I. General Information of the Company
1. Registered name of the Company in Chinese: !"#$%&'() Registered name of the Company in English: GD MIDEA HOLDING CO., LTD.
2. Legal representative of the Company: Fang Hongbo
3. Secretary of the Board: Li Feide Authorized Representative in charge of securities affairs: Jiang Peng Address: Midea Headquarters Building, No.6 Midea Road, Shunde District, Foshan City, Guangdong Province Tel: (0757) 2633455926338779 Fax: (0757) 26651991 E-mail: [email protected]
4. Registered address and office of the Company: Midea Headquarters Building, No.6 Midea Road,Shunde District, Foshan City, Guangdong Province Postal Code: 528311 Website: http://www.midea.com E-mail address: [email protected]
5. The newspapers for information disclosure: China Securities Journal, Securities Times, and Shanghai Securities News Website for publishing the Annual Report: http://www.cninfo.com.cn Place where Annual Reports are available: Securities Affairs Department of the Company
6. Stock exchange for listing of the Company's shares: Shenzhen Stock Exchange Stock name: Midea Electric Appliance Stock code: 000527
7. Other Information of the Company Date of change of registration: September 10th 2010 Place of change of registration: Guangdong Administration of Industry and Commerce No. of Business License of Corporate Body: 440000000020099 Taxation registration number: 440681190337092 Organization code: 19033709-2 Name of the CPA engaged by the Company: Ascenda Certified Public Accountants, Ltd. Office address of the CPA: 401, Level 4, Henghua International Business Center, 26 Yuetan Beijie, Xicheng District, Beijing
2 GD MIDEA HOLDING CO., LTD. ANNUAL REPORT 2010 3 II. Summary of Accounting and Business Data
1.Main accounting data Unit: RMB'000 Item 2010 2009 Year-on-Year 2008 Increase/decrease (%) Total operating revenue 74,558,886.12 47,278,248.26 57.70 45,313,461.92 Total profit 4,963,170.78 2,752,828.84 80.29 1,755,571.41 Net profit attributable to the shareholders of the Company 3,127,097.38 1,847,747.93 69.24 1,025,304.19 Net profit excluding extraordinary profit and loss attributed 2,956,398.46 1,821,067.57 62.34 1,134,215.99 to the shareholders of the Company Net cash flow from operating activities 5,445,721.00 2,056,466.98 164.81 3,752,847.69
Item At the end At the end Year-on-Year At the end of 2010 of 2009 Increase/decrease (%) of 2008 Total assets 42,054,037.52 31,657,627.47 32.84 23,383,586.43 Owner's equity attributable to the shareholders of the Company 12,336,337.43 8,906,427.61 38.51 4,749,026.99 Share capital (shares) 3,120,265,276 2,080,176,851 50.00 1,891,069,929
4 GD MIDEA HOLDING CO., LTD. (Con.) Summary of Accounting and Business Data
2. Main financial indicators
Financial Indicators 2010 2009 Year-on-Year 2008 Increase/decrease (%) Basic EPS (RMB/share) 1.00 0.82 21.95 0.54 Diluted EPS (RMB/share) 1.00 0.82 21.95 0.54 EPS calculated on the basis of the latest share capital (RMB/share) *Note 0.92 Basic EPS after deducting extraordinary profit and loss (RMB/share) 0.95 0.81 17.28 0.60 Weighted average return on equity (%) 29.54 28.81 0.73 21.04 Weighted average return on equity after deducting extraordinary profit and loss (%) 27.93 28.40 -0.47 23.28 Net cash flow per share from operating activities (RMB/share) 1.75 0.99 76.77 1.98
At the end At the end Year-on-Year At the end of 2010 of 2009 Increase/decrease (%) of 2008 Net asset per share attributable to the shareholders of the Company (RMB/share) 3.95 4.28 -7.71 2.51
Note: In March 2011, the Company completed non-public issue of 264,082,374 shares to six investors. Up to the date of disclosing this Annual Report, total share capital of the Company is 3,384,347,650 shares.
3. Extraordinary profit and loss items and amounts Unit: RMB'000 Item Amount Profit and loss from disposal of non-current assets -14,474.99 Governmental subsidies recognized in current profit and loss, except those closely related 148,487.63 to the normal operations of the Company and continuously granted at certain quotas or quantities according to the State's policies and regulations Profit and loss from change in fair value of trading financial assets/liabilities, and investment gain 208,285.57 or loss from disposal of trading financial assets/liabilities and financial assets available for sale, except for effective hedging activities related to the normal operations of the Company Other net non-operating income or expenditure except above-mentioned items -71,845.75 Other profit items complying with extraordinary profit or loss -9,886.15 Total extraordinary profit or loss 260,566.31 Effect of corporate income tax -19,943.53 Effect of minority interests -69,923.86 Total extraordinary profit or loss affecting net profit attributable to ordinary shareholders of the Company 170,698.92
ANNUAL REPORT 2010 5 III. Changes in Share Capital and Information of Shareholders
1. Changes in share capital during the reporting period Unit: Share At the beginning of Increase/decrease (+,-) during the reporting period At the end of reporting period reporting period Number Percen- New Bonus Shares converted Others Sub-total Number Percen- of shares tage(%) issue issue from the reserve of shares tage (%) I. Shares subject to trading restrictions 2,401,797 0.12 -2,401,797 -2,401,797 0 0.00 1. State-owned shares 2. Shares held by State-owned legal person 3. Shares held by other domestic shareholders Of which: Shares held by domestic non-State-owned legal persons Shares held by domestic natural persons 2,401,797 0.12 -2,401,797 -2,401,797 0 0.00 4. shares held by foreign shareholders Of which: Shares held by overseas legal persons Shares held by overseas natural persons II. Shares not subject to trading restrictions 2,077,775,054 99.88 1,040,088,425 2,401,797 1,042,490,222 3,120,265,276 100.00 1. RMB ordinary shares 2,077,775,054 99.88 1,040,088,425 2,401,797 1,042,490,222 3,120,265,276 100.00 2. Domestically-listed foreign shares 3. Overseas-listed foreign shares 4. Others III. Total Number of Shares 2,080,176,851 100.00 1,040,088,425 0 1,040,088,425 3,120,265,276 100.00
2. Issue and listing of shares
(i) Issue of shares in previous three years 189,106,922 RMB ordinary shares issued under the public issue 1) In accordance with the Reply on the Approval of Issue of of the Company's additional shares have been listed for trading th Additional Shares by GD Midea Holding Co., Ltd. under the since August 12 2009. CSRC Permit ([2009] No.668) from China Securities Regula- 2) In accordance with the Reply on the Approval of Non-public tory Commission, on July 30th 2009, the Company issued Issue of Shares by GD Midea Holding Co., Ltd. under the CSRC 189,106,922 new shares at an issue price of RMB15.75 per Permit ([2011] No.84) from China Securities Regulatory share by way of a priority placement to the existing holders of Commission, the Company issued 264,082,374 shares to six in- A-shares on a pro rata basis, combined with online and offline vestors on a non-public basis. Funds raised by issue of A-shares issues at a fixed price for the remaining portion of the new shares. were transferred to the special fund-raising account of the Com- The Company raised a total of RMB2,978,434,021.50 from this pany on February 24th, 2011. The Company raised a total of issue, representing net proceeds of RMB2,913,149,268.55 after RMB4,359,999,994.74 from this non-public issue, representing deducting the issue expenses. net proceeds of RMB4,300,149,994.74 after deducting the issue With the consent from Shenzhen Stock Exchange, the additional expenses.
6 GD MIDEA HOLDING CO., LTD. (Con.) Changes in Share Capital and Information of Shareholders
(ii) Changes in total shares and share capital shares of the Company were increased from 2,080,176,851 shares structure to 3,120,265,276 shares. 1)As of the end of this reporting period, the Company had no 3)On March 11th, 2011, 264,082,374 shares were issued to six shares subject to trading restrictions; investors by the Company on a non-public basis were listed, and 2)Upon approval of Shareholders' general meeting 2009 held total shares of the Company were increased from 3,120,265,276 on April 12th 2010, the Company completed implementation of shares to 3,384,347,650 shares. Change in share capital struc- its capital reserve capitalization scheme of converting five shares ture of the Company is as follows: into share capital for every 10 shares on May 13th 2010, and total
Before non-public issue After non-public issue Number of shares Percentage (%) Number of shares Percentage (%) I. Shares subject to trading restrictions 264,082,374 7.80 1. State-owned shares 2. Shares held by State-owned legal person 27,077,409 0.80 3. Shares held by other domestic shareholders 203,634,766 6.01 Of which: Shares held by domestic non-State-owned 203,634,766 6.01 legal persons Shares held by domestic natural persons 4. shares held by foreign shareholders 33,370,199 0.99 Of which: Shares held by overseas legal persons 33,370,199 0.99 Shares held by overseas natural persons II. Shares not subject to trading restrictions 3,120,265,276 100.00 3,120,265,276 92.20 1. RMB ordinary shares 3,120,265,276 100.00 3,120,265,276 92.20 2. Domestically-listed foreign shares 3. Overseas-listed foreign shares III. Total Number of Shares 3,120,265,276 100.00 3,384,347,650 100.00
ANNUAL REPORT 2010 7 Changes in Share Capital and Information of Shareholders (Con.)
(iii) Information of present employee shares The Company has no employee shares at present.
3. Information of the shareholders and beneficial controlling persons
(1) Shareholding of top ten shareholders and top ten shareholders not subject to trading restrictions at the end of the reporting period Total number of shareholders at the end of the reporting period: 100,509 shareholders
Shareholding of top ten shareholders Unit: Share Name of shareholder Type of shareholders Percentage Total number Number of shares Number of (%) of of held subject to pledged or shareholding shares held trading restrictions frozen shares Midea Group Holding Co., Ltd. Domestic non-State-owned legal person 42.49% 1,325,701,611 0 180,000,000 Foshan Shunde Kailian Industrial Development Co., Ltd. Domestic non-State-owned legal person 2.76% 85,967,913 0 0 Dacheng Blue Chip Sustaining Fund Domestic non-State-owned legal person 1.89% 58,897,805 0 0 MERRILL LYNCH INTERNATIONAL Foreign shareholder 1.75% 54,589,086 0 0 National Social Security Fund 501 Portfolio State 1.60% 50,000,000 0 0 Bosera Thematic Sectors Equity Securities Investment Fund Domestic non-State-owned legal person 1.57% 49,000,000 0 0 National Social Security Fund 102 Portfolio State 1.51% 47,207,115 0 0 YALE UNIVERSITY Foreign shareholder 1.40% 43,748,870 0 0 Yinhua Core Value Selected Stock Fund Domestic non-State-owned legal person 1.28% 40,000,000 0 0 Penghua Dynamic Growth Securities Investment Fund Domestic non-State-owned legal person 1.04% 32,406,886 0 0
Shareholding of top ten shareholders not subject to trading restrictions Unit: Share Name of shareholder Number of shares held not subject to trading restrictions Midea Group Holding Co., Ltd. 1,325,701,611 Foshan Shunde Kailian Industrial Development Co., Ltd. 85,967,913 Dacheng Blue Chip Sustaining Fund 58,897,805 MERRILL LYNCH INTERNATIONAL 54,589,086 National Social Security Fund 501 Portfolio 50,000,000 Bosera Thematic Sectors Equity Securities Investment Fund 49,000,000 National Social Security Fund 102 Portfolio 47,207,115 YALE UNIVERSITY 43,748,870 Yinhua Core Value Selected Stock Fund 40,000,000 Penghua Dynamic Growth Securities Investment Fund 32,406,886
Description for the connection or acting in concert relationship among the above-mentioned shareholders: Of the top ten shareholders of the Company, the beneficial controlling person of Midea Group Holding Co., Ltd. and Foshan Shunde Kailian Industrial Development Co., Ltd. is the same person and their legal representatives are direct family members, constituting the relationship of connected party with each other.
8 GD MIDEA HOLDING CO., LTD. (Con.) Changes in Share Capital and Information of Shareholders
(2) Information of the controlling shareholder of (except those items under exclusive operation or control accord- the Company ing to the Chinese governmental policies), computer software The controlling shareholder of the Company: Midea Group Hold- and hardware development, design of industrial products, infor- ing Co. Ltd. mation technology consultation and service, providing invest- Legal representative: He Xiangjian ment advisory and consultation services for enterprises, and Date of establishment: April 7th 2000. The name of this com- installation, maintenance and after-sales services of electric pany was changed from Shunde Meituo Investment Co., Ltd. to household appliances. Foshan Shunde Meituo Investment Co., Ltd. in July 2003 and to During the reporting period, there was no change in the control- Foshan Midea Group Holding Co.,Ltd. in December 2003, and ling shareholder of the Company. then to Midea Group Holding Co. Ltd. in April 2004. Registered office address: Industrial Avenue, Penglai Road, (3) Information of the beneficial controlling per- Beikao Township, Shunde District, Foshan, Guangdong son of the Company Province. Mr. He Xiangjian is the beneficial controlling person of the Registered capital: RMB one billion Company. The following diagram shows the equity holding and Main business scope: investment in manufacturing, wholesale control relation between the Company and its beneficial con- and retail trade, domestic commerce, commodity supply and sales trolling person as of the end of the reporting period:
He Xiangjian
94.55%
Midea Investment Holding Co., Ltd. 70%
84% 30%
Midea Group Holding Co., Ltd. Kailian Industrial Development Co., Ltd.
42.49% 3.66%
0.12% GD Midea Holding Co., Ltd.
ANNUAL REPORT 2010 9 10 GD MIDEA HOLDING CO., LTD. IV. Information of Directors, Supervisors, Senior Executives and Employees
1. General Information of Directors, Supervisors and Senior Executives
Name Sex Age Position Term of office Number of shares Number of shares held at the held at the beginning of the year end of the year Fang Hongbo Male 44 Chairman of the Board and President 2010.4 2013.4 0 0 Li Jianwei Male 45 Vice-Chairman of the Board 2010.4 2013.4 0 0 Huang Xiaoming Male 40 Vice-Chairman of the Board 2010.4 2013.4 0 0 Yuan Liqun Female 42 Director 2010.4 2013.4 0 0 Zhao Jun Male 36 Director, responsible person for finance 2010.4 2013.4 0 0 Li Feide Male 34 Director, Secretary to the Board 2010.4 2013.4 0 0 Wang Jun Male 53 Independent Director 2010.4 2013.4 0 0 Chen Renbao Male 49 Independent Director 2010.4 2013.4 0 0 Wang Bo Male 49 Independent Director 2010.4 2013.4 0 0 Zeng Qiao Female 38 Convener of the Supervisory Board meeting 2010.4 2013.4 0 0 Lu Shuping Male 39 Supervisor 2010.4 2013.4 0 0 Li Li Male 37 Staff and Workers Representative Supervisor 2010.4 2013.4 0 0 Lu Jianfeng Male 38 Vice-President 2010.8 2013.4 0 0 Cen Jiang Male 38 Vice-President 2010.8 2013.4
Note: The Company currently has not implemented any share incentive scheme. During the reporting period, none of the directors, the supervisors and senior executives holds any share option or restricted shares in the Company.
2. Main Work Experience and Positions of the Directors, Supervisors and Senior Executives
(1) Mr. Fang Hongbo, master's degree, joined Midea in 1992 Director and Vice-President of Midea Group Holding Co. Ltd. and was Vice-President and President of the Company, and is (5) Mr. Zhao Jun, master's degree, joined Midea in 2000 and was currently Chairman of the Board and president of the Company. Deputy Chief Officer of Financial Department of the Company, Mr. Fang Hongbo is also chairman of Wuxi Little Swan Com- and is currently a Director, responsible person for finance and pany Limited under the Company. Chief Officer of Financial Department of the Company. (2) Mr. Li Jianwei, master's degree, joined Midea in 1994 and was (6) Mr. Li Feide, master's degree, joined Midea in 1999 and was Secretary to the Board of the Company, and is currently Vice- Deputy Head of Strategic Development Department of the Chairman of the Board of the Company. Mr. Li Jianwei is also a Company, and is currently a Director, Secretary to the Board Director and Vice-President of Midea Group Holding Co. Ltd. and Chief Supervisor of Securities Affairs of the Company. (3) Mr. Huang Xiaoming, master's degree, joined Midea in (7) Mr. Wang Qun, doctor's degree, Head of Advanced Institute 1996 and was Board Secretary of the Company, and is cur- of Social Sciences of Sun Yat-Sen University, the professor in rently Vice-Chairman of the Board of the Company. Mr. Huang economics and PhD tutor of Lingnan College in Sun Yat-Sen Xiaoming is also a Director and Vice-President of Midea Group University, Vice-Director Commissioner of Liberal Arts' Aca- Holding Co. Ltd. demic Committee of Sun Yat-Sen University, model laborer of (4) Ms. Yuan Liqun, master's degree, joined Midea in 1992 and Guangzhou, and the President of Guangdong Province Economi- was Convener of the Supervisory Board of the Company, and is cal Association. He had conducted academic research in School currently a Director of the Company. Ms. Yuan Liqun is also a of Economics, University of Leicester in the U.K., Fairbank
ANNUAL REPORT 2010 11 Information of Directors, Supervisors, Senior Executives and Employees (Con.)
Center of Harvard University and Sloan School of Management pany and is currently a Supervisor of the Company. Mr. Lu Shuping of Massachusetts Institute of Technology in the US. Mr. Wang is also the Office Manager of Midea Group Holding Co. Ltd. owns extensive and insightful research and unique views in trans- (12) Mr. Li Li, master's degree, joined Midea in 2002. He acted formational economics, institutional economics, enterprise theory as the Chief Operation Officer and Chairman of the Supervisory and industrial cluster theory, etc. Since May 2007, he started to Board of Wuxi Little Swan Company Limited under the Com- act as an Independent Director of the Company. pany and is currently a Supervisor, and Chief Officer of Human (8) Mr. Chen Renbao, doctor's degree, is currently the associate Resources Department, of the Company. professor of Finance Department of Business School in National (13) Mr. Lu Jianfeng, master's degree, joined Midea in 1997. He University of Singapore and a director of Keywise Capital Man- acted as President of Residential Air-conditioner Domestic Division agement Ltd. in the US. He was the academic director of Chi- under the Company. He is now Vice-President of the Company and nese EMBA program in National University of Singapore, In- President of the China Marketing Headoffice of the Company. ternational MBA (IMBA) director of National University of Singapore and Peking University in China, and the consultant of (14) Mr. Cen Jiang, master's degree, joined Midea in 1997. He education fund investment in National University of Singapore acted as President of Residential Air-conditioner International (the amount of fund is 2 billion Singapore dollars). He special- Division under the Company. He is now Vice-President of the izes in the fields of financial management, risk management and Company and President of the International Division of the insurance, employee benefit and retirement plan, etc. He now is Company. the consultant of a number of Chinese and foreign companies, and provides consultation relating to corporate financial man- 3. Annual Remuneration of the Directors, Supervi- agement and financial risk management to a number of large- sors and Senior Executives sized corporations. He was an Independent Director of the Com- pany since May 2007. (1) Remuneration decision-making procedures (9) Mr. Wang Bo, postgraduate, is one of the first batch patent and basis for remuneration of the directors, super- attorneys in China who are qualified to engage in securities visors and senior executives business; he is currently the Chairman of Guangzhou Lawyers At the 25th meeting of the sixth Board of Directors of the Com- Association, Vice-Chairman of Guangdong Lawyers pany convened on April 29th 2009, the Company approved the Association, an arbitrator of Guangzhou Arbitration Commission, Remuneration Management System for Directors, Supervisors a part-time professor of Southwest University of Political Sci- and Senior Executives, pursuant to which the remuneration of ence & Law, a part-time postgraduate tutor of the Law School of the Company's directors, supervisors and senior executives shall Jinan University, and a director and senior partner of King Pound consist of basic annual salary and performance-related annual Law Firm. He was awarded The Best Lawyers in China and Ten salary. The basic remunerations shall be determined upon the Best Lawyers in Guangzhou. He was an Independent Director responsibilities, risks and pressure assumed by the directors, of the Company since September 2009. supervisors and senior executives respectively. The basic an- (10) Ms. Zeng Qiao, master's degree, joined Midea in 1999. She nual salary shall be fixed while the performance-related annual acted as the Vice Director of Audit and Compliance Department salary shall be linked to the fulfillment ratio of the Company's of Midea Group Holding Co. Ltd. She is now the Convener of profit and the results of performance target. The remuneration the Supervisory Board of the Company, and is also the Chief system for directors, supervisors and senior executives serves Director of Audit and Compliance Department of Midea Group the Company's operation strategies and shall be adjusted corre- Holding Co. Ltd. spondingly in response to change in the operation status of the Company in order to cope with the Company's needs for further (11) Mr. Lu Shuping, master's degree, joined Midea in 1998. He development. Bases for remuneration adjustment for the acted as the Assistant to President Office Manager of the Com-
12 GD MIDEA HOLDING CO., LTD. (Con.)Information of Directors, Supervisors, Senior Executives and Employees
Company's directors, supervisors and senior executives are: standards for the Independent Directors of the Company have been 1) level of salary/wage increment in the industry; 2) inflation increased to RMB150,000 (including tax ) per year. level; 3) profitability of the Company; 4) adjustment to the orga- nizational structure; and 5) individual adjustment in relation to (2) Annual remuneration of existing directors, su- change in position. pervisors and senior executives At the 9th meeting of the sixth Board of Directors of the Company th convened on February 18 2008, the Company considered and (i) Annual remunerations of directors, supervisors and senior approved the Proposal Concerning Adjusting Allowance Stan- executives who received remuneration from the Company: dards for Independent Directors, pursuant to which the allowance
Name Position Annual remuneration Remarks (RMB'0000) Fang Hongbo Chairman of the Board and President 405 - Zhao Jun Director, and responsible person for finance 75 - Li Feide Director and Secretary to the Board 86 - Lu Jianfeng Vice-President 288 Appointed in August 2010 Cen Jiang Vice-President 271 Appointed in August 2010 Li Donglai Former Vice-President 170 Resigned in December 2010 Li Li Staff and Workers Representative Supervisor 81 -
Emolument for each independent director is RMB150,000 (ii) During the reporting period, upon nomination by Mr. Fang (including tax), and all the expenses required for the indepen- Hongbo, President of the Company and consideration and ap- dent director to perform his or her responsibilities as indepen- proval at 5th meeting of 7th Board, Mr. Lu Jiangfeng and Mr. Cen dent director shall be borne by the Company. Jiang were elected vice presidents of the Company.
(ii) Information of directors, supervisors and senior executives (iii) During the reporting period, due to work adjustment, Mr. Li who did not receive remuneration from the Company Donglai, Vice President of the Company, tendered his resigna- Three directors, namely Mr. Li Jianwei, Mr. Huang Xiaoming, tion to the Board of Directors of the Company and resigned and Ms. Yuan Liqun, and two supervisors, namely Ms. Zeng from the post of Vice President of the Company. Qiao and Mr. Lu Shuping, received remuneration from the shareholders'unit, and the Company did not pay them any 5. Staff of the Company remuneration.
The Company had a total of 98,676 employees as at December 4. Changes in Directors, Supervisors and Senior 31st 2010. Executives during the Reporting Period Breakdown by function: Administration personnel, 692; Fi- (i) During the reporting period, the Company completed elec- nance personnel, 802; Sales personnel, 1,316; Technical tion of 7th Board of Directors and 7th Supervisory Board at expi- personnel, 3,216 and Production personnel, 92,650; ration of their office terms, and the Board of Directors appointed Educational background: Doctors, 30 and masters, 428; Univer- new senior executives of the Company. Directors of the Board, sity graduates, 7,240; College graduates, 17,337; Graduates from supervisors of Supervisory Board, and senior executives of the technical secondary schools, 49,168 and Others, 24,473. Company after this election are in conformity with relevant per- sons of 6th Board and 6th Supervisory Board.
ANNUAL REPORT 2010 13 V. Corporate Governance Structure
(I)Actual Situations of Corporate Governance of the Co., Ltd., in order to further guarantee security and liquidity of Company the Company's Funds Deposited at Midea Group Finance Co., Ltd. The controlling shareholder of the Company, namely Midea Group Holding Co. Ltd., issued a letter of commitment to guar- During the reporting period, in strict accordance with the re- quirements of the Company Law, Securities Law, and other re- anteeing the fund security when the Company has any financial transactions with Midea Group Finance Co., Ltd. lated laws and regulations of CSRC, the Company kept improv- ing its corporate governance structure and pushing forward im- 4. As controlling shareholder of the listed company "Wuxi Little provement of its standardized operation, and its actual condi- tions of corporate governance structure comply with the require- Swan Company Limited", the Company completed sales of its washing machine asset business to Little Swan and subscribed ments of regulatory documents concerning corporate governance of listed companies issued by CSRC and Shenzhen Stock for the shares issued by Little Swan to the Company, and thus completely eliminated competition between the Company and Exchange. During the reporting period, the Company completed the main work as follows to improve its corporate governance Little Swan in washing machine business. and standardized operation: 5. Based on the established internal control system, according to the requirements of Basic Code on the Corporate Internal Con- 1. The Company further strengthened and standardized the re- porting and process management of its internal information, and trol and actual conditions of the Company, the Company further strengthened and improved its internal control system, promoted made more efforts to organize the directors, supervisors and se- nior executives of the Company to study relevant laws and establishment of its effective internal control and management system centered around risk management and focusing on inter- regulations. In accordance with the formulated the Internal In- formation Confidential System and Internal Reporting System nal environment, risk evaluation and control activities, informa- tion and communication, and internal supervision, and thus pro- for Material Information, the Company eliminated and prevented the trading of the Company's shares via insider information and vided guarantee for sustainable and healthy development of the Company. short-term trading of the Company's shares during sensitive periods. In addition, according to the requirements of the notice 6. Strictly pursuant to the requirements of the laws, regulations, issued by CSRC Guangdong Bureau, the Company, within speci- fied time, reported the insiders knowing its relevant internal event Articles of Association and Administrative Measures for the Disclosure of Information, the Company strengthened the man- information to CSRC Guangdong Bureau for record via the online regulatory information platform information reporting system agement of information disclosure and ensured that the infor- mation regarding the Company was fairly available to all the set up by CSRC Guangdong Bureau. investors. The Company has formulated the Accountability Sys- tem for Material Faults in Information Disclosure made in An- 2. In accordance with the requirements of the Guidelines on Stan- dardized Operations of the Companies Listed on the Main Board nual Report, in order to strengthen imposing accountability on the person responsible for disclosing information in the annual issued by Shenzhen Stock Exchange, the controlling shareholder and beneficial controlling person signed the Statement and Com- reports, improve the quality and transparency of disclosing in- formation in the annual reports and ensure that the information mitment of Controlling Shareholder and Beneficial Controlling Person. is disclosed in a true, accurate, complete and timely manner.
3. To standardize the connected transactions between the Com- 7. The Company continued to improve the investor relations pany and Midea Group Finance Co., Ltd., the Company formu- management, designated a full-time person to be responsible for lated the Risk Control Regulations for Connected Transactions telephone, fax and e-mail of the Company to contact the investors, between GD Midea Holding Co., Ltd. and Midea Group Finance strengthened communication and contacts with all kinds of in-
14 GD MIDEA HOLDING CO., LTD. (Con.)Corporate Governance Structure
vestors through road show, reception on the spot, periodic per- (II)Performance of Duties of Independent Direc- formance reporting meeting and other channels, and allowed the tors investors to have full understanding of the Company's status while observing the information disclosure rules. During the reporting period, the independent directors of the The Company executed standardized corporate governance and Company carefully performed their obligations and duties of strengthened its investor relations, and was fully recognized by honesty and diligence according to the Articles of Association the society and investors. In 2010, the Company was awarded and relevant stipulations, and protected interests of the Com- the following main honors: pany and interests of all shareholders from being infringed. The "Listed Company with Best Investor Relations" Award by www. independent directors actively participated in the Board meet- hexun.com; ings of the Company, carefully considered and reviewed the "Best Board of Directors" Award and "6th Gold Round Table motions proposed at the meetings and made independent, objec- Awards for the Listed Companies" by Directors & Boards; tive and fair judgments thereon, gave independent opinions on the matters such as related-party transactions and external guar- "Top 100 Chinese Listed Companies in Market Value Manage- antee according to the regulations, and provided many valuable ment" Award and "Listed Company with Most Social Responsi- advices and recommendations for the operations and develop- bility Sense in Chinese Securities Market in 20 Years" by China ment of the Company through their respective professional Center for Market Value Management; perspectives, thereby formulating scientific and objective deci- "Top 100 Listed Company's Value" Award and "Top Ten Man- sions of the Board of Directors while exerting positive effects agement Team of Listed Companies" Award by Securities Times. on a promising development of the Company. "Top 100 Gold Bulls for Listed Company" award by China Se- curities Journal for the ten consecutive times.
1.Details of independent directors attending Board meetings
Name of independent director Number of meetings to Attended Attended Absent be attended during the year in person by proxy Wang Jun 11 11 0 0 Chen Renbao 11 11 0 0 Wang Bo 11 11 0 0
2.Details of independent directors attending meet- between the independent directors of the Company and the se- ings of special committees of the Board nior management of the Company, a report on the production, During the reporting period, there were 3 meetings of Audit operations, financial status, annual significant investments, 5- Committee and 2 meetings of Nomination Committee; all inde- year strategic plan, non-public issue of A shares, Little Swan pendent directors who were members of related special commit- asset restructuring and other significant events of the Company tees attended those special committee meetings. for 2010 was made by the senior management of the Company to the independent directors of the Company. On the same day, 3.Details of the implementation of the Rules on the independent directors of the Company held a meeting with Mr. Liu Zhiyong and Mr. Zhou Rongming, certified public ac- Responsibilities of Independent Directors in Prepa- countants auditing the financial statements of the Company for ration of Annual Reports 2010. During the meeting, the independent directors understood In the course of auditing and preparation of Annual Report 2010, in detail the audit team personnel arrangement, audit plan, the the independent directors earnestly performed their responsi- key audit work and audit strategy, and risk evaluation and bilities and obligations. On January 25th 2011, at a meeting held
ANNUAL REPORT 2010 15 Corporate Governance Structure (Con.)
judgment, agreed that annual audit was carried out according to (III) Segregation between the Company and its con- existing audit plan. On March 14th 2011, before Board of the trolling shareholder in respects of business, staff, Company reviewed the Annual Report 2010, the independent assets, organizational structure and finance directors of the Company held a second meeting with Mr. Liu Zhiyong and Mr. Zhou Rongming, certified public accountants 1. With regard to the segregation of business: auditing the financial statements of the Company for 2010, and The Company has a complete business chain in production and asked them the audit progress and other related circumstances, operation, owns an independent and complete procurement and inquired about significant changes in the relevant financial indi- sales system, operations and self-operating capabilities. cators and reasons for such changes, reviewed and considered the financial report on which the auditors have given their pre- 2. With regard to the segregation of personnel: liminary view of an unmodified and unqualified opinion. At the The personnel between the Company and the controlling share- same time, the independent directors read and reviewed the pro- holder are segregated. The Company is independent in the labour, cedures for the Company to hold the annual report review personnel and wage management. Each senior executive of the meeting, and all the resolutions and proposals to be examined at Company receives his or her salaries and remuneration from the the meeting and appendices thereto, and then agreed to convene Company, without holding any other executive position (other Board meeting of the Company as scheduled. than director and supervisor) in the controlling shareholder.
4.Objections raised by independent directors in 3. With regard to the completeness of assets: relation to the relevant matters of the Company The Company has an independent production system, auxiliary During the reporting period, the independent directors of the production system and auxiliary facilities, and has industrial prop- Company raised no objections as to the respective resolutions, erty rights, trademarks, non-patented technologies and other in- proposals and other matters of the Board for the year. tangible assets.
4.With regard to the independence of organization: The Company has established independent organizational struc- ture and maintains its independent operation, and has the right to set up its own affiliate organizations and make decision in personnel appointment and dismissal, there is no overlapping of personnel appointment with controlling shareholders.
5. With regard to the independence of finance: The Company and its controlling shareholder are separated from each other in respect of finance. The Company has established an independent finance department, and has established inde- pendent accounting system and financial management system and opened independent bank accounts. It makes decisions re- lated with finance by itself and pays taxes in accordance with the laws.
16 GD MIDEA HOLDING CO., LTD. (Con.)Corporate Governance Structure
(IV) Establishment and improvement of the internal Guidelines for Corporate Internal Control, further improve its control system established internal control system, strengthen the study of the laws and regulations related with internal control, formulate the implementation scheme, and establish an effectively-operating 1. Self-evaluation of internal control internal control system centered around risk management and According to the requirements of the statutes such as Company focusing on internal environment, risk evaluation and control Law ,Securities Law, Rules for Corporate Governance of Listed activities, information and communication, and internal Company, Basic Code on the Corporate Internal Control, and supervision, in order to meet the compliance requirements of Implementation Guidelines for Corporate Internal Control, the the internal and external regulatory departments and further im- Company kept improving its corporate governance structure, prove the corporate governance of the Company. regulating the relationships between the Company and its con- trolling shareholder, enhancing the control of daily related-party The Board of the Company reviewed and approved the Report transaction, revising and improving documents for internal of the Self-evaluation of Internal Control of the Company. control, thereby improving the governance and regulative op- Ascenda Certified Public Accountants, Ltd. audited the effec- eration of the Company. Currently, the Company has established tiveness of the internal control in respect of the financial state- a complete internal control system and effectively executes this ments for the year ended December 31st 2010, and issued Spe- system. Internal control system and relevant rules of the Com- cial Attestation Report on Internal Control (Tian Jian Zheng Xin pany can suit to the management requirements and development Shen (2011) Zhuan Zi No.150036). demands of the Company, provide reasonable assurance for pre- paring true and fair financial statements and guarantee healthy 3. Views of the Company's independent directors operation of each business and operation risk control of the on its self-evaluation of internal control Company. The Company is free from any material defects in As independent directors of the Company, We issue our views terms of the completeness, reasonableness and effectiveness of on the self-evaluation of the internal control of the Company as its internal control system (For details, please refer to Report of follows: the Self-evaluation of Internal Control issued by the Company). The internal control management system of the Company has been established, internal control system is normative, strict, suf- 2. Board Statement concerning its responsibility for ficient and effective in respects of internal environment, target internal control setting, risk responding and control activities, information and The Board of the Company thinks that the existing internal con- communication, inspection and supervision, and generally com- trol system has already been basically established and effec- plies with the requirements of the related laws, regulations and tively implemented, and the internal control system and its re- regulatory authorities. Internal control activities of the Company lated institutions are able to meet the management requirements have basically covered all links of operations, and perform suf- and development needs of the Company, provide a reasonable ficient and effective control over key activities such as the con- assurance for preparing true and fair financial statements and trolled subsidiaries, related party transactions, external guarantee, guarantee healthy operation of each business and operation risk fund raising management, significant investment, and informa- control of the Company. tion disclosure, thereby ensuring the smooth operation and man- The Board of the Company always attaches importance to es- agement of the Company. We are of the opinion that the report tablishment and effective implementation of its internal control of the self-evaluation of internal control gave a true and objec- system, and will, in accordance with the requirements of Basic tive view of the actual conditions of the internal control of the Code on the Corporate Internal Control and Implementation Company.
ANNUAL REPORT 2010 17 Corporate Governance Structure (Con.)
4. Establishment and operation of internal control and approval pursuant to the authority and procedures as stipu- system for financial report lated in relevant regulations and system. The Company strictly executed accounting laws and regulations With its budget management system established, the Company as well as the uniform national accounting standards, and executes budget control for purchase, income, cost and expense, strengthened the management on whole process of preparing and improves its internal control system by taking such measures financial report and providing it to external parties for analysis as budget drafting, budget execution, budget adjustment and bud- and use. get supervision, in order to strictly control non-productive capital The Company has formulated complete and sound accounting expenditures, optimize resource utilization and improve opera- management and internal control system as well as internal con- tion performance and efficiency of the Company. trol and management system relating to project construction, The Company has formulated various basic accounting systems, fund settlement, fixed assets, current assets, sales, management established normative accounts regulation rules, funds, materi- of accounts receivable, financing and guarantees for external als and settlement checking regulations, define the responsible parties, asset risk warning, financial review and approval au- persons and corresponding treatment procedures, and avoid in- thority process management, futures hedging, exchange capital, consistency of the accounts with corresponding vouchers, the financial checking system, accounting element management, and other related accounts and physical goods. The financial report accounting archives management. For preparation of its finan- has been prepared on the basis of the complete and correct ac- cial report, the Company focused on accounting policies and counting books and records, which ensures that the contents of estimates, and handling of the transactions and matters having the financial report are complete, true and accurate. significant effects on the financial report is subject to review The Company has established the management measures for delivery and disclosure of its financial reports, and delivers the financial reports to related responsible persons within the Com- pany and external users in the specified manner and discloses the information in accordance with the laws.
(V) Establishment and implementation of evaluation and incentive mechanism and related bonus system for senior executives of the Company during the re- porting period
The Company has established performance evaluation system based on the responsibility system for targets. Performance evalu- ation for senior executives was carried out by signing annual ob- jective responsibility evaluation agreement, determining the evalu- ated indicators and evaluation manners and correlating the bonus with the evaluation result. During the reporting period, the Com- pany conducted assessment and evaluation on its senior execu- tives according to the administrative measures for responsibility system for targets and took into account the evaluationresult in the payment of their annual performance bonus.
18 GD MIDEA HOLDING CO., LTD. VI. Shareholders' General Meeting
During the reporting period, the Company held five Sharehold- eral Meeting for 2010" on the designated newspapers for dis- ers' general meetings and they are described as follows: closing information of the Company: China Securities Journal, Securities Times, Shanghai Securities News and http://www. 1. The Company held the first extraordinary general meeting for cninfo.com.cn on April 30th 2010; 2010 on January 25th 2010, and this meeting examined and ap- proved the Proposal Concerning Changing Auditors of the Com- 4. The Company held the third extraordinary general meeting for pany for 2009. The Company published Announcement of the Reso- 2010 on June 14th 2010. This meeting examined and approved the lutions of First Extraordinary General Meeting for 2010 on the des- Resolution Concerning Amending the Articles of Association of ignated newspapers for disclosing information of the Company: GD Midea Holding Co., Ltd. and Resolution Concerning Provid- China Securities Journal, Securities Times and Shanghai Securities ing Guarantee for Controlled subsidiaries under the Company. News and http://www.cninfo.com.cn on January 26th 2010; The Company published its "Announcement of the Resolutions of Third Extraordinary General Meeting for 2009" on the desig- 2. The Company held the 2009 Annual General Meeting on April nated newspapers for disclosing information of the Company: 12th 2010, and this meeting examined and approved 13 propos- China Securities Journal, Securities Times, Shanghai Securities als and resolutions including 2009 Directors' Report. The Com- News and on http://www.cninfo.com.cn on June 18th 2010. pany published its "Announcement of the Resolutions of 2009 Annual General Meeting "on the designated newspapers for dis- 5. The Company held the fourth extraordinary general meeting closing information of the Company: China Securities Journal, for 2010 on September 17th 2010, and this meeting examined Securities Times, Shanghai Securities News and http://www. and approved seven resolutions including the Resolution Con- cninfo.com.cn on April 13th 2010; cerning the Company Complying with the Conditions for Non- pubic Issue of A Shares. The Company published its "Announce- 3. The Company held the second extraordinary general meeting ment of the Resolutions of Fourth Extraordinary General Meet- for 2010 on April 29th 2010, and this meeting examined and ing for 2010" on the designated newspapers for disclosing infor- approved Resolution Concerning the Related-Party Transaction mation of the Company: China Securities Journal, Securities in respect of Signing Financial Service Framework Agreement Times, Shanghai Securities News and on http://www.cninfo.com. with Midea Group Co., Ltd..The Company published its "An- cn on September 18th 2010. nouncement of the Resolutions of Second Extraordinary Gen-
ANNUAL REPORT 2010 19 VII. Directors' Report
(I)Management Discussion and Analysis brand, quality, energy-saving, comfort and fashionable appearance. After over twenty years of development, the urban 1. Overall Industrial Situation and Environment home appliance market entered a period of intensive upgrading and replacement. (1) Industrial demand grew rapidly Year 2010 saw industry-wide rapid growth of the air- Global competitiveness of Chinese home appliance prod- conditioners, refrigerators and washing machines industries. ucts was continuously enhanced, and there was huge room for According to the statistics, the sales quantities of the products in increase in the demands in export market 2010 recorded about 95 million air-conditioners, an increase of In 2010, home appliance exports showed the momentum of strong 44% year-on-year; about 70 million refrigerators, an increase of growth. Air-conditioners, refrigerators, washing machines manu- 22% year-on-year; and nearly 50 million washing machines, an factured in China accounted for nearly 85%, 45% and 30% of increase of 29% year-on-year. The rapid growth of these indus- respective global demands. The competitiveness of Chinese home tries was mainly attributed to the following factors: appliances lies not only in cost but also in other long-term ad- vantages including huge domestic demands and scale, complete Income and spending power of the residents were continu- industry clusters and growing supportive products. In the face ously growing, but the overall penetration rate of home appli- of the recovery and growth of the global economy, Chinese home ances was still low, and there was large consumption potential appliances enterprises, especially the leading enterprises, speeded in the third and the fourth-tier markets up their expansion in the huge markets of developing countries In 2009, China's per capita income exceeded the critical point of through effective globalized market disposition and expansion, US$3,000. According to the experience of overseas home appli- re-shaped the global brand image and enhanced brand value to ance consumption, China is now in a period of rapid growth of gain long-term competitive edges in the world. home appliance consumption. Meanwhile, current quantity of home appliances owned by consumers in China, especially in Continuous promotion by policies for the home appliance rural areas, is still at a low level. According to statistics, cur- industry rently the ownership of air-conditioners, refrigerators and wash- The continued implementation of a set of industrial policies re- ing machines in rural areas is only 12%, 37% and 50% lated to home appliances drove the increase of home appliance respectively. Driven by the enormous domestic demands in nearly consumption and the upgrade of industrial structure. The increase 3,000 districts and counties, 50,000 towns and 700,000 admin- in price ceiling of home appliances going to countryside pro- istrative villages, as well as thanks to increased income, decreased moted the further release of the rural demand for white home home appliance transaction cost, and improved after-sales ser- appliances. The rise of price ceiling and inclusion of inverter vices and water & power supply conditions in China, the third air-conditioners also provided an opportunity for popularization and fourth-tier markets have become a new engine for stimulat- of relatively high-end products in rural market, and implemen- ing rapid growth of the home appliance market. tation of new energy efficiency standard and energy-saving sub- sidy policies vigorously drove the upgrade of air conditioning Continuous urbanization, gradually changing consumption products. The reduced subsidy for fix-frequency air-condition- views and the demands for product upgrade have become strong ers may, on one hand resulted in industry-wide price increase of power driving increase of home appliance consumption energy-efficient fixed-frequency air-conditioner industry and on The urbanization rate of China quickly jumped from 20% in the other hand, is expected to further accelerate the populariza- 1982 to 46% in 2009. Compared with developed countries with tion of inverter air-conditioners. The nationwide popularization urbanization rate of above 80%, China was still in the stage of of the "trade-in" policy started in June 2010 would also further accelerating urbanization. The increased urban population and promote the upgrade and replacement of home appliances in the income, which led to upgrading of residents' lifestyle and con- first and second-tier markets. sumption views, resulted in the shift of concern from price to
20 GD MIDEA HOLDING CO., LTD. (Con.)Directors' Report
(2) Competition pattern has been changing the introduction of variable frequency dual-drum front-loading After perfect competition for many years in the white home ap- washing machine, the washing machine market showed not only pliance industry, the market is becoming more mature, the con- increased technical competition but also enriched content of high- centration of market shares is gradually improved and the stabil- end washing machine. According to statistics, in 2010, the over- ity of corporate profitability is enhanced. all sales of front-loading washing machines increased by more The sales of the top two companies in the air-conditioner indus- than 50%, nearly 28 percentage points higher than the overall try accounted for 50% of the industry's total sales. First-line level. Sales of front-loading washing machines in major cities large brands, by relying on their strong brand image, channel accounted for nearly 30%. control power, scale, position and quick response to market Refrigerator changes and other advantages, constantly consolidated and In 2010, high-end refrigerators represented by energy-saving and strengthened their leader positions. After industrial integration variable frequency, air-cooled, intelligent, high-capacity and for many years, the refrigerator and washing machine industry multi-compartment refrigerators were further popularized. Ac- was still not in perfect competition, but the brand concentration cording to the statistics, the sales of single-door refrigerators was gradually increased and the competition pattern and devel- decreased in 2010; the sales of the double-door refrigerators re- opment trends became clearer day by day. The increased con- mained unchanged; and the sales of side-by-side combination, centration of home appliance brands advanced the home appli- three-door and multi-door refrigerators rocketed by nearly 70%. ance industry to march in the direction of regulated competition The rapid sales increase of high-end refrigerators became the and healthy development. The focus of competition was shifted booster of the entire refrigerator industry. from price to technology, industry chain and services, as well as channel development in the third and fourth-tier markets. Indus- trial leaders with multiple competitive edges will occupy higher 2. Summary of Overall Operation and Key Review market shares and grow at a rate higher than the industry's for 2010 average. (1) Summary of the Overall Operation (3) Product mix continued to upgrade In 2010, the advantage of the portfolio of air conditioning, re- frigerator and washing machine businesses was further high- Air-conditioner lighted and promoted the rapid growth of sales revenue. The implementation of the new energy efficiency standards made Meanwhile, the continuous optimization of the product mix con- energy-efficient air conditioning products the mainstream of the sisting of inverter air-conditioners, multi-door refrigerators and market. Meanwhile, the popularization of inverter air-conditioner front-loading washing machines guaranteed the continuous in- was accelerated and the market's acceptance of inverter air-con- crease of the Company's profitability. In 2010, the Company ditioners turned from quantitative accumulation to qualitative realized an operating revenue of RMB74.559 billion, an increase change. Besides, after entering 2010, the emerging of fluorine- of 57.70%. The net profit attributable to shareholders of the free inverter air-conditioner pushed the rapid change of refriger- Company increased to RMB3.127 billion. Revenue from the air- ant used in air-conditioners to the more eco-friendly R410a re- conditioner and components, the refrigerator and components frigerant products. and the washing machine and components increased by 50.63%, 57.45% and 63.10% respectively to RMB48.259 billion, Washing machine RMB9.939 billion and RMB9.729 billion. Mainly due to imple- In the first and second-tier markets, the washing machine indus- mentation of the Company's operation strategy of giving prior- try was in a period of a large-scale upgrade and replacement. ity to scale and increasing market share as well as the rising The extensive application of inverter technology and continu- costs of main raw materials, the Company's gross profit margin ous emergence of new functional products led to constant in- decreased by 5.10 percentage points. The gross profit margin was crease in the market shares of high-end products. With increas- also affected by the implementation of preferential prices for energy- ingly affordable price, the market share increased rapidly. With
ANNUAL REPORT 2010 21 Directors' Report(Con.)
efficient products and adjustment of income from main business. The six major manufacturing base projects, namely Handan In addition, due to the deepened marketing reform for channel air-conditioner manufacturing base, Jinzhou refrigerator manu- integration, the advantage of the integration of three main busi- facturing base, Wuhu integral machine and compressor manu- nesses-air-conditioners, refrigerators and washing machines was facturing base, South China air-conditioner and refrigerator further brought into play and the Company's ratio of sales ex- manufacturing base and East China central air-conditioner manu- penses to sales income also dropped substantially. facturing base, progressed smoothly. The Company would es- tablish nine regional manufacturing bases covering five regional (2) Key Review for 2010 markets, i.e. South China, East China, Central China, Southwest During the reporting period, the Company continued to deepen China and North China. The preliminary industrial layout was organizational reforms, integrated resource advantages, inspired established and the scale advantage was gradually consolidated. operation vitality and enhanced operational efficiency By focusing on white home appliance and HVAC industry Intensively pushed on the improvement of the manage- and based on the consolidation of basic product scale and cost ment organizational structure for business regionalization and capacity advantage, the Company increased the marketing input product specialization, continuously carried out thorough cor- and improvement efforts in the fields of residential D/C inverter poration-oriented reform of products, geared to the market air-conditioners, front-loading washing machines, multi-door demands, defined rights and responsibilities well, drove decen- refrigerators and side-by-side combination refrigerators, D/C tralization of operation, further inspired the vitality of the opera- inverter air-conditioner compressors, large-sized central air-con- tional entities of various products and comprehensively improved ditioner systems, multi-connected air-conditioner systems and operation efficiency. water heaters through market orientation, resource input, intro- Promoted and improved the integration and sharing of criti- duction of talented people and mechanism innovation in order cal resources, established a refrigeration research institute to to further optimize product mix and guarantee the drive for con- strengthen the research and coordination on basic technologies, tinuous improvement of the Company's profitability. In 2010, common technologies and cutting-edge technologies; founded the Company's domestic sales of D/C inverter air-conditioners electronics company and mold company and strengthened the accounted for nearly 30%, a year-on-year growth of approxi- research and manufacture of key products to improve profes- mately 100%, and continued to lead the market; while sales of sional capacity. front-loading washing machines, multi-door refrigerators and side-by-side combination refrigerators all increased by several Deepened the supply chain integration, established a uni- times year-on-year. fied business platform and consolidated the resource coordina- tion and management of bulk raw materials and common mate- Deepened the marketing system reform, speeded up market rials to support the Company's mid-long term development and expansion, provided fine after-sales services, and gave play to meet business divisions' demands for operational support. the competitive edge of product mix consisting of air- conditioners, refrigerators and washing machines Strengthened the value chain integration, and by taking such measures as interests-bundled assessment of product value Further pushed on the operation of domestic sales compa- chain, coordination and communication, market pressure and nies as an entity, established more than 60 air-conditioner, re- quality pressure transmission, comprehensively improved the frigerator and washing machine sales companies and continued operational efficiency and response to market changes. to segment operation entities. Clearly defined structure of industrial development, improved Comprehensively promoted the construction of specialized regional industrial layout and continued to optimize product shops and the total number of specialized shops reached over mix 10,000.
22 GD MIDEA HOLDING CO., LTD. (Con.)Directors' Report
Thoroughly pushed on the "exploring the market in 1000 Continued to deepen the cooperation with strategic cus- counties and 10000 towns" program, vigorously developed town- tomers worldwide. In 2010, the Company acquired part of the level markets channels and outlets, and raised the total number shares of Miraco, a subsidiary of Carrier in Egypt, to promote its of sales outlets to nearly 60,000, which effectively enhanced the business development in the Middle East and Africa. influence of Midea brand in county/town-level markets. Promoted technical innovations, increased technical input and Continued to implement the "Total Customers' Satisfac- ensured the drive of sustainable development with the "technol- tion Project" with innovative service philosophy, substantially ogy-driven" strategy expanded the coverage of air-conditioner, refrigerator and wash- Established the refrigeration research institute and consoli- ing machine service networks, built reputation of our services in dated the fundamental, critical and forward-looking technical the market through efficient service mechanism and continu- researches, joined in the product development of various busi- ously improved customers' satisfaction with our products. The ness divisions to form a multi-level R&D system with clear service networks of Midea have covered all cities above county hierarchy, well-defined position and effective incentives, facili- level and some towns and the service responsiveness has been tated technical exchanges and synergistic innovations and es- continuously improved. At the ceremony of the Ministry of Com- tablished a technical experts committee to carry out researches merce promulgating Three Major Service Standards of the Air- on variable frequency, refrigeration, electric control, fluid and conditioner Industry and awarding the First Outstanding Model air duct, vibration, noise, and application of engineering materials. Unit, Midea, by virtue of its sound service networks, profes- sional service techniques, timely response and other excellent As to residential air-conditioners, by mastering the 10-130 performances, won the title of First Outstanding Model Unit in Hz frequency conversion technology, Midea developed by itself Compliance with Three Major Service Standards of the Air-con- products using the core technology of 180 degrees sine wave D/C ditioner Industry. In addition, the Company launched the "ten- inverter technology, achieving the objective of "broader fre- year free repair" campaign for Midea Air-conditioner, Midea quency and more comfortable" and firmly occupying the com- Refrigerator and Midea Washing Machine together, setting a manding ground of the industry. The Company is the first com- new record of the free repair period in the industry, and has pany in China that masters the 1 Hz low temperature preheating brought tangible benefits to consumers and promoted the fur- technology and has achieved major breakthrough in 0.1W ther upgrade of industrial standards. ultralow- power standby technology. With its inverter air-con- ditioner obtaining the certification certificate granted by UL, a Accelerated overseas disposition and steadily pushed on the in- US-based authoritative international certification body, the Com- ternationalization process pany became the first one around the world obtaining UL cer- Based on the previous refrigerator/washing machine mar- tificate for fluorine-free inverter air-conditioners. The Company's keting integration, promoted the integration of domestic sales "Residential Air-conditioner Energy Efficiency Upgrade" project and export businesses of refrigerators and central air-conditioner was regarded as national energy saving and emission reduction systems, accelerated the construction of a unified overseas sales key demonstration project and included in the central platform for multiple product lines, completed the emigration government's budget; the "Key Common Technology Research overseas of regional headquarters and established several na- Project for Energy-saving and Eco-friendly Air-conditioners" tional operation entities. was listed in the International Science and Technology Coop- eration Program of the Ministry of Science and Technology. Intensified channel cooperation, made greater efforts to The first Q-HAP solar air-conditioner developed by Midea by create self-owned brand brands and established the joint-ven- using several cutting-edge technologies including "Quasi-DC ture sales companies in Thailand and Indonesia by drawing on grid technology", "High-efficiency conversion technology", the experience of joint-venture sales companies in Brazil and "Adaptive MPPT technology" and "Preferential use of solar en- Malaysia to directly control the channels and vigorously pro- mote the Midea brand.
ANNUAL REPORT 2010 23 Directors' Report(Con.)
ergy technology" is technologically advanced in the world and system, silver ion sterilization system, air cleaning system and high- has passed China's 3C compulsory certification. efficiency washing, rinsing and self-cleaning technology system, the " " series of fully intelligent front-loading washing ma- As to central air-conditioners, Midea, owning the core tech- chines provide users with the experience of global intelligent nologies and providing high-quality services, became the top cen- operation. By employing four core technologies including 'steam tral air-conditioner brand in China. Known as "expert in environ- wash", 'spray water recirculation", "intelligent drying" and "D-PLUS mental control", the Company not only produces energy efficient variable frequency" and the innovative GLC eco-friendly cleaning products but also provides a wide range of environmental solu- system, the " " series of front-loading washing machines are tions for real estate, rail transit, communications and other featured with high energy efficiency, super-low noise, variable water industries. As the first manufacturer in China that possesses both flow and high spin speed, which secured its technological leader- industry-leading multi-connected air-conditioner system and cen- ship in the front-loading washing machine industry. The exclusive trifuge technology, Midea has developed the DC inverter air- core technology of "automatic detergent dispensing device for wash- conditioner, which has become one of the most competitive prod- ing machines" developed by Little Swan has obtained the patent ucts in the market and has been widely applied in a variety of key certificate issued by the State Intellectual Property Office. The au- projects, including service apartments for Shanghai World Expo, tomatic dispensing technology is the first of its kind in China, with the headquarters economy area of Guangzhou Science City, all technical indicators reaching the internationally advanced level Beijing-Shanghai High-Speed Railway and over 20 venues and and complying with the trend of energy efficient and environmen- facilities of Guangzhou Asian Games. With internationally ad- tally friendly development. vanced DC inverter technology and outstanding energy efficient products, Midea central air-conditioner won the "2010 China Dis- As to refrigerators, Midea refrigerator products passed sev- tinguished Contribution to Energy Saving" Award, was granted eral international authoritative certifications, including the U.S. "China Top Ten Enterprises for Distinguished Contribution to UL safety certification, the EU Energy Star certification and Energy Saving for 2010" award and became the only enterprise in TUV quality certification. The new high-end series launched by the air-conditioner industry that was granted "China Top Ten Midea, including European style " " luxury-door Enterprises for Distinguished Contribution to Energy Saving for refrigerators, " " side-by-side refrigerators, European 2010" award. This is another award received by Midea in energy- style " " 6F multi-function refrigerators, became the saving technology after Midea obtained the Energy-saving Engi- leader in the industry by virtue of innovative "dual high-mois- neering In-service Inspection Conformity Certificate for its cen- ture system" preservation technology, simple European styled tral air-conditioner system, the first of its kind in China. design and diversified and personalized product lines. The "2010 China Refrigerator Industry Summit" granted to Midea refrig- As to washing machines, Little Swan Company Limited erators the 2010 Low-carbon Contribution Award of the Refrig- under the Company became a representative manufacturer of the erator Industry, the Pioneer Brand in China's High-end Market first group of homemade washing machines receiving the "Interna- and the Best-selling Brand of Home Appliances Going to tional Pure Wool Mark Certification Certificate". "" series of Countryside. At the 2010 (third) China Annual Conference of front-loading washing machines developed by Little Swan Com- the Refrigerator Industry, Midea refrigerators won nine indus- pany Limited made breakthroughs in cleaning technology, with the trial prizes, including the 2010 Distinguished Refrigerator Brand washability ratio up to 1.25, far higher than the national standard of in Technological Innovation, Best-Performance Brand in High- 1.03. With eight intelligent innovative systems including the heat end Refrigerator Markets, Best Energy-saving Technology, Best balance drying, TS-Drive variable frequency, cleanness state moni- Air-Cooling Technology, Best Preservation Technology, and toring system, water mist deep cleaning system, gravity sensing Best Industrial Design.
24 GD MIDEA HOLDING CO., LTD. ANNUAL REPORT 2010 25 Directors' Report(Con.)
(3)Operating Results of our Principal Businesses Principal businesses by industry/product Composition of operating revenue and profit by industry
Unit: RMB'000 Breakdown by industry Operating Operating Gross Year-on-year Year-on-year Year-on-year revenue cost profit increase/ decrease in increase/decrease in increase/decrease in margin operating revenue (%) operating cost (%) gross profit margin (%) Air-conditioner and components 48,259,281.54 39,724,711.24 17.68% 50.63 59.98 -4.81 Refrigerators and components 9,939,276.02 8,186,418.78 17.64% 57.45 68.21 -5.27 Washing machine and components 9,729,237.13 8,047,537.55 17.29% 63.10 77.60 -6.75 Others 6,631,091.43 6,155,534.48 7.17% 123.95 124.21 -0.11 Total 74,558,886.12 62,114,202.05 16.69% 57.70 67.99 -5.10
Composition of operating revenue and profit by product Unit: RMB'000 Breakdown by product Operating Operating Gross Year-on-year Year-on-year Year-on-year revenue cost profit increase/ decrease in increase/decrease in increase/decrease in margin operating revenue (%) operating cost (%) gross profit margin (%) Air-conditioner and components 48,259,281.54 39,724,711.24 17.68% 50.63 59.98 -4.81 Refrigerators and components 9,939,276.02 8,186,418.78 17.64% 57.45 68.21 -5.27 Washing machine and components 9,729,237.13 8,047,537.55 17.29% 63.10 77.60 -6.75
Principal businesses by geographical region Unit: RMB'000 Geographical region Operating revenue Year-on-year increase/decrease in operating revenue (%) Domestic market 53,980,909.60 60.44% Overseas market 20,577,976.52 50.95%
Major suppliers and customers Unit: RMB'000 Item Total amount for the top five Percentage to the annual total (%) Suppliers 7,304,427.45 15.84 Customers 5,157,504.92 6.92
26 GD MIDEA HOLDING CO., LTD. (Con.)Directors' Report
(4)Items measured at fair value Unit: RMB'000 Item Opening Gain or loss from the Accumulative changes Impairment Closing amount change in fair in fair value included provided for amount value for the year in equity interest the year Financial assets: Of which:1. Financial assets measured at fair 28,522.34 122,982.15 15,033.22 170,210.20 value with fairvaluechanges included in profit and loss for the year Of which: derivative financial assets 28,522.34 122,982.15 15,033.22 170,210.20 2. Financial assets available for sale 312.82 312.82 Sub-total of financial assets 28,835.16 122,982.15 15,033.22 170,523.02 Financial liabilities 73.70 7,481.43 7,555.13 Investment real estate Productive living assets Others Total 28,908.86 130,463.58 15,033.22 178,078.15
(5) Analysis of changes in the composition of the Company's assets and expenses during the reporting period Table of changes in assets composition and analysis of reasons for material changes in assets and liabilities items Table of assets composition Unit: RMB'000 Asset item At the end of the reporting period Same period last year Increase/decrease Amount Percentage of total assets Amount Percentage of total assets in percentage (%) Trade receivables 4,442,125.80 10.56% 4,666,875.13 14.74% -4.18 Inventory 10,436,248.67 24.82% 5,827,507.52 18.41% 6.41 Investment real estate 505,404.75 1.20% 327,441.11 1.03% 0.17 Long-term equity investment 781,230.00 1.86% 374,835.81 1.18% 0.67 Fixed assets 7,672,288.74 18.24% 5,694,023.84 17.99% 0.26 Construction in progress 952,216.43 2.26% 486,632.30 1.54% 0.73 Short-term borrowings 728,562.71 1.73% 539,688.83 1.70% 0.03
Table of material changes in major assets and liabilities items Unit: RMB'000 Item At the end 2010 At the end of 2009 Percentage of increase/decrease Trading financial assets 150,165.90 27,183.74 452.41% Prepayments 2,544,402.55 808,353.86 214.76% Inventory 10,436,248.67 5,827,507.52 79.09% Other current assets 302,017.70 139,893.20 115.89% Long-term equity investment 781,230.00 374,835.81 108.42% Investment real estate 505,404.75 327,441.11 54.35% Construction in progress 952,216.43 486,632.30 95.67% Long-term deferred expenses 274,952.82 157,885.38 74.15% Notes payable 5,699,506.26 2,986,246.46 90.86%
ANNUAL REPORT 2010 27 Directors' Report(Con.)
Analysis of reasons for the changes: over the beginning of the period; Mainly due to the floating profits generated under the forward Mainly due to the completion of the construction of the forex contracts held by the Company, trading financial assets at Company's headquarter complex and the conversion into fixed the end of the reporting period increased by 452.41% over the assets and partial lease of the complex, investment real estate at beginning of the period; the end of the reporting period increased by 54.35% over the Mainly due to the increase of prepayments for raw materials and beginning of the period; engineering equipment, prepayments at the end of the reporting Mainly due to the construction with self-owned funds of projects period increased by 214.76% over the beginning of the period; invested by funds raised through non-public offering, the num- Mainly due to the enlargement of production and sales scales ber of projects under construction at the end of the reporting and the increase of stocks, stocks at the end of the reporting period increased by 95.67% over the beginning of the period; period increased by 79.09% over the beginning of the period; Mainly due to the increase of long-term deferred expenses caused Mainly due to the increase of amortized moulds within one year, by the increase of moulds, long-term deferred expenses at the other current assets at the end of the reporting period increased end of the reporting period increased by 74.15% over the begin- by 115.89% over the beginning of the period; ning of the period; Mainly due to an increase of long-term equity investment in Mainly due to the increase of sourcing scale and the majority Miraco in Egypt within the reporting period, long-term equity use of notes in settlement, notes payable at the end of the report- investment at the end of the reporting period increased by 108.42% ing period increased by 90.86% over the beginning of the period.
Explanation of significant changes in expense items Unit: RMB'000 Expense item Reporting period Same period last year Increase/decrease Percentage of change (%) Management expenses 2,663,128.42 1,660,163.89 1,002,964.53 60.41% Finance expenses 464,055.87 222,445.77 241,610.10 108.62%
Analysis of reasons for the changes: Mainly due to the expansion of scale and the increase of R&D input, management expenses for the reporting period recorded a year-on- year increase of 60.41%; Mainly due to the increase in interest expenses due to increased discount on notes and increase in foreign exchange loss due to exchange rate fluctuations, financial expenses for the reporting period recorded a year-on-year increase of 108.62%.
(6)Analysis of cash flows during the reporting period Unit: RMB'000 Item Reporting period Same period last year Increase/decrease Percentage of change (%) Net cash flow from operating activities 5,445,721.00 2,056,466.98 3,389,254.02 164.81% Net cash flow from investing activities -4,212,275.77 -1,112,635.55 -3,099,640.22 278.59% Net cash flow from financing activities 185,088.15 743,681.97 -558,593.82 -75.11%
Analysis of reasons for the changes: Mainly due to the increase of net profit and the decrease of operating receivables for accelerated settlement, net cash flow generated from operating activities for the reporting period recorded a year-on-year increase of 164.81%; Mainly due to the year-on-year increase of fixed assets investment, net cash outflow from investing activities for the reporting period recorded a year-on-year increase of 278.59%; Mainly due to the completion of the Company's non-public offering of securities in the previous year, net cash flow from financing activities for the reporting period recorded a year-on-year decrease of 75.11%.
28 GD MIDEA HOLDING CO., LTD. (Con.)Directors' Report
(7) Operating performance of the Company's principal subsidiaries and joint stock companies Unit: RMB million Company name Equity Major product or services Registered capital Total Net Operating Operating Net interest (%) (RMB' 000) assets assets revenue profit profit Guangdong Midea Refrigeration Equipment Co., Ltd. 80 Air-conditioner manufacturing RMB 854,000.00 13,665.36 1,914.24 32,867.65 -1,727.15 521.21 Wuhu Refrigeration Equipment Co.,Ltd. of Midea Group 80 Air-conditioner manufacturing US$ 6,928 3,070.82 865.61 14,244.43 572.06 477.01 Wuhan Refrigeration Equipment Co.,Ltd. of Midea Group 80 Air-conditioner manufacturing US$ 8,000 1,874.58 472.11 8,670.82 286.83 255.82 Foshan Midea Kailian Refrigeration Equipment Co.,Ltd. 60 Air-conditioner manufacturing RMB 200,000 537.10 246.69 1,104.28 55.38 41.94 Guangdong Meizhi Refrigeration Equipment Co.,Ltd. 60 Compressor manufacturing US$ 55,270 4,397.54 1,345.20 8,699.23 272.13 159.41 Guangdong Meizhi Precision Manufacture Co.,Ltd. 60 Compressor manufacturing US$ 7,740 1,004.45 479.76 2,692.76 118.76 100.26 Hefei Royalstar Refrigerator Co.,Ltd. 75 Refrigerator manufacturing US$ 92,110 3,472.99 1,595.77 8,324.43 793.66 710.76 Guangzhou Hualing Air Conditioning & Equipment Co.,Ltd. 100 Air-conditioner manufacturing RMB 437,575 989.84 655.27 4,671.51 136.55 124.42
Note: For information about Wuxi Little Swan Company Limited, a subsidiary in which the Company has a controlling stake, please refer to its Annual Report 2010.
ANNUAL REPORT 2010 29 Directors' Report(Con.)
3. Future Outlook of the Company crease the input in brand and after-sales services, improve mar- ket coverage and brand effect, and continuously improve the (1)Industrial development trend and market forecast effect of marketing consolidation of three major businesses. Despite that China is a major producer and consumer of home To continue to improve the disposition of overseas market- appliance products, the overall penetration rate is still relatively ing bodies and manufacturing bases, expand the overseas mar- low. Benefiting from the implementation of governmental policies, keting network by means of proprietorship and joint venture; to increase of resident income, urbanization process progress, in- further decentralize operation and management authority, carry creased demand for upgrade and replacement and better export out the real operation of national corporations and stimulate op- environment, as well as in consideration of the typical urban and eration vitality; to strengthen the cooperation with international rural dualistic market structure and the lower penetration rate of strategic partners, explore emerging markets and advance the home appliances, in China, which is the only country in the world acquisitions or establishment by joint venture of state-owned with the consumption demands exceeding twenty million air- factories of strategic emerging markets to improve the global conditioners, refrigerators, washing machines and other white manufacturing layout. home appliances, there will be still considerable room for the growth of home appliance demand in the foreseeable future, with To deepen the "technology-driven" strategy, strengthen the the domestic demand market to grow steadily and the export of development of new products and industrial expansion, and fos- home appliances to become more competitive. Meanwhile, in- ter strategic products that support future development; to persist dustry integration and brand concentration will be further enhanced, in technical input, advance the rapid breakthrough of core and industry leaders will capitalize on their advantages of brand technologies, and take the leadership in the industry; to continue names, management, scale of operation, channels and technical to improve multi-level technical R&D institutes and institutional knowhow to enlarge their room for growth. "Only the strong will development, implement the project manager responsibility get stronger" will be the inevitable outcome of the competition. system; to continue to make greater efforts to introduce profes- sional talents to guarantee the research manpower of key re- (2)Business development plan for 2011 search platforms. Adhering to the business philosophy of "increasing the scale, To improve resource coordination and management consis- guaranteeing profitability and adjusting the product mix" and tency and enhance critical business capabilities and system man- guided by the Company's Twelfth Five-year Plan, the Company agement quality. To continue to optimize supply chain will push for healthy development spanning across all products. management, consolidate resource integration by deepening To advance the establishment of regional manufacturing lay- mechanism adjustment, and build a supply chain system with out in a large scale and focus on regionalization of manufactur- competitive edges; to consolidate management fundamentals, ing layout, multi-product manufacturing synergy and improve- continuously improve basic systems, procedures, rules and ment of manufacturing technology and efficiency to consolidate standards, and advance informatization; to strengthen rigid the Company's scaled and regionalized low-cost advantage. management of product quality and improve quality manage- To accelerate the pace of making breakthroughs in new prod- ment throughout the whole process from product design, tech- ucts and technologies, promote the sales of the Company's key nology commercialization, quality to manufacturing consistency. products and cutting-edge products and the development of scaled (3)Future Capital Expenditure Plan growth capacity, and give play to the Company's advantage of During the Twelfth Five-year Plan period, the Company will product mix and industry leadership. persist in the business philosophy of "increasing the scale, guar- To continue to deepen the reform of marketing mechanism anteeing profitability and adjusting the product mix" and adopt for the domestic market, advance brand-oriented operation and the strategy of "technology driven, operations excellence, and real operation, strengthen the coordination of resources in brand, globalization" to continuously push forward reform and channel, logistics, after-sales service, storage and personnel, seg- innovation, improve the global layout of manufacturing bases ment the operation entities, improve network construction, in- and the operation of multi-product marketing platform, compre-
30 GD MIDEA HOLDING CO., LTD. (Con.)Directors' Report
hensively enhance technical capability and develop into a world- in orders and customers; to accelerate brand building, improve class supplier of white home appliances. According to the product quality, speed up export product mix adjustment against Company's strategic plan for the Twelfth Five-year Plan period, different regional markets and different product types, and im- the total investment expenditure in various businesses for 2011 prove products' added value and international competitiveness; is expected to be approximately RMB5.0 billion. in addressing foreign exchange risk, to reinforce dynamic con- trol and information tracking mechanism, and, to the extent of (4)Major Risk Factors Related to the Future Development actual export receivables, to properly use appropriate foreign Material price fluctuations exchange financial instruments to prevent and eliminate the risks. Due to the impact of excess liquidity and scarcity of resources, Trade barriers and technical barriers the prices of main raw materials for production, especially the As the tariff barriers are lowered, the impact of non-tariff barri- price of copper as one of the essential raw materials for refrig- ers between countries has become increasingly prominent. Main erator production, will continue to rise, which causes certain export areas of home appliances in China have constantly raised pressure on the Company's cost management. the energy efficiency and environmental protection indexes and Measures to be taken: to further improve supply chain integra- harmless recycling standards for waste home appliances. Non- tion and mechanism establishment, strengthen resource tariff barriers and trade frictions caused by anti-dumping mea- coordination, enhance the strategic partnership with suppliers of sures of some countries and regions have increased the cost critical resources, take advantage of its scale and reduce pur- burden of home appliance enterprises and brought new chal- chasing cost; to rationalize internal cost control process, advance lenges to market expansion. the fine-tuning and consistency management, and gradually es- Measures to be taken: to accelerate technical advancement and tablish the new technology-driven advantage in cost; to increase product upgrade, reinforce and improve the levels of core tech- efforts in technical research and development and inputs and nologies such as inverter, new refrigerant, and new type heat make bold practices in new materials, new technologies and new exchanging technologies; to strengthen quality inspection and techniques to achieve cost reduction driven by technical control, deepen technical exchanges and cooperation, and con- development; to carry out intensive marketing by segmenting tinue to apply for relevant product certifications to meet the markets, channels and products, expand the base of consumers, demands of international competition requirement; to speed up increase the market share, and set up barriers to competition; to the optimization of overseas dispositions and actively promote safely carry out futures operations for relevant large-volume raw inputs in and development of emerging markets, develop a ra- materials and lock in the budgeted cost through proper partici- tional regional layout of manufacturing bases across the globe, pation in futures hedging business; to optimize product mix by and improve the ratio of self-owned brands overseas. increasing the percentage of high-end and high energy efficiency products to improve profitability. (II)Investments during the Reporting Period RMB exchange rate fluctuations The appreciation of the Renminbi has weakened the low-cost 1. Use of funds raised during the reporting period advantage and international competitiveness of home appliance Under the CSRC Permit from China Securities Regulatory th products from China. With China's furtherance of RMB exchange Commission [2009] No.668, on July 30 2009, the Company rate regime reform and enhancement of RMB exchange rate issued 189,106,922 RMB ordinary shares (A-shares) at an is- flexibility, the Renminbi will continue to appreciate, which will sue price of RMB15.75 each by way of preferential placement result in the risk of foreign exchange loss to the Company. to the existing holders of A-shares on a pro rata basis, combined Measures to be taken: on the basis of global strategic thinking, with online and offline issues of the remaining portion of the to actively carry out overseas marketing transformation, take shares at a fixed price. The Company raised a total of national marketing entities as the core of operations to build a RMB2.978 billion from this issue, representing net proceeds multi-product international marketing platform; to deepen the of RMB2.913 billion after deducting the issue expenses. cooperative relationships with overseas dealers and core major The following table shows the use of funds raised by the Com- customers, enhance service ability and maintain stable growth pany during the reporting period:
ANNUAL REPORT 2010 31 Directors' Report(Con.)
Unit: RMB'00 million Total funds raised 29.13 Total raised funds contributed during the year 1.02 Total raised funds with purpose of use being changed during the reporting period 0 Total accumulated raised funds with purpose of use being changed 0 Total accumulated raised funds contributed 28.10 Percentage of total accumulated raised funds with purpose of use being changed 0 Committed Whether a Total investment Adjusted Committed Amount Accumulated Difference between accumu- Progress of contri- The date on Beneficial Whether ex- Any signifi- investment changed pro- committed to be total contribution as contributed contribution as lated contribution and com- bution as at the end which the pro- result pected bene- cant change project ject (including contributed from invest- at the end of for the year at the end of mitted contribution as at the of the period (%) ject be ready realized for ficial result in project partial change) fund raising ment the period (1) the period (2) end of the period (3)(2)-(1) (4)(2)/(1) for intended use the year was achieved feasibility 1. Project of acquisition No 1.43 1.43 1.43 0 1.43 0 100 2008.4 N/A N/A No of a 25% stake in three companies respectively including Hefei Royalstar Refrigerator Co., Ltd. 2. New refrigerator No 3.08 3.08 3.08 0 3.08 0 100 2011.11 N/A N/A No compressor project 3. Refrigerator technological No 3.39 3.39 3.39 0 3.39 0 100 2009.12 4.26 Yes No upgrading and capacity expansion project 4. Washing machine industrial No 5.41 3.77 3.77 0 3.77 0 100 2009.12 1.43 Yes No park phase II project 5. Central air-conditioner No 4.38 4.38 4.38 0 4.38 0 100 2010.12 4.01 Yes No technological upgrading and capacity expansion project 6. Residential air-conditioner No 4.41 4.41 4.41 0 4.41 0 100 2009.1 2.27 Yes No Shunde base capacity expansion project 7. IT data center construction No 2.08 2.08 2.08 0.92 2.08 0 100 2010.10 N/A N/A No project 8. Central research institute No 2.00 1.59 1.59 0.10 0.55 -1.03 34.89 2011.12 N/A N/A No construction project 9. Supplementary liquidity No 5.00 5.00 5.00 0 5.00 0 100 2009.9 N/A N/A No 10. New residential air-conditi- No 1.68 0 ------oner Vietnamese base project 11. Residential air-conditioner No 2.70 0 ------Wuhan base capacity expansion project Total - 35.56 29.13 29.13 1.02 28.10 -1.03 - - 11.97 - - Affected by factors of development progress and technology assimilation, the new refrigerator compressor project is expected to be ready for intended Conditions and reasons for not achieving planned use by November 2011; by reasons of equipment sourcing and construction of the central research institute, the central research institute is expected to schedule or expected gains (by particular project) be ready for intended use by December 2011. Explanation for significant change in project feasibility N/A Change of place of implementation for project invested by raised funds N/A Adjustment of means of implementation for project invested by raised funds N/A Pursuant to the Audited Report in respect of Financing Projects Contributed in advance by GD Midea Holding Co., Ltd. with Self-Raised Funds issued by Tianjian Guanghua (Beijing) Certified Public Accountants Company Limited (Tian Jian Guang Hua Shen (2009) Zhuan Zi No.030021), as at August 22nd 2009, actual investment contributed in advance in financing projects by the Company with self-raised funds amounted to RMB1,325,479,600. Reso- lution Concerning Replacement of Self-Raised Funds Contributed in advance in Financing Projects with Raised Funds was approved at the 26th meeting of the sixth Board of Directors of the Company, whereby it was agreed that self-raised funds contributed in advance by the Company in financing projects be replaced by the current raised funds of RMB1,325,479,600. In particular: replacement by raised funds of RMB143 million for project related to the Up-front contribution to and replacement of project invested by raised funds acquisition of 25% equity interest in each of Hefei Royalstar Refrigerator Co. Ltd., Hefei Royalstar Washing Machine Manufacture Co., Ltd. and Hefei Royalstar Midea Electric Appliance Marketing Co. Ltd.; replacement by raised funds of RMB308 million for the new refrigerator compressor project; replacement by raised funds of RMB225 million for the washing machine industrial park phase II project; replacement by raised funds of RMB263 million for the central air-conditioner technical reform and capacity expansion project; replacement by raised funds of RMB230 million for the residential air-conditioner Shunde base capacity expansion project; replacement by raised funds of RMB111 million for the IT data center construction project; and replacement by raised funds of RMB45 million for the central research institute construction project. Provisional supplement of liquidity using idle raised funds N/A Amount of and reasons for raised funds balance occurred N/A after project implementation As at December 31st 2010, an amount of RMB2.810 billion out of the raised funds has been utilized according to the Letter of Intent in the prospectus, Use and whereabouts of unutilized raised funds representing 96.46% of the net raised funds of RMB2.913 billion, with the balance to be contributed in accordance with the successive contribution progress and schedule of the projects. Issues or other situations in relation to the use and disclosure of raised funds N/A
32 GD MIDEA HOLDING CO., LTD. ANNUAL REPORT 2010 33 Directors' Report(Con.)
2. Major projects invested with non-raised funds (III)Changes in Accounting Policies and Account- For the Company's headquarters complex project, the invest- ing Estimates or Correction of Previous Accounting ment completed and accumulated investment during the report- Errors ing period amounted to RMB423.98 million and RMB794.11 During the reporting period, there has been no change in ac- million, respectively. The headquarters complex is expected to counting policies and estimates or correction of previous ac- commence operation by September 2010 and will further counting errors. strengthen the Company's headquarter in the centralized man- agement over headquarter functions of strategic administration (IV) Daily Work of the Board of Directors and control, IT support, fund control, basic technical research and development and cultural leadership etc. 1. Meetings and Resolutions of the Board during the Reporting Period
Meeting of the Board of Directors Date of Newspaper for information disclosure Date of information Meeting disclosure The 31st meeting of the sixth Board of Directors 2010.01.08 China Securities Journal, Securities Times, Shanghai Securities News 2010.01.09 The 32nd meeting of the sixth Board of Directors 2010.03.15 China Securities Journal, Securities Times, Shanghai Securities News 2010.03.16 The 33rd meeting of the sixth Board of Directors 2010.03.30 China Securities Journal, Securities Times, Shanghai Securities News 2010.03.31 The 1st meeting of the seventh Board of Directors 2010.04.12 China Securities Journal, Securities Times, Shanghai Securities News 2010.04.13 The 2nd meeting of the seventh Board of Directors 2010.04.22 China Securities Journal, Securities Times, Shanghai Securities News 2010.04.23 The 3rd meeting of the seventh Board of Directors 2010.04.28 China Securities Journal, Securities Times, Shanghai Securities News 2010.04.29 The 4th meeting of the seventh Board of Directors 2010.05.27 China Securities Journal, Securities Times, Shanghai Securities News 2010.05.28 The 5th meeting of the seventh Board of Directors 2010.08.27 China Securities Journal, Securities Times, Shanghai Securities News 2010.08.30 The 6th meeting of the seventh Board of Directors 2010.10.25 China Securities Journal, Securities Times, Shanghai Securities News 2010.10.26 The 7th meeting of the seventh Board of Directors 2010.11.19 China Securities Journal, Securities Times, Shanghai Securities News 2010.11.22 The 8th meeting of the seventh Board of Directors 2010.12.15 China Securities Journal, Securities Times, Shanghai Securities News 2010.12.16
2. Execution of General Meeting Resolutions by (2)According to the Resolution Concerning the Related-Party the Board Transaction in respect of Signing Financial Service Framework (1)According to the profit distribution plan and the plan for capi- Agreement with Midea Group Co., Ltd. considered and approved talization from capital reserve proposal for 2009 considered and at the second extraordinary general meeting for 2010 convened approved at the 2009 Annual General Meeting convened on April on April 29th 2010, Midea Group Co., Ltd. will procure its sub- 12th 2010, the Company published the announcement on the imple- sidiary Midea Group Finance Co., Ltd. (hereinafter referred to mentation of dividend distribution and capitalization of capital as the "Finance Company") to, according to the requests of the reserves for 2009 on May 7th 2010: based on a total of 2,080,176,851 Company and the subsidiaries under the Company, provide a outstanding shares as at December 31st 2009, a cash dividend of range of financial services, including but not limited to funds RMB1.00 (including tax, actually RMB0.90 of cash dividends for deposit, providing loans, discount on notes, guarantee and settle- individuals, securities investment funds and qualified foreign in- ment services, as well as other businesses that the Finance Com- stitutional investors) will be distributed to all shareholders for every pany may engage in with the approval of the China Bank Regu- 10 shares; 5 shares capitalized from capital reserve will also be latory Commission. In order to regulate the related-party trans- distributed to all shareholders for every 10 shares. The date of actions between the Company and Midea Group Finance Co., register was May 12th 2010, and the ex-right and ex-dividend date Ltd., the Risk Control System for Related-party Transactions and the date on which the distributed shares are recorded into between GD Midea Holding Co., Ltd. and Midea Group Finance shareholders' securities accounts was May 13th 2010. Co., Ltd. was considered and approved at the seventh meeting
34 GD MIDEA HOLDING CO., LTD. (Con.)Directors' Report
of the seventh Board of Directors convened on November 19th (1) Formulating overall audit plan 2010 so as to effectively ensure the safety and liquidity of the The Audit Committee, through discussion with the CPA Firm, Company's deposits at the Finance Company. Meantime, Midea formulated the overall audit plan for 2010. Before the on-site Group Co., Ltd. as the controlling shareholder, issued to the auditing by the CPA Firm, the certified public accountants for Company the Letter of Commitment to guarantee security of annual auditing held a communication meeting with indepen- funds when the Company has any financial transactions with dent directors of the Company, and submitted the 2010 Finan- Midea Group Finance Co., Ltd. cial Statements Audit Plan of Midea Electric Appliance and rel- evant materials, in which the staff arrangements for annual (3) The Resolution Concerning Amending the Articles of Asso- auditing, auditing plans, key audit points, auditing strategies and ciation of GD Midea Holding Co., Ltd. was considered and ap- risk evaluation and judgment were determined. proved at the third extraordinary general meeting 2010 convened on June 14th 2010. Due to the implementation of the plan for (2) Review of the financial statements of the Company capitalization from capital reserve for 2009, the Company's share On January 25th 2011, the Audit Committee convened the 1st meet- capital changed. The Company has completed the amendment ing of Audit Committee for 2011 at the Company's conference room to its Articles of Association and change registration with the and mainly reviewed the Company's financial statements for 2010 local administration of industry and commerce according to the at this meeting, made a comparison analysis and discussion on resolution of the general meeting. changes in the respective financial data and indicators in the finan- cial statements of the Company. All members of the Audit Com- (4)According to the Resolution Concerning Compliance of the mittee believed that, the financial statements prepared by the Com- Company with the Conditions for Non-public Issue of A Shares pany were in compliance with the requirements of Accounting Stan- considered and approved at the fourth extraordinary general meet- dards for Business Enterprises, relevant financial figures basically ing 2010 convened on September 17th 2010, the Company's Board reflected the financial status as well as the production and operation of Directors, based on the resolutions and authorization of the results and cash flow of the Company for the year ended December general meeting, rapidly initiated the Company's non-public issu- 31st 2010, and agreed that the audit work for 2010 was carried out ance of A shares. Pursuant to the Reply on the Approval of Non- on the basis of such financial statements. public Issue of Shares by GD Midea Holding Co., Ltd. under the CSRC Permit ([2011] No.84) from China Securities Regulatory (3)CPA Firm started on-site auditing, urged by the Audit Com- Commission, the funds raised by the Company through non-pub- mittee in writing lic issuance of 264,082,374 A shares to 6 investors were trans- During the period of on-site auditing conducted by the audit ferred to the Company's Special Fund-Raising Account on Febru- team of the CPA Firm, the Audit Committee issued two Letters ary 24th 2011. The Company raised a total of RMB4,359,999,994.74 of Urging for Completion of Audit Work on February 21st 2011 from this issue, representing net proceeds of RMB4,300,149,994.74 and March 11th 2011 respectively, urging the CPA Firm to com- after deducting the issue expenses. The newly issued shares were plete the audit work pursuant to the overall work plan, so as to listed on March 11th 2011. ensure the preparation and disclosure of the Company's annual reports and related documents, and received the replies from the 3. Conclusive Report on Performance of Duties by CPA Firm in response to the letters thereof. the Audit Committee under the Board Pursuant to the Annual Auditing Procedures of the Audit Commit- (4)CPA Firm issued initial audit opinions, and the Audit Com- tee of the Company, we hereby conclude on the performance of mittee formed a written opinion after second review of the fi- duties by the Audit Committee in 2010 and the annual audit works nancial statements conducted by Ascenda Certified Public Accountants, Ltd. as follows: On March 14th 2011, the CPA Firm issued initial audit opinions on the financial statements in due course as arranged under the
ANNUAL REPORT 2010 35 Directors' Report(Con.)
overall audit plan, and the Audit Committee convened the 2nd Ascenda Certified Public Accountants, Ltd. completed its audit meeting of the Audit Committee for 2011 on March 14th 2011, at services outstandingly for the Company's financial report for which it reviewed the financial statements after issuing of the 2010. During the audit process, its auditing staff showed excel- initial audit opinions, and was of the view that, the financial lent performance of duties and were meticulous and rigorous statements for 2010 prepared by the Company was in line with about their works. By virtue of the consciousness, professional the requirements of Accounting Standards for Business dutifulness and performance ability of its service, the Audit Enterprises, the CPA Firm issued an initial audit report for the Committee recommended that the Company re-appoint Ascenda Company's financial statements with unmodified and unquali- Certified Public Accountants, Ltd. as the Company's auditor for fied opinions, that the relevant financial figures in the financial the 2011 financial report. statements reflected the financial status as at December 31st 2010 as well as the production and operating results and cash flow of 4. Conclusive Report on Performance of Duties by the Company for the year then ended, thus agreed that the the Remuneration Committee under the Board Company's 2010 Annual Report and its summary were prepared The Remuneration Committee's audit opinion on remunerations on the basis of such financial statements. of the directors, supervisors and senior executives during the reporting period: (5) The audit report for 2010 financial statements of the Com- Upon review on the information disclosed concerning annual pany was finalized, and the CPA Firm issued an audit report and remunerations of the directors, supervisors and senior execu- other related documents for 2010. Then the Company's audit tives during the reporting period, all members of the Remunera- work for 2010 was successfully completed. tion Committee held that, the remunerations paid during the re- On March 16th 2010, the CPA Firm completed the final audit porting period were complied with the performance appraisal report as scheduled under the overall audit plan, and issued the system of the Company established on the basis of the goal- Explanations Given by Certified Public Accountants Concern- oriented responsibility system, with the total amount of remu- ing the Funds of GD Midea Holding Co., Ltd. Occupied by the nerations including basic salaries, bonus, subsidies, welfare funds Controlling Shareholder and Other Related Parties in accordance as well as miscellaneous insurance premiums, public reserve with Standard No. 2 for Contents and Format of Information funds and other such payments by the Company, and that such Disclosure Made by Publicly Listed Companies (Contents and information gave a true view of the status of remunerations of Format of Annual Report) (as amended in 2007) and other re- the Company for the directors, supervisors and senior execu- quirements of the Company. tives during the reporting period.
(6) Evaluation opinion of the Audit Committee on the audit work (V) Implementation of the Management Measures conducted by the CPA Firm for 2010 and review of relevant for Insiders of Inside Information resolutions In order to regulate management of the Company on its inside On the 3rd meeting of the Audit Committee for 2010 convened information, strengthen the confidentiality of inside informa- on March 16th 2011, the following resolutions were unanimously tion of the Company and maintain the principle of fair disclosure, approved by the members present at the meeting with the result in accordance with relevant laws, regulation and relevant provi- of 3 votes for consent, 0 vote for objection and 0 vote abstained: sions of the Articles of Association and based on the actual a. Financial Statements Report for 2010 was considered and conditions, the Company has formulated the Inside Information approved; Confidential System and the Internal Reporting System for Ma- b. Full Text and Summary of 2010 Annual Report was consid- terial Information, which defines the scope of inside information, ered and approved; insiders of inside information and their scope, registration c. Evaluation Opinion on the 2010 Audit Work Performed by management, confidentiality and relevant responsibilities. The the Company's Auditor was considered and approved. Board of Directors is the management body of inside informa-
36 GD MIDEA HOLDING CO., LTD. (Con.)Directors' Report
tion and the Secretary of the Board is the responsible person for manage- ment of inside information. The Company has strengthened the reg- istration and supervision of insiders of its inside information and standard- ized the internal circulating procedure for material information to ensure fair information disclosure and prevent disclosure of inside information to external parties and occurrence of in- sider trding. The Company strictly implemented the Management Mea- sures for Insiders of Inside Informa- tion and relevant policies, and prohib- ited the insiders from buying or sell- ing the Company's shares before dis- closure of significant sensitive infor- mation that will affect the Company's share price. Through self-investigation, it is found that in 2010 no insiders bought or sold the Company's shares by using inside information before the disclosure of significant sensitive information that affects the Company's share price, or were investigated and rectified by regulatory authorities. It is also not founded that any insiders bought or sold the Company's shares in the blackout period.
(VI) Profit Distribution Proposal of the Board for current year As audited by Ascenda Certified Public Accountants, Ltd., the parent company of the Company realized a net profit for 2010 of RMB1,001,891,930.67. Pursuant to the relevant provisions under the Articles of Association, RMB100,189,193.07, being 10% of the statutory surplus reserve was provided, plus undistributed profit at the beginning of the year of RMB863,770,719.29, and deducting the distributed profit of RMB273,006,988.18, therefore, the actual distributable profit shall be RMB1,492,466,468.71. The proposed profit distribution plan for 2010 is as follows: on the basis of a total equity capital of 3,384,347,650 shares (total shares after the non-public issuance) of the Company currently, a cash dividend of RMB1.00 (including tax) will be paid for every 10 shares held, resulting in a total cash payment of RMB 338,434,765.00, and the remaining balances of RMB1,154,031,703.71 will be kept for distributing in subsequent years. The proposal shall be submitted to the Company's annual general meeting for 2010 for consideration.
ANNUAL REPORT 2010 37 Directors' Report(Con.)
Details of the Company's distribution of cash dividends for the previous three years:
Year of Cash dividends Net profit attributable to Ratio of distribution to net Distributable distribution amount shareholders of listed company profit attributable to share- profit (including tax) in the combined statements holders of listed company for the year for the year of distribution in the consolidated statements 2009 208,017,685.10 1,847,747,930.00 11.00% 798,781,419.71 2008 189,106,922.90 1,025,304,190.00 18.44% 402,984,729.88 2007 504,285,314.40 1,193,466,811.98 42.25% 1,184,874,462.50 Ratio of accumulated cash dividends amount for the previous three years to net profit for the previous year (%) 65.78%
(VII) Explanations Given by Certified Public Accoun- During the reporting period, according to the requirements of tants Concerning the Funds of the Company Occu- controlled subsidiaries in the Company's consolidated statements pied by the Controlling Shareholder and Other Re- for production and operation funds and the requirement for busi- ness development, the Company provided guarantees for a total lated Parties of 15 companies including GD Midea Refrigeration Equipment Ascenda Certified Public Accountants issued the Special Ex- Co., Ltd., a subsidiary of the Company. As at December 31st planations on Funds Occupied by the Controlling Shareholders 2010, the balance of guarantee was RMB3,408.41 million, ac- and Related Parties of GD Midea Holding Co., Ltd. (ACPA counting for 27.63% of the Company's net assets. The decision- (2011) T No. 150005) concerning the funds occupied by the making and information disclosure procedures for GD Midea to controlling shareholders and other related parties of the provide guarantees to controlled subsidiaries comply with rel- Company. evant laws, regulations, regulatory documents and relevant pro- visions under the Articles of Association, and are legitimate and (VIII) Special Explanations Given by Independent valid, which, in combination with the guarantee fees charged to Directors Concerning Cumulative and Current Guar- the non-wholly-owned controlled subsidiaries and intensified antees Provided by the Company to Other Parties supervision of the guarantee funds by GD Midea, will effec- and the Company Executing Zheng Jian Hui [2003] tively reduce guarantee risks. No.56 Document. We believe that the Company has strictly observed its internal As at December 31st 2010, except current operating funds, the control systems and relevant provisions of the Notice of China controlling shareholder of the Company neither occupied any Securities Regulatory Commission Concerning Some Issues on funds of the Company nor conducted any occupation of the funds Regulating the Funds between Listed Companies and Associ- of the Company that occurred in previous years and accumu- ated Parties and Listed Companies' Provision of Guaranty to lated up to December 31st 2010. Other Parties, Shares Listing Rules issued by Shenzhen Stock The Company has not provided any guarantees to other parties Exchange, as well as the Articles of Association and the Internal except the controlling shareholder or provided any guarantees Control System of the Company, did not have its funds occu- for the shareholders of the Company, their controlled pied by its related parties and provide guarantees in violation of subsidiaries, their affiliates, other related parties in which the the related regulations, rules or provisions, controlled the risk of Company holds less than 50% shares, unincorporated entities external guarantees and effectively protected the legal rights and or natural persons. interests of all the shareholders.
38 GD MIDEA HOLDING CO., LTD. VIII. Supervisors' Report
(I)Work of the Supervisory Board During the reporting period, nine meetings of Supervisory Board were held. The Supervisory Board participated in the decision-making of the Company concerning significant issues, and performed its functions of overseeing and supervision in a serious and standardized manner in promoting standardized operation of the Company and protecting the rights and interests of the shareholders. The work of the Supervisory Board during the reporting period is described as follows:
Meeting of the Supervisory Board Date of meeting Items on the agenda of meeting The 26th meeting of the sixth Supervisory Board 2010.01.08 Resolution Concerning Changing the Company's Auditor for 2009 1. Work Report of the Supervisory Board for 2009; 2. Financial Statements Report for 2009; 3. 2009 Annual Report and its Summary; 4. Proposal Concerning Profit Distribution and Capitalization from Capital Reserve for 2009; 5. Resolution Concerning Ongoing Related Party Transactions for 2010; The 27th meeting of the sixth Supervisory Board 2010.03.15 6. Resolution Concerning Guarantee Provided by the Company for its Controlled Subsidiary; 7. Special Explanations Concerning the Deposit and Use of the Raised Funds for the Year; 8. Internal Control Self- Appraisal Report; 9. Resolution Concerning the Election of the New Supervisory Board; 10. Resolution Concerning Re-Appointment of CPA Firm. 1. Resolution Concerning the Election of Ms. Zeng Qiao as Convener of the Supervisory Board Meetings of the Company; 2. Special Report of GD Midea Holding Co., Ltd. Concerning Foreign Exchange The 28th meeting of the sixth Supervisory Board 2010.03.30 Derivative Business for 2010; 3. Special Report of GD Midea Holding Co., Ltd. Concerning Bulk Material Hedging Business for 2010. 1. Resolution Concerning the Election of Ms. Zeng Qiao as Convener of the Supervisory Board Meeting The 1st meeting of the seventh Supervisory Board 2010.04.12 of the Company; 2. Resolution Concerning Transfer of the Shares of Wuxi Little Swan Huayin Electrical Appliance Co., Ltd. & Connected Transactions. The 2nd meeting of the seventh Supervisory Board 2010.04.28 First Quarterly Report for 2010. 1. Resolution Concerning Guarantee Provided for a Controlled Subsidiary; 2. Resolution Concerning The 3rd meeting of the seventh Supervisory Board 2010.05.27 Amendment to the Articles of Association. 1. 2010 Interim Report and its Summary; 2. Resolution Concerning Adjustment of Daily Related-Party Transaction Amount for 2010; 3. Resolution Concerning the Company Complies with the Conditions for Non-pubic Issue of A Shares; 4. Resolution Concerning the Company's Scheme for Issuing A Shares on The 4th meeting of the seventh Supervisory Board 2010.08.27 Non-public Basis; 5. Proposal Concerning GD Midea Holding Co., Ltd Issuing A-share on Non-public Basis; 6. Resolution Concerning the Feasibility Report for the Investment Project Using Funds Raised through Non-public Issue of A Shares; 7. Report on the Use of Previously Raised Funds. The 5th meeting of the seventh Supervisory Board 2010.10.25 Third Quarterly Report 2010 1. Resolution Concerning Daily Related-Party Transactions of GD Midea Holding Co., Ltd. for 2011; The 6th meeting of the seventh Supervisory Board 2010.12.15 2. Resolution Concerning Transfer of the Shares of Wuxi Little Swan Huayin Electrical Appliance Co., Ltd. & Related-Party Transaction.
(II)Independent Opinions of the Supervisory Board relevant laws, regulations and regulatory documents, the Super- Pursuant to the Company Law and the Articles of Association of visory Board performed supervision on the convening and deci- the Company, the Supervisory Board hereby expresses the fol- sion-making procedures of the Board meetings and the General lowing independent opinions in respect of the Company's rel- Meeting, execution of the resolutions of the general meetings by evant matters during the reporting period: the Board of Directors, and the performance of duties by direc- tors and senior executives of the Company. The Supervisory 1. The Company's Operations in Compliance with Board believes that the Board of Directors carried out standard- Law ized operations pursuant to the Company Law, the Securities During the reporting period, by attending the general meetings Law, the Articles of Association and other relevant laws and and the Board meetings of the Company and in accordance with regulations, strictly implemented the resolutions of the general
ANNUAL REPORT 2010 39 Supervisors' Report (Con.)
meetings, seriously performed its responsibilities and exercised No damages were caused to the interests of the its powers, followed scientific and lawful decision-making shareholders being the non-related parties and procedures, established a standardized and efficient corporate interests of the listed company. governance structure with balanced authority and responsibility, and improved the Company's management systems; the Com- 6. Opinion of the Company's Supervisory Board pany established a sound, rational and effective internal control on the Internal Control Self-Appraisal Report of the system to sufficiently ensure the accuracy of information and Company integrity of assets and to better protect the interests of small and Pursuant to the relevant provisions of the Basic Code on the medium-sized shareholders and the Company. The directors, Corporate Internal Control jointly promulgated the Ministry of managers and other senior executives of Company dedicated Finance and the China Securities Regulatory Commission and themselves to their posts, worked diligently, dared to explore, Guidelines on Standardized Operations of the Companies Listed abided by laws and rules, honestly and diligently performed their at Main Board issued by Shenzhen Stock Exchange, Supervi- duties, and has not engaged in any activities that violate any sory Board of the Company expressed its opinions on internal laws, regulations and the provisions of the Articles of Associa- control self-appraisal conducted by the Company as follows: tion or cause damages to the interests of the Company or its shareholders. (1) Pursuant to the Company Law, the Securities Law, relevant regulations of China Securities Commission and Shenzhen Stock 2. Inspection on Financial Matters of the Company Exchange, and other relevant laws and regulations of China, The Company's Supervisory Board examined financial systems taking into account the industry in which the Company operates and financial status of the Company in accordance with the law. as well as the operating mode, assets structure and characteris- The Supervisory Board believes that the Company's Financial tics of the Company, the Company established and improved Statements for 2010 truly and fairly reflect the financial status corresponding internal control systems which ensured the nor- and operating results of the Company, and that the audit report mal implementation of the Company's business activities and with unmodified and unqualified opinions issued by Ascenda risk control, and guaranteed the security and integrity of the Certified Public Accountants, Ltd. for the financial statements Company's assets. of the Company for 2010 is objective and fair. (2) The Company established a relatively sound internal organi- 3. Actual investment projects of the Company us- zational structure and the internal audit department with full and ing the latest raised funds are exactly the same appropriate staff, and thus ensured the sufficient and effective investment projects announced by the Company implementation and supervision of major internal control ac- when raising the funds. tivities of the Company.
4. During the reporting period, the Company ac- (3) During the reporting period, the Company did not have any quired and sold the assets at reasonable prices, circumstances that violated Guidelines on Standardized Opera- no insider trading was discovered and no dam- tions of the Companies Listed at Main Board issued by Shenzhen ages to the interests of the Company or losses to Stock Exchange and the Basic Code on the Corporate Internal the assets of the Company were caused. Control of the Company. In summary, the Supervisory Board believes that the internal 5. During the reporting period, there were related control self-appraisal report of Company provides an overall, party transactions between the Company and true and accurate presentation of the actual internal control sta- tus of the Company. related parties, and such transactions were made on the fair and reasonable basis and at fair prices.
40 GD MIDEA HOLDING CO., LTD. IX. Significant Events
(I)Material litigations and arbitrations
The Company had no material litigation or arbi- tration during the year.
(II)Bankruptcy or restructuring related matters
There has been no bankruptcy or restructuring re- lated matters occurred during the reporting period.
(III)Acquisition and disposal of assets
1. On April 28th 2010, the Company, through its overseas wholly-owned subsidiary Midea Electrics Netherlands B.V., signed an agreement with United Technologies Holdings B.V., a wholly-owned sub- sidiary of United Technologies Corporation, and intended to purchase 32.5% of the shares in Miraco (Misr Refrigeration And Air Conditioning Manu- facturing Co.) held by the latter for a consider- ation of US$ 57.48 million. Miraco is a listed company in Cairo Stock Ex- Limited, pursuant to which GD Midea intended to sell shares of change in Egypt and specializes in the production and sales of US$94,145,000 (hereinafter referred to as the "Target Assets") household air conditioner, central air conditioner and cold chain directly held by it in Hefei Royalstar Washing Machine Manu- products. It takes the leading position in the Egyptian market of facture Co., Ltd. (hereinafter referred to as "Royalstar Washing household air conditioner, light-weight commercial air condi- Machine"), representing a 69.47% shares in Royalstar Washing tioner and central air conditioner and controls the high-quality Machine, to Little Swan, and subscribe for A-shares issued non- channel in Egypt, so it is a high-quality platform for the promo- publicly to the Company by Little Swan for a consideration of tion and integration of Midea brands in Africa. By purchasing a the Target Assets. Trading price for the Target Assets was portion of Miraco's shares, Midea obtained the opportunities to RMB732,100,200, therefore the number of shares required to be invest in Miraco's products, brands and markets, so as to help issued to the Company by Little Swan for acquiring the Target the Company establish the strategic competitive advantage, ex- Assets was 84,832,004 shares. pand its African market and enhance its cost competitiveness in On November 10th 2010, CSRC approved that Little Swan car- Egypt and neighboring regions. ried out major assets restructuring and issued 84,832,004 shares On October 11th 2010, the Company made a public announce- to the Company for acquiring related assets, and approved that ment that the Company purchased 32.5% of Miraco's shares and the Company was exempted from performing its due obligation completed the registration of this share transfer. of making a general offer resulted from the Company holding 2. On December 23rd 2009, the Company signed with Wuxi Little the 247,193,729 shares in Little Swan accounting for 39.08% of Swan Company Limited (hereinafter referred to as "Little Swan") Little Swan's total share capital after the Company's shareholding the Agreement for Share Issue to and Assets Acquisition from in Little Swan increased by 84,832,004 shares through this share GD Midea Holding Co., Ltd. by Wuxi Little Swan Company purchase for a consideration of its assets.
ANNUAL REPORT 2010 41 Significant Events (Con.)
On November 15th 2010, the transfer of 69.47% shares of (IV)Implementation of share incentive plan Royalstar Washing Machine held by the Company was com- pleted and registered with Hefei Administration for Industry and The Company did not implement any share incentive plan dur- Commerce, and the shares were transferred to Little Swan. On ing the reporting period. For relevant information, please refer December 2nd 2010, the 84,832,004 A-shares issued non-pub- to the Remuneration Committee's verification opinion on the licly to the Company by Little Swan were listed at Shenzhen implementation of share incentive plan as set out in the Direc- Stock Exchange. tors' Report. Upon completion of the abovementioned transaction, the hori- zontal competition will no longer exist between Little Swan's (V)Significant related-party transactions existing principal business and that of the Company. Meanwhile, the abovementioned transaction has effectively facilitated con- 1.Related-party transaction relating to day-to-day solidation of the Company's washing machine resources, en- operations hanced further integration effects of the Company's washing During the reporting period, the Company maintained related- machine assets in purchasing, research and development, logis- party transactions in respect of normal goods purchase/sale with tic and marketing channels, improved operating efficiencies, and related parties including Guangdong Welling Motor Co., Ltd. reduced overall operating cost, thereby enhancing the compre- and its subsidiaries, Foshan Wellkey Electrical Material Co., hensive competitiveness and profitability of the Company's wash- Ltd., Foshan Midea Household Appliances Co., Ltd., Midea ing machine business as a whole, which will produce positive Group Co., Ltd. and its subsidiaries, and Foshan Shunde Cen- effects on financial status and operating results of the Company tury S&T Development Co., Ltd. and its related companies as in the future. follows:
Unit: RMB'000 Related party Sale of goods and provision of Purchase of goods and receive labour service to related party labour service from related party Transaction Ratio to comparable Transaction Ratio to comparable amount transaction amount amount transaction amount Foshan Midea Household Appliances Co., Ltd. 58,373.29 0.09 36,967.01 0.06 Guangdong Welling Motor Co., Ltd. 2,446.63 0.00 1,048,611.26 1.60 Welling (Wuhu) Motor Manufacturing Co. Ltd. 929,408.78 1.41 Foshan Welling Electronic and Electric Appliances Co., Ltd. 965.50 0.00 76,776.94 0.12 Foshan Welling Wash Motor Manufacture Co., Ltd. 20.40 0.00 627,375.60 0.95 Foshan Wellkey Electrical Material Co., Ltd. 688,958.29 1.05 Foshan Shunde Century Tongchuang Plastic Industry Co., Ltd. 114,532.71 0.15 338,171.16 0.51 Wuhu Century Science & Technology Development Co., Ltd. 44,991.75 0.06 248,368.08 0.37 Foshan Midea Kitchen-Bath Appliances Manufacturing Co., Ltd. 3,050.06 0.00 Hefei Century Plastic Mold Science and Technology Co., Ltd 145,472.01 0.20 220,434.17 0.34 Guangdong Midea Environment Appliances Manufacturing Co., Ltd. 3,532.54 0.00 1,800.00 Huai'an Welling Motor Manufacturing Co. Ltd. 3,812.50 0.01 Guangdong Midea Microwave Oven Manufacturing Co., Ltd 11,453.64 0.02 - - Total 388,651.03 0.53 4,216,871.29 6.41
42 GD MIDEA HOLDING CO., LTD. (Con.) Significant Events
(1)Explanation on the necessity of related-party transactions (2)Impact of the related-party transactions on the Company's The routine transactions made by the Company with Midea Group independency Co., Ltd. and its related parties helped the Company make full Routine related-party transactions in goods purchase or sale car- use of internal advantageous resources of the group, so as to ried out during the reporting period do not have any adverse ensure stable product quality, reduce product costs and realize impacts on the interest and independency of the Company. The the effective allocation of resources. Therefore, these transac- Company will not rely significantly on any related party as a tions were quite necessary. result of entering into transaction with the related party.
2.Other related party transactions Unit: RMB'000 Name of related corporation Nature of transaction Amount incurred during the year Midea Group Co., Ltd. and its subsidiaries Receipt of trademark licensing fees 46,533.91 Midea Group Co., Ltd. and its subsidiaries Rental fees 37,051.42 Midea Group Co., Ltd. and its subsidiaries Transportation service 270,310.99
3.Deposits in and loans from related party Ltd., to further guarantee the security and liquidity of the Pursuant to the Financial Service Framework Agreement signed Company's deposit at the Finance Company. Meanwhile, Midea between the Company and Midea Group Co, Ltd., Midea Group Group Co., Ltd. issued a letter of commitment to the Company Finance Co., Ltd. (the "Finance Company") shall, provide the to undertake to guarantee the fund security during the financial Company and its subsidiaries with a series of financial services, transactions between the Company and Midea Group Finance including money deposit, loan provision, notes discount, Co., Ltd. guarantee, settlement service and other services that Midea Group The information on the risk control of Midea Group Finance Finance Co., Ltd. may provide with approval of CBRC. Co., Ltd. can be found in the Explanation on Risk Evaluation of By December 31st 2010, the balance of the Company's funds Midea Group Finance Co., Ltd. issued by the Company and the deposited at Midea Group Finance Co., Ltd. was RMB244.0118 related review comments issued by the sponsor CITIC Securi- million, and the balance of loan was RMB0.00. ties Co., Ltd. Various financial services provided by Midea Group Finance Co., Ltd. to the Company were priced on a fair and reasonable 4. Related party transaction in respect of acquisi- basis, not higher than the fair value in the market or the standard tion and disposal of assets stipulated by the People's Bank of China. The maximum daily To meet the demands of industrial integration and business balance of funds of the Company deposited at the Finance Com- development, the Company's subsidiary Wuxi Little Swan Com- pany and the maximum daily balance of outstanding loan granted pany Limited signed an agreement with Foshan Welling Wash by the Finance Company to the Company were determined ac- Motor Manufacture Co. Ltd. on December 15th 2010, pursuant cording to the historic data of deposits and loans between the to which the Company transferred its 100% of shares of Wuxi Company and commercial banks and the Company's future busi- Little Swan Company Limited to Foshan Welling Wash Motor ness growth plan. The Company's related party transactions with Manufacture Co., Ltd., for a consideration of RMB75 million, Midea Group Finance Co., Ltd. would not affect the indepen- which was determined according to the audited value of net as- dence of the Company. sets and through negotiation between both parties. In order to standardize the Company's related party transactions with Midea Group Finance Co., Ltd., the Company formulated 5.During the reporting period, there was no Re- the Risk Control System for Related Party Transactions between lated-Party Transaction occurring in joint invest- GD Midea Holding Co., Ltd. and Midea Group Finance Co., ment of the Company and related parties.
ANNUAL REPORT 2010 43 Significant Events (Con.)
6.During the reporting period, there was no credit/ (VI)Major contracts and their performance indebtedness existed between the Company and the related parties and the Company has pro- 1.Escrow, contracting or lease of assets from or to vided no guarantee for any related party. other companies No significant escrow, contracting or lease of assets to or from 7.During the reporting period, there was no non- other companies was incurred or subsisting during the reporting operating occupation of the Company's funds by period. existing major shareholder and its subsidiary corporations.
44 GD MIDEA HOLDING CO., LTD. (Con.) Significant Events
2.Significant guarantees The Company's guarantees incurred or subsisting during the reporting period are detailed as follows: Unit: RMB'0000 The Company's external guarantees (excluding guarantees provided for its subsidiaries) Name of Guarantee line re- Guarantee Date of occurr- Actual Guarantee Guarantee Whether Guarantee provided guaranteed lated announcement line ence (agreement guaranteed type period performance for related party party issuing date and No. signing date) amount was completed (yes or no) None ------Total line of external guarantees approved 0.00 Actual amount of external guarantees 0.00 during the reporting period (A1) provided during the reporting period (A2) Total line of external guarantees approved 0.00 Actual amount of external guarantees provided 0.00 at the end of reporting period (A3) at the end of reporting period (A4) Guarantee provided by the Company for its subsidiaries Name of guaranteed party Guaranteed amount Guaranteed Date of occurr- Actual Guarantee Guarantee Whether Guarantee provided limit announcement amount ence (agreement guaranteed type period performance for related party issuing date and No. limit signing date) amount was completed (yes or no) Guangdong Midea Refrigeration 224,120.00 2008.01.01 50,707.00 Warranty 2013.12.31 No No Equipment Co., Ltd. Midea Commercial Air Conditioning 7,500.00 2008.01.01 1,715.00 Warranty 2013.12.31 No No Equipment Co., Ltd., Guangdong Province GD Midea Heating & Ventilating 65,000.00 2010.01.20 23,949.00 Warranty 2012.01.19 No No Equipment Co., Ltd. Midea Group Wuhan Refrigeration 60,000.00 2010.09.30 23,000.00 Warranty 2011.09.29 No No Period of Equipment Co., Ltd. disclosure: Guangdong Meizhi Refrigeration 8,000.00 2008.01.01 1,169.00 Warranty 2013.12.31 No No March 16th Equipment Co., Ltd. and May GD Midea Group Wuhu Refrigerating 137,000.00 2010.01.03 55,000.00 Warranty 2011.01.02 No No 28th 2010 Equipment Co., Ltd. Announcement Anhui Meizhi Refrigeration 17,000.00 2010.01.14 9,350.00 Warranty 2011.01.13 No No No.: Equipment Co., Ltd. 2010-009 Hefei Hualing Co., Ltd 126,000.00 2010.03.01 49,470.00 Warranty 2011.02.28 No No 2010-033 Hefei Midea Royalstar Refrigerator 127,500.00 2010.03.01 79,764.00 Warranty 2011.02.28 No No Co,.Ltd. Chongqing Midea General Refrige- 18,000.00 2010.04.30 8,935.00 Warranty 2011.04.29 No No ration Equipment Co, Ltd Little Swan (Jingzhou) Electric 45,300.00 2010.06.01 9,582.00 Warranty 2010.05.29 No No Appliance Co., Ltd. China Refrigeration Industry Co., Ltd. 800.00 2010.08.01 800.00 Warranty 2011.02.28 No No Hefei Midea Material Supply Co., Ltd. 40,000.00 2010.09.01 27,400.00 Warranty 2011.09.01 No No Total of guaranteed amount limit approved and provided 766,633.00 Actual amount of guarantees provided 766,633.00 for subsidiaries during the reporting period (B1) for subsidiaries during the reporting period (B2) Total of guaranteed amount limit approved and 340,841.00 Actual amount of guarantees provided for 340,841.00 provided for subsidiaries at the end of reporting period (B3) subsidiaries at the end of reporting period (B4)
ANNUAL REPORT 2010 45 Significant Events (Con.)
(Con.) Total amount of guarantees provided by the Company (namely total amount of the above two items) Total amount of guarantees approved 766,633.00 Actual amount of guarantees provided 766,633.00 during the reporting period (A1+B1) during the reporting period (A2+B2) Total amount of guarantees approved 340,841.00 Actual amount of guarantees provided 340,841.00 at the end of reporting period (A3+B3) at the end of reporting period (A4+B4) Ratio of total guarantee amount (i.e. A4+B4) to the Company's net asset (%) 27.63% Of which: Amount of guarantee provided for shareholders, beneficial controlling person and related party (C) 0.00 Amount of guarantee of indebtedness directly or indirectly provided for the guaranteed party with the asset-liability ratio of over 70% (D) 215,959.00 The portion of total guarantee amount in excess of 50% of net asset (E) 0.00 Total of the abovementioned three guarantee amounts (C+D+E) 215,959.00 Explanation on several and joint liability possibly borne for undue guarantee No
ment with our company on March 30th 2010, pursuant to which 3.Entrusted financing and entrusted loans it is agreed that our company will urge the Finance Company to During the reporting period, no entrusted financing and entrusted provide your company and your subsidiaries with a series of loan occurred in the Company and no entrusted financing and financial services as required by your company and your entrusted loan was planned as at the end of the reporting period. subsidiaries, including but not limited to deposit service, loan service, discounting service, guarantee service, settlement ser- 4.Other material contracts vice and other services allowed by CBRC to be provided by the The Company had no other material contracts during the report- Finance Company. ing period. In order to guarantee the legal operation of the Finance Com- pany and guarantee the funds security of your company during (VII)Commitment and details on its fulfillment the financial transactions between your company and the Fi- nance Company, our company, as the controlling shareholder of the Finance Company, hereby undertakes that: On November 19th 2010, Midea Group Co., Ltd. issued a letter of commitment to the Company in order to guarantee the funds 1. The Finance Company is a corporate group finance company security during the financial transactions between the Company incorporated in accordance with the Measures on Administra- and Midea Group Finance Co., Ltd. The Letter of Commitment tion of the Finance Companies under Enterprises Groups, re- is as follows: lated laws, regulations and regulatory documents. The Finance Company has worked out various business rules and procedures, To GD Midea Holding Co., Ltd.: established and perfected its systems related to internal control, finance and accounting, business risk control and business Whereas: auditing, etc. Our company will urge the Finance Company to 1. Your company has jointly invested with our Company and perform its business activities in accordance with the regula- our subsidiary Guangdong Welling Motor Co., Ltd. to establish tions and requirements of related laws, regulations and regula- Midea Group Finance Co., Ltd. (hereinafter referred to as "Fi- tory documents, as well as the agreements in the Financial Ser- nance Company"). Our company holds 55% of its shares, your vice Framework Agreement signed between our company and company holds 40% of its shares and Guangdong Welling Mo- your company in the future, so as to ensure the funds security tor Co., Ltd. holds 5% of its shares. during the financial transactions between your company and the 2. Your company signed a Financial Service Framework Agree- Finance Company.
46 GD MIDEA HOLDING CO., LTD. (Con.) Significant Events
2. Whereas your company is independent from our company in make payment, take effective measures including increase of terms of asset, business, personnel, finance and organizational the Finance Company's share capital, according to the actual structure, etc., our company will continue guaranteeing the in- needs for overcoming such difficulty, to ensure the security of dependence of your company and fully respecting your funds of your company. company's autonomy in management, and allow your company Our company will strictly keep the abovementioned undertak- to independently make decisions on the financial businesses with ing to guarantee the funds security of your company during the the Finance Company according to the related regulatory provi- financial transactions between the Finance Company and your sions and the actual needs for business and to perform the inter- company. nal procedure in accordance with related laws, regulations and By the end of reporting period, Midea Group Co., Ltd. commit- your company's Articles of Association, and will not interfere ted no act of breaking the abovementioned undertaking. with your company's decisions. (VIII)Details on activities of surveys, communications 3. According to the provisions of the Measures on Administra- and interviews received or conducted in the Com- tion of the Finance Companies under Enterprises Groups, our pany during the reporting period company will, when the Finance Company finds it difficult to
Reception Reception Reception Visitors received Key discussion topics and Date place mode provided information 2010-01-06 Company's Office On-site survey CICC, Goldman Sacks 2010-01-07 Company's Office On-site survey F&C Management Ltd (UK) 2010-01-22 Company's Office On-site survey UBS Securities Guotai Junan Securities, E Fund Management, Da Cheng Fund, 2010-03-17 Company's Office On-site survey Boshi Fund, Penghua Fund, Lion Fund 2010-03-18 Company's Office On-site survey Everbright Securities Discussions were 2010-03-19 Company's Office On-site survey Taikang Asset Management mainly focused on Shenyin & Wanguo, Ping An Securities, Invesco Great Wall, Operating condi- 2010-04-16 Company's Office On-site survey Fullgoal Fund tions and develop- 2010-05-07 Company's Office On-site survey Samsung Securities, Hamon Investment Group, Swiss Bank, etc. ment strategies of 2010-05-17 Company's Office On-site survey BOC International the Company ; 2010-05-27 Company's Office On-site survey CITIC Securities, First Capital Current status 2010-06-03 Company's Office On-site survey CICC and development 2010-06-11 Company's Office On-site survey Morgan Stanley of the industry; 2010-06-22 Company's Office On-site survey Donghai Securities, Xiangcai Securities Information and 2010-07-07 Company's Office On-site survey Great Wall Securities report provided: 2010-07-09 Company's Office On-site survey Guangfa Securities the Company's 2010-07-22 Company's Office On-site survey Value Partners Fund regular reports, 2010-07-26 Company's Office On-site survey Alliance Bernstein Hong Kong Fund public announ- 2010-08-06 Company's Office On-site survey Essence Securities, Guoxin Securities, Southern Fund cement and others. Communication Yinhua Fund, China AMC, ICBC Credit Suisse, CICC, 2010-08-30 Beijing with investors Galaxy Securities, Changsheng Fund Communication China International, CITIC Securities, Shenyin & Wanguo, 2010-08-31 Shanghai with investors Guotai Junan, Guojin Securities, HSBC Jintrust Fund Boshi Fund, Da Cheng Fund, Penghua Fund, Rongtong Fund, Communication 2010-09-01 Shenzhen Lion Fund, Southern Fund, Guoxin Securities, CJIS, with investors China Merchants Securities
ANNUAL REPORT 2010 47 Significant Events (Con.)
(Con.) Reception Reception Reception Visitors received Key discussion topics and Date place mode provided information Ping An Securities, Changsheng Fund, 2010-09-03 Company's Office On-site survey Beijing Dingtian Investment Management Company 2010-09-06 Company's Office On-site survey BEA Penghua Fund, Da Cheng Fund, Yinhua Fund, China AMC, 2010-09-17 Company's Office On-site survey CICC, Guojin Securities, Shenzhen Baishan Venture Capital , Discussions were Chongyang Investment, Cinda Securities mainly focused on 2010-10-11 Company's Office On-site survey Haitong Securities Operating condi- 2010-11-01 Company's Office On-site survey Guangfa Securities tions and develop- 2010-11-03 Company's Office On-site survey CJIS, Guoxin Securities, Changjiang Securities, Great Wall Fund ment strategies of 2010-11-04 Company's Office On-site survey BNP Paribas Capital (Asia Pacific) Limited, Guoxin Securities the Company; 2010-11-09 Company's Office On-site survey Quam Securities Current status Telephone China Life, Franklin Templeton Sealand Fund, BOC International, and development 2010-11-10 Company's Office conference Shanghai Jingqi Investment of the industry; 2010-11-16 Company's Office On-site survey Credit Suisse Founder Information and 2010-11-17 Company's Office On-site survey Huashang Fund, Guojin Securities, Guotai AMC report provided: 2010-11-18 Company's Office On-site survey MATRIX CAPITAL MANAGEMENT the Company's 2010-11-23 Company's Office On-site survey Guoxin Securities, Ping An Asset, First State Cinda Fund regular reports , 2010-12-22 Company's Office On-site survey Turiya Advisors,CITIC International Assets Management Limited public announ- ICBC Credit Suisse, China Life, Aviation Investment, ZRT, cement and others. Communication 2010-12-29 Beijing Huashang Fund, Taikang Life, Lion Fund, New China Life, with investors Yale University, ZEG
(IX)The Company's performance of its social responsibilities during the reporting period
The Company has put much emphasis on the needs and benefits of the staff, customers, environment, society, cooperation partners and shareholders. It insists on a harmonious relationship and cohabitation with all parties and adheres to the principles of good faith and commitment. It complies with laws and moral standards and reinforces the communication and coordination with the interested parties. It also actively bears the social responsibility of an enterprise and strive to achieve the sustainable development of the society and environment (details of which can be found in the separately published Social Responsibility Report).
(X)Other major issues
1.Shareholdings in other listed companies (held for Wuxi Little Swan Company Limited) Unit: RMB Stock code Stock name Initial Percentage of Carrying value Profit and loss Change in owner's Accounting Source investment shareholding as at the end for the repor- equity interest for calculation of amount in the company of the period ting period the reporting period item shares 400038 Huaxin Hi-tech 100,300.00 0.01% 321,816.00 0.00 0.00 Financial assets Non-public available for sale issue Total - 100,300.00 - 321,816.00 0.00 0.00 - -
48 GD MIDEA HOLDING CO., LTD. (Con.) Significant Events
2.The Company's shareholdings in non-listed financial corporations and companies to be listed Unit: RMB Investee Initial Number Percentage of Carrying value Profit and loss Change in owner's Accounting Source held investment of shares shareholding in as at the end for the repor- equity interest for calculation of amount held the company of the period ting period the reporting period item shares Golden Eagle Asset 20,000,000.00 20,000,000.00 20% 7,242,056.53 -5,589,774.35 -5,589,774.35 Long-term equity Established by Management Co. investment way of promotion Bank of Jiangsu 1,100,000.00 2,202,564.00 - 1,210,000.00 - - Long-term equity Non-public Co., Ltd. investment issue
Note: Bank of Jiangsu Co., Ltd. is held by the Company's controlled subsidiary Wuxi Little Swan Company Limited.
3.Investment in derivatives Positions held in derivatives investment as at the end of the reporting period Unit: RMB'000 Contract type Contract amount Contract amount Profit and loss Ratio of contract amount at the end at the beginning at the end for the repor- of the period to the Company's net of the period of the period ting period asset at the end of the period (%) Futures hedging contracts 1,338.60 20,044.30 127,886.60 0.16 Forward forex contracts 27,110.00 142,610.77 208,285.56 1.16 Total 28,448.60 162,655.07 336,172.16 1.32
Note: Contract amount of positions held at the beginning/end of period represented fair value of the contracts. Details of derivatives investment
For the sake of eliminating the cost risk of the Company's bulk purchases of raw materials as a result of significant fluctuations in raw material prices, the Company carried out hedging business for some of its copper, aluminium and plastic materials to timely lock in some of the material costs according to spot market status within the purchase price range determined under the annual budget to reduce the uncertainty risk of the Company's operations caused by spot market price fluctuations; meanwhile, the Company conducted certain forex funds businesses by making use of bank financial instruments to eliminate the risks caused by exchange rate and interest rate fluc- tuations, to maintain and increase the value of foreign exchange assets, reduce foreign exchange Risk analysis of positions held in derivatives liabilities and make a cost lock-in. The Company has considered and formulated Administrative during the reporting period and explanation of Measures for Futures Hedging Business and Administrative Measures for Forex Funds Business control measures (including, inter alia, market to perform sufficient evaluation and control against derivatives investment and position risks. risk, liquidity risk, credit risk, operational risk Details of which are described as follows: and legal risk) 1.Legal risks The Company's hedging and forex funds businesses shall be conducted in compliance with laws and regulations, with clearly covenanted responsibility and obligation relationship between the Company and the agencies. Control measures: the Company designated relevant responsible departments to enhance learning of laws and regulations and market rules; stringent examination and verification of contracts; well-defined responsibility and obligation; strengthen compliance check; and to ensure that the Company's derivatives investment and position operations are in compliance with the require- ments of the laws and regulations and internal management system the Company.
ANNUAL REPORT 2010 49 Significant Events (Con.)
(Con.) 2.Operational risk Imperfect internal process, staff, systems and external issues may cause the Company to suffer from loss during the course of its hedging business and forex funds business. Control measures: relevant management system of the Company has clearly defined the functions and responsibility as well as review and approval process for the hedging business and forex funds business, established a comparatively well-developed monitoring mechanism, and effec- tively reduced operational risk by strengthening risk control over the business process, decision- making process and trading process. 3.Market risk Uncertainties caused by changes in the prices of bulk commodity and in exchange rate in foreign exchange market could lead to greater market risk in the futures business and forex funds business. Risk analysis of positions held in derivatives Meanwhile, inability to raise sufficient funds to establish and maintain hedging positions during during the reporting period and explanation of the futures hedging operations or the forex funds required for performance during the forex funds operations being unable to be credited into account could result in hedging loss and default risks. control measures (including, inter alia, market Control measures: the futures hedging business and forex funds business of the Company shall risk, liquidity risk, credit risk, operational risk always be conducted by observing prudent operation principles while no speculative trading shall and legal risk) be allowed. As to hedging business, the hedging volume shall be determined strictly according to the requirement of production & operations and application for futures transaction shall be made accordingly. The hedging volume shall in principle not exceed one-third of the estimated annual demand, and stop-loss mechanism shall be implemented; to establish futures risk measu- ring system to measure and calculate the margin amount occupied, floating gains and losses, margin amount available and margin amount required for intended positions to determine the pre- pared margin amount which may be required to be supplemented. As to forex funds business, a hierarchical management mechanism has been implemented whereby application for funds busi- ness is submitted by the operating unit, risk analysis must be made on the conditions and environ- ment affecting operating profit and loss, to evaluate the possible greatest revenue and loss, and report the greatest acceptable margin ratio or total margin amount. The Company will update ope- rating status of the funds business on a timely basis to ensure proper funds arrangement before the expiry dates. Changes in market price or fair value of deri- 1. Profit/loss from futures hedging contracts incurred during the reporting period was RMB127 vatives product invested during the reporting million; period: specific methods used and relevant 2. Profit/loss from forward forex contracts incurred during the reporting period was RMB208 assumption and parameter settings shall be dis- million; closed for analysis of fair value of derivatives 3. Public quotations in futures market or forward forex quotations announced by Bank of China are used in the analysis of derivatives fair value. Explanation of significant changes in accoun- ting policies and specific financial accounting principles in respect of the Company's deriva- No change tives for the reporting period as compared to the previous reporting period The Company's independent directors are of the view that the futures hedging business is an effective instrument for the Company to eliminate price volatility and implement risk prevention measures through enhanced internal control, thereby improving the operation and management Special opinions expressed by independent of the Company; the Company further improves its foreign exchange risk management capability directors concerning the Company's deriva- and maintains and increases the value of foreign exchange assets through the forex funds business; tives investment and risk control and the abovementioned investment in derivatives can help the Company to exert in full its com- petitive advantages and therefore it is practicable for the Company to carry out derivatives invest- ment business and the risks are controllable.
50 GD MIDEA HOLDING CO., LTD. (Con.) Significant Events
4.Items of other comprehensive income Unit: RMB'000 Item Amount in Amount in current period previous period 1. Gains (losses) arising from financial assets available for sale -5,128.21 Less: Effects of income tax arising from financial assets available for sale -769.23 Net amount carried forward from other comprehensive income in the previous period to profits and losses of the current period Sub-total -4,358.98 2. Share of other comprehensive income of investee company calculated on equity basis Less: Effects of income tax arising from the share of other comprehensive income of investee company calculated on equity basis Net amount carried forward from other comprehensive income in the previous period to profits and losses of the current period Sub-total 3. Gains (losses) arising from cash flow hedging tools 18,705.70 159,225.79 Less: Effects of income tax arising from cash flow hedging tools 4,676.42 39,806.44 Net amount carried forward from other comprehensive income in the previous period to profits and losses of the current period Adjusted amount carried forward to initial amount recognized for hedged items Sub-total 14,029.27 119,419.35 4. Translation difference arising from foreign exchange financial statements 30,414.78 -13,096.66 Less: Disposal of net amount of overseas operations carried forward in the current period Sub-total 30,414.78 -13,096.66 5. Others Less: Effect of income tax arising from inclusions in other comprehensive income from others Net amount carried forward from other comprehensive income in the previous period to profit and loss in the current period Sub-total Total 44,444.06 101,963.71
(XI)Appointment, dismissal and remuneration of Certified Public Accountants
During the reporting period, upon review and approval at 2009 annual general meeting of the Company convened on April 12th 2010, Ascenda Certified Public Accountants has been engaged by the Company to audit the Company's finance for the year of 2010. In 2010, a remuneration of RMB3.30 million (with travel expenses being borne by the Company) was paid to Ascenda Certified Public Accoun- tants by the Company.
(XII)During the reporting period, none of the Company, or its directors, supervisors, senior executives, share- holders or beneficial controlling persons were investigated by competent authorities, taken compulsory mea- sure against by judicial organs or discipline inspection departments, removed to judicial departments or pros- ecuted for criminal liabilities, inspected and imposed administrative penalty upon by CSRC, prohibited from participating in the securities market, punished by other administrative departments due to having been identi- fied as inappropriate persons or censured by the stock exchange in public.
ANNUAL REPORT 2010 51 X. Financial Accounting Report
Audit Report
Tian Jian Zheng Xin Shen (2011) GF Zi No.150008
To: All the Shareholders of GD Midea Holding Co., Ltd.
We have audited the financial statements of GD Midea Holding Co., Ltd. (hereinafter referred to as "Midea Electric Appliance") attached hereinafter, including the consolidated balance sheet and balance sheet as at December 31st, 2010, the consolidated profit and loss statement, profit and loss statement, consolidated cash flow statement, cash flow statement, consolidated statement of changes in equity and statement of changes in equity for the year ended December 31st, 2010, as well as the notes to these financial statements.
I. Responsibility of Midea Electric Appliance's Management for the Financial Statements Responsibility of Midea Electric Appliance's Management is to prepare these financial statements in accordance with the Account- ing Standards for Business Enterprises. This responsibility includes: (1) designing, implementing and maintaining internal control relevant to the preparation of financial statements so that they are free from material misstatement, whether due to fraud or error; (2) selecting and applying appropriate accounting policies; and (3) making accounting estimates that are reasonable in the circumstances.
II. Responsibility of Certified Public Accountants Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the Independent Auditing Standards for Chinese Certified Public Accountants. Those Standards require that we comply with the requirements of the professional ethics, and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit involves performing the audit procedures to obtain the audit evidence supporting the amounts and disclosures in the financial statements. These audit procedures selected depend on judgment of the certified public accountants, including the assess- ment of the risk of material misstatement in the financial statements, whether due to fraud or error. When making those risk assessments, we gave due consideration to the internal control relevant to the preparation of financial statements to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the internal control. An audit also includes evaluating the appropriateness of the accounting policies used and the reasonableness of accounting estimates made by the management, as well as evaluating the overall presentation of the financial statement.
We believe that the audit evidences we have obtained are sufficient and appropriate to provide a basis for our audit opinion.
52 GD MIDEA HOLDING CO., LTD. (Con.)Financial Accounting Report
III. Audit Opinion In our opinion, the financial statements of Midea Electric Appliance have been prepared in accordance with the requirements of the Accounting Standards for Business Enterprises, and give a true and fair view of financial position of Midea Electric Appliance as at December 31st 2010 and its profit and cash flows for the year then ended.
Ascenda Certified Public Accountants, Ltd. Chinese Certified Public AccountantLiu Zhiyong
Beijing, China Chinese Certified Public AccountantZhou Rongming
Date: March 16th, 2011
ANNUAL REPORT 2010 53