaxin (Foshan) Color Printing 122,635,203.01 Fund appropriation Rolling for 8.65% many years Co., Ltd. Dragon State International Limited 9,152,282.16 Compensation 2 years 0.65% below Huang Dabiao 36,714.76 Personal loan Over 3 --- years Ye Daxian 33,972.74 Personal loan Over 3 --- years ========================= ================ ============== ======== ============ 6. Other receivables of related parties took up 99.99% of total other receivables. (II) Long-term equity investment 31 Dec. 2008 31 Dec. 2007 Items Reserve for Reserve for Book balance Book balance impairment impairment ================== ============== ========== ================ ========== Investing in subsidiary 790,126,950.64 787,126,950.64 companies --- --- Investing in affiliated 197,956,976.49 159,686,086.88 enterprises --- --- ---------------- ---------- --------------- ---------- Total 988,083,927.13 --- 946,813,037.52 --- ============== ========== ================ ========== 1. Long-term equity investment measured based on cost method 121 -- (1) Investment measured based on cost method in subsidiary companies Proportion Initial Balance as at Increase in Decrease in Balance as at Name of invested enterprise of shares investment 31 Dec. 2007 2008 2008 31 Dec. 2008 held amount ================= ===== ========== ========= ========= ========= ========= Foshan Huafeng Paper Co., Ltd. 75% 800,295,306.86 746,190,450.61 --- --- 746,190,450.61 Huaxin (Foshan) Color Printing 75% 40,936,500.03 40,936,500.03 --- --- 40,936,500.03 Co., Ltd. Foshan Huaxin Jinfeng Industrial 100% 3,000,000.00 --- 3,000,000.00 --- 3,000,000.00 Co., Ltd. ----------- ----------- ----------- ----------- ----------- Total 844,231,806.89 787,126,950.64 3,000,000.00 --- 790,126,950.64 ========== ========= ========= ========= ========= (2) Other equity investment measured based on cost method: naught 2. Long-term equity investment measured based on equity method Increase/decrease in 2008 ----------------------------- Name of Initial Net gains and Additional Balance as at Balance as at invested investment losses Other investment 31 Dec. 2007 Cash dividends 31 Dec. 2008 enterprise amount adjusted equity distributed based on change equity method =========== ========== ==== ========== ========= ========== ===== ========== Affiliated enterprise: Tetra Huaxin 145,945,947.55 --- 159,686,086.88 58,258,692.68 19,987,803.07 --- 197,956,976.49 (Foshan) Packaging Co., Ltd. ---------- ---- ---------- --------- ---------- ---- ---------- Total 145,945,947.55 --- 159,686,086.88 58,258,692.68 19,987,803.07 --- 197,956,976.49 ========== ==== ========== ========= ========== ===== ========== Proportion Voting of shares right Name of invested Registration Business Total net assets as Total operating held by proportions Net profit in 2008 enterprise place nature at 31 Dec. 2008 income in 2008 the in invested Company enterprise =============== ====== ======== ====== ======== ============== ================ ============== 122 -- Affiliated enterprise: Tetra Huaxin Foshan Sino-foreign 25% 25% 791,827,905.98 1,224,560,556.08 233,034,770.73 (Foshan) Packaging joint Co., Ltd. venture =============== ====== ======== ====== ======== ============== ================ ============== (III) Investment income Items Amount in 2008 Amount in 2007 ========================================== ============== ============== Attributable share of the net profits and losses recognized under 58,258,692.68 95,306,219.03 equity method of the invested entity Dividend distribution measured in the light of cost method declared 19,420,768.42 949,518.44 by the invested company -------------- -------------- Total 77,679,461.10 96,255,737.47 ============== ============== There was no significant restriction to investment income transfer in the Company. 123 -- VII. Relationship and related transaction (I) Recognition standard of related parties In accordance with the Accounting Standard for Business Enterprise No. 36 - Related party disclosure, when a party controls, jointly controls or exercises significant influence over another party, or when two or more parties are under the control, joint control or significant influence of the same party, the affiliated party relationships are constituted. In the light of the Administrative Measures for the Disclosure of Information of Listed Companies (CSRC No. 40), the special related legal person and related natural person are recognized as related parties. (II) Related parties with control relationship 1. Related parties with control relationship (1) Related parties controlling the Company Relationship Name of Registration Natural of Legal Organization Main business with the enterprise place business representative code Company ========== ===== ========================== ===== ===== ====== ========= Manufacturing and trading of: Foshan Parent Limited Tong 19353992-5 packaging materials, paper, cable, wire, new materials; trading of; company company Laiming Foshan packaging machinery and Huaxin maintenance, amplifier and parts, Development decoration materials, beverages; Co., Ltd. Information and consulting service. (Manufacturing items are operated by the subsidiaries) Main businesses: Investment and Beijing Actual ownership Tong 10000890-7 development of important industrial materials; sales of metal materials controller by the Laiming (rare metal excluded), construction whole materials, cement, wood, chemical materials, garment, paper, rubber, people tire, electro-mechanic products, wire China & cable, industrial boilers, crops, Material automobile (including sales of cars Development to final users), (items particularly & Investment stated by national government General excluded). Import & export business Corporation * in the above range of products (as approved by the merchandise list, import and export business administrated collectively by the national government excluded). Technical consultant and service related to material development. China Beijng Operation and management of Actual Limited Ma Zhengwu 71092254-4 Chengtong capital; entrustment management; controller company Holding merger and acquisition, investment (state- Group Co., management and consultation, Owned Ltd. * logistical service, import & export corporate) business and sales of steels 124 -- ======= ===== ========================== ==== ===== ====== ========= * On June 28, 2005, Foshan Gongying Investment Holdings Co., Ltd. transferred its 62.1142% equity of Foshan Huaxin Development Co., Ltd. (investment amount of RMB 284.44 million) to China Materials Development Investment General Corporation. Owing to that Foshan Huaxin Development Co., Ltd. is the parent company of the Company and holds 65.2% equity of the Company, furthermore, China Materials Development Investment General Corporation formerly held 0.11% equity of the Company, thus, China Materials Development Investment General Corporation held 65.31% equity of the Company directly and indirectly, who became the actual controller of the Company. China Chengtong Holding Group Co., Ltd. held 100% equity of China Materials Development Investment General Corporation, thus, it also was the actual controller of the Company. (2) Related parties controlled by the Company Please see Note IV (I) for details. 2. Registered capital of related parties with controlling relationship and its change 31 Dec. 2007 (Ten 31 Dec. 2008 (Ten Increase in Decrease Name of companies thousand Yuan in thousand Yuan in this year in this year RMB ) RMB ) ================================ ============== ======== ======== ============== Foshan Huaxin Development Co., Ltd. CNY45,793 --- --- CNY45,793 China Chengtong Holding Group Co., Ltd. CNY256,016 --- --- CNY256,016 China Materials Development Investment CNY131,729 CNY131,729 --- --- General Corporation Foshan Huafeng Paper Co., Ltd. USD12,139 --- --- USD12,139 Huaxin (Foshan) Color Printing Co., Ltd. USD660 --- --- USD660 Foshan Huazhi Wasted Paper Recovery Co., CNY500 CNY500 --- --- Ltd. Foshan Chancheng Distric Pearl River Color CNY150 CNY150 --- --- Printing Co., Ltd. Foshan Huaxin Jinfeng Industrial Co., Ltd. --- CNY300 --- CNY300 ================================ ============== ======== ======== ============== 3. Shares held by the related parties with controlling relationship and its change 31 Dec. 2007 Increase in 2008 Decrease in 2008 31 Dec. 2008 Name of companies ------------------ --------------- --------- ----------------- Amount Ratio Amount Ratio Amount Ratio Amount Ratio ===================== ========== ===== ========= ==== ==== === ========== ===== Foshan Huaxin Development 329,512,030.00 65.20% --- --- --- --- 329,512,030.00 65.20% Co., Ltd. China Materials 569,710.00 0.11% --- --- --- --- 569,710.00 0.11% Development Investment 125 -- General Corporation Foshan Huafeng Paper Co., 746,192,321.86 75% --- --- --- 746,192,321.86 75% Ltd. Huaxin (Foshan) Color 40,936,500.03 75% --- --- --- --- 40,936,500.03 75% Printing Co., Ltd. Foshan Huazhi Wasted Paper 5,000,000.00 100% --- --- --- --- 5,000,000.00 100% Recovery Co., Ltd. Foshan Chancheng Distric 1,500,000.00 100% --- --- --- --- 1,500,000.00 100% Pearl River Color Printing Co., Ltd. Foshan Huaxin Jinfeng --- --- 3,000,000.00 100% --- --- 3,000,000.00 100% Industrial Co., Ltd. ===================== ========== ===== ========= ==== ==== === ========== ===== (III) Related parties without controlling relationship Relationship with the Name of companies Organization code Company ================================== ================ ================= Tetra Huaxin (Foshan) Packaging Co., Ltd. 61762144-8 Affiliated company 19354411-8 Under the same parent Foshan Huaxin Import & Export Co., Ltd. Company 73728500-4 Under the same actual Qingdao Chengtong Fuel Co., Ltd. controller Controlled by the same Dragon State International Limited actual controller ================================== ================ ================= (IV) Related transaction 1. The subsidiary companies with controlling relationship and brought into the consolidation scope of accounting statement of the Company, whose transactions each other and trading with parent company has been offset. 2. Pricing principle of related transaction Market price 3. Goods purchased from related parties 2008 2007 ---------------------- ---------------------- Name of company Amount Amount Proportion in Proportion in (Ten thousand (Ten thousand same transaction same transaction Yuan in Yuan in (%) (%) RMB ) RMB ) ======================= ======== ======== ======== ======== 126 -- Qingdao Chengtong Fuel Co., Ltd. 9,086.28 52.67 4,185.05 45.97 Foshan Huaxin Import & Export Co., Ltd. 53.62 --- --- --- ----------- -------- ----------- -------- Total 9,139.90 52.67 4,185.05 45.97 ======== ======== ======== ======== 4. Goods sold to related parties 2008 2007 ---------------------- ---------------------- Name of company Amount Amount Proportion in Proportion in (Ten thousand (Ten thousand same transaction same transaction Yuan in Yuan in (%) (%) RMB ) RMB ) ======================= ======== ======== ======== ======== Foshan Huaxin Import & Export Co., Ltd. 437.53 0.31 51.24 0.43 ----------- -------- ----------- -------- Total 437.53 0.31 51.24 0.43 ======== ======== ======== ======== 5. Unsettled amount due to associated parties 31 Dec. 2008 31 Dec. 2007 ---------------------- ----------------------- Items Reserve for Reserve for Balance Balance bad debt bad debt ============================ ============== ======== ============== ======== Accounts receivable Tetra Huaxin (Foshan) Packaging Co., Ltd 30,000.00 --- --- --- Foshan Huaxin Import & Export Co., Ltd. --- --- 77,915.85 --- Other receivables Dragon State International Limited 9,152,282.16 3,031,784.12 --- Notes payable Qingdao Chengtong Fuel Co., Ltd. 40,710,322.25 --- --- Account payable Qingdao Chengtong Fuel Co., Ltd. 13,447,754.84 --- 1,046,484.17 --- Foshan Huaxin Import & Export Co., Ltd. 811,263.61 --- --- --- Other payables Foshan Huaxin Development Co., Ltd. 2,794,874.48 --- 23,250,647.13 --- Dragon State International Limited 201,383.02 --- --- --- Long-term loans Foshan Huaxin Development Co., Ltd. --- --- 100,000,000.00 --- ============================ ============== ======== ============== ======== 127 -- 6. Other related transactions (1) Leasing of office building The Company entered the agreement with Foshan Huaxin Development Co., Ltd. to rent office building of 907 square meters located at the 18/F Jinghua Building, Jihua 5th Road, Foshan, with the lease term from 1 Jan. 2006 to 31 Dec. 2007. At the expiration of the lease, the leasing contract was renewed until 31 Dec. 2009 as well. The Company committed, during the lease term, to pay management fee of RMB326,520 and parking fee of RMB25,200 for every year to Foshan Huaxin Development Co., Ltd.. (2) Loan due to related parties a. In accordance with the Contract on Loan signed between the Company and Foshan Huaxin Development Co., Ltd, by the end of year, the loan balance that the Company borrowed from Foshan Huaxin Development Co., Ltd was RMB 2,705,000.00. The borrowing rate was determined at the rate of interest on Bank deposits for the same term. Accrued interest on loan is RMB 629,153.12 in 2008, as well as RMB 14,108,740.15 in 2007. b. In accordance with the Agreement signed between the Company and Dragon State International Limited, owing to that Dragon State International Limited failed to implement the equal investment responsibilities with the same as the Company, therefore, the Company will calculate relevant compensation of RMB 6,120,498.04 at the one-year bank lending rate for the same period, as well as RMB 3,031,784.12 in last year. (3) Guarantee of related parties As at 31 Dec. 2008, China Materials Development & Investment General Corporation and Foshan Huaxin Development Co., Ltd. jointly provide the joint liability guarantee for the Company’s short-term loan of RMB 50 million; China Materials Development & Investment General Corporation provides the joint liability guarantee for the Company’s short-term loan of RMB 180 million; Foshan Huaxin Development Co., Ltd. provides the joint liability guarantee for the Company’s short-term loan of RMB 50 million. China Chengtong Holding Group Co., Ltd. and the Company jointly provide the joint liability guarantee for the short-term loan of Foshan Huafeng Paper Co., Ltd. (the subsidiary of the Company) amounting to RMB 103.5 million; the Company provides the joint liability guarantee for the short-term loan of Foshan Huafeng Paper Co., Ltd. amounting to RMB 148 million; China Materials Development & Investment General Corporation, Foshan Huaxin Development Co., Ltd. and the Company jointly provide the joint liability guarantee for the balance on import L/C negotiation borrowing of Foshan Huafeng Paper Co., Ltd. amounting to RMB 379,802.81 and USD 396,131.98 (RMB3,086,188.85); the Company provides the joint liability guarantee for the balance on import L/C negotiation borrowing of Foshan Huafeng Paper Co., Ltd. amounting to RMB 14,653,000.00, USD 1,540,001.21 and HKD 6,194,020.00 (RMB30,621,945.86); China Chengtong Holding Group Co., Ltd. and the Company jointly provide the joint liability guarantee for the balance on import L/C negotiation borrowing of Foshan Huafeng Paper Co., Ltd. amounting to RMB 13,280,000.00. China Materials Development & Investment General Corporation, Foshan Huaxin Development Co., Ltd. and the Company jointly provide the joint liability guarantee for the short-term loan of Huaxin (Foshan) Color Printing Co., Ltd. (the subsidiary of the Company) amounting to RMB 25 million; the Company provides the joint liability guarantee for the short-term loan of Huaxin (Foshan) Color Printing Co., 128 -- Ltd. amounting to RMB 14 million. The Company provides the joint liability guarantee for the notes payable of Foshan Huafeng Paper Co., Ltd. amounting to RMB 54,510,322.25. And the said subsidiary deposits the margins and bank acceptance bill as mortgage. China Materials Development & Investment General Corporation provides the joint liability guarantee for the Company’s long-term loan of RMB 380 million; the Company provides the joint liability guarantee for the long-term loan of Foshan Huafeng Paper Co., Ltd. amounting to RMB 60 million. VIII. Contingent events (I) Contingent liabilities due to lawsuit and arbitration pending There was no contingent liability due to lawsuit and arbitration pending. (II) Contingent liabilities formed due to external guarantee up to 31 Dec. 2008 For guarantee provided by the Company for its subsidiaries, please see Note VII (IV) 6 for details. Except for this, ended 31 Dec. 2008, no any external guarantee existed in the Company. IX. Commitment events 1. In accordance with the Guarantee Contract with (2005) ZGWD Zi. No 5 and (2006) ZGWD Zi No. 6 signed between the subsidiary company of the Company --- Foshan Huafeng Paper Co., Ltd. and China Construction Bank Corporation Foshan Branch on 7 June 2006, the loan of maximum amount of RMB 62,741,600.00 and RMB 43,044,200.00 (including equivalence foreign currency) provided by the said bank to the said company from 1 March 2004 to 31 December 2009 were guaranteed with house and building located in No. 17, Hebin Road, Foshan with appraisal value amounting to RMB 62,741,600.00 and land as well as house and building with appraisal value of RMB 43,044,200.00 as mortgages. Up to the end of year 2008, Foshan Huafeng Paper has been repaid the said borrowing, but the above-mentioned house and building and land have not yet been released from mortgage. 2. As at 31 Dec. 2008, notes receivable of Foshan Huafeng Paper Co., Ltd. totaling to RMB 11.5 million has been used to the mortgage for issuing its bank acceptance bill. X. Events after balance sheet date Profit distribution plan of the Company after balance sheet date The profit distribution preplan for the year 2008 of the Company is that, in accordance with the resolutions of the 2nd meeting of the 4th Board of Directors for the year 2009 held on 26 Mar. 2009, appropriating 10% of net profit as statutory surplus reserve, after this, the profit available for distribution to investors is RMB 384,755,182.00. Therefore, neither profit distribution nor capitalization of the capital public is conducted. The said preplan shall be submitted to the Shareholders’ General Meeting 2008 for examined and approval. XI. Other events (I) Leasing Operating lease 129 -- Various assets leased by the Company as follows: Book value as at 31 Book value as at 31 type Dec. 2008 Dec. 2007 ============================== ================ ================ House and building 11,025,316.46 11,478,231.26 ---------------- ---------------- Total 11,025,316.46 11,478,231.26 ================ ================ (II) Government subsidies In view of completing government inspection by Huaxin (Foshan) Color Printing Co., Ltd. to the technology renovation for the year 2004 and 2005, the remaining fund on special support fund for enterprise development appropriated by Chancheng District of Foshan in Feb. 2008 was measured as non-operating income. (III) Other significant events 1. The Company entered into the Joint Venture Agreement with STORAENSO PACKAGING BOARDS ASIAOY on 28 October 2005, in which the both purchased the assets of Foshan Huafeng Paper Co., Ltd. Zhuhai Branch Company, the subsidiary company of the Company, at the price of RMB 710,265,723.03, and together set up a joint venture company, namely STORAENSO HUAXIN (ZHUHAI) PACKAGING PAPER LTD., through assets merger. The said joint venture company’s total investment amount was USD 98 million with registered capital of USD 49 million as well as operating duration of 50 years. Of which, the Company invested in RMB 9.8 million, STORAENSO PACKAGING BOARDS ASIAOY invested in USD 39.2 million.. As approved by Department of Foreign Trade and Economic Cooperation of Guangdong Province with YWJMZ Zi [2005] No. 673, the joint venture company has obtained certificate of approval for foreign-funded enterprise with SWZYHZZ Zi [2005] No. 0043. Owing to the said purchase, Foshan Huafeng Paper Co., Ltd. Zhuhai Branch Company’s project on production expansion of 300,000-ton high-class coated white board at place out of Zhuhai under construction was changed into project on production of liquid package paper board with production scale of 300,000 tons. However, the Company had a notice from STORAENSO PACKAGING BOARDS ASIAOY on 29 November 2005, in which STORAENSO PACKAGING BOARDS ASIAOY decided to give up the said investment and refuse handle the procedure related with enterprise corporate business license of joint-venture company because rate of return on profit from project on liquid package paper board was no all idealization, as a result, the Assets Transfer Agreement failed to be continued to carry out, as well as significant economic losses to Foshan Huafeng Paper Co., Ltd.. Unilateral statistics from Foshan Huafeng Paper Co., Ltd., such economic losses totaled to about RMB 58 million, including expense on rebuilding, claim on customer or vendor, engineering management expense during rebuilding, salary for staffs and 130 -- project interests during the delay period. Due to unilateral termination of the cooperation from STORAENSO PACKAGING BOARDS ASIAOY, in accordance with the Clause 22.1 and 22.2 in the Agreement, “if any part in the Joint Venture Agreement fails to implement any obligation under the Agreement…, the said party shall be regard that it violate this agreement”, STORAENSO PACKAGING BOARDS ASIAOY “shall undertake duties for direct and real loss (excluding indirect) for abiding party due to its breach of contract.” The Company considered that STORAENSO Huaxin (Zhuhai) Packaging Paper Ltd. failed to be established due to unilateral termination of the cooperation from STORAENSO PACKAGING BOARDS ASIAOY, resulting in a great of cost put into the project of coated white board in Zhuhai by the Company, for which the Company take proceedings against STORAENSO PACKAGING BOARDS ASIAOY for loss to the Company, in order to safeguard the legal rights of Foshan Huafeng Paper Co., Ltd.. The said dispute case on agreement transfer has been accepted by Zhuhai Intermediate Court on 20 Aug. 2007. But STORAENSO PACKAGING BOARDS ASIAOY proposed an objection to right of jurisdiction in this case. On 20 November 2007, as judged by Zhuhai Intermediate People's Court with Civil Judgment (2007) ZZFMSC Zi No. 52, the Court rejected the said objection on right of jurisdiction in this case. STORAENSO PACKAGING BOARDS ASIAOY has appeal from the judgment of Zhuhai Intermediate People's Court to Guangdong Higher People Court. On 16 June 2008, Guangdong Higher People's Court made the final order with written civil ruling (2008) YGFLMZ Zi No. 65, overruling the appeal of STORAENSO PACKAGING BOARDS ASIAOY, maintaining the first trial as well. In Jan. 2008, Foshan Huafeng Paper Co., Ltd. received the notice from Singapore International Arbitration Center (SIAC), in which STORAENSO PACKAGING BOARDS ASIAOY has recourse to arbitration. In Mar. 2008, SIAC has notified Foshan Huafeng Paper Co., Ltd. of the formation of arbitration court. Receiving the notice of responding to action from Zhuhai Intermediate Court on X X 2008, the Company, as a defendant, was notified to participate in the proceedings on the assets transfer agreement dispute Foshan Huafeng Paper Co., Ltd. bringing a suit against STORAENSO PACKAGING BOARDS ASIAOY. The case has been currently entering the substantive hearing. On 10 Feb. 2009, Zhuhai Intermediate Court convened both parties to conduct the first hearing, in which the both parties exchanged the evidence, and made the hearing of evidence to the application on evidence of economic losses submitted by Foshan Huafeng Paper Co., Ltd.. Being a larger uncertainty in whether the Company could withdraw claim payment through such judicial procedure as judgment and execution, the Company failed to judge the influence on the profit of Foshan Huafeng Paper Co., Ltd. due to the aforesaid case. Foshan Huafeng Paper Co., Ltd. has been making production and operation in good working order. 2. In accordance with the resolutions of the temporary Board meeting of Foshan Huafeng Paper Co., Ltd., the subsidiary of the Company, on 6 Oct. 2008, it agreed to sell its assets and liabilities related with the businesses located in Foshan to Foshan Huaxin Jinfeng Industrial Co., Ltd. (after a change to Huaxin (Foshan) Color Printing Co., Ltd.). Subsequent to finishing assets sale, Foshan Huafeng Paper Co., Ltd. also gave consent to increase capital in Zhuhai Special Economic Zone 131 -- Hongta Yanlord Paper Co., Ltd. by its original shareholders, the Company and Dragon State International Limited, at the evaluation of 75% equity and 25% equity held respectively by the said shareholders. After capital increase, Foshan Huafeng Paper Co., Ltd. would become into their wholly-owned subsidiary. At the 6th meeting of the 4th Board of Directors for the year 2008 held on 8 Oct. 2008, Foshan Huaxin Packaging Co., Ltd. increasing capital in Zhuhai Special Economic Zone Hongta Yanlord Paper Co., Ltd.and the material assets reorganization preplan was approved. On the same day, both the Company and Dragon State International Limited signed the Framework Agreement on Capital Increase with all three companies, Yunan Hongta Group Co., Ltd., Yanlord Industries Pte. Ltd. and Zhuhai Special Economic Zone Hongta Yanlord Paper Co., Ltd.. According to this agreement, both the Company and Dragon State International Limited carried out additional investment in Zhuhai Special Economic Zone Hongta Yanlord Paper Co., Ltd. at the appraisal value (base date of assets appraisal 30 June 2008) of 75% equity and 25% equity of Zhuhai Huafeng (a enterprise after Foshan Huafeng Paper Co., Ltd. sold its assets and liabilities related with the businesses located in Foshan) held respectively by the Company and Dragon State International Limited. On the base of such appraisal value, Zhuhai Huafeng has calculated additional investment in Zhuhai Special Economic Zone Hongta Yanlord Paper Co., Ltd. in the light of the paid-up amount invested by Dragon State International Limited although USD 10,233,793.55 is still not paid in full by Dragon State International Limited. After finishing the transaction, the Company and Dragon State International Limited respectively holds 40.18% equity and 13.39% equity of Zhuhai Special Economic Zone Hongta Yanlord Paper Co., Ltd., and Yunan Hongta Group Co., Ltd. and Yanlord Industries Pte. Ltd. respectively holds 32.50% equity and 13.93% equity of Zhuhai Special Economic Zone Hongta Yanlord Paper Co., Ltd.. Taking up super majority voting right in the Board of Zhuhai Special Economic Zone Hongta Yanlord Paper Co., Ltd. as well as control to its production and operation, a control relationship to Zhuhai Special Economic Zone Hongta Yanlord Paper Co., Ltd. is held by the Company. Dragon State International Limited has paid investment in full in Foshan Huafeng Paper Co., Ltd. on 7 Nov. 2008. As approved by the Ministry of Commerce of the People’s Republic of China with (approval document) SZP [2009] No, 23 document “Apply of MOFCOM on Giving Consent to Increase Capital in Zhuhai Special Economic Zone Hongta Yanlord Paper Co., Ltd.” on 12 Mar. 2009, the MOFCOM was in agreement with the capital increase in Zhuhai Special Economic Zone Hongta Yanlord Paper Co., Ltd. with the total investment amount reaching to USD 310.74 million from USD 197.67 million, as well as registered capital of USD 211,061,305 from USD 98,000,000. The Newly increased registered capital is paid by the Company and Dragon State International Limited at the evaluation of 75% equity and 25% equity of Foshan Huafeng Paper Co., Ltd. held respectively by the said shareholders. Foshan Huafeng Paper Co., Ltd. is changed in Investment By Foreign-funded Enterprises in China. The above-mentioned reorganization matters are under reviewing and approval by CSRC. 3. Owing to effect from typhoon “Hagupit”, Zhuhai Gaolan Port Economic Zone Gaolan Petrochemical Zone (hereinafter called the region) subject to super typhoon such as strong winds and torrential rains (instantaneous wind force of 14) on 24 Sep. 2008, the losses was caused to Foshan Huafeng Paper Co., Ltd. Zhuhai Branch located in the Region. Both relevant equipment and current assets has been arranged insurance cover. Foshan Huafeng Paper Co., Ltd. has been 132 -- discussing the claim settlement with insurance company. It is estimated that Huafeng Paper will obtain compensation from the insurance company. XII. Non-recurring gains and losses Items 2008 2007 ========================================= ============= ============= Gains/losses from disposal of non-current assets 12,680.80 80,811.83 Government subsidies recorded into profit and loss of the 225,000.00 525,000.00 current period Occupancy fees accepted by non-financing enterprise 5,774,689.89 2,860,488.32 recorded into profit and loss of the current period Other non-operating income and expense -288,958.70 3,188,505.41 Other non-recurring gains and losses --- --- ------------- ------------- Subtotal 5,723,411.99 6,654,805.56 ------------- ------------- Less: Influence on income tax 26,923.35 8,813.42 Quotient shared by minority shareholders 8,426.55 948,815.66 Net non-recurring gains and losses 5,688,062.09 5,697,176.48 ============= ============= Note: Date mentioned above table, “+” shows profit or income, “-” shows loss or expense XIII. Return on equity and earnings per share Return on equity（%） Earnings per share（RMB/share） ------------------------------- ------------------------------- Profit as of the report period Fully diluted Weighted average Fully diluted Weighted average --------------- --------------- --------------- --------------- 2008 2007 2008 2007 2008 2007 2008 2007 ================ ====== ====== ====== ====== ====== ====== ====== ====== Net profit attributable to 3.36 8.94 3.41 9.28 0.08 0.22 0.08 0.22 common shareholder of the Company Net profit after deducting 2.91 8.47 2.96 8.80 0.07 0.21 0.07 0.21 non-recurring gains and losses attributable to common shareholder of the Company ================== ====== ====== ====== ====== ====== ====== ====== ====== 133 -- Calculation formula on return on equity and earnings per share 1. Fully diluted return on equity Fully diluted return on equity =P÷E Of which: P refers to Net profit attributable to common shareholder of the Company or net profit after deducting non-recurring gains and losses attributable to common shareholder of the Company; E refers to net assets at the period-end attributable to common shareholders of the Company. “Net profit attributable to common shareholder of the Company” excluded minority interest, “net profit after deducting non-recurring gains and losses attributable to common shareholder of the Company” would be calculated based on consolidated net profit after deducting minority interests; deducting non-recurring gain and loss of parent company (the Company should consider influence of income tax) and non-recurring gain and loss of each subsidiary (the Company should consider influence of income tax) ; “net assets at the period-end attributable to common shareholders of the Company” excluded minority interests. 2. Weighted average return on equity Weighted average return on equity =P/ （ E0 ＋ NP÷2 ＋ Ei×Mi÷M0 － Ej×Mj÷M0±Ek×Mk÷M0） Of which: P refers to Net profit attributable to common shareholder of the Company or net profit after deducting non-recurring gains and losses attributable to common shareholder of the Company; NP refers to net profit attributable to common shareholders of the Company; E0 refers to net assets at the period-begin attributable to common shareholders of the Company; Ei refers to net assets increased due to issuance of new share or debts for equity swap or attributable to common shareholders of the Company; Ej refers to net assets decreased due to repurchased or dividends in cash or attributable to common shareholders of the Company; M0 refers to the number of months during the report period; Mi refers to the number of months from the next month when net assets increased to the end of the report period; Mj refers to the number of months from the next month when net assets decreased to the end of the report period; Ek refers to change of increase/decrease of net assets due to other transaction events; Mk refers to the number of months from the next month when other net assets changed the end of the report period 3. Earnings per share-basis Earnings per share-basis =P÷S S=S0＋S1＋Si×Mi÷M0－Sj×Mj÷M0－Sk Of which: P refers to net profit attributable to shareholders holding ordinary shares or net profit attributable to shareholders holding ordinary shares after deducting non-recurring gains and losses; S weighted average number of ordinary shares issued out; S0 refers to total number of shares at the period-begin; S1 refers to the number of shares increased due to transferring capital reserve into share capital or dividend distribution of shares during the report period; Si refers to the number of shares 134 -- increased due to issuance of new shares or debt for equity swap during the report period; Sj refers to the number of shares decreased due to stock repurchase during the report period; Sk refers to the number of split-share during the report period; M0 refers to the number of months during the report period; Mi refers to the number of months from the next month to the end of the report period for increase of shares; Mj refers to the number of months from the next month to the end of the report period for decrease of shares 4. Earnings per share-diluted Earnings per share-diluted =[P+ （ potential diluted interests of ordinary shares recognized as expense－transfer fee）×（1- income tax rate）]/（S0＋S1＋Si×Mi÷M0 －Sj×Mj÷M0—Sk+ weighted average amount of ordinary shares increased due to warrant, share options、convertible bond)） Of which, P refers to net profit attributable to shareholders holding ordinary shares or net profit attributable to shareholders holding ordinary shares after deducting non-recurring gains and losses. The Company shall consider all influence on potential diluted interests of ordinary shares when the Company calculated diluted earnings per share, till to minimum diluted EPS. XIV. Approval of financial statement The said financial statement has been approved by the Board of Directors of the Company on 26 March 2009. Foshan Huaxin Packing Co., Ltd. 26 March 2009 135 --