Corporate Profile
China Mengniu Dairy Company Limited (SEHK: 2319) and its subsidiaries (the “Group”) manufacture and distribute quality dairy products in China, including Hong Kong and Macau. It has become one of the leading dairy product manufacturers in China, with MENGNIU as its core brand. The Group’s diverse products include liquid milk products, such as UHT milk, yogurt and milk beverages, ice cream and other dairy products such as milk powder and milk tablets. In 2004, the Group operated 11 production bases with an aggregate annual production capacity of two million tons. CONTENTS
02 Financial Highlights 03 Corporate Structure 04 CEO’s Statement 06 Management Discussion & Analysis 13 Directors & Senior Management 17 Report of the Directors 32 Report of the Auditors 33 Consolidated Income Statement 34 Consolidated Balance Sheet 36 Consolidated Statement of Changes in Equity 37 Consolidated Statement of Cash Flows 39 Balance Sheet 40 Notes to Financial Statements 87 Financial Summary 88 Corporate Information FINANCIAL HIGHLIGHTS
For the year ended 31 December 2004 2003 Change RMB’000 RMB’000 %
Revenue 7,213,827 4,071,468 +77.2% Net profit attributable to shareholders 319,393 164,372 +94.3% Earnings per share (RMB) —Basic 0.357 0.192 +85.9% —Diluted 0.285 —N/A
. Revenue surged 77.2% to RMB7,213.8 million as a result of the success in brand building and market penetration strategies. According to ACNielsen, the Group’s market share in the liquid milk market increased by 5 percentage points from 17.0% in December 2003 to 22.0% in December 2004.
. Net profit increased by 94.3% to RMB319.4 million, exceeding 2004 full year forecast as disclosed in the prospectus by 6.5%.
02 China Mengniu Dairy Company Limited . Annual Report 2004 CORPORATE STRUCTURE
03 China Mengniu Dairy Company Limited . Annual Report 2004 CEO’S STATEMENT
2004 was a landmark year for China Mengniu Dairy Company Limited (the ‘‘Company’’) in its corporate history. Embracing its corporate mission of raising the health consciousness of the general public and providing them with quality dairy products, the Company has established a renowned national dairy brand in China and became the first Hong Kong listed PRC dairy products provider. On behalf of the Board of Directors, I am pleased to present to all shareholders the annual results of the Company and its subsidiaries (‘‘the Group’’) for the year ended 31 December 2004.
Despite the intensifying market competition, the Group focused its efforts on diversifying its product portfolio and implementing effective branding and marketing strategies. This strategic decision resulted in positive business growth momentum for the Group. The Group’s revenue in 2004 rose 77.2% to RMB7,213.8 million, while net profit surged by 94.3% to RMB319.4 million. Basic earnings per share increased by 85.9% to RMB0.357, and diluted earnings per share were RMB0.285. The Board of Directors has also resolved to recommend the payment of a final dividend of RMB0.0585 per share for the year ended 31 December 2004.
The favorable macro environment brought about by China’s strong and fast growing economy in recent years accelerated the rapid development of China’s dairy industry and presented unprecedented growth opportunities for the Group. Improving living standards in the country and heightening health consciousness have led to stronger demand for high quality, nutritional, branded and more sophisticated dairy products.
In order to fully capture the positive market growth potential, the Group brought to market a wider spectrum of dairy products in 2004 in each of its three major product categories. Liquid milk continued to be the greatest revenue generator of the Group during the year, contributing 84.5% to the total revenue. Sales of ice cream recorded rapid growth and accounted for 11.2%
04 China Mengniu Dairy Company Limited . Annual Report 2004 CEO’S STATEMENT
of the total revenue. The contribution from other dairy products experienced the most substantial growth, with revenue increasing by 217.3%. Its revenue accounted for 4.3% of the Group’s total revenue against 2.4% in 2003.
Benefiting from economies of scale, we also enjoyed improved cost efficiency. The budget for advertising and promotions was expended more effectively during the year, and the sales and distribution network were better utilized. As such, the Group’s market reach expanded and consumers’ brand loyalty was consolidated. Its liquid milk market share in China in terms of volume increased to 22.0% in December 2004 from 17.0% in December 2003, according to ACNielsen.
Apart from satisfactory business performance, the Company also took pride in gaining recognition from institutional investors during the first year of its listing. The Company was awarded the ‘‘Best Newly Listed Company in 2004’’ (China) by AsiaMoney magazine and for its IPO the ‘‘Best Mid-Cap Equity Deal’’ by FinanceAsia.
Looking ahead, the Group expects competition in China’s dairy market to remain keen in 2005. The Group will continue with its ongoing efforts to offer more quality dairy products and contribute to the healthier growth of the dairy industry. To seize opportunities to accelerate growth, the Group will proactively gauge consumers’ taste by offering a more diversified portfolio of products to ascertain that the Group stays ahead in the marketplace. The Group will also seek to elevate its brand equity by fully leveraging its extensive sales and distribution network and deepening market penetration by expanding into more second to third tier cities. The strengthening of milk source management will be another key initiative of the Group to enhance its raw milk quality to support the rapid growth of its business.
When Mengniu was founded, we have pledged to build it into an enterprise that would thrive for a century, and also a brand that would make the nation and its people proud. In the long run, the Group will strive for multi-win situations by offering tasty, nutritional and high quality milk products to consumers, to maximize returns to shareholders, cultivate employees with training and incentive systems, and nurture a stronger dairy industry for the country.
I would like to express my heartfelt gratitude to all shareholders and customers for their support. My thanks also go to the highly competent management team and employees. Without their hard work and dedication in the past year, the Group would not have achieved the outstanding results. In the year ahead, the Group will continue to work in concert to bring Mengniu’s business to new heights.
NIU Gensheng Chief Executive Officer
PRC, 6 April 2005
05 China Mengniu Dairy Company Limited . Annual Report 2004 MANAGEMENT DISCUSSION & ANALYSIS
FINANCIAL REVIEW
The Company was listed on the Main Board of the Hong Kong Stock Exchange on 10 June 2004, representing a significant milestone in the Company’s corporate development. The response to its global offering was encouraging. The international offering was significantly over- subscribed whilst the Hong Kong public offering was 205 times over-subscribed.
The Group achieved remarkable growth in 2004. For the year ended 31 December 2004, the Group recorded a revenue of RMB7,213.8 million, representing an increase of 77.2% over that of the previous year. Net profit attributable to shareholders increased by 94.3% to RMB319.4 million. Basic earnings per share were RMB0.357, representing an increase of 85.9% over that of 2003 and the diluted earnings per share were RMB0.285.
Gross Profit Robust sales growth brought about an increase in gross profit by 57.0% to RMB1,606.5 million. The primary reason for the gross margin decrease was due to the Group’s aggressive expansion strategy and intense competition that resulted in lower average selling price for both liquid milk and ice cream products. Overall gross profit margin decreased from 25.1% in 2003 to 22.3% in 2004.
Operating Expenses In 2004, the Group continued its stringent cost control measures. Although total operating expenses rose by 62.4% in 2004, the growth rate in operating expenses was lower than that of revenue. The Group leveraged greater economies of scale to deliver further operating efficiency. Total operating expenses as a percentage of total revenue in 2004 decreased to 16.4%, against 17.8% in 2003.
Profit from Operating Activities EBITDA in 2004 amounted to RMB610 million and EBITDA margin slightly decreased to 8.5%. The decrease in EBITDA margin was less than the decrease in gross profit margin, indicating that better cost control was enforced during the year.
06 China Mengniu Dairy Company Limited • Annual Report 2004 MANAGEMENT DISCUSSION & ANALYSIS
Net Profit Despite the intensifying market competition, the Group’s net profit attributable to shareholders reached RMB319.4 million, a surge of 94.3% from 2003, and exceeded 2004 full year forecast of RMB300 million as disclosed in the prospectus by 6.5%.
Capital Structure, Liquidity and Financial Resources The Group’s cash and cash equivalents amounted to RMB1,018.9 million as at 31 December 2004. Net cash from operating activities amounted to RMB572.3 million, representing an increase of 61.5% over that of 2003.
Non-current assets increased by RMB1,344.2 million to RMB2,693 million in 2004, attributable to the increase in investment in fixed assets and construction in progress and the goodwill arising on the acquisition of additional interest in a subsidiary.
As at 31 December 2004, the Group had outstanding bank loans amounting to RMB710.0 million, representing an increase of RMB322.5 million from RMB387.5 million as at 31 December 2003. Out of the outstanding bank loans, RMB470.5 million was repayable within one year and RMB239.5 million was repayable beyond one year.
The shareholders’ fund increased from RMB689.2 million as at 31 December 2003 to RMB1,954.5 million as at 31 December 2004, attributable to the listing proceeds of RMB981.5 million and the profit for the year.
Net finance cost increased from RMB12.9 million in 2003 to RMB29.1 million in 2004 as a result of an increase in interest-bearing loans for supporting the Group’s expanded operation scale.
The total debt to capital ratio of the Group was 27.8% as at 31 December 2004, as compared with 38.6% as at 31 December 2003.
MARKET REVIEW
The dairy industry in China experienced strong growth in 2004 as a result of rising GDP and awareness of the nutritional value of liquid milk. The liquid milk industry by volume recorded an average annual increase of 20.0% over that of 2003, according to ACNielsen. However, the per capita consumption of liquid milk in China was still relatively low when compared to other Asian countries, pointing to tremendous growth potential for China’s dairy industry.
07 China Mengniu Dairy Company Limited • Annual Report 2004 MANAGEMENT DISCUSSION & ANALYSIS
BUSINESS REVIEW
Branding and Marketing According to ACNielsen, the Group captured 22.0% share of the liquid milk market by volume in December 2004, as compared with 17.0% in December 2003. Brand equity and strong customer loyalty are key growth drivers for the Group. The competition in the liquid milk market favored key local dairy players, enabling them to expand their market shares, and accelerated industry consolidation. The top three players captured 55.5% market share in December 2004, as compared with 45.9% in December 2003.
The Group has built and maintained a nationwide sales and distribution network predominantly through over Heilongjiang 1,000 exclusive third party distributors
Xinjiang Uygur Autonomous Region Jilin Inner Mongolia located across China. To ensure close Autonomous Region Liaoning communication with distributors and Beijing Ningxia Huizu Autonomous Hebei Region Tianjin gain thorough understanding of market
Qinghai situations, the Group employed sales Shanxi Shandong Gansu personnel in key markets to assist Tibet Autonomous Shaanxi Henan Region Jiangsu distributors in serving retailers and Shanghai Hubei Sichuan Chong Qing Anhui gather first hand market information. Zhejiang Flexible logistics arrangement was in Hunan Jiangxi Guizhou Fujian place to meet market demands. Yunnan Guangdong Guangxi Autonomous Taiwan Region Hong Kong SAR Macau SAR
Hainan The Group also rolled out effective promotions and advertising campaigns on national television channels in prime time slots to further enhance its brand and product awareness. The advertising and promotion expenses amounted to RMB450.4 million in 2004, which accounted for 6.3% of the total revenue. The Group achieved its spending target disclosed at the time of its Listing, demonstrating the Group’s ability in achieving better scale of economy in its branding and marketing efforts.
08 China Mengniu Dairy Company Limited • Annual Report 2004 MANAGEMENT DISCUSSION & ANALYSIS
Products The Group offers a comprehensive array of choices to consumers with a product portfolio comprising over 200 varieties of liquid milk, ice cream and other dairy products.
Liquid milk The liquid milk segment remained the primary revenue contributor and accounted for 84.5% of the Group’s revenue. Its revenue rose to RMB6,097.2 million, an increase of 74.2% as compared with 2003. The increase was attributable to the Group’s success in tapping the growth of China liquid milk market through its new product offerings, to cater to the preference of different consumers. In order to attain the goal of delivering healthy, nutritious and high quality products to consumers, UHT milk, the core product of the Group, accounted for 79.2% of the revenue from our liquid milk segment. Apart from its ongoing efforts in consolidating the market share of our traditional UHT milk and sustaining its rapid growth, the Group also offered a variety of functional UHT milk products such as fortified milk with calcium and milk with low fat and low lactose content, in order to meet the nutritional needs of different consumer groups. Our new offering of breakfast milk, which has been well received by the public since its first launch into the market, has ample room for market development.
Milk beverages and yogurt accounted for 20.8% of the segment and delivered solid increase of 118.1% during the year. These products, which serve to keep one’s health, state of relaxation and vigour, are particularly sought after by ladies and teenagers. After several years of research and development, the Group has developed its competitive advantage in these products and has forged cooperation with Chr Hansen, the world-renowned probiotics manufacturer, to develop the Group’s proprietary probiotics products. This significantly contributes to the control of the high content quality in products and has laid a good foundation for the future expansion of this product.
Ice cream During the year, the ice cream segment generated revenue of RMB805.2 million, representing an increase of 69.4% from 2003. A traditional forte of the Group, ice cream products feature wide varieties, quick roll out of new products and seasonality in market demand. As such, the Group emphasizes research and development and strives to lead the market trend by introducing ice cream products that are suitable for sale in retail outlets.
09 China Mengniu Dairy Company Limited • Annual Report 2004 MANAGEMENT DISCUSSION & ANALYSIS
In light of the seasonality of ice cream products, the Group also emphasizes the development of premium products that are consumed during wintertime in north-eastern China, eastern China and southern China regions. These strategies have fuelled the continuous increase in the Group’s share in the ice cream market.
Other dairy products Owing to the launch of new product “milk tablets” and successful promotion campaigns in 2004, revenue from other dairy products soared by 217.6% to RMB311.4 million in 2004. Its contribution to revenue increased from 2.4% in 2003 to 4.3% in 2004.
Raw milk supply The Group established exclusive supply contracts with over 1,000 milk collection centers and raw milk suppliers to ensure a stable supply of quality raw milk to support the growth of the Group.
To help dairy farmers improve productivity and thus ensure stable and quality supply of raw milk in the long run, the Group’s indirectly controlled subsidiary, Inner Mongolia Mengniu Founding Industry Management Co., Ltd., invested jointly with foreign enterprises in the establishment of the single largest dairy farm in China — Mengniu-Australia International Model Ranch — in late 2004. Located near the Group’s production base in Helin Geer, the ranch will be constructed in three phases spanning three years. When the ranch is fully completed, it can raise up to 10,000 dairy cows. The ranch adopts a combination of technologies in grass planting, cattle breeding and milking from Australia, Europe, the U.S. and Asia. Advanced milking robot has also been installed on the ranch. The establishment of the ranch will help to promote the application of scientific knowledge and techniques, improvement of quality and quantity of milk supply, the establishment of scalable operations and in turn the modernization of dairy cow breeding in China.
Production Equipped with world-class production and packaging technologies, the Group operated 11 production bases with a combined production capacity of 2 million tons in 2004.
PROSPECTS
Looking ahead, despite the intensifying market competition, the Group has full confidence in its ability in delivering better financial results and managing the rapid development by launching high quality products and improving the profitability of products.
10 China Mengniu Dairy Company Limited • Annual Report 2004 MANAGEMENT DISCUSSION & ANALYSIS
In addition to its ongoing efforts in optimizing product mix in light of market demand, the Group will continue to enhance its investment portfolio, financial management processes and operational management structure in order to boost its operational capability and live up to its market strategies.
Product quality In line with our primary focus of strengthening milk source management, Mengniu-Australia International Model Ranch has been established as a role model for future formation and enhancement of a fine pool of raw milk supply. This would serve not only to enhance the quality of raw milk but also regulate and guide the development of the raw milk market. In respect of the quality control process, the GMP and QACP management systems are put in place, targeting at the establishment of standard operation procedures for every single stage of our production process. In addition, we will further invest in state-of-the-art milk inspection facilities boasting high technology and sophistication in pursuit of stability and further enhancement of our product quality.
New products introduction With liquid milk remaining as its key revenue contributor, the Group will invest more resources in introducing a more diversified portfolio of products such as flavored and functional milk products, premium yogurt and other dairy beverages to fulfill the sophisticated tastes of consumers, as well as to capture opportunities for further growth.
The Group is dedicated to improve yogurt products to cater to Chinese consumers to meet their increasing demand for yogurt products. At the same time, the Group will increase the proportion of in-house production of ice cream products, which to date are partly manufactured through OEM arrangements.
According to the market demand, the Group plans to expand the production capacity of milk powder and is dedicated to develop premium milk powder products. To ensure sustained consumer loyalty, the Group has been applying secondary brand names on certain products to differentiate its dairy product offerings for different market segments.
New markets penetration The Group will seek to achieve better economies of scale of its sales and distribution network by consolidating its leading position in the first-tier markets while expanding prudently into the second and third-tier markets. The Group is also set to further lift its brand position through effective budgeting for its nationwide promotion and advertising campaigns.
11 China Mengniu Dairy Company Limited • Annual Report 2004 MANAGEMENT DISCUSSION & ANALYSIS
Capacity expansion 141 new production lines were added to our factory premises as scheduled during the year. To stay in line with the projected sales growth, the Group will endeavour to expand its capacity so as to achieve an annual aggregate production capacity of approximately 2.75 million tons by the end of 2005.
Partnership cooperation In view of the vast but relatively fragmented raw milk supply base, the Group will work on enhancing its cooperation with raw milk suppliers and milk collection centers to expand its milk sources and ensure a quality supply of raw milk. The Group will encourage its suppliers to develop mid and larger scale milk collection centers so as to take advantage of economies of scale and meet the needs of the fast growing business.
Management incentives To encourage successful implementation of its growth strategies, the Group will continue to build employee excellence by strengthening its management system. The management will encourage employee initiatives and work place excellence by means of its established promotion and compensation systems.
HUMAN RESOURCES AND REMUNERATION OF EMPLOYEES
As at 31 December 2004, the Group employed a total of approximately 21,000 employees (2003: 9,973) in China and Hong Kong. Total staff costs for the year amounted to approximately RMB254 million, including those for the Directors, as compared with approximately RMB117 million in 2003.
The Group invests in continuing education and training programs for its management staff and other employees to constantly improve their skills and knowledge. An internal vocational training center, Mengniu Commercial College, has been set up to develop and implement training programs for the Group’s personnel.
Remuneration is maintained at competitive levels with incentive bonuses payable on a merit basis for innovations and improvements which is in line with industry practice. Other staff benefits provided by the Group include a pension contribution plan and insurance schemes.
12 China Mengniu Dairy Company Limited • Annual Report 2004 DIRECTORS & SENIOR MANAGEMENT
DIRECTORS
Mr Niu Gensheng, aged 47, is the Chief Executive Officer and one of the Founding Individuals who founded Inner Mongolia Mengniu Milk Industry (Group) Co., Ltd. (‘‘Mengniu’’) in 1999. Mr Niu graduated from Inner Mongolia University with a degree in administration and management and completed coursework for a Master Degree in enterprise administration at the Chinese Academy of Social Sciences Graduate School. Mr Niu gained the relevant management expertise and experience by previously serving as a director on the board of directors of Inner Mongolia Yili Industrial Group Co., Ltd. (‘‘Yili’’) and deputy chief executive in charge of production and operations at the same company. He has in-depth knowledge of the PRC dairy industry and over 27 years of experience in the PRC dairy industry. Mr Niu was elected as ‘‘CCTV People of the Year in China’s Economy’’ in 2003 and as one of ‘‘China’s New Business Leaders’’ in both 2003 and 2004, and was recognized as one of ‘‘Outstanding Performers in China’s Dairy Industry’’. He currently serves as deputy chairman of China Milk Association and China Dairy Industry Association.
Ms Lu Jun, aged 50, is an executive Director and Vice President of the Company as well as a Founding Individual who founded Mengniu in 1999. Ms Lu studied economic management at Inner Mongolia University and obtained a polytechnic graduation certificate from higher education self study testing center, and also obtained a BA graduation certificate with a degree in administration and management. Prior to joining the Company, Ms Lu gained the relevant management expertise as a member of board of directors of Yili and was a member of this company’s senior management. She also worked at Inner Mongolia Securities Regulatory Commission and served as the head of Inner Mongolia Property Rights Exchange. Ms Lu is formerly deputy chief of the Inner Mongolia Women Entrepreneurs’ Association. Ms Lu has over 26 years of operation and management experience in the PRC dairy industry.
Mr Sun Yubin, aged 39, is an executive Director of the Company, Vice President, General Manager of the ice cream division and one of the Founding Individuals who founded Mengniu in 1999. Mr Sun graduated from Inner Mongolia University with a degree in economic management. Prior to joining the Company, Mr Sun gained the relevant management experience as general manager at Yili’s Frozen Foods Company. He has over 22 years of experience in the PRC dairy industry.
Mr Yang Wenjun, aged 37, is an executive Director of the Company, Vice President, General Manager of the liquid milk division and one of the Founding Individuals who founded Mengniu in 1999. Mr Yang graduated from Inner Mongolia Light Industry Institute with a degree in dairy products and also graduated with a Master Degree in Business Administration from Barrington University. Prior to joining the Company, Mr Yang gained the relevant management experience as general manager at Yili’s Liquid Milk Company. He has over 17 years of experience in the PRC dairy industry.
13 China Mengniu Dairy Company Limited . Annual Report 2004 DIRECTORS & SENIOR MANAGEMENT
MrJiaoShuge(aliasJiaoZhen), aged 39, is the Chairman of the Board of Directors and is a non-executive Director of the Company appointed by CDH China Fund, L.P. (‘‘CDH’’). Mr Jiao joined the Group in September 2002. Mr Jiao received a Bachelor Degree in Mathematics from Shandong University and a Master Degree in Engineering from the Ministry of Space Industry Institute. Mr Jiao is the general manager of CDH. He previously served as deputy general manager of the direct investment department for China International Capital Corporation Limited, and researcher with Beijing Information and Control Research Institute. He is currently a director of Beijing Taiyang Pharmaceutical Industry Co., Ltd., Superdata Software Holdings Limited, China Paradise Electronics Retail Limited and Key World Industrial Company Limited.
Mr Liu Haifeng, David, aged 34, is a non-executive Director of the Company appointed by MS Dairy Holdings. Mr Liu joined the Group since September 2002. Mr Liu is a Managing Director of Morgan Stanley and Co-Head of Morgan Stanley Private Equity Asia. Mr Liu joined the private equity department of Morgan Stanley in New York in 1993 and has spent almost 12 years at Morgan Stanley. Mr Liu is also a director of Mengniu, Ping An Insurance (Group) Company of China, Ltd., Shanghai Yongle Electronics Retail Co. Ltd. and CIMIC Holdings Limited. Mr Liu was also responsible for the investment of Morgan Stanley in Hengan International Group Company Limited. Mr Liu graduated as Class Salutatorian from Columbia University with a B.S. in Electrical Engineering.
Ms Jin Yujuan, Lily, aged 38, is a non-executive Director of the Company appointed by Actis China Investment Company Limited. Ms Jin joined the Group in September 2002. Ms Jin is an Investment Principal of Actis China Limited. Ms Jin returned to China in 2000 after 12 years in the UK to establish Actis China Beijing Representative Office. Over the past five years, Ms Jin has been a key member of the Actis China team in sourcing, executing and managing a number of private equity transactions in China. Prior to setting up Actis in China, Ms Jin was an Investment Executive for four years in the Southeast Asian team of Actis Capital LLP in London, a leading UK private equity investor in emerging markets and a 100% shareholder of Actis China. Ms Jin graduated from Manchester Business School in early 1996 with a Master Degree in Business Administration.
INDEPENDENT DIRECTORS
Mr Wang Huaibao, aged 67, currently serves as deputy chairman of the China Milk Industry Association. Mr Wang graduated from China People’s University. Mr Wang previously served as chairman and general manager for Beijing Milk Company and Beijing Sanyuan Foods Shareholding Company Limited. He also served as chairman of the China Dairy Association. He was appointed as an independent director for Mengniu on 18 October 2002 and became an independent director of the Company on 23 February 2004.
14 China Mengniu Dairy Company Limited . Annual Report 2004 DIRECTORS & SENIOR MANAGEMENT
Mr Zhang Julin, aged 61, is a professor of accounting. Mr Zhang graduated from the economics department of Lanzhou University. He currently serves as assistant dean to the Inner Mongolia Finance and Economics University, chairman of the Inner Mongolia Market Development Research Council, vice chairman of the Inner Mongolia Accounting Society, director of the National Economic Council Inner Mongolian Training Center and independent director for Inner Mongolia Lantai Industrial Co., Ltd., a company listed on the Shanghai Stock Exchange which engages in the manufacture and sale of table salt, chemical salt and sodium. In his experience he has provided accounting consultancy services to listed enterprises in the PRC including advice on financial reporting and disclosure requirements. Additionally, as an independent director, he has also advised and assisted in the preparation and review of quarterly and annual financial statements before they are submitted to the CSRC on an annual basis. He is also a member of the Chinese Institute of Certified Public Accountants. He was appointed as an independent director for Mengniu on 18 October 2002 and became an independent director of the Company on 23 February 2004.
Mr Li Jianxin, aged 41, is a senior economist. He has served as commission deputy secretary, secretary, deputy general director and deputy director of the policy research office for China Lucky Film Corporation. He currently serves on the board of directors for Lucky Film Co., Ltd., a company listed on the Shanghai Stock Exchange which engages in the manufacturing and sale of colour film and colour photo paper, and is the secretary of its board of directors. He also serves as manager of the securities department. He was appointed as an independent director for Mengniu on 18 October 2002 and became an independent director of the Company on 23 February 2004.
SENIOR MANAGEMENT
Mr Yao Tongshan, aged 49, is the Chief Financial Officer. Mr Yao joined Mengniu in October 2001. Mr Yao graduated from Tianjin University with a Master Degree in engineering. Mr Yao gained the relevant finance and investment experience by previously serving as director at the department of international lending at China Construction Bank, Inner Mongolia branch, manager of State Energy Resources Investment Company investment banking division and chief financial officer of Inner Mongolia Xigao New Technology Group.
Mr Bai Jun, aged 41, is the Chairman of the labor union. Mr Bai joined Mengniu upon its establishment. Mr Bai attended a course in and obtained a BA degree in business administration at People’s University of China. He previously served as manager of Yili’s Baotou Branch Company where he gained the relevant management experience.
15 China Mengniu Dairy Company Limited . Annual Report 2004 DIRECTORS & SENIOR MANAGEMENT
Mr Lei Yongsheng, aged 43, is the Secretary of the Board of Directors of Mengniu and Chief Administrative Officer. Mr Lei joined the Group in February 2002. Mr Lei graduated from Inner Mongolia Finance and Economics University with a degree in economics. After teaching at the university for five years, Mr Lei served as deputy director of Inner Mongolia State-owned Assets Administration Bureau Asset Valuation Center and deputy director of Inner Mongolia Finance Bureau General Office where he gained the relevant administrative management experience.
Mr Deng Jiuqiang, aged 54, is the Vice Chairman of the Board of Directors of Mengniu and deputy director of the Advisory Committee and was one of the Founding Individuals who founded Mengniu in 1999. Mr Deng graduated from Inner Mongolia Industrial University with a degree in equipment manufacturing. Prior to joining the Company, he founded and served as the general manager of Hohhot Light Industrial Equipment Company Limited where he gained the relevant management experience.
COMPANY SECRETARY AND QUALIFIED ACCOUNTANT
Ms Lo Ka Wai, Claudia, aged 32, the Financial Controller and Company Secretary, joined the Group in 2005. Prior to joining the Group, she was the Financial Controller of a Hong Kong Main Board listed company. She also had nine years of working experience in international accounting firms. Ms Lo graduated with a Master Degree in Business Administration from the Hong Kong University of Science and Technology and is an associate member of the Hong Kong Institute of Certified Public Accountants.
AUDIT COMMITTEE
The audit committee comprises three non-executive Directors, two of whom are independent. The current committee members are Mr Zhang Julin (chairman), Mr Li Jianxin and Mr Jiao Zhen. The audit committee has reviewed with the Company management and the external auditors the accounting principles and practices adopted by the Company and discussed auditing, internal control and financial report matters including the review of the audited annual results for the year ended 31 December 2004.
REMUNERATION COMMITTEE
The remuneration committee comprises five members, three of whom are independent non- executive Directors, one executive Director and one non-executive Director. The current committee members are Mr Wang Huaibao (chairman), Ms Lu Jun, Mr Liu Haifeng, David, Mr Li Jianxin and Mr Zhang Julin. The remuneration committee evaluated the performance and made recommendations on the remuneration of the senior management and recommended members to the Board of Directors.
16 China Mengniu Dairy Company Limited . Annual Report 2004 REPORT OF THE DIRECTORS
The Board of Directors (the ‘‘Directors’’) takes pleasure in submitting their first annual report together with the audited financial statements of the Company and the Group for the year ended 31 December 2004.
PRINCIPAL ACTIVITIES AND GEOGRAPHICAL ANALYSIS OF OPERATIONS
The principal activity of the Company is investment holding. The principal activities of the operating subsidiary, Inner Mongolia Mengniu Milk Industry (Group) Co., Ltd. (‘‘Mengniu’’), and its subsidiaries are manufacturing and distributing dairy products including liquid milk (comprising ultra-high temperature milk (‘‘UHT milk’’), milk beverages and yogurt), ice cream and other dairy products (such as milk powder and milk tablets) in China.
Analyses of the Group’s revenue, net profit attributable to shareholders and segmental information for the year are set out in Notes 4 and 5 to the financial statements.
RESULTS AND APPROPRIATIONS
The results of the Group for the year ended 31 December 2004 are set out in the consolidated income statement on page 33.
The Directors recommend the payment of a final dividend of RMB0.0585 per share to shareholders, amounting to approximately RMB64,966,000. Holders of the Company’s convertible instruments are entitled to interest payment equivalent to the final dividend on an as if converted basis, amounting to approximately RMB15,087,000. The total dividend recorded in the financial statements amounted to RMB80,053,000.
PROPERTY, PLANT AND EQUIPMENT
During the year, the Group continued to expand its production bases and facilities. Details of movements in the property, plant and equipment of the Group and the Company are set out in Note 12 to the financial statements.
RESERVES
Details of the movements in the reserves of the Group and of the Company during the year are set out in the consolidated statement of changes in equity on page 36 and Note 31 to the financial statements.
DISTRIBUTABLE RESERVES
The Company’s reserves available for distribution comprise the share premium, contributed surplus and retained earnings. At 31 December 2004, the reserves of the Company available for distribution to shareholders amounted to approximately RMB1,429,270,000, subject to the restrictions stated in Note 31 to the financial statements.
17 China Mengniu Dairy Company Limited . Annual Report 2004 REPORT OF THE DIRECTORS
DONATIONS
Charitable and other donations made by the Group during the year amounted to approximately RMB1,500,000 (2003: RMB8,100,000).
SHARE CAPITAL
On 14 May and 18 May 2004, the Company issued an aggregate of 750,000,000 shares as part of the group reorganisation and preparation for the listing of shares in The Stock Exchange of Hong Kong Limited (‘‘Stock Exchange’’). The Company issued 250,000,000 shares at a total consideration of HK$981,300,000 (equivalent to approximately RMB1,043,900,000) pursuant to the global offering on 10 June 2004. The Company also issued 110,500,000 shares at a total consideration of approximately HK$81,800,000 (equivalent to approximately RMB87,000,000) pursuant to the conversion of convertible instrument on 20 December 2004.
Details of the movements in share capital of the Company are set out in Note 30 to the financial statements.
DIRECTORS
The Directors during the year and up to the date of this report were:
Executive Directors Mr NIU Gensheng Ms LU Jun Mr SUN Yubin Mr YANG Wenjun
Non-Executive Directors Mr JIAO Shuge (alias JIAO Zhen) Mr LIU Haifeng, David Ms JIN Yujuan, Lily
Independent Non-Executive Directors Mr WANG Huaibao Mr ZHANG Julin Mr LI Jianxin
In accordance with Article 112 of the Company’s articles of association, Mr Niu Gensheng, Mr Sun Yubin and Mr Li Jianxin retire by rotation and, being eligible, offer themselves for re-election at the forthcoming annual general meeting.
The Company considers that Mr Wang Huaibao, Mr Zhang Julin and Mr Li Jianxin are independent pursuant to the criteria set out in the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited (‘‘Listing Rules’’) and that confirmations of independence have been received from each of them.
18 China Mengniu Dairy Company Limited . Annual Report 2004 REPORT OF THE DIRECTORS
DIRECTORS’ SERVICE CONTRACTS
Each of the Directors has entered into a service contract with the Company for an initial term of one year and continuing thereafter for further successive period of one year, for a maximum duration of three years.
BIOGRAPHICAL DETAILS OF DIRECTORS AND SENIOR MANAGEMENT
Brief biographical details of the Directors and senior management are set out on pages 13 to 16.
DIRECTORS’ INTERESTS IN CONTRACTS
Save as disclosed in ‘‘Connected Transactions’’ in this report, no contracts of significance in relation to the Group’s business to which the Company or any of its subsidiaries was a party and in which a Director of the Company had a material interest, whether directly or indirectly, subsisted at the end of the year or at any time during the year.
DIRECTORS’ INTERESTS, LONG AND SHORT POSITIONS IN SHARES, UNDERLYING SHARES AND DEBENTURES
As at 31 December 2004, the interests of the Directors and chief executives of the Company in the shares of the Company and associated corporation as recorded in the register required to be kept under Section 352 of the Securities and Futures Ordinance (‘‘SFO’’) or as otherwise notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Companies (the ‘‘Model Code’’) were as follows:
Percentage of the Company/Name of Total Number Company’s Associated of Ordinary Issued Share Name of Director Corporation Nature of Interest Shares Capital
Niu Gensheng The Company Personal Interest 45,505,172(L) 4.10% The Company Corporate Interest 335,937,391(L) 30.25% (Note 1) Mengniu Personal Interest 21,862,810(L) 8.18% (Note 2) Mengniu Personal Interest 7,325,670(S) 2.74%
Lu Jun Mengniu Personal Interest 804,646(L) 0.30%
Sun Yubin Mengniu Personal Interest 1,772,646(L) 0.66%
Yang Wenjun Mengniu Personal Interest 1,068,646(L) 0.40%
19 China Mengniu Dairy Company Limited . Annual Report 2004 REPORT OF THE DIRECTORS
Notes:
(1) These shares are held by Yinniu Milk Industry Limited (‘‘Yinniu’’), a substantial shareholder of the Company, and Niu Gensheng by virtue of the Xie Trust has been delegated voting rights to the shares in Yinniu in the Xie Trust. The Xie Trust has been in effect since September 2002 and is a trust declared by Xie Qiuxu in respect of Shares in Yinniu held on trust by him for a selected group of individuals comprising employees and business associates of Mengniu. Xie Qiuxu has similarly delegated the voting rights of his own shares in Yinniu to Niu Gensheng. Therefore, Niu Gensheng controls 63.5% of the voting rights of Yinniu. Niu Gensheng also has equity rights which would convert to 17.8% of the enlarged issued share capital of Yinniu assuming all equity rights in Yinniu issued have been exercised. None of the equity rights have been exercised.
(2) Out of his share interests in Mengniu, Niu Gensheng granted an option of over 7,325,670 shares in total representing approximately 2.7% of the issued capital of Mengniu to CDH China Fund. L.P., Actis China Investment Company Limited and MS Dairy Holdings (‘‘Financial Investors’’) on 23 March 2004. Such options can be exercised in one or more tranches by each Financial Investor and are exercisable within 10 years. None of the options have been exercised.
(L) Indicates a long position. (S) Indicates a short position.
Saved as disclosed above, as at 31 December 2004, none of the Directors or their associates had any interests and short positions in the shares, underlying shares and debentures of the Company or any of its associated corporations (within the meaning of Part XV of the SFO).
SUBSTANTIAL SHAREHOLDERS’ INTERESTS
As at 31 December 2004, the interests or short positions of substantial shareholders, other than the Directors of the Company, in the shares and underlying shares of the Company as recorded in the register maintained under section 336 of the SFO were as follows:
Number of Shares Percentage of Share Name Issued Capital
Morgan Stanley Global Emerging Markets Inc 371,664,288(L) 37.17(L) 87,295,726(S) 8.73(S) Niu Gensheng 381,442,563(L) 34.35(L) Xie Qiuxu 335,937,391(L) 30.25(L) Yinniu (Note 1) 335,937,391(L) 30.25(L) Jinniu Milk Industry Limited (‘‘Jinniu’’) (Note 1) 236,657,176(L) 21.31(L) 78,313,169(S) 7.05(S)
20 China Mengniu Dairy Company Limited . Annual Report 2004 REPORT OF THE DIRECTORS
Number of Shares Percentage of Share Name Issued Capital
Morgan Stanley 231,178,314(L) 20.82(L) 58,160,988(S) 5.24(S) Morgan Stanley Global Emerging Markets Private 224,360,443(L) 20.20(L) Investment Fund, L.P. 52,260,988(S) 4.71(S) MS Dairy Holdings 224,360,443(L) 20.20(L) 52,260,988(S) 4.71(S) MSGEM, LLC 224,360,443(L) 20.20(L) 52,260,988(S) 4.71(S) CDH China Fund, L.P. 71,188,759(L) 6.41(L) 16,581,508(S) 1.49(S) CDH China Holdings Company Limited 71,188,759(L) 6.41(L) 16,581,508(S) 1.49(S) China Diamond Holdings Company Limited 71,188,759(L) 6.41(L) 16,581,508(S) 1.49(S) China Diamond Holdings, L.P. 71,188,759(L) 6.41(L) 16,581,508(S) 1.49(S) Morgan Stanley Capital Management, LLC 54,847,000(L) 5.48(L) 52,500,000(S) 5.25(S) Morgan Stanley International Incorporated 54,847,000(L) 5.48(L) 52,500,000(S) 5.25(S) Morgan Stanley Domestic Capital Inc. 54,847,000(L) 5.29(L) 52,500,000(S) 5.25(S) Morgan Stanley & Co International Limited 52,865,000(L) 5.29(L) 52,500,000(S) 5.25(S) Morgan Stanley Group (Europe) 52,865,000(L) 5.29(L) 52,500,000(S) 5.25(S) Morgan Stanley International Limited 52,865,000(L) 5.29(L) 52,500,000(S) 5.25(S) Morgan Stanley UK Group 52,865,000(L) 5.29(L) 52,500,000(S) 5.25(S)
21 China Mengniu Dairy Company Limited . Annual Report 2004 REPORT OF THE DIRECTORS
Notes:
(1) 10 founding individuals, namely Niu Gensheng, Deng Jiuqiang, Hou Jiangbin, Sun Yunbin, Qiu Lianjun, Yang Wenjun, Pang Kaitai, Lu Jun, Sun Xianhong and Xie Qiuxu, have been acting as a controlling group over the business since its inception in 1999. Therefore, they as a group are controlling shareholders of the Company. As at 31 December 2004, Niu Gensheng, Deng Jiuqiang, Lu Jun, Sun Yubin, Yang Wenjun, Sun Xianhong and Qiu Lianjun who are shareholders of Jinniu together control approximately 87.4% of Jinniu. Xie Qiuxu, Pang Kaitai, Hou Jiangbin and Deng Jiuqiang who are shareholders of Yinniu together control approximately 70.8% of Yinniu. Jinniu and Yinniu in aggregate control approximately 44.5% of the voting power at the general meeting of the Company.
(L) Indicates a long position. (S) Indicates a short position.
Saved as disclosed above, as at 31 December 2004, no other interests or short positions in the shares or underlying shares of the Company were recorded in the register maintained under section 336 of the SFO.
CONNECTED TRANSACTIONS
Intra-group connected transactions and/or non-exempt connected transactions Mengniu is a non wholly-owned subsidiary of the Company. Currently, four executive directors of the Company (who are connected persons as defined under the Listing Rules) and another five Founding Individuals (who are connected persons of the Company as all the Founding Individuals as a group are the controlling shareholders of the Company) together are entitled to exercise more than 10% of the voting power of Mengniu. As a result, Mengniu is a connected person of the Company as defined under Rule 14A.11(5) the Listing Rules. Accordingly, each of Mengniu’s subsidiaries (‘‘Mengniu Subsidiaries’’) is also a connected person of the Company pursuant to Rule 14A.11(6) of the Listing Rules. Therefore, all intra group transactions between Mengniu and Mengniu Subsidiaries which would otherwise be common and in the ordinary course of group operations for any group of companies, constitute continuing connected transactions under the Listing Rules. Owing to the complexities involved in the Group’s transaction flow starting from the manufacturing of various products to when they are received by the Group’s distributors, the process involves many intra-group transfers (mainly for accounting and administrative purposes) which constitute non-exempt continuing connected transactions (‘‘Non-Exempt Connected Transactions’’).
22 China Mengniu Dairy Company Limited . Annual Report 2004 REPORT OF THE DIRECTORS
Summary of the Group’s Non-Exempt Connected Transactions During the year, the Group has entered into the following discloseable continuing connected transactions:
Type of transaction Amount (RMB’000)
1. Centralised UHT milk and milk beverages products sales arrangement 1,960,660 by Mengniu for the Group
2. Sales of UHT milk and milk beverages products by Mengniu to the 568,103 distributors within the Group for distribution
3. Transfer of UHT milk and milk beverages products between Mengniu 4,006 and certain Mengniu Subsidiaries for inventory adjustment purposes
4. Centralised yogurt product sales arrangement by Mengniu Dairy 77,461 (Beijing) Co., Ltd. (‘‘Mengniu Beijing’’) for the Group
5. Sales of yogurt products by Mengniu Beijing to the distributors within 18,461 the Group for further distribution
6. Transfer of yogurt products between Mengniu Beijing and certain 67 Mengniu Subsidiaries for inventory adjustment purposes
7. Sales of ice cream products between Mengniu and certain Mengniu 74,320 Subsidiaries for inventory adjustment purposes
8. Ongoing inventory adjustment of raw materials and production and 303,252 packaging materials between Mengniu and Mengniu Subsidiaries
9. Purchase of packaging materials from Chaozhou Yangtian Printing Co., 14,450 Ltd. (‘‘Chaozhou Yangtian’’) by Mengniu and certain Mengniu Subsidiaries for their ice cream products (Note)
10. Provision of guarantees by Mengniu to banking organisations for loans 390,000 and credit facilities drawn by Mengniu Subsidiaries
11. Centralised dairy products (except UHT milk, milk beverages, yogurt 239 and ice cream products) sales arrangement by Mengniu for the Group
12. Sales of other dairy products by Mengniu to Mengniu Subsidiaries for 13,123 inventory adjustment purposes
23 China Mengniu Dairy Company Limited . Annual Report 2004 REPORT OF THE DIRECTORS
Note: Chaozhou Yangtian is owned by Xie Qiuxu, a substantial shareholder of the Company, and his brother. This transaction is also a related party transaction under accounting standard. Except for this transaction, connected transactions disclosed above are not related party transactions. Significant related party transactions entered into by the Group during the year are disclosed in Note 37 to the financial statements.
1. Centralised UHT milk and milk beverages products sales arrangement by Mengniu for the Group The Group has implemented a centralised sales system for its UHT milk and milk beverages products whereby all such products are centralised for sale, billing and invoicing to distributors by Mengniu. Pursuant to this system, those Mengniu Subsidiaries that manufacture UHT milk and milk beverages products sell their UHT milk and milk beverages products to Mengniu and Mengniu then deals with the distributors centrally. These sales do not involve physical delivery to Mengniu as these transactions are merely the Group’s operational mechanism to centralise administration. Each of the Mengniu Subsidiaries will execute physical delivery on Mengniu’s instructions. The companies in the Group which take part (or will take part) in this arrangement include Mengniu and Mengniu Subsidiaries that are currently (or will in the future be) producing UHT milk and milk beverages products, including Mengniu Beijing, Inner Mongolia Mengniu Dairy Baotou Co., Ltd. (‘‘Mengniu Baotou’’), Inner Mongolia Mengniu Dairy Keerqin Co., Ltd. (‘‘Mengniu Keerqin’’), Mengniu Dairy Wulanhaote Co., Ltd. (‘‘Mengniu Wulanhaote’’), Inner Mongolia Mengniu Dairy (Group) Shanxi Dairy Co., Ltd. (‘‘Mengniu Shanxi’’), Mengniu Dairy Taian Co., Ltd. (‘‘Mengniu Taian’’), Mengniu Dairy (Jiaozuo) Co., Ltd. (‘‘Mengniu Jiaozuo’’), Mengniu Dairy (Shenyang) Co., Ltd. (‘‘Mengniu Shenyang’’), Mengniu Dairy (Dengkou Bayan Gaole) Co., Ltd. (‘‘Mengniu Dengkou’’), Mengniu Dairy (Tangshan) Co., Ltd. (‘‘Mengniu Tangshan’’) and Mengniu Dairy (Luannan) Co., Ltd. (‘‘Mengniu Luannan’’), each of the above companies is a company incorporated in the PRC and an indirect non-wholly owned subsidiary of the Company. Mengniu and relevant subsidiaries have entered into a centralised sales agreement dated 13 May 2004 for an initial period of three years commencing 1 January 2004 ending 31 December 2006.
2. Sales of UHT milk and milk beverages products by Mengniu to the distributor within the Group for distribution As described above, Mengniu is responsible for dealing and liaising with the distributors of UHT milk and milk beverages products, which include Beijing Mengniu Hongda Dairy Product Co. Ltd. (‘‘Mengniu Hongda’’) (a company incorporated in the PRC and an indirect non-wholly owned subsidiary of the Company). Mengniu sells its UHT milk and milk beverages products to the distributor for further distribution. Delivery is usually handled by the relevant Mengniu Subsidiaries which manufacture the UHT milk and milk beverages products. Mengniu and Mengniu Hongda have on 13 May 2004 entered into a distribution agreement for the Beijing area for an initial period of three years commencing 1 January 2004 ending 31 December 2006.
24 China Mengniu Dairy Company Limited . Annual Report 2004 REPORT OF THE DIRECTORS
3. Transfer of UHT milk and milk beverages products between Mengniu and certain Mengniu Subsidiaries for inventory adjustment purposes As part of the centralised sales system described above, delivery of the UHT milk and milk beverages products to the distributors is made by those Mengniu Subsidiaries that manufacture the UHT milk and milk beverages products. In meeting delivery orders there are occasionally shortfalls in the inventories of particular Mengniu Subsidiaries. Where this occurs the respective Mengniu Subsidiary purchases from Mengniu inventory to make up for the shortfalls. The products will be physically delivered to the particular Mengniu Subsidiary. These intra-group sales are part of the overall centralised sales system, and are booked for accounting and administrative purposes at the intra-group rate for UHT milk and milk beverages products.
An inventory adjustment agreement for an initial period of three years commencing 1 January 2004 ending 31 December 2006 has been entered into on 13 May 2004 by Mengniu and the Mengniu Subsidiaries that are or will be UHT milk and milk beverages products manufacturers. Companies in the Group involved are Mengniu, Mengniu Beijing, Mengniu Baotou, Mengniu Keerqin, Mengniu Wulanhaote, Mengniu Shanxi, Mengniu Taian, Mengniu Jiaozuo, Mengniu Shenyang, Mengniu Dengkou, Mengniu Tangshan and Mengniu Luannan.
4. Centralised yogurt product sales arrangement by Mengniu Beijing for the Group The Group has implemented a centralised sales system for its yogurt products whereby all its yogurt products are centralised for sale and distribution to distributors by Mengniu Beijing. Pursuant to this system Mengniu and those Mengniu Subsidiaries which manufacture yogurt products sell their yogurt products to Mengniu Beijing who will, in turn, sell and invoice to distributors. These sales do not involve delivery to Mengniu Beijing as these transactions are operational transactions for the centralised sales system. The companies in its Group which take part or will take part in this arrangement are Mengniu and the Mengniu Subsidiaries which are currently or will in the future be producing yogurt products including Mengniu, Mengniu Beijing, Mengniu Taian, Mengniu Jiaozuo, Mengniu Shenyang, Mengniu Tangshan and Mengniu Luannan.
Mengniu, Mengniu Beijing, Mengniu Taian, Mengniu Jiaozuo, Mengniu Shenyang, Mengniu Luannan and Mengniu Tangshan have entered into a centralised sales agreement on 13 May 2004 for an initial period for three years commencing 1 January 2004 ending 31 December 2006.
25 China Mengniu Dairy Company Limited . Annual Report 2004 REPORT OF THE DIRECTORS
5. Sales of yogurt products by Mengniu Beijing to the distributors within the Group for further distribution As described above Mengniu Beijing is the company in its Group responsible for dealing and liaising with external sales and distributors of its yogurt products. Yogurt products are sold by Mengniu Beijing to either independent third party distributors or Mengniu Hongda, a distributor within its Group for the Beijing area. Mengniu Hongda predominantly handles sales administration and occasionally actual delivery of the yogurt products. Delivery is predominantly handled by Mengniu or the relevant Mengniu Subsidiaries which manufacture the yogurt products. Mengniu Beijing and Mengniu Hongda have entered into a distribution agreement on 13 May 2004 for an initial period of three years commencing 1 January 2004 ending 31 December 2006.
6. Transfer of yogurt products between Mengniu Beijing and certain Mengniu Subsidiaries for inventory adjustment purposes As part of the centralised sales system described above, delivery of the yogurt products to the distributors is made by those companies in its Group which manufacture the yogurt products. In meeting delivery orders it is anticipated there will be occasional shortfalls in the inventories of either Mengniu or the relevant Mengniu Subsidiaries. Where this occurs the respective company will purchase inventory from each other to make up for the shortfalls. These products will be physically delivered to the particular Mengniu Subsidiary. These intra-group sales are part of the overall centralised sales system and are booked for accounting and administrative purposes at an intra-group rate for yogurt products.
An inventory adjustment agreement has been entered into on 13 May 2004 for an initial period of three years commencing 1 January 2004 ending 31 December 2006 by Mengniu, Mengniu Beijing, Mengniu Baotou, Mengniu Keerqin, Mengniu Wulanhaote, Mengniu Shanxi, Mengniu Taian, Mengniu Jiaozuo, Mengniu Shenyang, Mengniu Dengkou, Mengniu Tangshan and Mengniu Luannan.
7. Sales of ice cream products between Mengniu and certain Mengniu Subsidiaries for inventory adjustment purposes As an inventory adjustment mechanism Mengniu Dairy (Dangyang) Co., Ltd. (‘‘Mengniu Dangyang’’), Jinhua Mengniu Dairy Co., Ltd. (‘‘Mengniu Jinhua’’), Mengniu Jiaozuo, Mengniu Taian and Mengniu (each of the above companies is a company incorporated in the PRC and an indirect non-wholly owned subsidiary of the Company) which currently manufacture ice cream products supply each other with finished ice cream products whenever shortages arise in another member. The Group intend for Mengniu Shenyang to participate in this mechanism when it commences the manufacture of ice cream in the near future. This inventory adjustment mechanism is beneficial for all parties involved as it minimises wastage, is an efficient use of its resources whilst permitting such companies to meet their respective market’s fluctuating demand for ice cream products.
26 China Mengniu Dairy Company Limited . Annual Report 2004 REPORT OF THE DIRECTORS
An inventory adjustment agreement for an initial period ending 31 December 2006 has been entered into on 13 May 2004 by Mengniu Dangyang, Mengniu Jinhua, Mengniu, Mengniu Shenyang, Mengniu Jiaozuo and Mengniu Taian which are currently, or will be, ice cream products manufacturers. Under the agreement, payment in full will be made by the transferee on a monthly basis for inventory adjustments that month.
8. Ongoing inventory adjustment of raw materials and production and packaging materials between Mengniu and Mengniu Subsidiaries As an inventory adjustment mechanism, members of its Group transfer any excess raw materials (including, inter alia, sugar, oil etc.) and packaging materials to other members whenever shortages arise. Mengniu and all Mengniu Subsidiaries take part in this arrangement. This inventory adjustment mechanism is beneficial for all parties involved as it minimises wastage, is an efficient use of its resources permitting companies to meet their respective market’s fluctuating demand.
Mengniu and all Mengniu Subsidiaries (except for Inner Mongolia Mengniu Founding Industry Management Co., Ltd. (‘‘Mengniu Founding’’), a company incorporated in the PRC and an indirect non-wholly owned subsidiary of the Company), have entered into an inventory adjustment agreement on 13 May 2004 for an initial period of three years commencing 1 January 2004 ending 31 December 2006.
9. Purchase of packaging materials from Chaozhou Yangtian by Mengniu and certain Mengniu Subsidiaries for their ice cream products Chaozhou Yangtian sells packaging materials to Mengniu and certain Mengniu Subsidiaries which currently manufacture ice cream products. A packaging materials supply agreement has been entered into by Chaozhou Yangtian, Mengniu, Mengniu Danyang, Mengniu Jinhua, Mengniu Shenyang, Mengniu Jiaozuo, Mengniu Taian, Mengniu Luannan and Mengniu Tangshan on 13 May 2004 for an initial period of three years commencing 1 January 2004 ending 31 December 2006.
10. Provision of guarantees by Mengniu to banking organisations for loans and credit facilities drawn by certain Mengniu Subsidiaries (provision of financial assistance to a connected person of the Company) For the benefit of the Group as a whole, Mengniu, as the main operating subsidiary, provides guarantees to Mengniu Subsidiaries at nil consideration. These loans were required for the expansion of the Group over the past two years, and out of necessity, Mengniu was required by the relevant banks to act as guarantor for its subsidiaries. From Mengniu Subsidiaries’ perspective, this continuing connected transaction represents financial assistance provided by Mengniu to the benefit of the Mengniu Subsidiaries, which are connected persons of the Company.
27 China Mengniu Dairy Company Limited . Annual Report 2004 REPORT OF THE DIRECTORS
11. Centralised dairy products (except UHT milk, milk beverages, yogurt and ice cream products) sales arrangement by Mengniu for the Group The Group has implemented a centralised sales system for its dairy products (except UHT milk, milk beverages, yogurt and ice cream products) whereby all such products produced by the Group are centralised for billing and invoicing to distributors by Mengniu. Pursuant to this system, those Mengniu Subsidiaries that manufacture dairy products (except UHT milk, milk beverages, yogurt and ice cream products) sell their dairy products (except UHT milk, milk beverages, yogurt and ice cream products) to Mengniu and Mengniu then deals with the distributors. Delivery is not made as these transactions are the Group’s operational mechanism to centralise administration. Instead, each of the Mengniu Subsidiaries will execute delivery on Mengniu’s instructions. The companies which take part (or will take part) in this arrangement include Mengniu and Mengniu Subsidiaries that are currently (or will in the future be) producing dairy products (except UHT milk, milk beverages, yogurt and ice cream products) including Mengniu Taian and Mengniu Jiaozuo.
This arrangement is covered by a centralised sales agreement dated 13 May 2004 and is for an initial period of three years commencing 1 January 2004 ending 31 December 2006. Under the agreement, Mengniu will pay the relevant Mengniu Subsidiary on a monthly basis in accordance with centralised sales that month.
12. Sales of other dairy products by Mengniu to Mengniu Subsidiaries for inventory adjustment purposes As disclosed above as part of the centralised sales system of the Other Dairy Products (including dairy products such as milk powder, milk tea powder and milk tablets), delivery of the Other Dairy Products to the distributors is made by those Mengniu Subsidiaries that manufacture the Other Dairy Products for logistical efficiency. In meeting delivery orders there are occasionally shortfalls in the inventories of particular Mengniu Subsidiaries. Where this occurs the respective Mengniu Subsidiary will purchase inventory from Mengniu to make up for the shortfalls. The products will be physically delivered to the particular Mengniu Subsidiary. These intra-group sales are part of the overall centralised sales system, and are booked for accounting and administrative purposes at an intra-group rate for Other Dairy Products.
This inventory adjustment arrangement is covered by the Inventory Adjustment Agreement entered into by Mengniu and Mengniu Subsidiaries that are manufacturers of Other Dairy Products on 25 November 2004. It is for an initial period commencing on the date of this agreement ending 31 December 2006. The companies in the Group involved are Mengniu, Mengniu Baotou, Mengniu Beijing, Mengniu Dangyang, Mengniu Dengkou, Mengniu Jiaozuo, Mengniu Wulanhaote, Mengniu Jinhua, Mengniu Keerqin, Mengniu Luannan, Mengniu Shanxi, Mengniu Taian, Mengniu Shenyang and Mengniu Tangshan.
28 China Mengniu Dairy Company Limited . Annual Report 2004 REPORT OF THE DIRECTORS
In addition to the above Non-Exempt Connected Transactions, certain equipment was transferred between Mengniu and certain Mengniu Subsidiaries at net book value amounting to approximately RMB65,865,000 as at 31 October 2004 pursuant to the Intra-group Equipment Transfer Agreements entered into on 25 November 2004. As these were intra-group transfers of equipment currently owned by Mengniu or the relevant Mengniu Subsidiaries and there was no market for these used office, dairy production and manufacturing equipment, the net book value of the equipment was used as the basis of determining the consideration. This transfer was a one-off connected transaction.
The Directors (including the independent non-executive Directors) are of the opinion that the connected transactions had been entered into and were carried out in the ordinary and usual course of business of the members of the Group and on normal commercial terms which are fair and reasonable so far as the interests of the shareholders of the Company are concerned.
Saved as disclosed above, there were no other transactions which needed to be disclosed as connected transactions in accordance with the requirements of the Listing Rules.
SHARE OPTION SCHEME
As at 31 December 2004, the Company had not adopted a share option scheme and no option had been granted or agreed to be granted. Subsequent to the year ended 31 December 2004, the Directors proposed to adopt a share option scheme to provide incentives to the employees of the Company. Terms of the proposal are set out in the circular to be circulated.
PRE-EMPTIVE RIGHTS
There is no provision for pre-emptive rights under the Company’s Articles of Association and there is no restriction against such rights under the laws of the Cayman Islands.
PURCHASE, SALE OR REDEMPTION OF THE COMPANY’S LISTED SHARES
During the year, neither the Company nor any of its subsidiaries purchased, sold or redeemed any of the Company’s listed securities.
PUBLIC FLOAT
As at the date of this report, the Company has maintained the prescribed public float under the Listing Rules, based on the information that is publicly available to the Company and to the knowledge of the Directors.
MANAGEMENT CONTRACTS
No contracts concerning the management and administration of the whole or any substantial part of the business of the Company were entered into or existed during the year.
29 China Mengniu Dairy Company Limited . Annual Report 2004 REPORT OF THE DIRECTORS
MAJOR CUSTOMERS AND SUPPLIERS
During the year, the largest customer accounted for approximately 6% of the Group’s revenue, and the five largest customers accounted in aggregate for approximately 18% of the Group’s revenue.
The purchases for the year attributable to the Group’s largest supplier and five largest suppliers were approximately 9% and 19% of the Group’s total purchases respectively.
None of the Directors, their respective associates or the existing shareholders who, to the knowledge of the Directors, own more than 5% of the Company’s share capital, has any interest in any of the five largest customers and suppliers.
USE OF PROCEEDS
During 2004, the Group was dedicated to the development and expansion of the production capacity in order to capture the anticipated growth in the consumption of dairy products in China. The Group has injected all of the net proceeds into its operating subsidiary, Mengniu, which then applied the proceeds as follows:
. approximately RMB480,000,000, RMB140,000,000 and RMB80,000,000 were used to expand the production facilities of liquid milk, ice cream and other dairy product respectively, majority of which were spent on the purchase of equipment;
. approximately RMB40,000,000 was spent on the public facilities of new production bases;
. approximately RMB60,000,000 was used for general working capital; and
. the remaining amount of approximately RMB180,000,000 has been deposited into interest bearing accounts and retained for future expansion plans.
CONTINGENT LIABILITIES AND COMMITMENTS
Details of contingent liabilities and commitments are set out in Notes 33 to 35 to the financial statements.
SUBSEQUENT EVENTS
Details of subsequent events are set out in Note 39 to the financial statements.
FINANCIAL SUMMARY
A summary of the results and of the assets and liabilities of the Group for the last three periods is set out on page 87.
30 China Mengniu Dairy Company Limited . Annual Report 2004 REPORT OF THE DIRECTORS
INVESTOR RELATIONS AND COMMUNICATIONS
The Company adopts a proactive policy in promoting investor relations and communications. Regular meetings are held with institutional investors and financial analysts to ensure two-way communications on the Company’s performance and development.
COMPLIANCE WITH THE CODE OF BEST PRACTICE
None of the Directors of the Company is aware of any information that would reasonably indicate that the Company was not at any time during the year in compliance with the Code of Best Practice as set out by the Stock Exchange in Appendix 14 to the Listing Rules.
COMPLIANCE WITH MODEL CODE
The Company has adopted the Model Code set out in Appendix 10 of the Listing Rules as the Company’s code of conduct and rules governing dealings by all Directors in the securities of the Company. Having made specific enquiry of all Directors of the Company, during the year, the Directors of the Company had strictly complied with the Model Code.
AUDITORS
The financial statements have been audited by Ernst & Young. A resolution for their reappointment as auditors of the Company will be proposed at the forthcoming annual general meeting.
By order of the Board of Directors NIU Gensheng Chief Executive Officer
PRC, 6 April 2005
31 China Mengniu Dairy Company Limited . Annual Report 2004 REPORT OF THE AUDITORS
To the members China Mengniu Dairy Company Limited (the ‘‘Company’’) (Incorporated in the Cayman Islands with limited liability)
We have audited the annual financial statements on pages 33 to 86 which have been prepared in accordance with International Financial Reporting Standards.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS
The Company’s directors are responsible for the preparation of financial statements which give a true and fair view. In preparing financial statements which give a true and fair view, it is fundamental that appropriate accounting policies are selected and applied consistently. It is our responsibility to form an independent opinion, based on our audit, on those financial statements and to report our opinion solely to you, as a body, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report.
BASIS OF OPINION
We conducted our audit in accordance with Statements of Auditing Standards issued by the Hong Kong Institute of Certified Public Accountants. An audit includes an examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Company’s and the Group’s circumstances, consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance as to whether the financial statements are free from material misstatement. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. We believe that our audit provides a reasonable basis for our opinion.
OPINION
In our opinion, the financial statements give a true and fair view of the state of affairs of the Company and of the Group as at 31 December 2004 and of the profit and cash flows of the Group for the year then ended and have been properly prepared in accordance with the disclosure requirements of the Hong Kong Companies Ordinance.
Ernst & Young Certified Public Accountants Hong Kong 6 April 2005
32 China Mengniu Dairy Company Limited . Annual Report 2004 CONSOLIDATED INCOME STATEMENT For the year ended 31 December 2004
2004 2003 Notes RMB’000 RMB’000
Revenue 5 7,213,827 4,071,468 Cost of sales (5,607,363) (3,047,949)
GROSS PROFIT 1,606,464 1,023,519
Other income 5 13,138 9,068 Selling and distribution costs (1,039,282) (630,046) Administrative expenses (136,662) (86,099) Other operating expenses (4,040) (10,492)
PROFIT FROM OPERATING ACTIVITIES 6 439,618 305,950 Finance costs, net 8 (29,086) (12,900) Shareofprofitofassociates 32 738
PROFIT BEFORE TAX 410,564 293,788 Tax 9 (18,465) (61,458)
PROFIT AFTER TAX 392,099 232,330 Minority interests (72,706) (67,958)
NET PROFIT ATTRIBUTABLE TO SHAREHOLDERS 319,393 164,372
DIVIDEND Final 10 80,053 61,860
EARNINGS PER SHARE Basic 11 RMB0.357 RMB0.192 Diluted 11 RMB0.285 —
33 China Mengniu Dairy Company Limited . Annual Report 2004 CONSOLIDATED BALANCE SHEET As at 31 December 2004
2004 2003 Notes RMB’000 RMB’000
NON-CURRENT ASSETS Property, plant and equipment, net 12 2,227,528 1,191,478 Construction in progress 13 292,013 146,016 Land use rights 14 34,062 34,293 Investments in associates 16 20,578 1,917 Long term investments 17 3,409 3,409 Negative goodwill 18 — (28,182) Goodwill 18 115,549 —
2,693,139 1,348,931
CURRENT ASSETS Inventories 19 714,799 408,790 Trade receivables 20 185,299 94,443 Prepayments, deposits and other receivables 21 129,186 105,548 Pledged deposits 22 20,763 2,425 Cash and cash equivalents 22 1,018,928 374,173
2,068,975 985,379
CURRENT LIABILITIES Trade payables 23 694,597 427,533 Accruals and other payables 24 758,160 400,536 Interest-bearing bank loans, unsecured 25 470,542 161,534 Other loans, unsecured 26 22,600 27,600 Income tax payable 1,436 7,591
1,947,335 1,024,794
NET CURRENT ASSETS/(LIABILITIES) 121,640 (39,415)
TOTAL ASSETS LESS CURRENT LIABILITIES 2,814,779 1,309,516
34 China Mengniu Dairy Company Limited . Annual Report 2004 CONSOLIDATED BALANCE SHEET As at 31 December 2004
2004 2003 Notes RMB’000 RMB’000
NON-CURRENT LIABILITIES Interest-bearing bank loans, unsecured 25 239,500 226,000 Other loans, unsecured 26 18,000 18,000 Long term payables 27 189,925 148,089 Deferred income 29 64,226 57,706
511,651 449,795
MINORITY INTERESTS 348,654 170,511
1,954,474 689,210
REPRESENTED BY: Share capital 30 118,138 — Reserves 31 1,551,647 335,729 Non-voting convertible redeemable preferred shares 32 — 291,621 Convertible Instrument 32 204,636 — Proposed final dividend 80,053 61,860
1,954,474 689,210
NIU Gensheng JIAO Shuge Director Director
35 China Mengniu Dairy Company Limited . Annual Report 2004 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the year ended 31 December 2004
Non-voting convertible Owner’s Issued redeemable Currency capital and share Share Contributed preferred Convertible Statutory Proposed translation retained capital premium surplus shares instrument reserves final dividend difference earnings Total Notes 31(B) (a) 31(A) (b) RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
At 1 January 2003 — — — — — 12,073 — — 221,144 233,217 Netprofitforthe year — — — — — — — — 164,372 164,372 Issuance of non- voting convertible redeemable preferred shares 32 — — — 291,621 — — — — — 291,621 Transfer to statutory reserves — — — — — 47,932 — — (47,932) — Proposed final 2003 dividend — — — — — — 61,860 — (61,860) —
At 31 December 2003 — — — 291,621 — 60,005 61,860 — 275,724 689,210
Derecognition of negative goodwill on early adoption of IFRS3 18 — — — — — — — — 28,182 28,182
At 1 January 2004 (As restated) — — — 291,621 — 60,005 61,860 — 303,906 717,392 Net profit for the year — — — — — — — — 319,393 319,393 Issuance of convertible instrument and shares for Reorganisation 30(c)/32 15 — 214,677 (291,621) 291,621 — — — (214,692) — Issuance of shares upon public listing 30(e) 26,595 1,017,259 — — — — — — — 1,043,854 Share premium transfer to share capital 30(d) 79,770 (79,770) — — — — — — — — Share issue expenses — (62,336) — — — — — — — (62,336) Shares issued upon conversion of convertible instruments 30(f) 11,758 75,227 — — (86,985) — — — — — Transfer to statutory reserves — — — — — 89,957 — — (89,957) — Currency translation difference and net losses not recognized in the income statement — — — — — — — (1,969) — (1,969) Dividends paid — — — — — — (61,860) — — (61,860) Proposed final 2004 dividend — — — — — — 80,053 — (80,053) —
At 31 December 2004 118,138 950,380 214,677 — 204,636 149,962 80,053 (1,969) 238,597 1,954,474
36 China Mengniu Dairy Company Limited . Annual Report 2004 CONSOLIDATED STATEMENT OF CASH FLOWS For the year ended 31 December 2004
2004 2003 RMB’000 RMB’000
Cash flows from operating activities
Profit before tax 410,564 293,788 Adjustments for: Finance costs, net 29,086 12,900 Depreciation of property, plant and equipment 169,476 70,211 Amortisation of land use right 906 406 Losses/(gains) on disposal of property, plant and equipment 60 (44) Government grants received (7,865) (4,561) Provision for doubtful debts 4,113 1,081 Shareofprofitofassociates (32) (738) Provision for obsolete inventories 6,212 522 Amortisation of deferred income (3,860) — Foreign exchange losses (1,969) — Goodwill amortisation — (1,993)
Operating profit before working capital changes 606,691 371,572
Increase in inventories (312,221) (227,105) Increase in trade receivables (94,969) (54,502) Increase in prepayments, deposits and other receivables (23,638) (38,508) Increase in trade payables 267,064 249,171 Increase in accruals and other payables 211,769 141,086 Increase in pledged deposit (18,338) (2,425)
Net cash generated from operations 636,358 439,289 Interest paid (39,432) (15,145) Income taxes paid (24,609) (72,290)
Net cash generated from operating activities 572,317 351,854
37 China Mengniu Dairy Company Limited . Annual Report 2004 CONSOLIDATED STATEMENT OF CASH FLOWS For the year ended 31 December 2004
2004 2003 RMB’000 RMB’000
Cash flows from investing activities
Proceeds from disposal of property, plant and equipment 254 103 Purchases of property, plant and equipment (1,017,769) (133,363) Increase in construction in progress (145,997) (539,260) Additions to land use rights (675) (68,826) Additions to long term investments — (1,850) Capital injection to associates (18,905) (1,512) Receipt of government grants 17,865 4,561 Interest received 10,346 2,245 Dividend received from an associate 265 —
Net cash outflow from investing activities (1,154,616) (737,902)
Cash flows from financing activities
Proceeds from issuance of new shares 1,043,854 — Proceeds from issuance of preferred shares — 291,093 Contribution from minority shareholders 1,826 3,416 Proceeds from interest-bearing bank loans 1,347,810 593,113 Repayment of interest-bearing bank loans (1,025,302) (271,579) Dividends paid (61,860) (10,937) Dividends paid to minority interest shareholders (11,938) — Repaymentofotherloan (5,000) — Share issue expenses (62,336) —
Net cash generated from financing activities 1,227,054 605,106
Net increase in cash and cash equivalents 644,755 219,058
Cash and cash equivalents at beginning of year 374,173 155,115
Cash and cash equivalents at end of year 1,018,928 374,173
Analysis of balance of cash and cash equivalents Cash and bank balances 1,018,928 374,173
1,018,928 374,173
38 China Mengniu Dairy Company Limited . Annual Report 2004 BALANCE SHEET As at 31 December 2004
2004 Notes RMB’000
NON-CURRENT ASSETS Property, plant and equipment, net 12 105 Investments in subsidiaries 15 1,661,629
1,661,734 CURRENT ASSETS Deposit and other receivables 82 Cash and cash equivalents 22 10,998
11,080 CURRENT LIABILITIES Other payables 823
NET CURRENT ASSETS 10,257
NET ASSETS 1,671,991
CAPITAL AND RESERVES Share capital 30 118,138 Reserves 31 1,269,164 Convertible instrument 32 204,636 Final dividend 80,053
1,671,991
NIU Gensheng JIAO Shuge Director Director
39 China Mengniu Dairy Company Limited . Annual Report 2004 NOTES TO FINANCIAL STATEMENTS
1. CORPORATE INFORMATION/GROUP REORGANISATION AND BASIS OF PRESENTATION OF THE FINANCIAL STATEMENTS
The Company was incorporated in the Cayman Islands on 16 February 2004 as an exempted company with limited liability. The shares of the Company have been listed on The Stock Exchange of Hong Kong Limited (the ‘‘Stock Exchange’’) with effect from 10 June 2004.
Pursuant to a group reorganisation scheme (the ‘‘Reorganisation’’) to rationalise the structure of the Group in preparation for the public listing of the Company’s shares on the Stock Exchange, the Company acquired the entire issued share capital of China Dairy Holdings, the then holding company of the subsidiaries set out in note 15 to the financial statements on 14 May 2004, and thereby became the holding company of the Group. Further details of the Group Reorganisation are set out in the Company’s prospectus dated 1June2004.
The Group Reorganisation involved companies under common control and, for accounting purposes, the Group is regarded and accounted for as a continuing group. Accordingly, the consolidated financial statements have been prepared using the pooling of interests method of accounting as if the Company has always been the holding company of the Group. On this basis, the Company has been treated as the holding company of the companies comprising the Group for the financial years presented rather than from the date of acquisition of China Dairy Holdings.
In the opinion of the directors, the financial statements, prepared on the above basis, present fairly the results, cash flows and the state of affairs of the Group as a whole.
2. IMPACT OF RECENTLY ISSUED INTERNATIONAL FINANCIAL REPORTING STANDARDS (‘‘IFRSs’’)
The International Accounting Standards Board has issued a number of new and revised IFRSs, herein collectively referred to as the new IFRSs, which are generally effective for accounting periods beginning on or after 1 January 2005. The Group has not early adopted these new IFRSs in the financial statements for the year ended 31 December 2004, except for the following standards:
. IFRS 3 Business Combinations; . IAS 36 (amended 2004), Impairment of Assets; and . IAS 38 (amended 2004), Intangible Assets.
40 China Mengniu Dairy Company Limited . Annual Report 2004 NOTES TO FINANCIAL STATEMENTS
2. IMPACT OF RECENTLY ISSUED INTERNATIONAL FINANCIAL REPORTING STANDARDS (‘‘IFRSs’’) (CONTINUED)
The early adoption of IFRS 3 has resulted in the Group ceasing to amortise goodwill acquired during the year, and starting to test for impairment of goodwill annually at the cash-generating unit level (unless an event occurs during the year which requires the goodwill to be tested more frequently). The transitional provisions of IFRS 3 has required the Group to derecognise the carrying amount of negative goodwill at 1 January 2004 of RMB28,182,000 with a corresponding adjustment to the opening balance of retained earnings. The adoption of IAS 36 and IAS 38 (amended 2004) has had no significant impact on the financial statements.
The Group has already commenced an assessment of the impact of the other new IFRSs, which are generally effective for accounting periods beginning on or after 1 January 2005, but is not yet in a position to state whether these new IFRSs would have a significant impact on its result of operations and financial position.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of preparation These financial statements, which are presented in Renminbi, have been prepared in accordance with the IFRSs, which comprise standards and interpretations approved by the International Accounting Standards Board. They are prepared on the historical cost basis except that long term investments are stated at their fair values.
Basis of consolidation The consolidated financial statements include the financial statements of the Company and its subsidiaries for the year ended 31 December 2004. The results of subsidiaries acquired or disposed of during the year are consolidated from or to their effective dates of acquisition or disposal, respectively. All significant intercompany transactions and balances within the Group are eliminated on consolidation.
Minority interests represent the interests of outside shareholders in the results and net assets of the Company’s subsidiaries.
Subsidiaries A subsidiary is a company, whose financial and operating policies the Company controls directly or indirectly, so as to obtain benefits from its activities. The results of subsidiaries are included in the Company’s consolidated income statement to the extent of dividends received and receivable. The Company’s investment in subsidiaries are stated at cost less any impairment losses.
41 China Mengniu Dairy Company Limited . Annual Report 2004 NOTES TO FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Associates The Group’s investments in its associates are accounted for under the equity method of accounting. An associate is an entity in which the Group has significant influence and which is neither a subsidiary nor a jointly-controlled entity of the Group. The investments in associates are carried in the balance sheet at cost plus post-acquisition changes in the Group’s share of net assets of the operation of the associates, less any impairment in value. The consolidated income statement reflects the Group’s share of the results of the operation of the associates.
Long term investments Long term investment are non-trading investments in unlisted equity securities intended to be held on a long term basis.
Unlisted securities are stated at their estimated fair values, on an individual basis. The estimated fair values of unlisted investments are determined by the directors having regard to, inter alia, the prices of the most recent reported sales or purchases of the securities, or comparison of price/earnings ratios and dividend yields of the securities with those of similar listed securities, with allowance made for the lower liquidity of the unlisted securities.
The gains or losses arising from changes in the fair value of a security are dealt with as movements in the long term investment revaluation reserve, until the security is sold, collected, or otherwise disposed of, or until the security is determined to be impaired, when the cumulative gain or loss derived from the security recognised in the long term investment revaluation reserve, together with the amount of any further impairment, is charged to the consolidated income statement in the period in which the impairment arises.
Property, plant and equipment Items of property, plant and equipment are stated at cost less accumulated depreciation (see below) and impairment losses. The cost of self-constructed assets includes the cost of materials, direct labour and an appropriate proportion of production overheads.
Where an item of property, plant and equipment comprises major components having different useful lives, they are accounted for as separate items of property, plant and equipment.
42 China Mengniu Dairy Company Limited . Annual Report 2004 NOTES TO FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property, plant and equipment (Continued) Expenditure incurred to replace a component of an item of property, plant and equipment that is accounted for separately, including major inspection and overhaul expenditure, is capitalised. Other subsequent expenditure is capitalised only when it increases the future economic benefits embodied in the item of property, plant and equipment. All other expenditure is recognised in the consolidated income statement as an expense when incurred.
Depreciation is charged to the consolidated income statement on the straight-line basis over the estimated useful lives of items of property, plant and equipment and major components that are accounted for separately.
The estimated useful lives of property, plant and equipment are as follows:
Buildings and structures 20 years Plant and machinery 5 to 10 years Office equipment 5years Motor vehicles 5years
An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in the consolidated income statement in the year the item is derecognised.
Construction in progress Construction in progress represents plant and property under construction, which is stated at cost less any impairment losses, and is not depreciated. Cost comprises the direct costs of construction and capitalised borrowing costs on related borrowed funds during the period of construction. Construction in progress is reclassified to the appropriate category of property, plant and equipment when completed and ready for use.
Land use rights Land use rights held by the Group are stated at cost less accumulated amortisation and any impairment losses. The land use rights are amortised on the straight-line basis over the unexpired period of approximately 50 years.
At the balance sheet date, the Group assesses whether there is any indication of impairment. If any such indication exists, the recoverable amount is estimated and the assets are written down to the recoverable amount.
43 China Mengniu Dairy Company Limited . Annual Report 2004 NOTES TO FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Goodwill and negative goodwill Goodwill on acquisition is initially measured at cost being the excess of the cost of the business combination over the acquirer’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. As further explained under note 2 ‘‘Impact of Recently Issued International Financial Reporting Standards’’ on adoption of IFRS 3, goodwill is no longer required to be amortised and is reviewed for impairment, annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired.
As at the acquisition date, any goodwill acquired is allocated to each of the cash- generating units expected to benefit from the combination’s synergies. Impairment is determined by assessing the recoverable amount of the cash-generating unit, to which the goodwill relates. Where the recoverable amount of the cash-generating unit is less than the carrying amount, an impairment loss is recognised. Where goodwill forms part of a cash- generating unit and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured on the basis of the relative values of the operation disposed of and the portion of the cash-generating unit retained.
Borrowing costs Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, i.e., assets that necessarily take a substantial period of time to prepare for their intended use, are capitalised as a part of the cost of those assets. The capitalisation of such borrowing costs ceases when the assets are substantially ready for their intended use. The capitalisation rate for the year is based on the actual cost of the related borrowings.
All other borrowing costs are recognised as expenses in the period in which they are incurred.
44 China Mengniu Dairy Company Limited . Annual Report 2004 NOTES TO FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Inventories Inventories are valued at the lower of cost and net realisable value.
Costs incurred in bringing each product to its present location and condition are accounted for as follows:
(a) Raw materials: purchase cost on a weighted average basis.
(b) Finished goods: cost of direct materials and labour and a proportion of manufacturing overheads based on normal operating capacity but excluding borrowing costs on a weighted average basis.
Net realisable value is the estimated selling price in the ordinary course of business, less any estimated costs of completion and the estimated costs necessary to make the sale.
Revenue recognition Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be measured reliably. The following specific recognition criteria must also be met before revenue is recognised:
(a) Sale of goods Revenue is recognised when the significant risks and rewards of ownership of the goods have been transferred to the buyer and the amount of revenue can be measured reliably.
(b) Interest income Revenue is recognised as interest accrues (taking into account the effective yield on the relevant asset).
Government grants Government grants are recognised at their fair value where there is reasonable assurance that the grant will be received and all attaching conditions will be complied with. When the grant relates to an expense item, it is recognised as income over the periods necessary to match the grant on a systematic basis to the costs that it is intended to compensate. Where the grant relates to an asset, the fair value is credited to a deferred income account and is released to the consolidated income statement over the expected useful life of the relevant asset by equal annual instalments.
45 China Mengniu Dairy Company Limited . Annual Report 2004 NOTES TO FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Related parties Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or common significant influence. Related parties may be individuals or corporate entities.
Operating leases Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases. Rentals payable under operating leases are charged as expense to the consolidated income statement on the straight line basis over the lease terms.
Research and development costs All research costs are charged to the consolidated income statement as incurred. Development costs incurred on an individual project are carried forward when its future recoverability can reasonably be regarded as assured. Any expenditure carried forward is amortised over the period of expected future sale from the related project.
The carrying value of development costs is reviewed for impairment annually when the asset is not yet in use, and otherwise when events or changes in circumstances indicate that the carrying value may not be recoverable.
Foreign currency transactions Transactions in foreign currencies are recorded at the exchange rates ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated into RMB at the exchange rates ruling at the balance sheet date. All foreign exchange gains or losses are accounted for in the consolidated income statement. The assets and liabilities of overseas subsidiaries are translated at the exchange rates ruling at the balance sheet date. The income statements of overseas subsidiaries are translated at weighted average exchange rates for the year. The exchange differences arising on the retranslation are taken directly to equity. On disposal of a foreign entity, accumulated exchange differences are recognised in the consolidated income statement as a component of the gain or loss on disposal.
46 China Mengniu Dairy Company Limited . Annual Report 2004 NOTES TO FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income tax Deferred income tax is provided, using the liability method, on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred income tax liabilities are recognised for all taxable temporary differences:
. except where the deferred income tax liability arises from goodwill amortisation or the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
. in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, except where the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future.
Deferred income tax assets are recognised for all deductible temporary differences, carry- forward of unused tax assets and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, carry- forward of unused tax assets and unused tax losses can be utilised:
. except where the deferred income tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
. in respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, deferred tax assets are only recognised to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary difference can be utilised.
The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised.
Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date.
47 China Mengniu Dairy Company Limited . Annual Report 2004 NOTES TO FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Cash and cash equivalents Cash and cash equivalents comprise cash at banks and in hand and term deposits with an original maturity of three months or less. For purpose of the consolidated cash flow statements, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts, if any.
Trade receivables, other receivables and amounts due from related parties Trade receivables are recognised and carried at the original invoice amount less an allowance for any uncollectible amounts. An estimate for doubtful debts is made when collection of the full amount is no longer probable. Bad debts are written off when identified.
Other receivables and amounts due from related parties are recognised and carried at cost less a provision for any doubtful amount.
Trade and other payables Trade payables and other payables are carried at cost which is the fair value of the consideration to be paid in the future for goods and services received, whether or not billed to the Group.
Interest-bearing loans and borrowings All loans and borrowings are initially recognised at cost, being the fair value of the consideration received, net of issue costs associated with the borrowing. After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the effective interest rate method. Amortised cost is calculated by taking into account any issue costs, and any discount or premium on settlement. Gains and losses are recognised in net profit or loss when the liabilities are derecognised or impaired, as well as through the amortisation process.
Provisions A provision is recognised when the Group has a present legal or constructive obligation as a result of a past event and it is probable that a future outflow of resources embodying economic benefits will be required to settle the obligation provided that a reliable estimate can be made of the amount of the obligation.
48 China Mengniu Dairy Company Limited . Annual Report 2004 NOTES TO FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Provisions (Continued) Where the Group expects a provision to be reimbursed, the reimbursement is recognised as a separate asset, but only when the reimbursement is virtually certain. If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognised as an interest expense.
Retirement benefits The companies incorporated in the PRC now comprising the Group participate in defined contribution retirement plans managed by the local municipal government in the locations in which they operate. The relevant authorities of the local municipal government in the PRC undertake the retirement obligations of the Group’s employees. The Group has no obligation for payment of retirement benefits beyond the annual contributions. The contribution payable is charged as an expense to the consolidated income statement as and when incurred.
Recoverable amount of non-current assets At each reporting date, the Group assesses whether there is any indication that an asset may be impaired. Where an indicator of impairment exists, the Group makes a formal estimate of the recoverable amount. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. The recoverable amount is the higher of an asset’s or cash- generating unit’s fair value less costs to sell and its value in use, and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets.
In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash- generating unit to which the asset belongs. Impairment losses are recognised in the consolidated income statement.
49 China Mengniu Dairy Company Limited . Annual Report 2004 NOTES TO FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Contingent liabilities and contingent assets A contingent liability is a possible obligation that arises from past events for which existence will only be confirmed by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Group. It can also be a present obligation arising from past events that is not recognised because it is not probable that an outflow of economic resources will be required, or that the amount of the obligation cannot be measured reliably.
A contingent liability is not recognised but is disclosed in the notes to the financial statements. When a change in the probability of an outflow occurs so that an outflow is probable, they will then be recognised as a provision.
A contingent asset is a possible asset that arises from past events for which existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain events not wholly within the control of the Group.
Contingent assets are not recognised but are disclosed in the notes to the financial statements when an inflow of economic benefits is probable. When an inflow is virtually certain, an asset is recognised.
Post balance sheet events Post balance sheet events that provide additional information about a company’s position at the balance sheet date or those that indicate the going concern assumption is not appropriate (adjusting events) are reflected in the financial statements. Post balance sheet events that are not adjusting events are disclosed in the notes to the financial statements when material.
Segment reporting A segment is a distinguishable component of the Group that is engaged either in providing products or services (business segment), or in providing products or services within a particular economic environment (geographical segment), which is subject to risks and rewards that are different from those of other segments.
Financial instruments Financial assets and financial liabilities carried in the balance sheet include cash and cash equivalents, trade receivables and payables, other receivables and payables, loans and balances with related parties. The accounting policies on recognition and measurement of these items are disclosed in the respective accounting policies found in this section.
50 China Mengniu Dairy Company Limited . Annual Report 2004 NOTES TO FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Financial instruments (Continued) Financial instruments are classified as liabilities or equity in accordance with the substance of the contractual arrangement. Interest, dividends, gains and losses relating to a financial instrument classified as a liability are reported as expenses or income. Distributions to holders of financial instruments classified as equity are charged directly to equity. Financial instruments are offset when the Group has a legally enforceable right to offset and intends to settle either on a net basis or to realise the asset and settle the liability simultaneously.
Dividend Final dividends proposed by the directors are classified as a separate allocation of retained profits within the capital and reserves section in the balance sheet, until they have been approved by the shareholders in a general meeting. When these dividends are approved by the shareholders and declared, they are recognised as a liability.
Interim dividends are simultaneously proposed and declared, because the Company’s memorandum and articles grant the directors the authority to declare interim dividends. Consequently, interim dividends are recognised directly as a liability when they are proposed and declared.
4. SEGMENTAL INFORMATION
The Group’s operating businesses are organised and managed separately according to the nature of the products, with each segment representing a strategic business segment that offers different products in the PRC market. The liquid milk products segment carries out the business of the manufacture and distribution of UHT milk, milk beverages and yogurt. The ice cream products segment carries out the business of the manufacture and distribution of ice cream products. The other dairy products segment carries out the business of the manufacture and distribution of milk powder and milk tablets products.
51 China Mengniu Dairy Company Limited . Annual Report 2004 NOTES TO FINANCIAL STATEMENTS
4. SEGMENTAL INFORMATION (CONTINUED)
During the year, the Group’s revenue, expenses, results, assets and liabilities and capital expenditure were principally generated in the PRC. Accordingly, an analysis of the Group’s revenue, expenses, assets and liabilities and capital expenditure by geographical segment is not presented in this report.
2004 2003 RMB’000 RMB’000
Segmental revenue: Liquid milk 6,097,187 3,498,162 Ice cream 805,208 475,233 Other dairy products 311,432 98,073
Consolidated revenue 7,213,827 4,071,468 Segmental net profit Liquid milk 414,265 327,911 Ice cream 53,821 29,683 Other dairy products 24,142 2,002
Consolidated net profit 492,228 359,596 Unallocated corporate expenses (52,610) (53,646)
Profit from operating activities 439,618 305,950
Finance costs, net (29,086) (12,900) Shareofprofitofassociates 32 738
Profit before taxation 410,564 293,788 Tax (18,465) (61,458)
Profit after taxation 392,099 232,330 Minority interests (72,706) (67,958)
Net profit attributable to shareholders 319,393 164,372
52 China Mengniu Dairy Company Limited . Annual Report 2004 NOTES TO FINANCIAL STATEMENTS
4. SEGMENTAL INFORMATION (CONTINUED)
2004 2003 RMB’000 RMB’000
Segmental assets: Liquid milk 3,492,377 1,790,802 Ice cream 585,881 320,500 Other dairy products 285,661 81,466 Unallocated corporate assets 808,970 314,699 Elimination (410,775) (173,157)
Consolidated total assets 4,762,114 2,334,310 Segmental liabilities: Liquid milk 2,229,560 813,508 Ice cream 170,511 169,809 Other dairy products 161,876 80,457 Unallocated corporate liabilities 307,814 583,972 Elimination (410,775) (173,157)
Consolidated total liabilities 2,458,986 1,474,589 Capital expenditure: Liquid milk 764,715 601,651 Ice cream 252,653 125,992 Other dairy products 81,732 10,029 Others 65,341 3,777
1,164,441 741,449
Depreciation: Liquid milk 125,092 49,671 Ice cream 35,692 17,555 Other dairy products 1,628 177 Others 7,064 2,808
169,476 70,211
Other non-cash expenses: Liquid milk 3,040 1,366 Ice cream 910 (194) Other dairy products 6,058 117 Others 377 270
10,385 1,559
53 China Mengniu Dairy Company Limited . Annual Report 2004 NOTES TO FINANCIAL STATEMENTS
5. REVENUE AND OTHER INCOME
Revenue, being the turnover of the Group, represents the net invoiced value of goods sold, after allowances for goods returns and trade discounts, and after eliminations of all significant intra-group transactions.
An analysis of the Group’s revenue and other income is as follows:
2004 2003 RMB’000 RMB’000
Revenue 7,213,827 4,071,468 Other income: Government grants 7,865 4,561 Trademark fees 1,000 1,272 Amortisation of deferred income 3,860 — Goodwill amortisation — 1,993 Others 413 1,242
13,138 9,068
7,226,965 4,080,536
Government grants have been received for the contribution of the Group to the local economy with respect to the establishment of infrastructure relating to the dairy products industry. There are no unfulfilled conditions or contingences attached to these grants.
54 China Mengniu Dairy Company Limited . Annual Report 2004 NOTES TO FINANCIAL STATEMENTS
6. PROFIT FROM OPERATING ACTIVITIES
The Group’s profit from operating activities is arrived at after charging/(crediting):
2004 2003 RMB’000 RMB’000
Cost of inventories sold 5,607,363 3,047,949 Staff costs (excluding directors’ remuneration) 248,809 113,673 Retirement benefit contributions 3,459 1,292
252,268 114,965
Depreciation on property, plant and equipment 169,476 70,211 Amortisation of land use rights 906 406 Research and development costs 7,428 2,142 Provision for doubtful debts 4,113 1,081 Provision for obsolete inventories 6,212 522 Minimum lease payments under operating lease rentals on land and buildings 3,073 4,974 Display space leasing fees 38,597 6,970 Losses/(gains) on disposal of property, plant and equipment 60 (44) Auditors’ remuneration 1,500 800 Exchange losses, net 1,969 1,038
55 China Mengniu Dairy Company Limited . Annual Report 2004 NOTES TO FINANCIAL STATEMENTS
7. DIRECTORS’ AND SENIOR EXECUTIVES’ EMOLUMENTS
Directors’ remuneration for the year, disclosed pursuant to the Listing Rules and Section 161 of the Hong Kong Companies Ordinance, is as follows:
2004 2003 RMB’000 RMB’000
Fees 60 60 Other emoluments of directors — basic salaries, housing benefits, other allowances and benefits in kind 2,028 2,420 — retirement benefits contributions 14 14
2,102 2,494
Directors’ fees disclosed above include RMB36,000 (2003: RMB18,000) paid to independent non-executive directors.
Three non-executive directors agreed to waive their entitlements to directors’ fees totaling RMB18,000 (2003: nil) for the year. Other than this, there was no arrangement under which a director waived or agreed to waive any remuneration during the year.
The number of directors whose remuneration fell within the following bands is as follows:
2004 2003 Number of Number of directors directors
Nil to RMB1,000,000 10 10
56 China Mengniu Dairy Company Limited . Annual Report 2004 NOTES TO FINANCIAL STATEMENTS
7. DIRECTORS’ AND SENIOR EXECUTIVES’ EMOLUMENTS (CONTINUED)
The five highest paid individuals in the Group during the year ended 31 December 2004 included three (2003: four) directors. Information relating to their emoluments has been disclosed above. The emoluments paid to the remaining non-director, highest paid senior executives during the year, were as follows:
2004 2003 RMB’000 RMB’000
Basic salaries, housing benefits, other allowances and benefits in kind 1,100 289 Retirement benefits scheme contributions 4 3
1,104 292
The remuneration of these remaining highest paid senior executives for the year ended 31 December 2004 and 2003 fell within the band of nil to RMB1,000,000.
8. FINANCE COSTS, NET
2004 2003 RMB’000 RMB’000
Interest on bank loans wholly repayable within five years 46,294 15,881 Less: Amounts capitalised (6,862) (736)
39,432 15,145 Interest income (10,346) (2,245)
Finance costs, net 29,086 12,900
The amounts capitalised are borrowing costs related to funds borrowed specifically for the purpose of obtaining qualifying assets. The interest rates on such capitalised borrowings during the years varied from 2.88% to 5.76% per annum.
9. TAX
Hong Kong profits tax has not been provided as the Group had no assessable profits arising in Hong Kong during the year.
57 China Mengniu Dairy Company Limited . Annual Report 2004 NOTES TO FINANCIAL STATEMENTS
9. TAX (CONTINUED)
The tax charge represents the PRC income tax provision for the year. An analysis of the major components of tax expenses of the Group is as follows:
2004 2003 RMB’000 RMB’000
PRC corporate income tax 18,454 61,177 Share of tax attributable to associates 11 281
18,465 61,458
Under PRC income tax law, except for certain preferential treatment available to six of its subsidiaries, the entities within the Group are subject to corporate income tax (‘‘CIT’’) at a rate of 33% on the taxable income as reported in their statutory accounts which are prepared in accordance with the PRC accounting standards and financial regulations.
A reconciliation of the income tax expense applicable to profit before tax at the statutory income tax rate to income tax expense at the Group’s effective income tax rate for the year is as follows:
2004 2003 Note RMB’000 RMB’000
Profit before tax 410,564 293,788
At PRC corporate income tax rate of 33% 135,486 96,950 Non-taxable items and others, net (181) 10,745 Effect of tax exemption (1) (116,840) (46,237)
At effective income tax rates of 4.5% and 21%, respectively 18,465 61,458
58 China Mengniu Dairy Company Limited . Annual Report 2004 NOTES TO FINANCIAL STATEMENTS
9. TAX (CONTINUED)
Note:
1. Six (2003: three) subsidiaries were subject to tax exemption in 2004. The profit before tax in respect of these subsidiaries amounted to RMB354,060,000 (2003: RMB140,112,000) in aggregate. Five (2003: one) subsidiaries were granted tax exemption in accordance with the state tax bureau’s approval based on the ‘‘Income Tax Law of People’s Republic of China for Enterprises with Foreign Investment and Foreign Enterprises’’ under which these subsidiaries would be exempted from CIT for the first two profitable years and subject to 50% of the applicable tax rate for the following three profitable years. The remaining (2003: two) subsidiary was granted an exemption in accordance with the local tax bureau’s approvals which are based on the policy of ‘‘The Notice of Income Tax Exemption for the Country’s Key Enterprises in Agricultural Industries’’ from the tax authorities.
10. DIVIDEND
2004 2003 Note RMB’000 RMB’000
Proposed final — RMB0.0585 cents per ordinary share (1) 64,966 — Interest on convertible instrument 15,087 — Dividend paid by China Dairy Holdings to the then shareholders of: — ordinary shares — 41,483 — non-voting convertible redeemable preferred shares — 20,377
80,053 61,860
Note:
1. The proposed final dividend for the year is subject to the approval of the Company’s shareholders at the forthcoming annual general meeting.
11. EARNINGS PER SHARE
The calculation of basic earnings per share for the current year is based on the net profit from ordinary activities attributable to shareholders for the year of RMB319,393,000, and the weighted average of 893,965,000 ordinary shares in issue during the year.
59 China Mengniu Dairy Company Limited . Annual Report 2004 NOTES TO FINANCIAL STATEMENTS
11. EARNINGS PER SHARE (CONTINUED)
The weighted average number of shares used to calculate the basic earnings per share for the year ended 31 December 2004 includes the additional 250,000,000 ordinary shares issued upon the listing of the Company’s shares on the Stock Exchange on 10 June 2004 and 110,524,942 ordinary shares issued upon conversion of the convertible instrument on 20 December 2004. The comparative number of shares used to calculate the basic earnings per share for the year ended 31 December 2003 represents the pro forma issued share capital of the Company, comprising 143,654 ordinary shares and 749,856,346 ordinary shares issued for the Reorganisation as further described in note 30 to the consolidated financial statements.
The calculation of basic earnings per share for the year ended 31 December 2003 is based on the net profit from ordinary activities attributable to shareholders for the year of RMB164,372,000, and after the deduction of the dividend entitlement of the holders of the non-voting convertible redeemable preferred shares of RMB20,377,000, as set out in note 10 to the consolidated financial statements, and the weighted average of 750,000,000 ordinary shares assumed to have been in issue during the year ended 31 December 2003.
The calculation of diluted earnings per share is based on the net profit from ordinary activities attributable to shareholders for the year of RMB319,393,000 and the weighted average of 1,118,851,000 ordinary shares in issue during the year, being the weighted average number of ordinary shares outstanding during the year, adjusted for the effects of dilutive potential ordinary shares outstanding during the year.
A reconciliation of the weighted average number of shares used in calculating the basic and diluted earnings per share is as follows:
2004 2003 Number of Number of ’000 shares ’000 shares (Note)
Weighted average number of ordinary shares for the purpose of basic earnings per share calculation 893,965 750,000
Weighted average number of ordinary shares, assuming issued at conversion of convertible instrument during the year 224,886
Weighted average number of ordinary shares for the purpose of diluted earnings per share calculation 1,118,851
60 China Mengniu Dairy Company Limited . Annual Report 2004 NOTES TO FINANCIAL STATEMENTS
11. EARNINGS PER SHARE (CONTINUED)
Note:
Diluted earnings per share amount has not been shown for the year ended 31 December 2003 as the non- voting convertible redeemable preferred shares of the Group outstanding during that year had an anti-dilutive effect on the basic earnings per share for that year.
12. PROPERTY, PLANT AND EQUIPMENT, NET
Group
Buildings and Plant and Office Motor structures machinery equipment vehicles Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
At 1 January 2004, net of accumulated depreciation 294,804 823,682 42,033 30,959 1,191,478 Additions — 76,584 16,146 10,921 103,651 Transfers from construction in progress 504,761 579,251 15,254 2,923 1,102,189 Disposals — (156) (149) (9) (314) Depreciation charged for the year (24,084) (127,608) (10,910) (6,874) (169,476)
At 31 December 2004, net of accumulated depreciation 775,481 1,351,753 62,374 37,920 2,227,528
At 1 January 2004 Cost 305,576 907,363 47,181 35,339 1,295,459 Accumulated depreciation (10,772) (83,681) (5,148) (4,380) (103,981)
Net carrying amount 294,804 823,682 42,033 30,959 1,191,478
At 31 December 2004 Cost 810,337 1,563,042 78,432 49,174 2,500,985 Accumulated depreciation (34,856) (211,289) (16,058) (11,254) (273,457)
Net carrying amount 775,481 1,351,753 62,374 37,920 2,227,528
61 China Mengniu Dairy Company Limited . Annual Report 2004 NOTES TO FINANCIAL STATEMENTS
12. PROPERTY, PLANT AND EQUIPMENT, NET (CONTINUED)
The Group’s buildings are located in Mainland China.
Certain property, plant and equipment of the Group with a carrying value amounting to RMB430,428,000 (2003: RMB372,771,000) have been pledged to secure the long term payables of the Group, details of which are set out in note 27 to the consolidated financial statements.
Company
Office equipment RMB’000
At 1 January 2004 — Additions 115 Depreciation charged for the year (10)
At 31 December 2004, net of accumulated depreciation 105
At 1 January 2004 Cost —
At 31 December 2004 Cost 115 Accumulated depreciation (10)
Net carrying amount 105
62 China Mengniu Dairy Company Limited . Annual Report 2004 NOTES TO FINANCIAL STATEMENTS
13. CONSTRUCTIONINPROGRESS
Group
2004 2003 RMB’000 RMB’000
At beginning of year 146,016 68,288 Additions during the year 1,248,186 579,471 Transferred to property, plant and equipment (1,102,189) (501,743)
At end of year 292,013 146,016
The Group’s construction in progress is located in the PRC.
14. LAND USE RIGHTS
Group
RMB’000
Cost: At beginning of year 35,479 Additions 675
At 31 December 2004 36,154
Accumulated amortisation At beginning of year (1,186) Additions (906)
At 31 December 2004 (2,092)
Net book value At 31 December 2004 34,062
At 31 December 2003 34,293
63 China Mengniu Dairy Company Limited . Annual Report 2004 NOTES TO FINANCIAL STATEMENTS
15. INVESTMENTS IN SUBSIDIARIES
Company 2004 RMB’000
Unlisted shares, at fair value 699,572 Due from a subsidiary 972,419
1,671,991
The amount due from a subsidiary is unsecured, interest-free and has no fixed terms of repayment.
Details of the Company’s principal subsidiaries at 31 December 2004 are set out below:
Percentage of equity interests attributable Date of Paid-up share/ to the Company incorporation/ registered Principal Name establishment* capital Direct Indirect activities
China Dairy Holdings (i) 5 June 2002 US$214 100% — Investment holding
China Dairy (Mauritius) Limited (i) 15 June 2002 US$100 — 100% Investment holding
Inner Mongolia Mengniu Milk 18 August 1999 RMB267,429,488 — 84.32% Industry (Group) Co., Ltd. (iii) ( ) Manufacture and sale of dairy products
Inner Mongolia Mengniu 9 February 2002 RMB30,000,000 — 83.34% Investment Founding Industry Management holding Co., Ltd. (i) (iii) ( )
Mengniu Dairy (Wulanhaote) Co., 18 June 2002 RMB30,000,000 — 84.31% Manufacture Ltd. (i) (iii) and sale ( ) of dairy products
64 China Mengniu Dairy Company Limited . Annual Report 2004 NOTES TO FINANCIAL STATEMENTS
15. INVESTMENTS IN SUBSIDIARIES (CONTINUED)
Percentage of equity interests attributable Date of Paid-up share/ to the Company incorporation/ registered Principal Name establishment* capital Direct Indirect activities
Inner Mongolia Mengniu Dairy 19 June 2002 RMB20,000,000 — 84.32% Manufacture Keerqin Co., Ltd. (i) (iii) and sale ( ) of dairy products
Mengniu Dairy (Dangyang) Co., 7 November 2002 RMB42,000,000 — 84.32% Manufacture Ltd. (i) (iii) and sale ( ) of dairy products
Mengniu Dairy (Beijing) Co., Ltd. 11 November RMB60,000,000 — 84.31% Manufacture (i) (iii) 2002 and sale ( ) of dairy products
Mengniu Dairy (Shenyang) Co., 4 December 2003 RMB50,000,000 — 84.32% Manufacture Ltd. (i) (ii) and sale ( ) of dairy products
Beijing Mengniu Hongda Dairy 12 September RMB10,000,000 — 43.85% Package and Co., Ltd. (i) 2002 sale of ( ) dairy products
Inner Mongolia Mengniu Dairy 9 January 2003 RMB30,000,000 — 84.32% Manufacture Baotou Co., Ltd. (i) (iii) and sale ( ) of dairy products
Mengniu Dairy (Dengkou Bayan 13 July 2003 RMB40,000,000 — 84.31% Manufacture Gaole) Co., Ltd. (i) (iii) and sale ( of dairy ) products
Inner Mongolia Mengniu Dairy 14 July 2003 RMB10,000,000 — 75.89% Manufacture (Group) Shanxi Dairy Co., Ltd. and sale (i) (ii) of dairy ( products )
65 China Mengniu Dairy Company Limited . Annual Report 2004 NOTES TO FINANCIAL STATEMENTS
15. INVESTMENTS IN SUBSIDIARIES (CONTINUED)
Percentage of equity interests attributable Date of Paid-up share/ to the Company incorporation/ registered Principal Name establishment* capital Direct Indirect activities
Mengniu Dairy (Jiaozuo) Co., 6 November 2003 RMB110,000,000 — 84.32% Manufacture Ltd. (i) (iii) and sale ( ) of dairy products
Mengniu Dairy Taian Co., 18 November RMB110,000,000 — 84.32% Manufacture Ltd. (i) (ii) 2003 and sale ( ) of dairy products
Mengniu Dairy (Luannan) Co., 31 March 2004 RMB35,000,000 — 84.32% Manufacture Ltd. (i) (iii) and sale ( ) of dairy products
Mengniu Dairy (Tangshan) Co., 31 March 2004 RMB35,000,000 — 84.32% Manufacture Ltd. (i) (iii) and sale ( ) of dairy products
* Except for China Dairy Holdings and China Dairy (Mauritius) Limited, which were incorporated in the Cayman Islands and Mauritius, respectively, all other subsidiaries were incorporated in the PRC.
(i) Not audited by Ernst & Young Hong Kong or other Ernst & Young International member firms.
(ii) The subsidiaries are registered as companies with limited liability under PRC law.
(iii) The subsidiaries are registered as sino-foreign equity joint ventures under PRC law.
The above table lists the subsidiaries of the Company which, in the opinion of the directors, principally affected the results for the year or formed a substantial portion of the net assets of the Group. To give details of other subsidiaries would, in the opinion of the directors, result in particulars of excessive length.
66 China Mengniu Dairy Company Limited . Annual Report 2004 NOTES TO FINANCIAL STATEMENTS
16. INVESTMENTS IN ASSOCIATES
Group 2004 2003 RMB’000 RMB’000
Share of net assets 20,578 1,917
Details of the Group’s principal associates at 31 December 2004 are set out below:
Percentage of equity Place of attributable to the incorporation/ Group Business registration and Name structure operations 2004 2003 Principal activities
Xinjiang Tianxue Food Corporate The PRC 21% 20% Trading of dairy Co., Ltd. (i) products ( )
Inner Mongolia Meng Niu Corporate The PRC 25% —Productionofraw AustAsia Model Dairy milk, planting of Farm Company pastures and Limited (i) processing of ( milk )
Shandong Mengniu Corporate The PRC 21% — Import and export International Trading of equipment Co., Ltd. (i) ( )
Fuzhou Mengxin Trading Corporate The PRC 38% 35% Trading of dairy Co., Ltd. (i) products ( )
Shijiazhuang Mengniu Ice Corporate The PRC 33% 30% Trading of dairy Cream Sales Co., products Ltd. (i) ( )
67 China Mengniu Dairy Company Limited . Annual Report 2004 NOTES TO FINANCIAL STATEMENTS
16. INVESTMENTS IN ASSOCIATES (CONTINUED)
Percentage of equity Place of attributable to the incorporation/ Group Business registration and Name structure operations 2004 2003 Principal activities
Tianjin Mengniu Ice Corporate The PRC 33% 30% Trading of dairy Cream Sales Co., products Ltd. (i) ( )
Guangzhou Mengniu Corporate The PRC 33% 30% Trading of dairy Dairy Trading Co., products Ltd. (i) ( )
Wuhan Mengniu Dairy Corporate The PRC 31% 28% Trading of dairy Co., Ltd. (i) products ( )
Guilin Mengniu Dairy Corporate The PRC 33% — Trading of dairy Sales Co., Ltd (i) products ( )
Tianjin Mengniu Dairy Corporate The PRC 33% — Trading of dairy Sales Co., Ltd (i) products ( )
Wenzhou Mengniu Dairy Corporate The PRC 33% — Trading of dairy Co., Ltd (i) products ( )
Harbin Mengniu Dairy Corporate The PRC 38% — Trading of dairy Co., Ltd (i) products ( )
Chengdu Mengniu Dairy Corporate The PRC 33% — Trading of dairy Sales Co., Ltd (i) products ( )
(i) Not audited by Ernst & Young Hong Kong or other Ernst & Young International member firms.
68 China Mengniu Dairy Company Limited . Annual Report 2004 NOTES TO FINANCIAL STATEMENTS
16. INVESTMENTS IN ASSOCIATES (CONTINUED)
The above table lists the associates of the Group which, in the opinion of the directors, principally affected the results for the period or formed a substantial portion of the net assets of the Group. To give details of other associates would, in the opinion of the directors, result in particulars of excessive length.
17. LONG TERM INVESTMENTS
Group 2004 2003 RMB’000 RMB’000
Unlisted equity investments, at fair value 3,409 3,409
18. GOODWILL/NEGATIVE GOODWILL
Group
Negative Goodwill goodwill RMB’000 RMB’000
At 1 January 2004, net of accumulated amortisation — (28,182) Additions during the year 115,549 — Derecognition of negative goodwill on early adoption of IFRS3 — 28,182
At 31 December 2004 115,549 —
At 1 January 2004 Cost — (30,584) Accumulated amortisation — 2,402
Net carrying amount — (28,182)
At 31 December 2004 Net carrying amount 115,549 —
As explained in note 2 to the consolidated financial statements, the Group had early adopted IFRS 3 for the current year.
69 China Mengniu Dairy Company Limited . Annual Report 2004 NOTES TO FINANCIAL STATEMENTS
19. INVENTORIES
Group 2004 2003 RMB’000 RMB’000
Raw materials 465,976 304,860 Finished goods 248,823 103,930
714,799 408,790
The carrying amount of inventories carried at net realisable value included in the above balances was approximately RMB12,000,000 (2003: nil) as at 31 December 2004.
20. TRADE RECEIVABLES
The Group normally allows a credit period of not more than 30 days to its customers. The Group closely monitors overdue balances. A provision for doubtful debts is made when it is considered that amounts due may not be recovered.
An aged analysis of the trade receivables of the Group is as follows:
Group 2004 2003 RMB’000 RMB’000
Within 3 months 168,601 97,030 Between4–6months 21,904 2,083 Between 7 – 12 months 3,513 — Over 1 year 64 —
194,082 99,113 Less: Provision for doubtful debts (8,783) (4,670)
185,299 94,443
70 China Mengniu Dairy Company Limited . Annual Report 2004 NOTES TO FINANCIAL STATEMENTS
20. TRADE RECEIVABLES (CONTINUED)
The amounts due from related parties included in the above can be analysed as follows:
2004 2003 RMB’000 RMB’000
Associates 21,582 3,623
The balances are unsecured, non-interest bearing and are repayable on credit terms similar to those offered to other major customers of the Group.
21. PREPAYMENTS, DEPOSITS AND OTHER RECEIVABLES
Group 2004 2003 RMB’000 RMB’000
Deposits 306 309 Prepayments 110,258 93,370 Other receivables 18,622 11,869
129,186 105,548
22. CASH AND CASH EQUIVALENTS AND PLEDGED DEPOSITS
Group 2004 2003 RMB’000 RMB’000
Bank balances 841,322 376,598 Time deposits 198,369 —
1,039,691 376,598 Less: Deposits pledged for bills payable (20,763) (2,425)
Cash and cash equivalents 1,018,928 374,173
71 China Mengniu Dairy Company Limited . Annual Report 2004 NOTES TO FINANCIAL STATEMENTS
22. CASH AND CASH EQUIVALENTS AND PLEDGED DEPOSITS (CONTINUED)
Company 2004 2003 RMB’000 RMB’000
Bank balances 8,736 — Time deposits 2,262 —
10,998 —
The Group’s cash and cash equivalents comprise cash at banks and in hand. Cash at banks earns interest at floating rates based on daily bank deposit rates. Cash and bank balances aggregating RMB844,974,000 (2003: RMB321,871,000) were denominated in Renminbi, which is not freely convertible in the international foreign exchange market and its exchange rate is determined by the People’s Bank of China.
23. TRADE PAYABLES
An aged analysis of the trade payables of the Group is as follows:
Group 2004 2003 RMB’000 RMB’000
Outstanding balances aged: Within 3 months 585,208 351,848 Between 4 – 6 months 81,172 65,255 Between 7 – 12 months 26,100 9,532 Over 1 year 2,117 898
694,597 427,533
72 China Mengniu Dairy Company Limited . Annual Report 2004 NOTES TO FINANCIAL STATEMENTS
23. TRADE PAYABLES (CONTINUED)
The amount due to a related party included in the above can be analysed as follows:
2004 2003 RMB’000 RMB’000
An associate 669 —
The balances are unsecured, non-interest bearing and are repayable on demand.
24. ACCRUALS AND OTHER PAYABLES
Group 2004 2003 RMB’000 RMB’000
Advances from customers 136,870 65,464 Salary and welfare payables 40,220 25,446 Current portion of long term payables (note 27) 102,334 87,146 Other payables 454,270 201,256 Other accruals 24,466 21,224
758,160 400,536
The amount due to related parties included in the above can be analysed as follows:
Group 2004 2003 Note RMB’000 RMB’000
Associates 17,825 2,058 A related party (a) 1,039 2,152
18,864 4,210
(a) The related party is Inner Mongolia Jiuqiang Machinery Co., Ltd., which is controlled and beneficially owned by a director of a major subsidiary of the Group.
The balances are unsecured, non-interest bearing and are repayable on demand.
73 China Mengniu Dairy Company Limited . Annual Report 2004 NOTES TO FINANCIAL STATEMENTS
25. INTEREST BEARING BANK LOANS
Group 2004 2003 RMB’000 RMB’000
Short term bank loans, unsecured 470,542 161,534 Long term bank loans, unsecured 239,500 226,000
710,042 387,534
During the year, the annual interest rates of the short term bank loans and the long term bank loans varied from 3.65% to 5.31% and from 2.88% to 5.76% (2003: varied from 2.82% to 5.49% and from 2.88% to 5.76%), respectively. As at 31 December 2003 and 2004, the Group’s interest bearing bank loans were denominated in Renminbi.
The repayment schedule of the bank loans is as follows:
Group 2004 2003 RMB’000 RMB’000
Within1year 470,542 161,534 Between 1–2 years 76,500 — Between 2–5 years 163,000 226,000
Total interest bearing bank loans 710,042 387,534 Less: Amount due within 1 year included in current liabilities 470,542 161,534
239,500 226,000
74 China Mengniu Dairy Company Limited . Annual Report 2004 NOTES TO FINANCIAL STATEMENTS
26. OTHER LOANS, UNSECURED
Group 2004 2003 RMB’000 RMB’000
Short term 22,600 27,600 Long term 18,000 18,000
40,600 45,600
The repayment schedule of the other loans is as follows:
2004 2003 RMB’000 RMB’000
Within1year 22,600 27,600 Between 1–2 years 18,000 18,000
40,600 45,600
The other loans represented unsecured, interest-free loans from various local government authorities to support the Group’s establishment of manufacturing plants in various locations.
75 China Mengniu Dairy Company Limited . Annual Report 2004 NOTES TO FINANCIAL STATEMENTS
27. LONG TERM PAYABLES
The Group’s long term payables represent outstanding instalments payable for the purchase of plant, machinery and equipment. The balances are interest-free and are repayable as follows:
2004 2003 RMB’000 RMB’000
Within1year 102,334 87,146 Between 1–2 years 86,939 58,809 Between 2–5 years 102,986 89,280
Total long term payables 292,259 235,235 Less: Amount due within 1 year included in current liabilities (note 24) (102,334) (87,146)
189,925 148,089
28. DEFERRED TAX
As at 31 December 2004, the Group had unrecognised deferred tax assets in respect of tax losses arising in the PRC of RMB10,491,000 (2003: RMB14,851,000), provision of doubtful debts of RMB9,155,000 (2003: RMB5,483,000), provision for obsolete inventories of RMB7,146,000 (2003: nil) and accrued expenses of RMB16,169,000 (2003: RMB10,109,000).
76 China Mengniu Dairy Company Limited . Annual Report 2004 NOTES TO FINANCIAL STATEMENTS
29. DEFERRED INCOME
During 2004, various local government authorities granted certain fixed assets to the Group for nil consideration and provided finance for the Group to purchase certain fixed assets by way of a cash donation. The fair value of the fixed assets is included in fixed assets. The grants received are regarded as deferred income, which is amortised to match the depreciation charge of such fixed assets in accordance with the useful lives of those fixed assets. The movement of the balance during the year is as follows:
Group 2004 2003 RMB’000 RMB’000
At beginning of the year 57,706 — Additions during the year 10,380 57,706 Amortisation (3,860) —
At end of the year 64,226 57,706
77 China Mengniu Dairy Company Limited . Annual Report 2004 NOTES TO FINANCIAL STATEMENTS
30. SHARE CAPITAL
Number of ordinary shares Note ’000 RMB’000
Authorised: At incorporation on 16 February 2004 (a) 1,000 106 Increase in authorised capital (b) 2,999,000 319,129
At 31 December 2004 3,000,000 319,235
Issued and fully paid: At incorporation on 16 February 2004 (a) — — Shares issued for Reorganisation (c) 144 15 Additional shares issued for Reorganisation (d) 749,856 79,770 New issue on public listing (e) 250,000 26,595 Shares issued upon conversion of convertible instruments (f) 110,525 11,758
At 31 December 2004 1,110,525 118,138
(a) On 16 February 2004 (date of incorporation), the authorised share capital of the Company was HK$100,000 divided into 1,000,000 ordinary shares of HK$0.10 each. 1 share was allotted and issued at par.
(b) Pursuant to a written resolution of the shareholders on 18 May 2004, the authorised share capital was increased from HK$100,000 (equivalent to RMB106,000) to HK$300,000,000 (equivalent to RMB319,235,000) by the creation of an additional 2,999,000,000 ordinary shares of HK$0.10 each.
(c) On 14 May 2004, as part of the Reorganisation described in note 1 to the consolidated financial statements, the Company issued 143,654 ordinary shares of HK$0.10 each to the then shareholders of China Dairy Holdings in exchange for the entire issued share capital in China Dairy Holdings.
78 China Mengniu Dairy Company Limited . Annual Report 2004 NOTES TO FINANCIAL STATEMENTS
30. SHARE CAPITAL (CONTINUED)
(d) Upon the approval of the Company’s listing on the Stock Exchange of Hong Kong Limited and pursuant to the resolution passed on 18 May 2004, the Company issued 749,856,346 ordinary shares of HK$0.10 each to the then existing shareholders in proportion to their respective shareholdings. The issued share capital of RMB79,770,000 was offset with the share premium arising from the public listing.
(e) On 10 June 2004, 250,000,000 ordinary shares of HK$0.10 each were issued to the public at HK$3.925 each for a total cash consideration, before the related issue expenses, of HK$981,250,000 (equivalent to RMB1,043,854,000) giving rise to a share premium of RMB1,017,259,000.
(f) On 20 December 2004, convertible instrument of US$10,570,000 (equivalent to RMB86,985,000) were converted into 110,524,942 ordinary shares of HK$0.10 each (note 32), giving rise to a share premium of RMB75,227,000, being the excess of the value of the convertible instrument of RMB86,985,000 over the par value of the new share issued of RMB11,758,000.
31. RESERVES
(A) Group The movements in the reserves of the Group are set out in the consolidated statement of changes in equity of the consolidated financial statements.
(a) Statutory reserves In accordance with the relevant PRC laws and regulations, PRC domestic companies are required to transfer 10% of the profit after income tax, as determined under PRC accounting standards and financial regulations, to the statutory common reserve, until the balance of the fund reaches 50% of the registered capital of that company. Subject to certain restrictions as set out in the relevant PRC laws and regulations, the statutory common reserve may be used to offset against accumulated losses, if any.
Pursuant to the relevant PRC laws and regulations, certain subsidiaries within the Group are also required to transfer 5% to 10% of their net profit, as determined under PRC accounting standards and financial regulations, to the statutory common welfare reserve. This reserve can only be used to provide staff welfare facilities and other collective benefits to the employees of that company. This reserve is non-distributable other than in the event of liquidation.
79 China Mengniu Dairy Company Limited . Annual Report 2004 NOTES TO FINANCIAL STATEMENTS
31. RESERVES (CONTINUED)
(b) Contributed surplus The contributed surplus of the Group represents the difference between the nominal value of the share capital of the subsidiaries acquired pursuant to the Group Reorganisation, as set out in note 1 to the consolidated financial statements, over the nominal value of the shares of the Company issued in exchange therefor.
(B) Company
Share Contributed Convertible Retained premium surplus instrument earnings Total Notes RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Note (a) Note (b)
Net profit for the year Note (c) — — — 81,316 81,316 Issuance of convertible instrument and shares for Reorganisation 30 (c)/32 — 397,574 291,621 — 689,195 Issuance of shares upon public listing 30 (e) 1,017,259 — — — 1,017,259 Share premium transfer to share capital 30 (d) (79,770) — — — (79,770) Share issue costs (62,336) — — — (62,336) Shares issued upon conversion of convertible instrument 30 (f) 75,227 — (86,985) — (11,758) Proposed final dividend 10 — — — (80,053) (80,053)
At 31 December 2004 950,380 397,574 204,636 1,263 1,553,853
(a) Share premium Under the Companies Law (2001 Second Revision) of the Cayman Islands, the share premium and contributed surplus are distributable to the shareholders of the Company, provided that immediately following the date on which the dividend is proposed to be distributed, the Company will be in a position to pay off its debts as and when they fall due in the ordinary course of business.
80 China Mengniu Dairy Company Limited . Annual Report 2004 NOTES TO FINANCIAL STATEMENTS
31. RESERVES (CONTINUED)
(b) Contributed surplus The contributed surplus of the Company represents the difference between the then combined net asset value of the subsidiaries acquired pursuant to the Reorganisation over the nominal value of the shares of the Company issued in exchange therefor.
(c) The net profit attributable to shareholders for the year ended 31 December 2004 dealt with in the financial statements of the Company was RMB81,316,000.
32. NON-VOTING CONVERTIBLE REDEEMABLE PREFERRED SHARES/CONVERTIBLE INSTRUMENT
On 17 October 2003, China Dairy Holdings issued 49,379 non-voting convertible redeemable preferred shares (the ‘‘Preferred Shares’’) to MS Dairy Holdings, CDH China Fund, L.P. and Actis China Investment Company Limited (collectively the ‘‘Financial Investors’’). The initial subscription price of the Preferred Shares is US$713.54 per share, (the ‘‘Subscription Price’’) which is the same as the conversion price of the Preferred Shares (the ‘‘Conversion Price I’’).
On the same date, China Dairy Holdings declared a stock dividend in the form of (i) 0.86 ordinary shares per existing ordinary share; or (ii) 0.43 Preferred Shares per existing ordinary share. The Financial Investors elected to receive the Preferred Shares while other shareholders elected to receive the ordinary shares. As such, the Company issued an additional 21,187 Preferred Shares to the Financial Investors.
Pursuant to the terms of the Preferred Shares, the Conversion Price I is subject to certain adjustments under certain conditions and the Preferred Shareholders could elect to redeem the Preferred Shares at a predefined rate if certain conditions occur such as the merger and other business combination of the Company or certain subsidiaries. As at 31 December 2003 and 1 June 2004, being the Company’s prospectus date, except for the stock dividend declared on 17 October 2003, the above conditions as defined in the terms of the Preferred Shares had not occurred, and no Preferred Shares have been redeemed or converted.
On the fifth anniversary of the closing date of the issuance of the Preferred Shares, China Dairy Holdings would be required to redeem all the Preferred Shares at a price per share equal to the original Subscription Price (plus accrued and unpaid dividend thereon).
Upon the approval of the Company’s listing on the Stock Exchange of Hong Kong Limited, the Company issued units of convertible instrument (the ‘‘Convertible Instrument’’) in exchange for all Preferred Shares held by the Financial Investors.
81 China Mengniu Dairy Company Limited . Annual Report 2004 NOTES TO FINANCIAL STATEMENTS
32. NON-VOTING CONVERTIBLE REDEEMABLE PREFERRED SHARES/CONVERTIBLE INSTRUMENT (CONTINUED)
The principal amount of the Convertible Instrument amounted to US$35,233,827 (equivalent to RMB291,621,000) and the holders of the Convertible Instrument are entitled to interest payable simultaneously with any payment of dividends to the holders of the Company’s ordinary shares, in an aggregate amount equal to the aggregate amount of the dividends declared on the ordinary shares multiplied by a pre-determined formula. The proposed interest which is regarded as an equity transaction and is calculated based on the proposed final dividend for the ordinary shares as set out in note 10 to the financial statements. The outstanding principal amount of the Convertible Instrument shall convert into such number of ordinary shares of the Company at a conversion price equal to approximately US$0.096 per share (the ‘‘Conversion Price II’’). Pursuant to the terms of the Convertible Instrument, the Convertible Price II is subject to adjustment under certain conditions and the holders of the Convertible Instrument could elect to redeem the Convertible Instrument at a predefined rate if certain conditions occur such as a merger and other business combination of the Company or certain subsidiaries. The Group has pledged its interest in the entire share capital of China Dairy (Mauritius) Limited, a wholly- owned subsidiary of the Group, to the Financial Investors to secure this Convertible Instrument.
On the fifth anniversary of the date of the listing of Company’s shares on the Stock Exchange of Hong Kong Limited, the Company is required to redeem the Convertible Instruments at the principal amount (plus accrued and unpaid dividend thereon) if not already converted by that date.
On 17 December 2004, units of the Convertible Instrument amounting to US$10,570,148 (equivalent to RMB86,985,000) representing 30% of the outstanding principal amount, were converted into 110,524,942 ordinary shares of HK$0.10 each.
82 China Mengniu Dairy Company Limited . Annual Report 2004 NOTES TO FINANCIAL STATEMENTS
33. OPERATING LEASE COMMITMENTS
The Group had total future minimum lease payments under non-cancellable operating leases in respect of buildings as follows:
Group 2004 2003 RMB’000 RMB’000
Within one year 1,530 859 In the second to fifth years, inclusive 38 230
1,568 1,089
The Company did not have any significant commitments as at the balance sheet date.
34. CONTINGENT LIABILITIES
The Group is contingently liable in respect of four guarantee contracts with a bank in favour of certain suppliers of raw milk (the ‘‘Suppliers’’) pursuant to which certain bank loans were granted to those Suppliers. The outstanding bank loans as at 31 December 2004 amounted to RMB83,000,000 (2003: RMB83,000,000). The guarantees are solely given by the Group, but the guarantees are counter-guaranteed by these Suppliers who are independent third parties. Security under these counter-guarantees included property, dairy cattle and other assets owned by these Suppliers.
The Company did not have any significant contingent liabilities as at the balance sheet date.
83 China Mengniu Dairy Company Limited . Annual Report 2004 NOTES TO FINANCIAL STATEMENTS
35. COMMITMENTS
The Group had the following outstanding capital commitments in respect of the purchase/ construction of plant, machinery and buildings at the end of each of the years:
Group 2004 2003 RMB’000 RMB’000
Contracted, but not provided for 419,076 214,558 Authorised, but not contracted for — 601,786
419,076 816,344
Subsequent to year end, the board of directors approved capital expenditure amounting to approximately RMB449,000,000.
36. FAIR VALUES OF FINANCIAL INSTRUMENTS
Financial instruments of the Group mainly consist of cash and bank balances, trade receivables, other current assets, trade payables, other payables, short term interest- bearing borrowings, long term interest-bearing borrowings and long term payables.
The carrying amounts of the Group’s financial instruments approximated their fair value as at 31 December 2004 because of the short maturity of these instruments, except for long term interest-bearing borrowings. The carrying amount of the Group’s long term interest bearing-borrowings approximated its fair value based on borrowing rates currently charged for loans with similar terms and maturities.
It was not practicable to estimate the fair value of the long term payables of RMB189,925,000 (2003: RMB148,089,000) and the long term other loans of RMB18,000,000 (2003: RMB18,000,000) as the instruments are not marketable.
Fair value estimates are made at a specific point in time and based on relevant market information about the financial instruments. These estimates are subjective in nature and involve uncertainties and matters of significant judgement and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
37. RELATED PARTY TRANSACTIONS
In addition to the transactions and balances which are disclosed elsewhere in these financial statements, the Group had the following significant transactions with its associates and related parties. The associates comprise of Guangzhou Mengniu Dairy Trading Co., Ltd., Fuzhou Mengxin Trading Co., Ltd. and other companies which are engaged in the sales of dairy products.
84 China Mengniu Dairy Company Limited . Annual Report 2004 NOTES TO FINANCIAL STATEMENTS
37. RELATED PARTY TRANSACTIONS (CONTINUED)
2004 2003 Note RMB’000 RMB’000
(a) Sales of liquid milk to the associates (i) 668,009 396,194 (b) Sales of ice cream and other dairy products to the associates (i) 26,914 — (c) Purchase of equipment from a related party (i)/(ii) — (22,708) (d) Purchase of packaging materials from a related party (i)/(iii) (14,450) (14,343)
(i) The price was determined with reference to the then prevailing market price/rates and the price charged to third parties.
(ii) The related party is Inner Mongolia Jiuqiang Machinery Co., Ltd. which is controlled and beneficially owned by a director of a major subsidiary of the Group.
(iii) The related party is Chaozhou Yangtian Printing Co., Ltd. which is controlled and beneficially owned by a substantial shareholder of the Company.
38. CONCENTRATION OF RISK
The main risks arising from the Group’s financial instruments are business risk, interest rate risk, foreign currency risk and credit risk. The Group does not have any written risk management policies and guidelines. However, the board of directors meets periodically to analyse and formulate measures to manage the Group’s exposure to those risks. Generally, the Group adopts conservative strategies on its risk management. As the Group’s exposure to these risks is kept to a minimum, the Group has not used any derivatives and other instruments for hedging purposes. The Group does not hold or issue derivative financial instruments for trading purposes. The board of directors reviews and agrees policies for managing each of these risks and they are summarised below:
(i) Business risk The Group conducts its operations in the Mainland China and accordingly is subject to special considerations and significant risks. These include risks associated with, inter alia, the political, economic and legal environment, influence of national authorities over pricing regulations and competition in the industry.
Furthermore, the five largest customers represented in aggregate approximately 24.78% and 18.02% of the revenues of the Group for the years ended 31 December 2003 and 2004, respectively.
(ii) Interest rate risk The interest rates and terms of repayment of the bank loans of the Group are disclosed in note 25 to the consolidated financial statements. The Group has no significant concentration of interest rate risk.
85 China Mengniu Dairy Company Limited . Annual Report 2004 NOTES TO FINANCIAL STATEMENTS
38. CONCENTRATION OF RISK (CONTINUED)
(iii) Foreign currency risk The Group’s businesses are principally located in the PRC and all transactions are conducted in RMB, except for the purchases of machinery and equipment and sales to Hong Kong. As at 31 December 2004, all of the Group’s assets and liabilities were denominated in RMB except that cash and cash equivalents of approximately RMB182,179,000 and RMB12,539,000 were denominated in US$ and HK$, respectively. Fluctuation of the exchange rates of RMB against foreign currencies could affect the Group’s results of operations. However, in the opinion of the directors, the foreign currency risk exposure is under management’s scrutiny.
(iv) Credit risk In the opinion of the directors, the Group has no significant concentrations of credit risk. The carrying amount of trade receivables and cash included in the consolidated financial statements represent the Group’s maximum exposure to credit risk in relation to its financial assets. The Group’s cash and cash equivalents are mainly deposited with state-owned banks in the PRC. It has implemented policies to ensure sales of products are made to distributors with an appropriate credit history which is subject to periodic review. In addition, the Group’s guarantees to the bank loans borrowed by certain suppliers of raw milk amounting to RMB83,000,000 (2003: RMB83,000,000) (detailed in note 34 to the consolidated financial statements) represent the Group’s other exposure to credit risk. These guarantees are cross-guaranteed by assets owned by these suppliers.
39. SUBSEQUENT EVENTS
On 14 January 2005, the Company was informed by Mr Niu Gensheng (‘‘Mr Niu’’), the chief executive officer and director of the Company, that he has entered into an agreement (the ‘‘Agreement’’) with Inner Mongolia Mengniu Business Development Association (the ‘‘Association’’), an independent and non-profit social organization established for the purpose of developing and promoting the business of the Group. Pursuant to the Agreement dated 12 January 2005, the Association will establish the Inner Mongolia Mengniu Business Development Association Laoniu Fund and Mr Niu will donate 51% of the cash dividends received from his shares in the Company and Mengniu to the fund. The fund will be used to provide incentives and rewards to individuals or organisations who have made significant contributions to the business of the Group.
Apart from the above, no other significant events took place subsequent to 31 December 2004.
40. APPROVAL OF THE FINANCIAL STATEMENTS
The financial statements were approved and authorised for issue by the board of directors on 6 April 2005.
86 China Mengniu Dairy Company Limited . Annual Report 2004 FINANCIAL SUMMARY
The following is a summary of the audited financial statements of China Mengniu Dairy Company Limited (the ‘‘Company’’) and its subsidiaries (the ‘‘Group’’) for the respective year/period as hereunder stated.
For the period from For the year For the year 5 June 2002 ended ended (Note 1) to 31 December 31 December 31 December Results 2004 2003 2002 RMB’000 RMB’000 RMB’000 Revenue 7,213,827 4,071,468 459,020 Profit before tax 410,564 293,788 44,720 Tax (18,465) (61,458) (17,086) Profit after tax 392,099 232,330 27,634 Minority interests (72,706) (67,958) (9,109) Net profit attributable to shareholders 319,393 164,372 18,525 Dividend 80,053 61,860 — Earnings per share (RMB) (Note 2) —basic 0.357 0.192 0.025 — diluted (Note 3) 0.285 ——
At 31 December Assets and liabilities 2004 2003 2002 RMB’000 RMB’000 RMB’000 Total assets 4,762,114 2,334,310 814,581 Total liabilities 2,458,986 1,474,589 455,236 Minority interests 348,654 170,511 126,128
Shareholder’s equity 1,954,474 689,210 233,217
Notes:
(1) This was the date of incorporation of China Dairy Holdings. The financial statements from which the summary is derived are presented on a uniting of interests method as if the current group structure had been in existence before the listing of the Company. Details of the basis of presentation are set out in Note 1 to the financial statements.
(2) Calculation bases for the earnings per share are set out in Note 11 to the financial statements.
(3) The diluted earnings per share for 2003 has not been presented as the non-voting convertible redeemable preferred shares of the Group had an anti-dilutive effect on the basic earnings per share. The diluted earnings per share for 2002 has not been presented as the Company did not have any dilutive potential shares in issue during that period.
87 China Mengniu Dairy Company Limited . Annual Report 2004 CORPORATE INFORMATION
BOARD OF DIRECTORS REGISTERED OFFICE Executive Directors M&C Corporate Service, P.O. Box 309 GT Mr NIU Gensheng Ugland House, South Church Street Ms LU Jun George Town, Grand Cayman Mr SUN Yubin Cayman Islands Mr YANG Wenjun PLACE OF BUSINESS IN HONG KONG Non-Executive Directors Unit 1001, 10th Floor, Jubilee Centre Mr JIAO Shuge (alias JIAO Zhen) 18 Fenwick Street, Wanchai Mr LIU Haifeng, David Hong Kong Ms JIN Yujuan, Lily PRINCIPAL SHARE REGISTRAR Independent Non-Executive Directors Bank of Butterfield International (Cayman) Ltd. Mr WANG Huaibao Butterfield House Mr ZHANG Julin 68 Ford Street Mr LI Jianxin P.O. Box 705, George Town Grand Cayman, Cayman Islands SENIOR MANAGEMENT Mr YAO Tongshan HONG KONG BRANCH SHARE REGISTRAR Mr BAI Jun Computershare Hong Kong Investor Services Mr LEI Yongsheng Limited Mr DENG Jiuqiang Shops 1712–16, 17th Floor Ms LO Ka Wai, Claudia (Qualified Accountant Hopewell Centre & Company Secretary) 183 Queen’s Road East, Wanchai Hong Kong STOCK CODE Hong Kong Stock Exchange 2319 LEGAL ADVISORS As to Hong Kong Law INVESTOR RELATIONS CONTACT Norton Rose Ms LO Ka Wai, Claudia Unit 1001, 10th Floor, Jubilee Centre As to PRC Law 18 Fenwick Street, Wanchai King & Wood PRC Lawyers Hong Kong Email: [email protected] As to Cayman Islands Law Website: http://www.mengniuir.com Maples and Calder Asia
PRINCIPAL BANKERS Industrial Commercial Bank of China Agricultural Bank of China
AUDITORS Ernst & Young Certified Public Accountants
88 China Mengniu Dairy Company Limited . Annual Report 2004