2011 Annual Report Important Notice: The Board of Directors, the Supervisory Committee and the Directors, members of the Supervisory Committee and senior management of the Company warrant that in respect of the information contained in this report, there are no misrepresentations or misleading statements, or material omission, and individually and collectively accept full responsibility for the authenticity, accuracy and completeness of the information contained in this report. Chairman Wang Shi, Director Yu Liang, Director Sun Jianyi, Director Xiao Li, Independent Director Zhang Liping, Independent Director Paul Chan Mo Po attended the board meeting in person. Deputy Chairman Qiao Shibo, and Director Jiang Wei were not able to attend the board meeting in person due to their business engagements and had authorised Director Yu Liang to represent them and vote on behalf of them at the board meeting. Director Wang Yin was not able to attend the board meeting in person due to business engagements and had authorised Director Xiao Li to represent him and vote on his behalf at the board meeting. Independent Director Qi Daqing was not able to attend the board meeting in person due to business engagements and had authorised Independent Director Paul Chan Mo Po to represent him and vote on his behalf at the board meeting. Independent Director Hua Sheng was not able to attend the board meeting in person due to business engagements and had authorised Independent Director Zhang Liping to represent him and vote on his behalf at the board meeting. Chairman Wang Shi, Director and President Yu Liang, and Executive Vice President and Supervisor of Finance Wang Wenjin declare that the financial report contained in the annual report is warranted to be true and complete. To Shareholders ……………………………………………………….……………………….… 2 Basic Corporate Information …………………………………………………………………..…4 Accounts and Financial Highlights…………………………………………………………..……5 Change in Share Capital and Shareholders………………………………………………………5 Directors, Members of Supervisory Committee, Senior Management and Employees… 10 Corporate Governance Structure………………………………………………………………. 16 Summary of Shareholders’ Meetings ……………………………………………………… …19 Directors’ Report…………………………………………………………………………… … 20 Report of Supervisory Committee ………………………………………………………… .….53 Significant Events ………………………………………………………………………………. 55 Chronology of 2011………………………………………………………………………………..66 Financial Report ………………………………………………………………………………….66 Page 1 I. To Shareholders This winter feels like déjà vu. Perhaps, there is nothing new under the sun, and history merely repeats itself. Since 2006, we have undergone a complete industry cycle. Another winter should not come as a surprise, nor should it bring fear --- for the factors determining the industry prospects and its upward trend have remained unchanged. So were the deep-rooted contradictions that had caused the short-term ripples in the market. Although they had gone through several adjustments, these contradictions were actually nothing new. On this subject, we had discussed before in our past annual reports. Of course, the ups and downs of a market cannot be compared to the changing seasons of Nature. Each season arrives in order, and to know when it is the exact time for a season change is not that difficult. Yet, it would be a much more difficult task to make a similar precise prediction for a change in market cycles. Reason is that the market is human affairs. Humans have expectations. They have the ability to draw conclusions on things with regular patterns and they will try to exploit them as fully as possible. Moreover, people vary in observations, estimations, expectations and actions, and because of these differences, each individual will have his/her influence, whether big or small, on the development of things with regular patterns. As such, human affairs are not constant, without change, which are the characteristics of affairs governed by the law of nature. Change and constancy What is invariable in a market is perhaps change, and what is certain is its characteristic of uncertainty. That is why we have been advocating “response over prediction” and opposing to over estimating and superstitiously believing in one’s own ability to make predictions – even though we have competitive edge in such a power. And maybe what is more important than “response” is “constancy” – unwavering faith and aspirations, understanding of the perpetual business logic and stable business strategy. In the past reports, we have discussed in detail the reasons for the existence of an enterprise, the mission of professional managers, and China Vanke’s unwavering operating principles. Each individual or organisation may make a different choice on these issues, but once the choice is made, it will normally remain unchanged, or even become a path dependence that is difficult to change. Business strategy, on the other hand, is normally more flexible. Most of the companies will choose, based on their evaluation of market changes, a strategy that they believe is appropriate at the time. However, when the short-term change in the market has become extremely complex or even reversed its direction within a period of time too short for a company’s strategy to take effect, frequent adjustments to the strategy may be futile. When it is easier to gauge the market’s long-term development direction than its short-time volatility, the stability of a business strategy is perhaps more important than its flexibility. China Vanke’s business strategies are relatively stable. These strategies include: insist on building small and furbished units; insist on quick turnover and a land bank just sufficient to meet its development needs; attach great importance to collaboration; prudent investment strategies and promoting prefabrication in residential development and green construction. Detailed discussion on quick turnover, prudent investment, collaboration and aspiration to become an outstanding green enterprise had been recorded in the previous reports. Here, we will elaborate more on the remaining three areas. Small dwellings and furbished units Among all the leading enterprises in the industry, China Vanke perhaps has the smallest average size of residential units, and it may be the first property developer to hand over homes with basic full furbishing. China Vanke’s commitment to build small and fully furbished residential units originates from its vision and not commercial considerations. China is a country where land is scarce compared to its population. As the nation is undergoing urbanisation at an unprecedented pace in world history, this will certainly lead to upsurges in the number of families and population density in cities faced with the influx of migrants from other parts of China. However, urban construction and land development cannot keep pace with urbanisation. With limited land resources, only through the economical use of land can the living needs of families be satisfied to the greatest extent. We were aware of this as early as at the end of 1990s, and since then have been adhering to our belief that small dwellings will be an inevitable trend. Starting from 2001, China Vanke has commenced research on building small Page 2 residential units. In recent years, close to 90% of our products sold have been residential units smaller than 144 sq m. During the urbanisation process, young people make up the mainstream floating population. Among the new city migrants, the proportion of singles or young families with no children is high. This implies there is enormous market potential for ultra small homes. The market gap in ultra small housing has led to the emergence of “share housing” in mega cities in recent years. We believe this situation reflects that there is no better choice. To cope with this situation, China Vanke has completed the research and development of ultra small residential units with an area below 20 sq m, and construction of these dwellings has commenced. As the customer base gets younger, urban families have greater demand for a rich and eventful life. To the young families, it is a cumbersome task to take care of their home furbishing, which is time consuming and requires much energy during the process. Compared with an individual client handling his or her own furbishing works, a company has significant advantages in pricing negotiation during procurement and quality control. Besides, waste generated from centralised furbishing is far less than individual home furbishing, which helps save energy and protect the environment. Centralised furbishing also avoids causing disturbance to neighbours who might have their furbishing works take place at different times. At present, apartments under construction of the Company are basically furbished units. A larger proportion of homes to be handed over by the Company will be furbished units. On the other hand, as a developer specialising in residential properties, we hope what we produce serve as dwellings and not investment products. Large residential units are normally considered highly scarce, while the furbishing of these units will only depreciate. As such, investment-driven home buyers prefer large units and roughcast housing. However, we want to build homes with people living inside; we do not want to see the units we sell left unoccupied for a long period of time. As a company, we are unable to identify and select customers. But this inability can be resolved by our product mix focusing on small and furbished units, which can