THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION
If you are in any doubt as to any aspect of this circular or as to the action to be taken, you should consult your stockbroker or other registered dealer in securities, bank manager, solicitor, professional accountant, independent adviser or other professional adviser. If you have sold or otherwise transferred all your shares in Zhengzhou Coal Mining Machinery Group Company Limited, you should at once hand this circular and the enclosed form of proxy and reply slip to the purchaser or transferee or to the bank, stockbroker or other agent through whom the sale or transfer was effected for transmission to the purchaser or transferee. Hong Kong Exchanges and Clearing Limited and The Stock Exchange of Hong Kong Limited take no responsibility for the contents of this circular, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this circular. This circular is for information purpose only and does not constitute an invitation or offer to acquire, purchase or subscribe for any securities of the Company.
Zhengzhou Coal Mining Machinery Group Company Limited 鄭州煤礦機械集團股份有限公司 (A joint stock limited company incorporated in the People’s Republic of China with limited liability) (Stock Code: 00564) VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION REPORT OF THE BOARD FOR THE YEAR 2015 REPORT OF THE BOARD OF SUPERVISORS FOR THE YEAR 2015 ANNUAL REPORT FOR THE YEAR 2015 REPORT OF THE INDEPENDENT NON-EXECUTIVE DIRECTORS ON THEIR PERFORMANCE IN THE YEAR 2015 APPOINTMENT OF THE EXTERNAL AUDITORS FOR THE YEAR 2016 THE PROVISION OF REPURCHASE GUARANTEE TO CUSTOMERS UNDER FINANCE LEASE BUSINESS THE USE OF SELF-OWNED IDLE FUNDS AND IDLE PROCEEDS FROM THE H SHARES FOR THE INVESTMENT OF WEALTH MANAGEMENT PRODUCTS PROFIT DISTRIBUTION PLAN FOR THE YEAR 2015 AMENDMENTS TO THE ARTICLES OF ASSOCIATION FORMULATION OF THE DIVIDEND DISTRIBUTION PLAN FOR SHAREHOLDERS OF THE COMPANY FOR THE NEXT THREE YEARS (2016-2018) AND NOTICE OF THE 2015 ANNUAL GENERAL MEETING NOTICE OF THE 2016 FIRST H SHAREHOLDERS CLASS MEETING Independent Financial Adviser to Independent Board Committee and Independent Shareholders
The Company will convene the 2015 AGM and the 2016 first H Shareholders Class Meeting at 9:00 a.m. on Monday, 13 June 2016 at the Convention Centre, Office Building of Zhengzhou Coal Mining Machinery Group Company Limited, No. 167, 9th Street, Econ-Tech Development Zone, Zhengzhou, Henan Province, PRC. Notice of the AGM and Notice of the 2016 first H Shareholders Class Meeting are set out respectively on pages 93 to 97 and 98 to 100 of this circular. The letter from the Board and the letter from the Independent Board Committee are set out respectively on pages 9 to 68 and page 69 of this circular. The letter from the Independent Financial Adviser is set out on pages 70 to 92 of this circular, which contains its advice to the Independent Board Committee and Independent Shareholders. The notice, proxy form and reply slip for the AGM and the 2016 first H Shareholders Class Meeting were dispatched on 29 April 2016.
23 May 2016 CONTENTS
Page
Definitions ...... 1
Forward-looking Statements ...... 7
Letter from the Board ...... 9 (I) Very substantial acquisition and connected transaction ...... 10 (II) AGM and the 2016 First H Shareholders Class Meeting ...... 49 (III) Recommendation ...... 59 (IV) Additional Information ...... 59
Letter from the Independent Board Committee ...... 69
Letter from the Independent Financial Adviser ...... 70
Notice of 2015 Annual General Meeting ...... 93
Notice of 2016 First H Shareholders Class Meeting ...... 98
Appendix I — Information about the Target Companies 1. Glossary of Technical Terms ...... I-1 2. Risk Factors ...... I-3 3. Industry Overview ...... I-18 4. Regulatory Overview ...... I-35 5. History and Reorganisation ...... I-53 6. Business ...... I-65 7. Directors, Supervisors and Senior Management ...... I-109 8. Financial Information ...... I-127
Appendix II — Financial Information of the Group ...... II-1
Appendix III — Audited Financial Information of the Target Companies 1. Accountant’s Report of CACG I ...... III-1 2. Accountant’s Report of ASIMCO Camshaft ...... III-43 3. Accountant’s Report of ASIMCO Foundry ...... III-77 4. Accountant’s Report of ASIMCO NVH ...... III-102 5. Accountant’s Report of ASIMCO Shanxi ...... III-145 6. Accountant’s Report of ASIMCO Shuanghuan ...... III-178
Appendix IV — Unaudited Pro Forma Financial Information of the Enlarged Group ...... IV-1
Appendix V — Summary of the Asset Evaluation Report 1. Summary of the Asset Evaluation Report ...... V-1 2. Letter from the Board ...... V-79 3. Letter from PricewaterhouseCoopers ...... V-80
Appendix VI — General Information ...... VI-1
–i– DEFINITIONS
In this circular, the following expressions shall have the following meanings unless the context otherwise requires. Certain other terms are explained in the section headed “Appendix I — Information about the Target Companies — 1. Glossary of Technical Terms”.
“Acquisition” or “Transaction” pursuant to the Equity Transfer Agreement, the Purchaser conditionally agreed to acquire from the Sellers the Target Equity Interests, the purchase price shall be RMB2,200,000,000, payable in its USD equivalent, after applying the Applicable Exchange Rate, unless based on the appraised value set out in the Asset Evaluation Report, all parties, upon negotiation, agree in writing on price adjustment, the Purchase Price shall be the price after such adjustments
“AGM” the annual general meeting of the Company to be held at the Convention Centre, Office Building of Zhengzhou Coal Mining Machinery Group Company Limited, No. 167, 9th Street, Econ-Tech Development Zone, Zhengzhou, Henan Province, PRC at 9:00 a.m. on Monday, 13 June 2016 or any adjournment thereof, the notice of which was dispatched on 29 April 2016
“Applicable Exchange Rate” the Applicable Exchange Rate shall be 6.54825, being the average of (i) 6.515, the midpoint of the buying and selling rates of RMB/USD set by the People’s Bank of China on March 24, 2016 and (ii) 6.5815, the exchange rate of RMB/USD based on the forward exchange settlement and sale arrangement made by the Purchaser and Bank of China Henan Branch on March 30, 2016
“Appraisal Reference Date” 31 December 2015
“ASIMCO Electric Motor” Hubei Super-Elec Auto Electric Motor Co. Ltd., which is principally engaged in the production and sales of motors and appliance for use in automobiles and held by CACG I of 51%
–1– DEFINITIONS
“Asset Evaluation Report” the asset evaluation report of each Target Company prepared by China United Assets Appraisal Group Company Limited (中聯資產評估集團有限公司), the appraiser engaged by the Purchaser in connection with the Material Asset Reorganization, and filed with the State-owned Assets Supervision and Administration Commission of Henan Province, including all the schedules thereof. Such evaluations are proposed to be conducted using the asset-based approach and income approach, while the outcome of the income approach is adopted
“Articles of Association” the articles of association of the Company
“A Share(s)” domestic ordinary share(s) with a par value of RMB1.00 each issued by the Company which are subscribed for by domestic investors and are listed for trading on the Shanghai Stock Exchange (stock code: 601717)
“A Shareholder(s)” holder(s) of A Share(s)
“Board” the board of directors of the Company
“China” or “PRC” the People’s Republic of China, which for the purposes of this circular excludes Hong Kong, Macau Special Administrative Region and Taiwan
“China Securities Depository China Securities Depository and Clearing and Clearing Corporation Corporation Limited and its subsidiary in Shanghai Limited”
“Commerce Authorities” the Ministry of Commerce or relevant local authorities of the PRC
“Company” Zhengzhou Coal Mining Machinery Group Company Limited (鄭州煤礦機械集團股份有限公司), a joint stock company incorporated in the PRC with limited liability, the Shares of which are listed on the main board of the Stock Exchange (stock code: 00564)
“CSRC” China Securities Regulatory Commission
“Directors” the directors of the Company
–2– DEFINITIONS
“Dividends” proposed distribution of 2015 final dividends to the Shareholders whose names appear on the register of members for the A Shareholders and the H Shareholders at the close of business on the record date, based on a rule of receiving RMB0.08 (inclusive of tax) in cash dividends per 10 shares held by the Shareholders payable in RMB to A Shareholders and in HK$ to H Shareholders
“EIT Law” the Enterprise Income Tax
“Enlarged Group” the Company together with the Target Equity Interests of the Target Companies after the Transaction
“Equity Transfer Agreement” the equity transfer agreement dated 24 March 2016 entered into between the Purchaser and the Sellers
“ESO Scheme” the Placing Shares shall be issued to not more than 10 qualified targets (the “Placees”) on a non-public basis, and the Placees are expected to include the Company’s employee share ownership scheme in which the Directors, supervisors and chief executives of the Company are expected to participate
“Government Entity(ies)” any court, administrative agency, regulatory authority, department or commission or other governmental authority or instrumentality, whether supra-national, national, municipal, provincial or local, or any entity exercising any regulatory, taxing, importing or quasi-governmental authority
“Group” the Company together with its subsidiaries
“HK$” or “HK dollars” Hong Kong dollars, the lawful currency of Hong Kong
“Hong Kong” the Hong Kong Special Administrative Region of the PRC
“Hong Kong Stock Exchange” the Stock Exchange of Hong Kong Limited
–3– DEFINITIONS
“H Share(s)” overseas listed foreign invested share(s) with a par value of RMB1.00 each in the share capital of the Company, which are listed on the Hong Kong Stock Exchange (stock code: 00564) and are subscribed for in HK dollars
“H Shareholder(s)” holder(s) of H Share(s)
“H Shareholders Class Meeting” the H Shareholders Class Meeting to be held at the Convention Centre of Zhengzhou Coal Mining Machinery Group Company Limited, No. 167, 9th Street, Econ-Tech Development Zone, Zhengzhou, Henan Province, the PRC at 9:00 a.m. on 13 June 2016, the notice for which was dispatched on 29 April 2016
“Independent Board the independent board committee comprising Ms. Committee” LIU Yao, Mr. JIANG Hua, Mr. LI Xudong and Mr. WU Guangming, which has been established to advise the Independent Shareholders on the Acquisition, connected transaction and other relevant matters
“Independent Financial Central China International Capital Limited, an Adviser” Independent Financial Adviser who is appointed to advise the Independent Board Committee and the Independent Shareholders on the connected transaction
“Independent Shareholders” Shareholders, excluding the parties who will be required to abstain from voting shall be Shareholders who are involved or interested in the Acquisition
“Independent Third Party(ies)” third parties independent of the Company and its connected persons
“Industry and Commerce the State Administration for Industry and Commerce authorities” or “AIC” or relevant local authorities of the PRC
“Issued Shares” or the portion of the Purchase Price to be paid by the “Consideration Shares” Purchaser by way of issue of Shares to ASIMCO China in the amount of RMB550 million pursuant to this Material Asset Reorganization
“Latest Practicable Date” 18 May 2016, being the latest practicable date for ascertaining certain information in this circular before its publication
–4– DEFINITIONS
“Listing Rules” the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited
“Long Stop Date” 31 December 2016, or such later date as shall be agreed in writing among the parties
“Material Asset Reorganization” the material asset reorganization to be implemented by the Purchaser according to the relevant rules to be promulgated by the CSRC, pursuant to which the Purchaser will acquire all of the Target Equity Interests by the payment of cash and issue of Shares to the Sellers in accordance with the Equity Transfer Agreement
“MOFCOM” the Ministry of Commerce of China or its relevant local counterpart
“NDRC” the National Development and Reform Commission of China or its relevant local counterpart
“Placing Shares” the Shares to be issued specifically to not more than 10 qualified targets including the ESO Scheme on a non-public basis by way of price consultation, the proceeds of which shall amount to not more than RMB2,200,000,000, being not more than 100% of the consideration of this Transaction
“Purchase Price” the total purchase price for this Transaction, which amounts to RMB2.2 billion (or equivalent USD amount)
“Purchaser” the Company
“RMB” or “Renminbi” Renminbi, the lawful currency of the PRC
“SAFE” the State Administration of Foreign Exchange or relevant local authorities of the PRC
“Seller(s)” the entities set out in Schedule I in the letter from the Board of this circular
“Shanghai Composite Index” the weighted composite stock price index established by the Shanghai Stock Exchange, which is calculated by all shares listed on the Shanghai Stock Exchange and weighted by the issue volume
–5– DEFINITIONS
“Shanghai Stock Exchange” or Shanghai Stock Exchange “SSE”
“Share(s)” the share(s) of RMB1.00 each of the Company
“Shareholder(s)” holders of the Share(s)
“Shareholders’ General the general meeting of the shareholders of the Meeting” Company
“Supervisory Committee” the supervisory committee of the Company
“Supplemental Agreement to the supplemental agreement of the Equity Transfer Equity Transfer Agreement” Agreement entered into between the Purchaser and the Sellers on 28 April 2016
“Stock Exchange” The Stock Exchange of Hong Kong Limited
“Target Company(ies)” the relevant target companies owned by the respective Sellers corresponding to the names set out in Schedule II in the letter from the Board of this circular, ie. ASIMCO Shuanghuan Piston Ring (Yizheng) Co., Ltd. (“ASIMCO Shuanghuan”), ASIMCO Foundry (Yizheng) Co., Ltd. (“ASIMCO Foundry”), ASIMCO Camshaft (Yizheng) Co., Ltd. (“ASIMCO Camshaft”), ASIMCO NVH Technologies Co., Ltd. (Anhui) (“ASIMCO NVH”), CACG LTD. I (“CACG I”) and ASIMCO International Casting Co., Ltd. (Shanxi) (“ASIMCO Shanxi”)
“Target Equity Interest(s)” the equity interest corresponding to the respective Target Companies set out in Schedule II in the letter from the Board of this circular
“Target Group” the Target Companies together with their subsidiaries
“Transfer” the transfer of the Target Equity Interests from the Seller to the Purchaser under the Equity Transfer Agreement
“USD” or “US$” the lawful currency of the United States
“%” per cent
–6– FORWARD-LOOKING STATEMENTS
This circular contains forward-looking statements that are not historical facts, but relate to the Company’s plans, intentions, beliefs, expectations and predictions for the future. By their nature, these forward-looking statements are subject to risks and uncertainties.
These forward-looking statements in this circular include, without limitation, statements relating to:
– the competition in the market in which the Company and/or Target Companies operate;
– the Company’s operations and business strategies;
– general domestic and global economic conditions, including those related specifically to China;
– changes in the regulatory policies of the PRC government and other relevant government authorities relating to the industries discussed herein and their potential impact on the Company’s business;
– the effects of domestic and overseas competition in the Company’s industry and their potential impact on the Company’s business;
– changes in pricing for the Company’s services;
– changes in the availability of, or requirements for, financing;
– changes in regulations and restrictions;
– the Company’s ability to expand and manage the Company’s business and to introduce new services;
– future development, trends and conditions in the industry in which the Company and/or Target Companies operate;
– changes in political, economic, legal and social conditions in the PRC, including specifically, the PRC government’s policies with respect to economic growth, inflation and foreign exchange;
– macroeconomic measures taken by the PRC government to manage economic growth;
– changes in restrictions on foreign currency convertibility and remittance abroad;
– fluctuations in exchange rates and interest rates;
– the Company’s financial condition and performance;
–7– FORWARD-LOOKING STATEMENTS
– the Company’s ability to implement the Company’s business strategy, plans objectives and goals;
– the Company’s expansion and capital expenditure plans;
– the Company’s dividend policy;
– certain statements in the sections headed “Business” and “Financial Information” in Appendix I of this circular with respect to trends in prices, volumes, operations, margins, overall market trends, risk management and exchange rates; and
– other statements in this circular that are not historical facts.
In addition, statements regarding the Company’s future financial position, strategy, projected costs and the plans and the objectives of the Company’s management for future operations are forward-looking statements. In some cases, the Company uses words such as “aim”, “continue”, “predict”, “propose”, “believe”, “seek”, “intend”, “anticipate”, “estimate”, “project”, “forecast”, “target”, “plan”, “potential”, “will”, “would”, “may”, “could”, “should” and “expect”, and the negatives of these words and other similar expressions, to identify forward-looking statements.
These forward-looking statements reflect the Company’s current views on future events but are not assurance of future performance, and will be affected by certain risks, uncertainties and assumptions, including the risk factors mentioned in this circular. The possible occurrence of one or more relevant risk factors or uncertainties, or the potential inaccuracy of the relevant assumptions, may cause actual results, performance or effects or industry results to differ materially from any future results, performance or presentation indicated expressly or implicitly in the forward-looking statements.
These forward-looking statements are based on current plans and estimates, and speak only as at the date they are made. The Company undertakes no obligation to publicly update or revise any forward-looking statements contained in this circular, whether as a result of new information, future events or otherwise, except as required by law and the Listing Rules. Forward-looking statements involve inherent risks and uncertainties and are subject to assumptions, some of which are beyond the Company’s control. The Company cautions you that a number of important factors could cause actual outcomes to differ, or to differ materially, from those expressed in any forward-looking statements.
Due to these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this circular may not occur in the way the Company expects, or at all. Accordingly, you should not place undue reliance on any forward-looking information. All forward-looking statements contained in this circular are qualified by reference to these cautionarystatements.
–8– LETTER FROM THE BOARD
Zhengzhou Coal Mining Machinery Group Company Limited 鄭州煤礦機械集團股份有限公司 (A joint stock limited company incorporated in the People’s Republic of China with limited liability) (Stock Code: 00564)
Members of the Board Registered Office Executive Directors: No. 167, 9th Street, Mr. JIAO Chengyao Econ-Tech Development Zone Mr. XIANG Jiayu Zhengzhou, Henan Province Mr. WANG Xinying PRC Mr. GUO Haofeng Mr. LIU Qiang Principal Place of Business in Hong Kong Independent Non-executive Directors: 18/F, Tesbury Centre, Ms. LIU Yao 28 Queen’s Road East, Mr. JIANG Hua Wanchai, Hong Kong Mr. LI Xudong Mr. Wu Guangming
23 May 2016
To the Shareholders
Dear Sir or Madam,
VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION REPORT OF THE BOARD FOR THE YEAR 2015 REPORT OF THE BOARD OF SUPERVISORS FOR THE YEAR 2015 ANNUAL REPORT FOR THE YEAR 2015 REPORT OF THE INDEPENDENT NON-EXECUTIVE DIRECTORS ON THEIR PERFORMANCE IN THE YEAR 2015 APPOINTMENT OF THE EXTERNAL AUDITORS FOR THE YEAR 2016 THE PROVISION OF REPURCHASE GUARANTEE TO CUSTOMERS UNDER FINANCE LEASE BUSINESS THE USE OF SELF-OWNED IDLE FUNDS AND IDLE PROCEEDS FROM THE H SHARES FOR THE INVESTMENT OF WEALTH MANAGEMENT PRODUCTS PROFIT DISTRIBUTION PLAN FOR THE YEAR 2015 AMENDMENTS TO THE ARTICLES OF ASSOCIATION FORMULATION OF THE DIVIDEND DISTRIBUTION PLAN FOR SHAREHOLDERS OF THE COMPANY FOR THE NEXT THREE YEARS (2016-2018) AND NOTICE OF THE 2015 ANNUAL GENERAL MEETING NOTICE OF THE 2016 FIRST H SHAREHOLDERS CLASS MEETING
References are made to the announcement and further announcement in relation to the Acquisition and potential connected transaction issued by the Company on 24 March 2016 and 28 April 2016 respectively.
–9– LETTER FROM THE BOARD
The purpose of this circular, among other matters, is to provide you with the notice of the 2015 AGM, further information regarding the Acquisition and the potential connected transaction and other information as required under the Listing rules so that you can make informed decision on whether or not to vote for relevant resolutions to be proposed at the AGM and H Shareholders Class Meeting.
(I) VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION
1. OVERVIEW OF THE VERY SUBSTANTIAL ACQUISITION AND THE CONNECTED TRANSACTION
On 24 March 2016, the Company and the Sellers (together with their Guarantor) entered into the Equity Transfer Agreement, pursuant to which the Company conditionally agreed to acquire from the Sellers the Target Equity Interests. The consideration shall be settled by the Company by way of issue of the Consideration Shares to the Sellers and with all or part of the cash proceeds from the issue of the Placing Shares. If Fundraising cannot be conducted or Placing Shares are not fully subscribed, the difference in the Purchase Price will be funded by the Company (if any). In the opinion of Directors, the working capital available to the Group is sufficient for the Group’s requirements for at least 12 months from the date of this circular.
As at the date of this circular, the identity of the Placees to whom the Placing Shares will be issued and other key terms were yet to be determined. The Company expects that the Placing Shares will be issued to not more than 10 qualified targets on a non-public basis. The Placees are expected to include the Company’s ESO Scheme, in which the Directors, supervisors and chief executives of the Company are expected to participate.
2. EQUITY TRANSFER AGREEMENT
Date:
24 March 2016 (the Supplement Agreement to Equity Transfer Agreement was further entered into between the Purchaser and the Sellers on 28 April 2016)
Parties:
Purchaser:
the Company
Sellers: Axle ATL, ASIMCO Technologies, ASIMCO China and ASIMCO HK (each a “Seller” and collectively, the “Sellers”)
Guarantor: ASIMCO China
–10– LETTER FROM THE BOARD
Assets to be acquired:
The Target Equity Interests, being 63% interest in ASIMCO Camshaft, 63% interest in ASIMCO Shuanghuan, 70% interest in ASIMCO Foundry, 100% interest in ASIMCO Shanxi, 100% interest in ASIMCO NVH and 100% interest in CACG I.
Consideration:
The Company conditionally agreed to acquire from the Sellers the Target Equity Interests. Based on the appraised value of each Target Equity Interest in the Asset Evaluation Report, the purchase price for each Target Equity Interest shall be the purchase price as set forth against the relevant Target Equity Interest in Schedule II, or, an aggregate of RMB2,200,000,000, payable in its USD equivalent, after applying the Applicable Exchange Rate. The consideration shall be settled by the Purchaser by way of issue of the Consideration Shares to the Sellers and with all or part of the cash proceeds from the issue of the Placing Shares. The parties agreed that the portion of the Purchase Price of RMB1,650,000,000 payable in USD cash shall be USD251,975,718.7 after applying the Applicable Exchange Rate.
In the event that the sum of the actual amount of proceeds from the Fundraising and Consideration Shares is lower than the Purchase Price, the Company will cover the shortfall with its internal funds or credit facilities from its banks. Currently, the Company has adequate banking facilities to cover such shortfall.
The Purchaser further acknowledges and agrees that the Sellers are entitled to an aggregate distribution of RMB273,665,437.72, dividends that have been announced but not yet distributed by the board of directors of certain Target Companies (“Dividends Payable”), and such dividends payable shall be distributed out of the profits made by the Target Companies prior to the Appraisal Reference Date and shall have no impact on the appraised value of the Target Companies stated in the Asset Evaluation Report or the Purchase Price.
The Purchase Price of the Transaction shall be RMB2,200,000,000, which shall be settled by way of:
(I) The total cash consideration included in the Purchase Price shall be RMB1,650,000,000, payable in its USD equivalent after applying the Applicable Exchange Rate (e.g., based on the Applicable Exchange Rate of 6.525, the portion of the Purchase Price payable in cash will be USD252,873,563) in a lump sum on the Completion Date; and
–11– LETTER FROM THE BOARD
(II) The remaining Purchase Price for the issue of Shares to ASIMCO China by the Purchaser shall be RMB550 million to pay for the 100% equity interests in ASIMCO Shanxi and part of the equity interests in ASIMCO NVH:
(i) Reference date for price determination for the issue
The reference date for price determination for the issue (the “Price Determination Reference Date”) shall be the date of announcing the resolutions of the 11th Board meeting of the third session of the Board of the Company (being 25 March 2016), at which the Purchaser will consider the resolutions regarding this Transaction.
(ii) Issue price
Subject to the pricing adjustment to the Issued Shares set out in Schedule III, the issue price shall be RMB6.41 per Share, being 90% of the average Share price of the Purchaser during the period of 60 trading days immediately prior to the Price Determination Reference Date. The average Share price shall be computed as follows: Average Share price of the Purchaser during the period of 60 trading days immediately prior to the Price Determination Reference Date = the total sum of trading prices of the Purchaser’s Shares during the period of 60 consecutive trading days immediately prior to the Price Determination Reference Date/the total trading volume of the Purchaser’s Shares during the period of 60 consecutive trading days immediately prior to the Price Determination Reference Date.
Unless otherwise provided for in the preceding paragraph, during the period from the Price Determination Reference Date to the date of this issue, any ex-right or ex-dividend events including dividend payment, Share placement, bonus issue and capitalization of capital reserve on the part of the Purchaser shall render it necessary to adjust the issue price and issue volume. The final issue volume shall nevertheless be subject to the approval by the CSRC:
–12– LETTER FROM THE BOARD
Assuming that the issue price prior to adjustment is P0, the number of Shares involved in bonus issue or capitalization per Share is N, the number of Shares involved in new issue or placing per Share is K, the price of new issue or placing is A, dividend payment per Share is D, and adjusted issue price is P1 (to the nearest one-hundredth by rounding), then:
Dividend payment: P1=P0−D
Bonus issue or capitalization: P1=P0/(1+N)
New issue or placing: P1=(P0+A*K)/(1+K)
All of the above: P1=(P0−D+A*K)/(1+K+N)
(iii) Issue volume
The total number of Consideration Shares to be issued to ASIMCO China by the Purchaser pursuant to the Transaction is preliminarily determined to be 85,803,432 Shares. The detailed formula is as follows: total number of Shares to be issued pursuant to the Transaction = RMB550 million/issue price. The volume of Issued Shares will be rounded down to the nearest unit, with the fractional portion being truncated and renounced voluntarily by ASIMCO China. Where the issue price of the Transaction shall be adjusted by virtue of (ii) above, the volume of Issued Shares in this issue shall be adjusted accordingly.
(iv) Share issue
Within five working days from the Completion Date, the Purchaser shall apply, on behalf of ASIMCO China, to the Shanghai Stock Exchange and China Securities Depository and Clearing Corporation Limited for registration of the Issued Shares under the name of ASIMCO China and listing of such Shares. The aforesaid Share registration procedures shall be completed within ten working days from the date of application. The Purchaser further agrees that it shall use its best effort to communicate and cooperate with the Shanghai Stock Exchange and China Securities Depository and Clearing Corporation Limited in connection with their work process and time limitations. The Purchaser shall be responsible for such Share registration procedures and ASIMCO China shall provide such assistance as shall be necessary and ASIMCO China shall open an A Share stock account at China Securities Depository and Clearing Corporation Limited by or prior to the Completion Date and provide the details of such account in writing to the Purchaser.
–13– LETTER FROM THE BOARD
(v) Class and Nominal Value of the Issued Shares
The Issued Shares are RMB ordinary shares (A Shares) with nominal value of RMB1 each, which will be traded in the Shanghai Stock Exchange upon obtaining the approval of the CSRC.
The Company will make a submission to the CSRC within three working days after the Shareholders’ General Meeting of the Company at which the Acquisition is considered.
(vi) Pricing Principles and Issue Price
The price determination date for the issue of Shares shall be the date on which the resolution of the 11th Board meeting of the third session of the Board of the Company is published. The price shall not be less than 90% of the average trading prices of the Shares for 60 trading days preceding the price determination date, i.e., RMB6.41 per Share.
After amicable negotiation among all parties, the issue price shall be RMB6.41 per Share. The definitive issue price is subject to the approval at the Shareholders’ General Meeting of the Company.
(vii) Lock-up Period
The parties agreed that the Issued Shares shall be subject to a lock-up period of 12 months after the issuance, unless otherwise required by the CSRC, in which case the aforesaid lock-up period shall be adjusted according to such requirements of the CSRC.
The total cash consideration included in the Purchase Price of the Transaction of RMB2,200,000,000 shall be RMB1,650,000,000, payable in its USD equivalent after applying the Applicable Exchange Rate (e.g., based on the Applicable Exchange Rate of 6.525, the portion of the Purchase Price payable in cash will be USD252,873,563). The Consideration Shares to be paid by the Purchaser to the Sellers in the Transaction amount to RMB550,000,000. On the basis of the share consideration to be
–14– LETTER FROM THE BOARD
received by each Seller and the issue price, the total number of Consideration Shares to be issued for the Transaction will be 85,803,432 Shares. The details are as follows:
Shareholding Cash Share of the Seller(s) Consideration Consideration Consideration in the Target (RMB ten (RMB ten (RMB ten Number of Target Company Seller(s) Company thousand) thousand) thousand) Shares
ASIMCO Camshaft Axle ATL 63% 11,745.00 11,745.00 – – ASIMCO Axle ATL 63% 45,470.00 45,470.00 – – Shuanghuan ASIMCO Foundry Axle ATL 70% 680.00 680.00 – – ASIMCO Shanxi ASIMCO China 100% 49,980.00 – 49,980.00 85,803,432 ASIMCO NVH ASIMCO China 23% 14,307.15 9,287.15 5,020.00 ASIMCO HK 77% 47,897.85 47,897.85 – – CACG I ASIMCO 100% 49,920.00 49,920.00 – – Technologies
Total 220,000.00 165,000.00 55,000.00 85,803,432
Effect of the Agreement:
The Equity Transfer Agreement herein to complete the Material Asset Reorganization will not be effective until the CSRC’s approval thereof shall have been obtained, provided however, the foregoing shall not impact on other provisions regarding the representations, warranties, covenants and agreements in the Equity Transfer Agreement, which provisions shall be in full force and effect and binding on the parties upon the execution of the Equity Transfer Agreement.
Conditions to the Completion:
The obligations of the Purchaser and the Sellers to consummate the Completion are subject to the satisfaction, at or prior to the Completion, of the following conditions.
(a) No Restraint. There being no injunction, writ, temporary restraining order or other order of any nature issued by any Governmental Entity of that has the effect of enjoining, restraining, prohibiting or otherwise making illegal the consummation of the transactions contemplated by the Equity Transfer Agreement.
(b) Commerce Authorities Approval. The Commerce Authorities has approved the Transfer and the submission documents.
–15– LETTER FROM THE BOARD
(c) Anti-Trust Clearance. If applicable, the Commerce Authorities has issued the clearance of the anti-trust review in respect of the Transfer.
(d) SAFE Approval. The approval(s) of, or registration(s) with SAFE, if required by applicable laws or Governmental Entity, the portion of the Purchase Price to be paid in cash by the Purchaser having been duly obtained from SAFE.
(e) CSRC Approval. The approval from CSRC of the Material Asset Reorganization shall have been obtained.
(f) Shareholders’ Approval. The approval from the Shareholders of the Purchaser shall have been obtained. The Shareholders’ approval means the approval from the Shareholders of the Purchaser at the Shareholders’ General Meeting that is necessary under the articles of association of the Purchaser, the rules of the Shanghai Stock Exchange and the Stock Exchange to which the Purchaser is subject, and the applicable laws to authorize and approve the Equity Transfer Agreement, other transaction documents and the transaction contemplated under the Equity Transfer Agreement and other transaction documents.
(g) Approval from the State-owned Assets Supervision and Administration Commission. The approval for the Transaction under the Equity Transfer Agreement from the State-owned Assets Supervision and Administration Commission of Henan Province shall have been obtained.
(h) NDRC Filing. The acquisition of the Target Equity Interest in CACG I by the Purchaser shall have been filed with Henan Province Development and Reform Commission.
(i) Announcement and Circular. The Stock Exchange has no objection to the publication by the Purchaser of the announcement and the Shareholder circular in connection with the transactions contemplated under the Equity Transfer Agreement.
(j) No Material Adverse Effect. Since the date of the Equity Transfer Agreement, no material adverse effect has occurred.
(k) Waiver. Each shareholder of each Target Company (other than the Sellers) has waived its right of first refusal or consent right with respect to the sale of the respective Target Equity Interests by the respective Sellers under the Equity Transfer Agreement.
–16– LETTER FROM THE BOARD
None of the conditions to the Completion is waivable, and the Company has no intention to waive any of the conditions. As at the date of this circular, condition specified in (i) above has been fulfilled. The Acquisition is expected to be completed by the Long Stop Date, i.e., 31 December 2016. Where the conditions precedent to the Completion are not fulfilled in whole by the Long Stop Date, then parties shall immediately, upon request by the applicable Sellers, proceed to the completion for the sale and purchase of the Target Equity Interests in ASIMCO NVH and CACG I (the “Alternative Transaction”).
Completion:
The consummation of the transactions contemplated in the Equity Transfer Agreement (including for the avoidance of doubt, the consummation of the Alternative Transaction, the “Completion”) will take place remotely via the exchange of documents and signatures as soon as practicable, and no later than five (5) business days after satisfaction or waiver of the last of the conditions set forth in the aforesaid conditions to the Completion (other than those to be satisfied upon completion by nature and subject to the satisfaction or waiver of the aforesaid conditions), and relevant documents evidencing the Purchaser’s status as a shareholder of the respective Target Companies shall be filed with the Industry and Commerce authorities on the same day, or at such other time or to such other venue as shall be agreed between the Sellers and the Purchaser (the date of actual completion of the Transaction, the “Completion Date”). Where the conditions precedent to the Completion of the Material Asset Reorganization are not fulfilled in whole by the Long Stop Date, then parties shall proceed to the Alternative Transaction, provided further that, if, for purposes of obtaining the approval from the SAFE (if applicable) required under conditions specified in (d) of the conditions to the Completion, registration with the in respect of the Transfer is required, upon request from the Sellers, the Purchaser shall deposit the aggregate amount of the Purchase Price payable in cash into an escrow account with a bank jointly selected by the Purchaser and the Sellers, and then the Sellers shall proceed with the AIC application, upon the completion of which (and the approval from the SAFE, if applicable), the aggregate amount of the Purchase Price payable in cash shall be paid to the Sellers in USD immediately. For the purpose of the Alternative Transaction, (i) the parties shall agree in writing to extend the Long Stop Date for 60 days; and (ii) the Purchaser shall pay to the applicable Sellers the purchase price for such Target Equity Interests by applying the funds available in its account, and the payment is not subject to the conditions specified in (e) and (f) of the conditions to the Completion. The consideration of the Alternative Transaction shall be the consideration of each of ASIMCO NVH and CACG I, which shall then be paid in a lump sum. The Alternative Transaction will be implemented when the conditions precedent to the Completion of the Material Asset Reorganization are not fulfilled in whole by the Long Stop Date. Therefore, when the Alternative Transaction is implemented, the acquisition of the remaining Target Companies (other than ASIMCO NVH and CACG I) will be terminated. The Alternative Transaction
–17– LETTER FROM THE BOARD
is subject to all applicable rules and regulations requirement including but not limited to Shareholders’ approval. In addition, according to applicable rules and regulations, under the Alternative Transaction, where it is necessary to obtain additional approvals (including but not limited to the expiration of the Asset Evaluation Report), shareholders’ approval shall be again obtained.
The Equity Transfer Agreement may be terminated at any time prior to the Completion (with respect to (b) below, by written notice from the terminating party to the other party setting forth a brief description of the basis for termination):
(a) by the mutual written consent of the Sellers and the Purchaser;
(b) by either the Purchaser or any Seller in the event that the Completion is not achieved by the Long Stop Date; provided, however, that the right to terminate the Equity Transfer Agreement under (b) shall not be available to any party whose failure to fulfill any obligation under the Equity Transfer Agreement has been the primary cause of, primarily resulted in, or materially contributed to the failure of the Completion to occur on or before the Long Stop Date.
3. THE ASSET EVALUATION REPORT
China United Assets Appraisal Group Company Limited, the appraiser engaged by the Purchaser in connection with the Material Asset Reorganization, issued an Asset Evaluation Report, dated 13 April 2016 based on the Appraisal Reference Date of December 31, 2015 for each Target Companies, and the Purchaser has filed such Asset Evaluation Report with the State-owned Assets Supervision and Administration Commission of Henan Province. Therefore, the Purchaser and the Sellers, based on the evaluation results of the Asset Evaluation Report, entered into a supplemental agreement of the Equity Transfer Agreement on 28 April 2016 and confirmed the Purchase Price of the Target Equity Interests in the Equity Transfer Agreement.
Given that the appraisal of all the Target Companies involves the use of income approach (except that the appraisal of CACG I adopted asset-based approach, while the appraisal of ASIMCO Electric Motor, held by CACG I of 51%, adopted income approach), such valuation is regarded as a profit forecast under Rule 14.61 of the Listing Rules and the Company thus has fully complied with appendix 1B.29(2) of the Listing Rules.
The Board has reviewed major assumptions upon which the income approach was based, and are of the view that the profit forecast has been made after due and careful enquiry. PricewaterhouseCoopers has reviewed the calculation of income approach adopted in the Asset Evaluation Report. According to appendix 1B.29(2) of the Listing Rules, Letter from the Board and Letter from PricewaterhouseCoopers are set out from page V-79 to page V-81 of this circular.
–18– LETTER FROM THE BOARD
4. INFORMATION OF THE TARGET COMPANIES
Bain Capital Asia Integral Investors, L.P., whose principal business activity is private equity investment, is the ultimate controller of the Target Companies. Bain Capital Asia Integral Investors, L.P. and each of the Sellers and their ultimate beneficial owner(s) are Independent Third Parties of the Company and its connected persons.
Attributable Interests to No. Name of Company Principal Business be Acquired
1 ASIMCO Camshaft Fabrication, processing and sales of 63%(1) camshafts for use in automobiles and motorcycles and raw components of related motors; related technical consultation services and after-sales services
2 ASIMCO Design, research and development, 63%(1) Shuanghuan production and processing of valve rings and components for internal combustion engines; and provision of related technical and after-sales services
3 ASIMCO Foundry Mainly provision of raw components of 70%(1) valve rings to ASIMCO Shuanghuan
4 ASIMCO Shanxi Production and processing of motor 100% chambers, chamber lids and other iron casting components, sales and after-sales services
5 ASIMCO NVH Production, processing and sales of 100% self-made rubber products for use in automobiles and for industrial use; rubber products for use in railway sleepers and bridges; products for absorbing vibration, reducing noise and enhancing driving comfort in and of vehicles and related services; production and sales of mixed rubber; hydraulic tools; automotive assembly; industrial equipment; molds and automotive components and related services
–19– LETTER FROM THE BOARD
Attributable Interests to No. Name of Company Principal Business be Acquired
6 CACG I CACG I is a holding company. Its major 100% assets are the holding of 51% in ASIMCO Electric Motor, which is principally engaged in the production and sales of motors and appliance for use in automobiles
Note (1) Each of ASIMCO Camshaft, ASIMCO Shuanghuan and ASIMCO Foundry is held as to 37%, 37% and 30% respectively by Jiangsu Yizheng Piston Ring Factory (江蘇省儀征活塞 環廠), a state-owned enterprise. Since Jiangsu Yizheng Piston Ring Factory currently does not intend to transfer its equity interests in the Target Companies, the Company cannot acquire all the equity interests in the Target Companies. Jiangsu Yizheng Piston Ring Factory and its ultimate beneficial owner are Independent Third Parties of the Company, Bain Capital Asia Integral Investors, L.P. and the Sellers and their connected persons.
Since their inception, the Target Companies have been engaging in the research and development, manufacturing and sale of automotive components. With advanced techniques and good market reputation in the automotive component market in China, the Target Companies have been operating smoothly over the past two years. The Target Companies mainly operate in the automotive component market (including piston rings, camshafts, cylinder blocks and covers, starter motors, sealants and noise reduction components) in China. Their major customers are domestically and internationally leading motor and auto manufacturers, and their major suppliers are suppliers of raw materials such as pig iron, scrap iron, rubber and copper coil. ASIMCO Shuanghuan, ASIMCO Foundry and ASIMCO Camshaft are located in Yizheng, Jiangsu Province. ASIMCO Shanxi is located in Jiang County, Shanxi Province. ASIMCO NVH is located in Ningguo, Anhui Province. ASIMCO Electric Motor is located in Jinzhou, Hubei Province. The sole customer of ASIMCO Foundry is ASIMCO Shuanghuan, while other Target Companies are operating independently from each other. Most of the core managements with expertise on automotive components will remain working at the Target Companies to ensure the continuity operation of the Target Companies. In the last three financial years, Hubei Jingsheng Technologies Co., Ltd., being a shareholder of ASIMCO Electric Motor (holding 49% in ASIMCO Electric Motor), has conducted certain transactions with ASIMCO Electric Motor, and details of which are set out in “26. Related Party Transactions” in Appendix III-1 of this circular. Save as disclosed above, the Company and its subsidiaries had no transaction with the connected person at subsidiary level. If the Company expects to continue the aforesaid transaction, the Company will comply with relevant requirements under Chapter 14A of the Listing Rules and make relevant notice to the shareholders where appropriate.
Further detailed information of the Target Companies please refer to Appendix I of this circular.
–20– LETTER FROM THE BOARD
5. FINANCIAL INFORMATION OF THE TARGET COMPANIES
The audited net profit before and after tax and the net asset value of the Target Companies for each period are set out below:
Year ended on 31 December 2014 2015 RMB’000 RMB’000
ASIMCO Camshaft Profit before tax 12,237 13,341 Profit after tax 14,772 13,279 Net asset value 91,563 104,842 ASIMCO Shuanghuan Profit before tax 72,699 70,527 Profit after tax 61,586 59,956 Net asset value 477,589 361,219 ASIMCO Foundry Profit before tax 5,340 846 Profit after tax 3,941 642 Net asset value 118,215 118,858 ASIMCO Shanxi Profit before tax 43,067 51,045 Profit after tax 36,220 44,193 Net asset value 407,035 451,228 ASIMCO NVH Profit before tax 49,512 58,135 Profit after tax 42,705 50,356 Net asset value 277,219 239,542 CACG I Profit before tax 89,236 85,010 Profit after tax 67,225 64,879 Net asset value 297,535 206,001
Financial Effects of the Transaction on the Group
After the completion of the Transaction, ASIMCO Shuanghuan, ASIMCO Foundry, ASIMCO Camshaft, ASIMCO NVH, CACG I and ASIMCO Shanxi will become the subsidiaries of the Company (among which, ASIMCO NVH, CACG I and ASIMCO Shanxi will become wholly-owned subsidiaries of the Company). The financial results of these companies will be consolidated into the financial statements of the Group after the completion of the Transaction.
The following analysis of financial data is made based on the pro forma financial statements as set out in “Appendix IV – Unaudited Pro Forma Financial Information of the Enlarged Group” of the circular. To prepare the pro forma financial information, it is assumed that the Transaction had taken place at 31 December 2015 for the purpose of illustrating the Enlarged Group’s financial position, and at 1 January 2015 for the purpose of illustrating the Enlarged Group’s financial performance and cash flows.
–21– LETTER FROM THE BOARD
This pro forma financial information has been prepared for illustrative purposes only and because of its hypothetical nature, it may not give a true picture of the financial position of the Enlarged Group as at 31 December 2015 or at any future date had the Transaction been completed on 31 December 2015 or the financial performance and cash flows of the Enlarged Group for the year ended 31 December 2015 or for any future period had the Transaction been completed on 1 January 2015. Readers should not rely on the unaudited condensed consolidated pro forma financial statements as being indicative of the historical operating results that the Company would have achieved or any future operating results or financial position that it will experience after the transaction closes.
In preparing the pro forma financial information, the Directors have conduct an impairment assessment of the goodwill in the proposed acquisition based on the valuation reports and in accordance with International Accounting Standards 36 Impairment of Assets, applying consistent accounting policies and assumptions. The Company’s reporting accountants, Deloitte Touche Tohmatsu, has performed the procedures set out in Hong Kong Standard on Assurance Engagements 3420 “Assurance Engagements to Report on the Compilation of Pro Forma Financial Information Included in a Prospectus” and issued the independent reporting accountants’ assurance report on the compilation of pro forma financial information of the Company to provide an assurance opinion on the pro forma pro forma financial information, as set out in Appendix IV to the Circular.
Assets and Liabilities
As at 31 December 2015 Total pro The forma Enlarged The Group adjustments Group RMB in millions
Non-current assets Property, plant and equipment 1,607.7 1,161.2 2,768.9 Prepaid lease payments 381.0 166.5 547.5 Investment properties 47.2 – 47.2 Intangible assets 4.3 103.7 108.0 Investments in associates 420.4 – 420.4 Investments in joint ventures 2.4 22.9 25.3 Available-for-sale investments 31.2 1.2 32.4 Deferred tax assets 171.8 42.4 214.2 Debt investment 390.0 – 390.0 Finance lease receivables 58.1 – 58.1 Long-term receivables 131.2 – 131.2 loans to fellow subsidiaries for long term – – – Loan receivables from a joint venture – 19.2 19.2 Goodwill – 843.0 843.0
Total non-current assets 3,245.3 2,360.1 5,605.4
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As at 31 December 2015 Total pro The forma Enlarged The Group adjustments Group RMB in millions
Current assets Prepaid lease payments 8.7 – 8.7 Inventories 1,175.8 355.7 1,531.5 Loan receivables from an associate 80.0 – 80.0 loans to fellow subsidiaries for short term – 91.0 91.0 Loan receivables from a joint venture (current) – 8.0 8.0 Trade and other receivables 4,054.9 1,075.7 5,130.6 Finance lease receivables 26.0 – 26.0 Long-term receivables within one year 105.1 – 105.1 Other financial assets 1,063.0 – 1,063.0 Tax recoverable 1.4 1.2 2.6 Pledged bank deposits 278.1 10.9 289.0 Bank balances and cash 2,011.2 (1,347.2) 664.0
Total current assets 8,804.2 195.3 8,999.5
Total assets 12,049.5 2,555.4 14,604.9
Current liabilities Trade and other payables 2,193.7 1,258.1 3,451.8 Advances from customers 198.9 15.9 214.8 Tax liabilities 19.6 8.2 27.8 Borrowings (current) – 106.4 106.4 Provision – 39.1 39.1
Total current liabilities 2,412.2 1,427.7 3,839.9
–23– LETTER FROM THE BOARD
As at 31 December 2015 Total pro The forma Enlarged The Group adjustments Group RMB in millions
Non-current liabilities Other non-current liabilities 14.8 0.3 15.1 Loan from fellow subsidiaries (non-current) – – – Deferred tax liabilities – 112.6 112.6
Total non-current liabilities 14.8 112.9 127.7
Total liabilities 2,427.0 1,540.6 3,967.6
Net assets 9,622.5 1,014.8 10,637.3
Capital and reserves Share capital 1,621.1 85.8 1,706.9 Share premium 3,409.4 559.4 3,968.8 Reserves 4,472.1 (27.8) 4,444.3
Equity attributable to owners of the Company 9,502.6 617.5 10,120.1 Non-controlling interests 119.9 397.3 517.2
Total equity 9,622.5 1,014.8 10,637.3
As indicated above, upon completion of the Transaction, the Enlarged Group’s total assets as at 31 December 2015 would amount to RMB14,604.9 million, representing an increase of RMB2,555.4 million as compared with the Group’s total assets as at 31 December 2015, mainly due to (i) an increase in property, plant and equipment of RMB1,161.2 million, (ii) an increase in prepaid lease payment of RMB166.5 million, (iii) an increase in intangible assets of RMB103.7 million, (iv) an increase in goodwill of RMB843.0 million, (v) an increase in inventories of RMB355.7 million, and (vi) an increase in trade and other receivables of RMB1,075.7 million, which was partially offset by a decrease in bank balances and cash of RMB1,347.2 million.
–24– LETTER FROM THE BOARD
As indicated above, upon completion of the Transaction, the Enlarged Group’s total liabilities as at 31 December 2015 would amount to RMB3,967.6 million, representing a increase of RMB1,540.6 million as compared with the Group’s total liabilities as at 31 December 2015, mainly due to (i) an increase in trade and other payables of RMB1,258.1 million, (ii) an increase in current borrowings of RMB106.4 million, (iii) an increase in provision of RMB39.1 million, and (iv) an increase in deferred tax liabilities of RMB112.6 million.
As a result of the above factors, upon completion of the Transaction, the Group’s net assets would be RMB10,637.3 million, representing an increase of RMB1,014.8 million compared to the Group’s net assets as at 31 December 2015.
Profit and Loss
For the year ended 31 December 2015 Total pro The forma Enlarged The Group adjustments Group RMB in millions
Revenue 4,510.9 2,454.7 6,965.6 Cost of sales (3,653.9) (1,925.2) (5,579.0)
Gross profit 857.0 529.5 1,386.6 Other income 120.7 15.0 135.7 Other gains and losses (335.9) (4.1) (340.0) Selling and distribution expenses (214.9) (138.1) (353.0) Administrative expenses (304.2) (121.0) (425.2) other expenses – (32.6) (32.6) Research and development expenses (102.6) (98.9) (201.5) Share of profit of associates 13.4 – 13.4 Share of (loss) profit of joint ventures (1.0) (2.2) (3.2) Finance costs (2.2) (12.5) (14.7)
Profit before tax 30.3 135.1 165.4 Income tax expense (19.8) (17.1) (36.9)
Profit for the year 10.5 118 128.5
Other comprehensive income (expense) for the year, net of income tax 64.7 (0.1) 64.6
Total comprehensive income for the year 75.2 117.9 193.1
–25– LETTER FROM THE BOARD
For the year ended 31 December 2015 Total pro The forma Enlarged The Group adjustments Group RMB in millions
Profit for the year attributable to: Owners of the Company 42.2 77.2 119.4 Non-controlling interests (31.7) 40.8 9.1
10.5 118 128.5
Total comprehensive income attributable to: Owners of the Company 106.8 77.1 184.0 Non-controlling interests (31.6) 40.8 9.1
75.2 117.9 193.1
As indicated above, for the year ended 31 December 2015, the gross profit of the Group was approximately RMB857.0 million, and assuming 1 January 2015 is the date of the completion of the Transaction, the unaudited pro forma profit before tax of the Enlarged Group for the year ended 31 December 2015 would be approximately RMB529.5 million. The increase is mainly due to the increase in revenue of RMB2,454.7 million, which is partially offset by the increase in cost of sales of RMB1,925.2 million. Accordingly, the gross profit margin would increase to approximately 20.0% compared to 19.0% for the year ended 31 December 2015, which was mainly attributable to the consolidation of the financial results of the Target Companies to into the Group.
For the year ended 31 December 2015, the profit for the year and profit for the year attributable to owners of the Company was approximately RMB10.5 million and RMB42.2 million, respectively, and assuming 1 January 2015 is the date of the completion of the Transaction, the unaudited pro forma profit for the year of the Enlarged Group and the unaudited pro forma profit for the year attributable to owners of the Company for the year ended 31 December 2015 would be approximately RMB128.5 million and RMB119.4 million, respectively.
Further information for the audited financial information of the Target Companies please refer to Appendix III of this circular.
–26– LETTER FROM THE BOARD
6. INFORMATION OF THE SELLERS
The Sellers are: Axle ATL Cayman Limited, ASIMCO (China) Limited, ASIMCO Technologies Hong Kong Limited and ASIMCO Technologies Limited. Bain Capital Asia Integral Investors, L.P. is the ultimate controller of these companies.
Axle ATL Cayman Limited is an investment holding company incorporated in the Cayman Islands. As at the date of this circular, it is an investment holding company and does not have business operations.
ASIMCO (China) Limited is a limited liability company incorporated in the PRC. As at the date of this circular, it is an investment holding company and is engaged in the provision of services including technology, operation, sales, human resources, finance, IT, law etc.
ASIMCO Technologies Hong Kong Limited is an investment holding company incorporated in Hong Kong. As at the date of this circular, it is an investment holding company and is engaged in export agency business.
ASIMCO Technologies Limited is an investment holding company incorporated in the Cayman Islands. As at the date of this circular, it is an investment holding company and does not have business operations.
To the best of the Directors’ knowledge, information and belief having made all reasonable enquiry, the Sellers and the ultimate beneficial owners of the Sellers are Independent Third Parties.
7. INFORMATION OF THE GUARANTOR
ASIMCO (China) Limited is a limited liability company incorporated in the PRC (the “Guarantor”). As of the date of this circular, it is an investment holding company and is engaged in the provision of services including technology, operation, sales, human resources, finance, IT, law etc.
8. INFORMATION OF THE PURCHASER
The Company is principally engaged in the manufacturing and sales of hydraulic roof supports and related components for comprehensive coal mining and provision of related services. Products of the Company are manufactured according to sales orders and tailor-made to suit customers’ specific requirements. Research and development, design, procurement, production and sales of the major products of the Company are all completed internally.
–27– LETTER FROM THE BOARD
As at the date of this announcement, Henan Machinery and Equipment Investment Group Co., Ltd. is the controlling Shareholder of the Company and holds 32.14% of the issued shares of the Company. The controlling shareholder of Henan Machinery and Equipment Investment Group Co., Ltd. is the State-owned Assets Supervision and Administration Commission of Henan Province, which holds 100% shares of Henan Machinery and Equipment Investment Group Co., Ltd.
9. ISSUE OF PLACING SHARES AND SUBSCRIPTION OF PLACING SHARES BY CONNECTED PERSONS
Pursuant to this Transaction, the Company has proposed to issue shares specifically to not more than 10 qualified targets including the ESO Scheme on a non-public basis by way of price consultation for fundraising (the “Fundraising”), the proceeds of which shall not be more than 100% of the consideration of this Transaction. In particular, the subscription amount under the ESO Scheme shall be no more than RMB57.36 million. The proceeds from the Fundraising shall be applied as cash consideration for this Transaction, replenishment of the working capital of the Target Companies and so forth. The effect and implementation of the Fundraising shall be conditional upon the Acquisition taking effect and put to implementation, and the Fundraising shall also be subject to approval by the Shareholders’ General Meeting as well as the approval by the CSRC. The final success of the issue of the Placing Shares shall however not affect the implementation of the Acquisition.
Issue Price and Pricing Principles:
The issue of the Placing Shares shall be by way of price consultation. The base price determination date was the date on which the resolution of the 11th Board meeting of the third session of Board of the Company is announced, i.e., 24 March 2016. The base issue price per Share shall be equal to 90% of the average trading prices of the A Shares of the Company for 20 trading days preceding the price determination date, i.e., RMB6.49 per Share. The closing share price of A and H Share on the price determination date were RMB7.52 per Share (the trading of A Shares was suspended as at the price determination date, and RMB7.52 was the share price of the last trading date preceding the price determination date) and HK$3.41 per Share respectively, and the base issue price RMB6.49 per Share representing 13.7% discount and 126.9% premium (adopting the conversion rate of HK$1.00 to RMB0.84013, being the mid-exchange rate as at the Latest Practicable Date published by the People’s Bank of China) of each of them. The closing share price of A and H Share on the Latest Practicable Date were RMB5.51 per Share and HK$3.20 per Share respectively, and the base issue price RMB6.49 per Share representing 17.8% premium and 141.3% premium (adopting the mid-exchange rate as at the Latest practicable Date) of each of them. The final issue price shall be determined upon approval of the Material Asset Reorganization by the CSRC, as agreed between the Board authorized by Shareholders’ General Meeting, in accordance with relevant laws, administrative regulations and other normative documents including the Administrative Methods for the Issue of Securities by Listed Companies, Implementation Rules for Non-public Issue of Shares by Listed Companies and market conditions and as agreed between the Board and the lead underwriter for the Fundraising, according to the price
–28– LETTER FROM THE BOARD quoted by the participants in their application. The ESO Scheme will not participate in the price consultation, will accept the final result of the price consultation and will subscribe for the Shares on that price. The principle underlying determination of price in the aforesaid shall be subject to approval by the Shareholders at the Shareholders’ General Meeting. And the valid period of the independent shareholders’ approval of the Fundraising would be one year.
During the period from the reference date for price determination to the date of issue of the Placing Shares, any ex-right or ex-dividend events including dividend payment, bonus issue and capitalization of capital reserve on the part of the Company shall render it necessary to adjust the issue price and issue volume.
The Company did not conduct any fundraising on issue of any equity securities in the 12 months immediately preceding the date of this circular.
Lead underwriter and the terms of the underwriting agreement:
The Company has entered into an underwriting agreement with China Merchants Securities Co., Ltd (“CMS”) in relation to the Fundraising, and the major terms of such agreement are as follows:
• In terms of the Material Asset Reorganization, CMS provides services as an independent financial adviser as to A-share matters in relation to the Acquisition, continual guidance and underwriting in connection with the Fundraising. The service fees to be paid by the Company to CMS shall comprise the fee for independent financial advice and underwriting fee in connection with the Fundraising. The underwriting fee in connection with the Fundraising shall be charged under the following scenarios:
Scenario 1: Where the subscribers under the Fundraising is identified and determined by the Company or members of the underwriting syndicate other than CMS, such portion of underwriting fee in connection with the Fundraising shall be charged to the Company at 0.2% of the amount to be paid by the corresponding subscribers;
Scenario 2: Where the subscribers under the Fundraising is contacted/identified by the Company at the assistance of CMS or determined by the Company at the assistance of CMS, such portion of underwriting fee in connection with the Fundraising shall be charged to the Company at 1.7% of the amount to be paid by the corresponding subscribers.
Where the CSRC’s rejection or disapproval of the Material Asset Reorganization or the Fundraising, or violation by the subscribers of laws or regulations or contracts, or market factors cause(s): (1) the Company’s failure to proceed with the Fundraising, then CMS shall not charge the Company any underwriting fee; or (2) the Company’s failure to proceed fully with the
–29– LETTER FROM THE BOARD
Fundraising for raising the full amount, then CMS shall charge the Company such underwriting fee as shall be determined under Scenarios 1 or 2 above.
• The underwriting agreement or terms of the underwriting agreement may be terminated by agreement of the parties which shall be signed in writing. Where the occurrence of force majeure which have or may have material adverse effect on the fundamentals of the Company, including but not limited to business conditions, financial conditions and prospects of the Company or on the Material Asset Reorganization, makes it impossible to continue to perform the underwriting agreement or makes such continuation of performance impossible to achieve the goals envisaged at the time of signing the underwriting agreement, then any party to the agreement shall be entitled to suspend or terminate the performance of the underwriting agreement by written notice to the other party.
During the validity of the underwriting agreement, if there is any material change to the fundamentals of the Company, including but not limited to business conditions, financial conditions and prospects of the Company, or there exists material impediment on the part of the Company in the Material Asset Reorganization as suggested by the feedback from the CSRC or identified by the further due diligence to be conducted by CMS, which makes it impossible to continue to perform the underwriting agreement or makes such continuation of performance impossible to achieve the goals envisaged at the time of signing the underwriting agreement, then CMS shall be entitled to unilaterally terminate the underwriting agreement by serving writing notice on the Company, and in that case the financial advice fee already charged cannot be refunded. Where the Material Asset Reorganization is not passed or approved by the CSRC, the underwriting agreement shall terminate automatically.
To the best of the Directors’ knowledge, information and belief having made all reasonable enquiries, CMS is independent of the Company and its connected persons.
Nominal value and class of Placing Shares:
The Placing Shares shall be RMB ordinary shares (A Shares), with nominal value of RMB1 each, which will be traded in the Shanghai Stock Exchange upon obtaining the approval of the CSRC.
The Company will make a submission to the CSRC within three working days after the Company’s general meeting at which the Acquisition is considered.
–30– LETTER FROM THE BOARD
Targets and method of issue:
It will be by way of non-public issue, specifically to not more than 10 qualified investors under relevant laws and regulations, including securities investment and fund management firms, securities firms, trust investment companies, finance companies, insurance institutional investors, qualified foreign institutional investors, other domestic legal-person investors and nature persons. Depending on the outcome of the Fundraising, there is a possibility that certain qualified investor may become substantial shareholder of the Company upon completion of the Fundraising.
Issue volume and percentage in total issued shares:
The total proceeds to be raised are expected to amount to not more than RMB2,200,000,000. Based on the issue base price of RMB6.49 per Share, the issue to not more than 10 qualified investors including the ESO Scheme is expected to be not more than 338,983,050 shares, representing 16.57% of the total number of shares of the Company after the issue. The non-public issue of the Placing Shares shall be in such volume as shall be finally approved by the CSRC.
The Fundraising is expected to be completed within six months upon obtaining the approval of the CSRC. And the valid period for the mandate for the Fundraising is one year after the approval of relevant resolution on the Shareholders’ meeting, and Shareholders’ approval shall be re-obtained upon the expiration. In the circumstances that the Acquisition is not completed on 31 December 2016, the Fundraising shall then not proceed.
Lock-up period of the Placing Shares:
The shares to be subscribed for in the Fundraising under the ESO Scheme pursuant to this Transaction shall not be transferred within 36 months upon completion of the issue. The Shares to be subscribed for in the Fundraising by other investors pursuant to this Transaction shall not be transferred within 12 months of the end of the issue. Upon completion of the issue, Shares to be acquired by specific investors pursuant to bonus Shares and capitalization shall comply with the aforesaid requirements.
–31– LETTER FROM THE BOARD
Use of proceeds:
The Company will invest in the relevant projects based on the sequence and amount below and the actual circumstances of each project upon the availability of proceeds from the Fundraising.
No. Use of Proceeds Amount Entity Means (RMB ten thousand)
1 Cash consideration to be paid for 165,000.00 The Company N/A this Transaction 2 Partial payment to intermediaries 6,000.00 The Company N/A 3 Replenishment of liquid capital 18,000.00 N/A of Target Companies 3.1 Including: ASIMCO NVH 10,000.00 ASIMCO NVH Capital increase 3.2 ASIMCO Shanxi 8,000.00 ASIMCO Shanxi Capital increase 4 ASIMCO Anhui Industrial Park 25,000.00 ASIMCO NVH Capital increase Project 5 Motor component intelligent 6,000 ASIMCO Shanxi Capital increase processing project
Total 220,000.00
When the proceeds from the Fundraising are available, the Company will first ensure that the planned amount of proceeds from the Fundraising are fully utilized on prioritized projects, whereas the remaining amount of proceeds from the Fundraising will be utilized on the planned investment of the other projects. The Company will invest in the relevant projects in strict accordance with the above sequence and stated amount. In the event that the availability of the net proceeds from the Fundraising is not consistent with the implementation schedule of the projects, the Company may utilize other funds based on the actual circumstances of the projects and swap such funds with the proceeds raised when they are available.
Details of the aforesaid projects are expected as below, while the actual progress of the projects may subject to possible adjustment:
• Replenishment of liquid capital of the Target Companies
As the business of the Target Companies is developing rapidly, the working capital gap tends to expand. As a result, the Company intended to use a proportion of the proceeds from the Fundraising for replenishing the working capital of the Target Companies.
–32– LETTER FROM THE BOARD
The working capital gap of the two Target Companies of which the Company intends to replenish the liquid capital for daily operation is as follows:
Balance of cash and cash equivalents as at the Working end of Name of capital February Working the Target Company requirement 2016 capital gap (RMB ten (RMB ten (RMB ten thousand) thousand) thousand)
ASIMCO NVH 13,424.97 1,764.94 11,660.03 ASIMCO Shanxi 11,034.30 2,456.07 8,578.23
Total 24,459.27 4,221.01 20,238.26
• ASIMCO Anhui Industrial Park Project
(1) Implementation of the project
The Company intended to use RMB250 million of the proceeds for the construction of ASIMCO Anhui Industrial Park Project. The construction period of this project is five years and will be implemented in two phases. The project will raise the production capacity of plastic parts and components of the Company to solve the undercapacity of braking systems products.
(2) Investment in the project
In accordance with the general planning, the project will be implemented in two phases, whereas the construction focus of each phase is different.
Phase I concerns the general planning of plants that includes the construction of workshops and the ancillary public facilities, production equipment and the corresponding liquid capital to ensure the orderly commencement of production. It also considers the investment in R&D building and dormitories for staff to enhance experiment ability and solve life issues of staff as well as the on-site work issues of the management of the Company.
–33– LETTER FROM THE BOARD
Phase II invests in workshops and necessary production equipment as well as the corresponding liquid capital.
Estimated % of total investment investment Phase Name of fees in aggregate in project Note (RMB ten thousand)
Phase I 1.1 Investment in lands 20,800 260 mu 1.2 Plants 24,000 24,000 m2 1.3 Investment in public utilities 15,000 1.4 Investment in equipment 26,000 300 units 1.5 Investment in working capital 20,000
Sub-total 105,800 35.30%
Phase I 2.1 Investment in plants 29,200 R&D building 2.2 Investment in equipment 30,000 Test equipment
Sub-total 59,200 19.70%
Phase II 3.1 Investment in plants 50,000 30,000 m2 3.2 Investment in equipment 45,000 400 units 3.3 Investment in working capital 40,000
Sub-total 135,000 45%
Total 300,000 100.00%
–34– LETTER FROM THE BOARD
• Motor component intelligent processing project
(1) Implementation of the project
The project intended to newly acquire 186.35 mu of lands in the Economic Development Zone of Jiang County of Yuncheng City in Shanxi Province to construct a production facility for the intelligent manufacturing of parts and components of motors. The construction period of this project is expected to be 18 months. The project follows the principle of “One planning, implementation in phases”. The implementation of phase I is:
1. newly construct a GFA of 12,240m2 for 1# production plants;
2. newly construct a GFA of 5,042m2 for ancillary facilities such as R&D center, canteen and entrance guard and the construction of piles for electricity, heat, sewage and fire control as well as auxiliary projects such as roads and green space for the production facility in phase I;
3. newly construct intelligent processing lines with an annual production capacity of 30,000 units of medium-sized motor chambers;
4. newly construct intelligent semifinishing lines with an annual production capacity of 60,000 units of heavy-duty motors;
5. add measurement and test equipment required for production.
–35– LETTER FROM THE BOARD
(2) Investment in the project
Details regarding the total investment of this project of RMB290.8566 million are set out as follows:
Unit: RMB ten thousand
Serial Total no. Name of project investment %
1 Construction fees 21,679.16 74.54% 2 Other construction fees 4,112.01 14.14% 3 Preparation fees 2,063.29 7.09% 4 Initial working capital 1,231.20 4.23%
Total 29,085.66 100.00%
RMB60 million of the proceeds is intended to be used as the payment of the construction fees of the project.
Below please see the details of the capital expenditure plan of the Target Companies.
Unit: RMB ten thousand
Summary of capital expenditure 2016 2017 2018 2019 2020
Assets upgrade 11,401.65 11,892.57 12,328.02 12,506.02 12,538.18 Capital expenditure 5,629.53 5,448.00 4,798.50 2,976.00 823.00
–36– LETTER FROM THE BOARD
10. SHAREHOLDING STRUCTURE OF THE COMPANY BEFORE AND AFTER THE ISSUE OF THE CONSIDERATION SHARES AND THE PLACING SHARES
As the price of the Placing Shares has not been determined yet, the shareholding structures below are for reference only.
Shareholding Structure before the Issue of the Consideration Shares and the Placing Shares
Approximate percentage of the total Class of Number of number of Name shares shares shares (%)
Henan Machinery and Equipment Investment Group Co., Ltd. A share 521,087,800 32.14 National Council for Social Security Fund H share 23,709,400 1.46 CSI Capital Management Limited H share 22,402,600 1.38 Other public shareholders 1,053,922,200 65.02
Total 1,621,122,000 100
Shareholding Structure after the Issue of the Consideration Shares but before the Issue of the Placing Shares
Approximate percentage of the total Class of Number of number of Name shares shares shares (%)
Henan Machinery and Equipment Investment Group Co., Ltd. A share 521,087,800 30.53 National Council for Social Security Fund H share 23,709,400 1.39 CSI Capital Management Limited H share 22,402,600 1.31 ASIMCO China A share 85,803,432 5.03 Other public shareholders 1,053,922,200 61.74
Total 1,706,925,432 100
–37– LETTER FROM THE BOARD
Shareholding Structure after the Issue of the Consideration Shares and the Issue of the Placing Shares (On the assumption that the issue price of the Placing Shares is the same with the base issue price, i.e., RMB6.49 per Share and 338,983,050 Shares in volume)
Approximate percentage of the total Class of Number of number of Name shares shares shares (%)
Henan Machinery and Equipment Investment Group Co., Ltd. A share 521,087,800 25.47 National Council for Social Security Fund H share 23,709,400 1.16 CSI Capital Management Limited H share 22,402,600 1.09 ASIMCO China A share 85,803,432 4.19 Subscribers of the Fundraising ESO Scheme A share 8,838,212 0.43 Other subscribers A share 330,144,838 16.14 Other public shareholders 1,053,922,200 51.51
Total 2,045,908,482 100
Shareholding structure of all companies under the Enlarged Group of Target Companies after completion of the Acquisition
The Company
Jiansu Yizheng Piston Ring Facoty
63%70% 63% 100% 100% 100% 37% 30% 37%
ASIMCO ASIMCO ASIMCO ASIMCO ASIMCO CACG I Shuanghuan Foundry Camshaft NVH Shanxi Hubei Jingsheng Technologies Co., Ltd 100% 51%
ASIMCO Metal Hubei Super-Elec 49% Products Auto Electric (Ningguo) Co., Ltd Motor Co., Ltd
ASM Holding 100% 80% Limited
Yangzhou ASM Alloy 20% Winway Auto Materials Parts Co., Ltd (Yizheng) Co., Ltd
–38– LETTER FROM THE BOARD
11. DETAILS OF THE ESO SCHEME
Pursuant to Chapter 14A of the Listing Rules, the Directors, supervisors and chief executives of the Company are connected persons of the Company. Since certain Directors, supervisors and chief executives of the Company have participated in the ESO Scheme which is included in the Fundraising, the ESO Scheme constitutes a connected transaction within the meaning of Chapter 14A of the Listing Rules and is subject to the reporting, announcement and independent shareholders’ approval requirements. The Directors (including independent non-executive Directors) believe that the terms of the Subscription of Placing Shares by Connected Persons are fair and reasonable and in the interests of the Company and its shareholders on the whole.
1. Details of the ESO Scheme
The ESO Scheme will cover the directors (excluding independent directors), supervisors, senior management, mid-level management personnel of the Company and its subsidiaries who maintain the employment contracts with the Company, and ESO Scheme also covers those employees of the Company and its subsidiaries who have made outstanding contributions to the Company.
The maximum amount of the funds raised by ESO Scheme is RMB57.36 million, and the source of funds will include the legitimate remuneration of the employees, the funds raised by the employees and other sources permitted by applicable laws and regulations.
Upon its establishment, ESO Scheme will subscribe all units of Hua Tai Mei Ji No. 1 Targeted Asset Management Scheme launched by Huatai Securities (Shanghai) Asset Management Co. Ltd, which will be managed by Huatai Securities (Shanghai) Asset Management Co. Ltd. ESO Scheme will subscribe the non-publicly offered shares of the Company in an amount up to RMB57.36 million.
The shares to be held by ESO Scheme include the outstanding shares of the Company subscribed by ESO Scheme and non-publicly offered shares issued by the Company for the purpose of purchase of assets in cash and Fundraising. The price determination date of the non-public offering will be the date of announcement of first board resolution approving the Material Assets Reorganization, and the issue price per Share shall be no less than 90% of the average trading prices of the A Shares of the Company for 20 trading days preceding the price determination date. The ESO Scheme will not participate in the bidding process in respect of the non-public offering, and, in accordance with the Conditional Share Subscription Agreement entered into by and between Zhengzhou Coal Mining Machinery Group Company Limited and Huatai Securities (Shanghai) Asset Management Co. Ltd, the subscription price to be paid by ESO Scheme will be same with that offered to other participants.
–39– LETTER FROM THE BOARD
The term of ESO Scheme shall be 48 months, commencing on the date on which the shares issued by the Company in this offering is registered in the name of ESO Scheme Targeted Asset Management Scheme. The Lock-up period of the shares subscribed by the ESO Scheme in this offering shall be 36 months. The term of ESO Scheme shall terminated automatically upon its expiry, and may be terminated prior to its expiry or extended in accordance with applicable laws and regulations and relevant contracts.
The objectives of the ESO Scheme are to (i) incentivise the Company’s entire staff and establish a sound and comprehensive incentive mechanism for employees, (ii) improve the cohesion and competitiveness of the Company employees; and (iii) effectively mobilise the enthusiasm and creativity of staff, so as to promote long-term, sustained and healthy development of the Group.
The funds of the ESO scheme are derived from the lawful remuneration of the Participants as well as funds raised through other legal means. Eligible participants of the Scheme would be no more than 354 persons in number and include Directors (excluding independent non-executive Directors), supervisors, senior management and other employees of the Group). Proceeds from the Fundraising will be applied as cash consideration for the Transaction, replenishment of the working capital of the Target Companies and so forth.
The ESO Scheme will be managed by the Company. After the ESO Scheme is implemented, the first meeting of the Participants of the Scheme will be held at which the management committee (the “MC”) will be formed. The Participants meeting is the supreme power organ of the Scheme, and has the power to elect or dismiss any members in the MC. All Participants are entitled to attend the Participants meeting. The MC consists of three members, who have been elected at the Participants meeting. One of the MC members, in turn, will be elected by a majority vote to head the MC. It should be noted that no director, supervisor or senior management of the Company can stand for election as a member of the MC in the Participants meeting. Duties of the MC include convening Participants meeting, supervising the daily operation of the ESO Scheme on behalf of the Participants and exercising shareholders’ rights on behalf of Participants of the Scheme. The MC is entitled by the Participants meeting to vote on behalf of the Participants on any resolution to be considered at the Shareholders’ meeting of the Company. The MC is independent from the Board of the Company.
–40– LETTER FROM THE BOARD
2. Subscription of ESO Scheme by the participants
The number of employees participating the ESO Scheme shall be no more than 354, and actual number of the employees participating the ESO Scheme and the subscription amount shall be subject to the actual payment of subscription prices by such employees.
The percentages of the directors (excluding independent directors), supervisors, senior management and other employees who maintain the employment contracts with the Company are as below:
Capital Holder Title contribution Percentage (RMB10,000)
Directors, Fu Zugang General Manager 200 3.49% supervisors, Wang Xinying Director 150 2.62% senior Guo Haofeng Director 150 2.62% management Liu Qiang Director, Secretary 10 0.17% of Committee for Discipline Inspection Li Chongqing Chairman of the 150 2.62% Supervisory Board, Trade Union Chairman Ni Heping Employee 60 1.05% Representative Supervisor Xu Mingkai Employee 30 0.52% Representative Supervisor Zhang Jun Employee 20 0.35% Representative Supervisor Zhou Rong Supervisor 50 0.87% Liu Fuying Supervisor 50 0.87% Other employees 4,866 84.83%
Total 5,736 100.00%
Note:
The percentage of the units of ESO Scheme actually held by the holders of ESO Scheme will be subject to the number of participants and payment of their subscription prices.
–41– LETTER FROM THE BOARD
12. REASONS FOR AND BENEFITS OF THE ACQUISITION
Prior to the Transaction, the Company is principally engaged in the manufacturing of coal mining equipment and the research and production of hydraulic roof support. Since the manufacturing of coal mining equipment and the research and production of hydraulic roof support are easily affected by the downstream coal industries with its long industrial cycle and being vulnerable to macroeconomic conditions and policies, in order to enhance the profitability of the Company, incubate new centres for profit growth, the Company has actively pursued business transformation and identified new centres for profit growth, with a view to better arrangement for its development in the automotive components sector. Upon completion of this Transaction, a new automotive components segment will be added to the Company’s principal businesses on the basis of the manufacturing of coal mining equipment and the research and production of hydraulic roof support. The incorporation of the six Target Companies will represent an important step for the Company to enter the automotive components market. The six Target Companies under this Transaction are involved in different sectors along the automotive component industry chain. By merging to the Company, the Target Companies shall complement each other to give rise to synergy, which will effectively foster their business development. On one hand, with respect to the products of the Target Companies, the main products of the Target Companies are foundry products, mechanically processed products, rubber products for non-vehicle tyre and assembly components. The production of hydraulic roof supports, the main products of the Company also requires foundry products, mechanically processed products, rubber products for oil tanks and assembly components, which are also self-manufactured by the Company. In particular, in respect of the foundry products, the Company can lower the manufacturing costs of hydraulic roof supports by adopting the advanced foundry techniques of the Target Companies in core making, molding, melting and polishing. On the other hand, with respect to the manufacturing process of the Target Companies, their major production process mainly involves casting, mechanical processing and component assembling, which are also included in the production of the Company’s products. The Company leads the industry in terms of its processing capability and equipment automation level. With a highly automated digital control processing center, intelligent steel plate cutting production lines, intelligent welding robots and automatic coating production lines in the coal mining machinery industry, the Company will be able to help the Target Companies to become more automated and intelligent in their manufacturing process.
Upon the completion of the Transaction, the Company and Target Companies can realise better synergy in aspects such as technology, finance, and management.
(I) Technological Synergy
The Company has cultivated the coal mining machinery manufacturing industry for years, boasting levels of mechanical processing equipment, processing ability and automation that top the industry. The Company excels in mechanical processing and can offer guidance to Target Companies in respect of the upgrade and revamp of their mechanical processing equipment and their design and construction, which can enhance the quality and added value of their products. Target Companies have various product manufacturing techniques similar to those of the Company and, in the process
–42– LETTER FROM THE BOARD
of manufacturing foundry products, Target Companies adopt world-advanced equipment and techniques in core making, molding, melting and polishing, which in turn enables the Company to produce hydraulic roof supports of better quality by making reference to Target Companies’ advanced foundry techniques.
(II) Financial Synergy
Upon the completion of the Transaction, with the help of the Company as a platform, Target Companies can on the one hand lift its indirect finance ability in that financial support can be obtained from external financial institutions and can effectively lower its finance costs; on the other hand, they can fully exploit the financial functions of the Company by choosing diversified finance instruments of loans or equities as a means of direct finance, realising optimisation for its capital structure. The improvement of finance ability favours Target Companies in strengthening research and development, expanding and increasing market shares in the field of auto components. Meanwhile, upon the completion of the Transaction, the operational scale of the Company will be further enlarged, its social influence will accordingly be enhanced, and its finance ability and finance convenience will be boosted.
(III) Managerial Synergy
Upon the completion of the Transaction, the Company can uplift its management standard by making reference to the experience of Target Companies in management and talent training. The Company will follow the management concepts and technological advantages of Target Companies in order for them to steadily perform their work in production, operation and sales. Target Companies have a lean management standard which rates highly in the auto component industry. Operating in the same machinery manufacturing industry as Target Companies, the Company can refer to their long experience in lean management to fully implement lean management and lower its various operating costs. Moreover, the Company and Target Companies can refer to each other’s strategy formulation, research and development, innovation, channel construction, human resource development and internationalisation, which realises the dual propelling of coal mining machinery and core auto components, largely enhancing the risk protection of the Company.
The Target Companies involved in this reorganization enjoy competitive advantage and high profitability in their respective market segments. Upon completion of this Transaction, the listed company shall see enhancement in profitability and boosted capability in its sustainable development. The Directors believe that the terms of the Transaction are fair and reasonable and in the interests of the Shareholders as a whole.
On 21 August 2015, the Resolution Concerning the Partial Transfer of Interest in Subsidiary Huainan ZMJ Shun Li Machinery Co., Ltd. (淮南鄭煤機舜立機械有限公 司) was passed on the sixth meeting of the third session of the Board, agreeing to the public transfer by the Company of interest in Huainan ZMJ Shun Li Machinery Co., Ltd (“Huainan Shun Li”) of 35.369% (the Company held 57.969% of Huainan Shun
–43– LETTER FROM THE BOARD
Li before the transfer). Upon completion of the transfer, the Company shall no longer hold majority stake in Huainan Shun Li. As of the latest practicable date, the interest proposed to be transferred is put to open tender on Henan Zhongyuan Property Rights Exchange Co. Ltd. As of 31 December 2015, the net assets of Huainan Shun Li amount to RMB26.7666 million, representing 0.28% of the net asset of the Company as at 31 December 2015. Save as disclosed above, the Company has no intention to dispose of or downsize the existing businesses of the Company as at the Latest Practicable Date.
13. GENERAL
The Acquisition constitutes a very substantial acquisition for the Company under Chapter 14 of the Listing Rules and is subject to the reporting, announcement and Shareholders’ approval requirements thereunder.
Having made all reasonable enquiries, to the best of the Directors’ knowledge, information and belief, none of the Shareholders are materially interested in the Acquisition. Accordingly, none of the Shareholders shall be required to abstain from voting on the relevant resolution approving the Equity Transfer Agreement and the Acquisition contemplated thereunder.
The Directors, supervisors and chief executives of the Company will acquire interests in the Placing Shares pursuant to their participation in the ESO Scheme (the “Subscription of Placing Shares by Connected Persons”). Under Chapter 14A of the Listing Rules, the Subscription of Placing Shares by Connected Persons constitutes a non-exempt connected transaction of the Company and is subject to the requirement of independent Shareholders’ approval in the Shareholders’ General Meeting of the Company.
Mr. WANG Xinying, Mr. GUO Haofeng and Mr. LIU Qiang, all being Directors of the Company, are materially interested in the Transaction by virtue of their possible participation in the ESO Scheme and have abstained from voting on the Acquisition and the issue of Placing Shares. Save as disclosed above, none of the Directors are materially interested in the Acquisition. The Directors, including the independent non-executive Directors, consider that the Subscription of Placing Shares by Connected Persons is on terms which are fair and reasonable and is in the interests of the Company and its Shareholders as a whole.
12 persons namely WANG Xinying, GUO Haofeng, LIU Qiang, NI Heping, ZHOU Rong, LIU Fuying, XU Mingkai, FU Zugang, GAO Youjin, ZHANG Minglin, GUO Desheng and WANG Yongqiang, who are Directors, supervisors or senior management of the Company, are related parties of the Company. They hold shares in the Company and are Shareholders of the Company also. They will participate in the ESO Scheme and accordingly shall abstain from voting on resolutions related to the Fundraising.
An independent board committee comprising all four independent non-executive Directors of the Company has been formed, to advise the independent Shareholders regarding the Subscription of Placing Shares by Connected Persons.
–44– LETTER FROM THE BOARD
Schedule I Sellers
(1) Axle ATL Cayman Limited, a company incorporated under the laws of the Cayman Islands, whose legal address is at P.O. Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands (“Axle ATL”),
(2) ASIMCO Technologies Limited, a company incorporated under the laws of the Cayman Islands, whose legal address is at P.O. Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands (“ASIMCO Technologies”),
(3) ASIMCO (China) Limited, a company incorporated under the laws of the PRC whose legal address is at 7F, Tower B, Renji Plaza, 101 Jingshun Road, Chaoyang District, Beijing, PRC (“ASIMCO China”), and
(4) ASIMCO Technologies Hong Kong Limited, a company incorporated under the laws of Hong Kong, whose legal address is at 21/F, Chinachem Tower, 34–37 Connaught Road Central, Hong Kong (“ASIMCO HK”).
–45– LETTER FROM THE BOARD
Schedule II
TARGET COMPANIES AND TARGET EQUITY INTERESTS
Purchase Price (cash portion payable in USD after applying the Applicable Sellers Target Companies Target Equity Interests Appraised Value Exchange Rate)
Axle ATL ASIMCO Shuanghuan 63% of the equity interest RMB454,770,981 RMB454,700,000 Piston Ring (Yizheng) in ASIMCO Shuanghuan Co., Ltd. (“ASIMCO Shuanghuan”)
Axle ATL ASIMCO Foundry 70% of the equity interest RMB6,852,440 RMB6,800,000 (Yizheng) Co., Ltd. in ASIMCO Foundry (“ASIMCO Foundry”)
Axle ATL ASIMCO Camshaft 63% of the equity interest RMB117,539,541 RMB117,450,000 (Yizheng) Co., Ltd. in ASIMCO Camshaft (“ASIMCO Camshaft”)
ASIMCO China and ASIMCO NVH 100% of the equity interest RMB622,782,500 RMB622,050,000 ASIMCO HK Technologies Co., Ltd. in ASIMCO NVH (Anhui) (“ASIMCO NVH”)
ASIMCO CACG LTD. I (“CACG I”) 100% of the equity interest RMB499,314,000 RMB499,200,000 Technologies in CACG I
ASIMCO China ASIMCO International 100%of the equity interest RMB528,692,300 RMB499,800,000 Casting Co., Ltd. in ASIMCO Shanxi (Shanxi) (“ASIMCO Shanxi”)
–46– LETTER FROM THE BOARD
Schedule III
Price Adjustment for the Issue of Shares
During the period from the date of resolution of the Purchaser’s Shareholders’ General Meeting to the date prior to approval of the Material Asset Reorganization by the Mergers, Acquisition and Restructuring Committee of the CSRC (the “Price Adjustment Period”), the Sellers may on any trading day on which the conditions are satisfied (the “Price Adjustment Date”) request, and the Purchaser shall within one week upon receipt of the Sellers’ written request convene its Board meeting to resolve on, adjustment to the issue price of the Issued Shares, upon occurrence of any of the following (the “Triggering Events”):
a. The Shanghai Composite Index shall for at least 20 trading days during the period of 30 consecutive trading days immediately preceding that any trading day drop by more than 15% compared to the closing index (i.e. 3,580.00 points) on 17 December 2015, being the trading day immediately prior to the date on which the Shares of the Purchaser first suspended trading pursuant to the Material Asset Reorganization; or
b. The Machinery and Equipment (CSRC) Index (883108.WI) shall for at least 20 trading days during the period of 30 consecutive trading days immediately preceding that any trading day drop by more than 15% compared to the closing index (i.e. 5,183.37 points) on 17 December 2015, being the trading day immediately prior to the date on which the Shares of the Purchaser first suspended trading pursuant to the Material Asset Reorganization.
In (a) and (b) above, “any trading day” shall refer to a particular trading day during the Price Adjustment Period. The issue price of the Issued Shares as adjusted by the aforesaid shall not be lower than the higher of the audited net asset value per Share as at 31 December 2015 of the Purchaser or the unaudited net asset value per Share as shown on the latest account as of the expiry date of the Price Adjustment Period of the Purchaser (subject to the determination of the State-owned Assets Supervision and Administration Commission of Henan Province).
Where the Board of the Purchaser shall resolve to adjust the issue price, the issue price of the Issued Shares shall be adjusted accordingly, for the same percentage as the percentage of the decrease of the arithmetic average value of the closing indices of the Shanghai Composite Index or the Machinery and Equipment (CSRC) Index (883108.WI) for a period of 30 trading days immediately prior to the Price Adjustment Date compared to 17 December 2015, being the trading day immediately prior to the date on which the Shares of the Purchaser first suspended trading pursuant to the Material Asset Reorganization. Where both a and b of the Triggering Events on the Price Adjustment Date occur, then the adjustment shall be based on the higher of the absolute values of the cumulative decrease percentage of the adjusted Shanghai Composite Index or the Machinery and Equipment (CSRC) Index (883108.WI). Where the Board of the Purchaser resolves not to adjust the issue price, the Purchaser shall not adjust the issue price subsequently.
–47– LETTER FROM THE BOARD
No adjustment shall be made to the Purchase Price if the issue price has been adjusted.
Please see below an illustrative example for your reference.
According to Schedule III of the Equity Transfer Agreement, during the period from the date of resolution of the Purchaser’s Shareholders’ General Meeting to the date prior to approval of the Material Asset Reorganization by the CSRC (marked as the “T Date”), assuming the following circumstances:
a. Description of the status of the Shanghai Composite Index:
During the period of 30 consecutive trading days immediately preceding the T Date, the closing index stands below 3043.00 points for at least 20 trading days (on the trading day immediately prior to the date on which the Shares of the Purchaser first suspended trading pursuant to the Material Asset Reorganization, the closing index of the Shanghai Composite Index was 3,580.00 points, becoming 3,043.00 points if it drops by 15%), which represents an aggregate decrease of 7.01% for the Shanghai Composite Index taking into account the abovementioned arithmetic average value of the closing index at 3329.00 points for 30 consecutive trading days.
b. Description of the status of the Machinery and Equipment Index:
During the period of 30 consecutive trading days immediately preceding the T Date, the closing index stands below 4,405.87 points for at least 20 trading days (on the trading day immediately prior to the date on which the Shares of the Purchaser first suspended trading pursuant to the Material Asset Reorganization, the closing index of the Machinery and Equipment Index was 5,183.37 points, becoming 4,405.87 points if it drops by 15%), which represents an aggregate decrease of 17.11% for the Machinery and Equipment Index taking into account the abovementioned arithmetic average value of the closing index at 4,300.00 points for 30 consecutive trading days.
Upon occurrence of any of the above Triggering Events, the Sellers may request, and the Purchaser shall within one week upon receipt of the Sellers’ written request convene its Board meeting to resolve on, adjustment to the issue price of the Issued Shares. If it is resolved to adjust the issue price, the following calculation shall be made to adjust the price.
The price adjustment shall be computed as follows:
Step 1: Under the above circumstances, the higher of the aggregate decrease of the Shanghai Composite Index or that of the Machinery and Equipment Index shall be 17.11%. Upon calculation, the issue price of the Issued Shares shall drop by 17.11% to RMB5.31 per Share (90% of the average trading prices of the A Shares of the Company for 60 trading days preceding the price determination date was RMB6.41 per Share, becoming RMB5.31 per Share, marked as P1, if it drops by 17.11%);
–48– LETTER FROM THE BOARD
Step 2: Upon calculation, as at 31 December 2015, the net asset value per Share of the Company was RMB5.86; assuming the unaudited net asset value per Share as shown on the latest account prior to the T Date is RMB5.91, the higher of the abovementioned net asset value per Share of the Company shall be RMB5.91 (marked as P2);
Step 3: Upon comparison, P2 shall be higher than P1, and the adjusted issue price of the Issued Shares shall be RMB5.91 per Share.
(II) AGM AND 2016 FIRST H SHAREHOLDERS CLASS MEETING
1. REPORT OF THE BOARD FOR THE YEAR 2015
An ordinary resolution will be proposed at the AGM to approve the report of the Board for the year 2015. The full text of the report of the Board for the year 2015 is set out in the 2015 annual report of the Company which is dispatched on 29 April 2016.
2. REPORT OF THE BOARD OF SUPERVISORS FOR THE YEAR 2015
An ordinary resolution will be proposed at the AGM to approve the report of the board of supervisors for the year 2015. The full text of the report of the board of supervisors for the year 2015 is set out in the 2015 annual report of the Company which is dispatched on 29 April 2016.
3. ANNUAL REPORT FOR THE YEAR 2015
An ordinary resolution will be proposed at the AGM to approve the annual report of the Company for the year 2015 which is dispatched on 29 April 2016.
4. REPORT OF THE INDEPENDENT NON-EXECUTIVE DIRECTORS ON THEIR PERFORMANCE IN THE YEAR 2015
An ordinary resolution will be proposed at the AGM to approve the report of the independent non-executive directors on their performance in the year 2015. Details of the aforesaid report is set out in Annex A of this letter.
5. APPOINTMENT OF THE EXTERNAL AUDITORS FOR THE YEAR 2016
An ordinary resolution will be proposed at the AGM to approve: the appointment of BDO China Shu Lun Pan Certified Public Accountants LLP and Deloitte Touche Tohmatsu as the PRC auditor and the international auditor of the Company, respectively, for the year 2016; and the proposal in relation to the remuneration of the Company’s PRC and international auditors for the year 2016, which amounts to RMB680,000 and RMB2,300,000, respectively; to authorize the management of the Company to negotiate and determine the relevant fees with the financial and audit firm based on the scope of the group and the changes in audit volume.
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6. THE PROVISION OF REPURCHASE GUARANTEE TO CUSTOMERS UNDER FINANCE LEASE BUSINESS
To foster sales and expedite collection of trade receivables, the Company proposes to engage in finance lease business with finance lease companies and to provide guarantee for repurchasing residue values in respect of the finance lease business.
1. Guaranteed amount:
At any particular point of time during the validity period of the resolution, the maximum guaranteed amount is up to RMB2 billion within the maximum guaranteed amount.
Where particular guarantee constitutes one which is subject to consideration and approval by Shareholders at the general meeting of the Company under the Articles of Association, any of such guarantee shall be put forth to a general meeting for consideration prior to provision of such guarantee.
2. Validity period of the resolution:
Within one year from the date of consideration and approval at the Shareholders’ general meeting.
3. Implementation:
Upon consideration and approval of the resolution by the Board and by Shareholders at the general meeting, the Board shall authorize the general manager to enter into relevant guarantee contracts and the finance department shall be responsible for detailed implementation.
An ordinary resolution will be proposed at the AGM to approve the above arrangements of the provision of repurchase guarantee to customers under finance lease business, and the Company will make proper disclosure and comply with the requirements under the Listing Rules for the developments and the specific transactions to be entered into before or after the Shareholders’ approval at the AGM in due course.
7. THE USE OF SELF-OWNED IDLE FUNDS AND IDLE PROCEEDS FROM THE H SHARES FOR THE INVESTMENT OF WEALTH MANAGEMENT PRODUCTS
To further revitalize the internal funds on the book and enhance the ability of capital preservation and appreciation for the monetary fund, the Company
–50– LETTER FROM THE BOARD proposes the application of internal idle funds and idle portion of proceeds from H share issue to invest in wealth management products issued by financial institutions.
I. Plan of Investing in Wealth Management Products
To enhance the efficiency of the use of capital and maximize shareholders’ interests, the Company proposes that internal idle funds and idle portion of proceeds from H share issue of not more than RMB2 billion shall be applied on a revolving basis in a timely manner to purchasing wealth management products, issued by financial institutions, which offer high level of safety and liquidity.
Where a particular purchase of a wealth management product constitutes one which requires the approval of the Board or the Shareholders’ general meeting under the Listing Rules or other laws and regulations or the Articles of Association of the Company, such purchase shall be subject to prior approval by the Board or the Shareholders’ general meeting.
1. Scope of Investment
Wealth management products issued by financial institutions, which offer high level of safety and liquidity.
2. Validity Period of the Resolution
One year from the date on which it is considered and approved by the Board.
3. Amount of Investment
At any particular point of time during the validity period of the resolution, the wealth management products held by the Company shall be subject to a maximum amount of not more than RMB2 billion.
4. Method of Implementation
Pursuant to the Rules Governing the Listing of Securities on the Stock Exchange of Shanghai (2014 revision) and the Listing Rules as well as rules applicable to companies, for investment in wealth management products which are within the scope of authority conferred on the management, the chief financial officer is under the authorization of the Board to exercise such power of making investment decisions and enter into relevant contracts. The finance department is responsible for arranging detailed implementation thereof; for investment in wealth management products which are within the scope of authority conferred on the Board and the Shareholders’ General Meeting, upon approval by the Board or the Shareholders’ General
–51– LETTER FROM THE BOARD
Meeting, the chief financial officer is under the authorization to enter into relevant contracts. The finance department is responsible for arranging detailed implementation thereof.
II. Purchasing Wealth Management Products From The Bank Of Communications, China Minsheng Bank, China Everbright Bank, China Construction Bank, China Guangfa Bank And Industrial Bank
For the aforesaid I. Plan of Investing in Wealth Management Products, the Company’s purchase of wealth management products from the Bank of Communications, China Minsheng Bank, China Everbright Bank, China Construction Bank, China Guangfa Bank and Industrial Bank (including their respective sub-branches, branches and subsidiaries) may constitute discloseable transactions under the Listing Rules.
1. Information about the Subscriptions
Parties: The Company and the Bank of Communications, China Minsheng Bank, China Everbright Bank, China Construction Bank, China Guangfa Bank and Industrial Bank (collectively, the “Banks”) respectively.
The Banks are licensed banks incorporated under the laws of the People’s Republic of China. They and their respective ultimate beneficial owners are independent third parties.
Total amount Not more than RMB700 million by Bank of subscribed for: Communications
Not more than RMB600 million by China Minsheng Bank
Not more than RMB600 million by China Everbright Bank
Not more than RMB600 million by China Construction Bank
Not more than RMB500 million by China Guangfa Bank
Not more than RMB500 million by Industrial Bank
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Term of 17 March 2016 to 4 March 2017 investment:
Method of Can be in batches, to be negotiated between subscription: the Company and each of the Banks individually
2. Risk Control Measures
On the principle of protecting the interests of the shareholders and the Company, the Company gives first priority to risk prevention. It makes decisions carefully and handle investments in wealth management products with due care. During the subsistence of the wealth management products, the Company will maintain close connection with the Banks and keep track of the operation of the funds invested in the relevant products, thereby strengthening risk control and supervision and strictly monitor the safety of our funds.
3. Effect on the Company
The Company’s use of internal funds which are idle and the idle portion of proceeds from H share issue for the time being for purchasing low-risk wealth management products issued by financial institutions enable full control over risks and does not affect the normal operations of the Company. It helps enhancing the efficiency of the use of capital and raise the Company’s income.
Where investments in any wealth management products of the Company constitute transactions for which disclosure is required under the Listing Rules, the Company will perform the relevant procedures accordingly.
An ordinary resolution will be proposed at the AGM to approve the above arrangements.
8. PROFIT DISTRIBUTION PLAN FOR THE YEAR 2015
An ordinary resolution will be proposed at the AGM to approve the 2015 profit distribution plan of the Company.
To protect the interest of the Shareholders, based on its audited financial report, the Company proposes to distribute profit to its A Shareholders and H Shareholders, the details of which are as follows:
1. The proposal of 2015 dividend distribution plan is as follows: Based on the 1,621,122,000 shares of total share capital of the Company as at 31 December 2015, the Company distributed cash dividends of RMB0.08 (inclusive of tax) to all registered shareholders for every 10 Shares held
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and effectively distributed cash profit of RMB12,968,976, representing 30.73% of the net profit attributable to the shareholders of the Company.
2. The cash dividend is denominated and declared in RMB and payable in RMB to A Shareholders and in HK dollars to H Shareholders. Dividend to National Council for Social Security Fund will be distributed out of profit before tax in RMB. The actual amount declared in HK dollars is converted based on the average benchmark exchange rate of Renminbi against Hong Kong dollars as promulgated by the People’s Bank of China for the five business days preceding the date of the AGM. Subject to the approval of the profit distribution plan of the Company for the year 2015 at the AGM, the dividend will be distributed within two months after the date of the AGM.
9. AMENDMENTS TO THE ARTICLES OF ASSOCIATION
A special resolution will be proposed at the AGM to approve the amendments of Articles of Association.
Based on the Company’ operating conditions and the requirements under the Dividend Distribution Plan for Shareholders for the Next Three Years (2016–2018) of Zhengzhou Coal Mining Machinery Group Company Limited, corresponding amendments have been made to the Articles of Association of the Company. Details are as follows:
Paragraph 13 of Article 67 has been amended as follows:
to examine matters relating to the purchases, disposals of the Company’s material assets, asset pledges and entrusted financial management within one year, which exceed 30% of the Company’s latest audited total assets;
Two paragraphs have been added prior to paragraph 3 of Article 245 as follows:
3. The conditions of cash dividend of the Company: when the Company records a profit for the year and the cumulative undistributed profit for the year, after making up for losses in previous years and allocation to the common reserve fund in accordance with laws, is positive in value, and where the auditing firm issues an unqualified audit opinion on the financial report of the Company for the year, the Company may prioritize distribution of dividend in cash. If the Company distributes dividend in cash, it shall follow the rules below:
(1) if the Company is in a mature development stage without significant cash expenditure plan, the minimum percentage o f cash dividend in profit distribution shall be 80%;
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(2) if the Company is in a mature development stage with significant cash expenditure plan, the minimum percentage of cash dividend in profit distribution shall be 40%;
(3) if the Company is in a growth stage with significant cash expenditure plan, the minimum percentage of cash dividend in profit distribution shall be 20%;
If it is difficult to determine the Company’s stage of development while it has a significant cash expenditure plan, the profit distribution may be dealt with pursuant to the rules applied in the previous distribution. Major investment or significant cash expenditure refers to the proposed external investment, asset acquisition (including land use rights) or facilities procurement by the Company within the next twelve months with accumulated expenditure amounting to or exceeding 10% of the latest audited net assets of the Company.
4. Specific conditions for dividend distribution in shares: provided that the Company’s business is in a sound condition and the reasonable scale of share capital of the Company is ensured, and the Board of the Company believes dividend payment in shares will be in the interests of all shareholders of the Company, the Company may propose to distribute dividends in shares and implement upon the consideration and approval at the general meeting;
One paragraph has been added prior to paragraph 5 of Article 245 as follows:
7. Where there is a change in the Company’s control resulting from securities issuance, material asset reorganization, merger, division or acquisition, the Company shall disclose in details the cash dividend policy and relevant arrangements after such offering, issuance, reorganization or change in the control, as well as the Board’s explanation of the aforesaid, in the prospectus, offering proposal, material asset reorganization report, report of change of interest or acquisition report;
Paragraphs 6, 7 and 8 of Article 245 have been replaced by the following:
9. Decision-making processes and mechanisms for profit distribution of the Company
(i) The Board of Directors of the Company shall devise a reasonable dividend distribution recommendation and proposal based on the profitability, capital requirements
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and shareholders’ returns plan of the Company and implement after the consideration and approval at the general meeting upon the consideration and approval by the Board. Any adjustment thereof shall go through the procedures above again. The independent Directors of the Company shall examine the profit distribution proposal and issue independent opinions thereon; independent Directors may solicit opinions of minority shareholders and prepare a dividend distribution proposal and submit it directly to the Board for consideration.
(ii) The Company shall strictly implement its cash dividend policy as determined in the Articles of Association and the specific cash dividend proposal as considered and approved at the general meeting. If the Company needs to adjust or change the cash dividend policy as determined in the Articles of Association, it is required to satisfy the conditions under the Articles of Association and execute appropriate decision making procedures after substantiation. The adjustment or changes shall be passed by shareholders representing not less than two-thirds of voting rights held by all shareholders present at the meeting; the independent Directors shall give explicit opinion on matters such as the truthfulness, adequacy and reasonableness of the reasons for adjustments and changes, truthfulness and validity of the approval procedures as well as its compliance with the conditions required in the Articles of Association, and communicate and exchange ideas with minority shareholders before the general meeting and give timely reply to issues that concern minority shareholders. Independent directors may collect opinions from shareholders through network-based voting system, if necessary.
(iii) Specific conditions for the Company to adjust the cash dividend policy: (1) the Company suffers from losses or has issued loss warning announcement; (2) the balance of cash, excluding cash raised from capital markets and cash within special funding for special purposes or special account management funding such as a government special financial funds (including bank deposits and bonds with high liquidity), is not sufficient to pay the cash dividends within two months from the date of general meeting approving the profit distribution; (3) following the established dividend policy will render it impossible for the material investment projects and material transactions approved by the general meeting or the Board of Directors of the Company to be implemented according to established
–56– LETTER FROM THE BOARD
transaction plans; (4) the Board has reasonable grounds to believe that following the established dividend policy will have material adverse impact on the continuing operation or profitability of the Company.
10. Mechanism for supervision and limitation on cash dividend
(i) The board of supervisors shall supervise the implementation of dividend distribution policy and shareholders’ returns plan by the Board of Directors and the management, and the execution and decision-making procedures thereof;
(ii) The Board and the general meeting of the Company shall, in the decision-making and substantiation process in respect of profit distribution policy, fully consider the opinions of independent Directors and minority shareholders. When considering the specific plan on cash dividend distribution in the general meeting, active communication and exchange with shareholders, especially minority shareholders, shall be conducted via different channels, including but not limited to telephone, facsimile, e-mails, letters and the Internet, to thoroughly listen to the views and needs of minority shareholders, and reply to questions concerned by minority shareholders shall also be made in a timely manner;
(iii) If profit is recorded but the Board of Directors of the Company does not put forth a cash dividend distribution proposal, reasons therefor and the use of capital that may otherwise be used as dividends but has been retained by the Company shall be disclosed in its periodic report, and independent Directors shall express explicit independent opinions thereon;
(iv) The Company shall fully disclose the formulation and execution of the cash distribution policy in its periodical reports. The report shall explain: whether the profit distribution is in compliance with the Company’ s Articles of Association or with the general meeting resolution; whether the standard and proportion of profit distribution is precise and clear; whether the decision-making procedures and mechanisms are adequate; whether the independent Directors have fulfilled their responsibilities and played their role; whether the minority shareholders have the opportunity to fully express their views and needs; whether the legitimate rights and interests of minority shareholders are fully protected and so forth. In the event
–57– LETTER FROM THE BOARD
that adjustment or change of the cash distribution policy is carried out, full explanation shall also be given as to whether the conditions and procedures for the adjustment or change are compliant and transparent.
The amended Articles of Association shall take effect from the date on which it is considered and approved by the Shareholders’ general meeting.
Apart from the above, special resolutions 11.01 to 11.07, special resolution 16 and special resolution 23 as stated in the Notice of 2015 Annual General Meeting are related to the Acquisition; special resolutions 11.08 to 11.10 as stated in the Notice of 2015 Annual General Meeting are related to the Fundraising. For details of the aforementioned resolutions, please make reference to this letter from the Board and Appendix I to VI of this circular.
10. FORMULATION OF THE DIVIDEND DISTRIBUTION PLAN FOR SHAREHOLDERS OF THE COMPANY FOR THE NEXT THREE YEARS (2016-2018)
A special resolution will be proposed at the AGM to approve the Formulation of the Dividend Distribution Plan for Shareholders of The Company for the Next Three Years (2016-2018). Details of the aforesaid proposal is set out in Annex B of this circular.
CLOSURE OF REGISTER
The register of members for H Shares of the Company will be closed from Saturday, 14 May 2016 to Monday, 13 June 2016 (both days inclusive), during which period no transfer of shares will be registered. H Shareholders whose names appear on the Company’s register of members on Monday, 13 June 2016 are entitled to attend the AGM and the 2016 first H Shareholders Class Meeting. For the H Shareholders of the Company who wish to attend the AGM and the 2016 first H Shareholders Class Meeting but have not yet registered, all transfer documents accompanied by the relevant share certificates must be lodged with the Company’s share registrar for H Shares, Computershare Hong Kong Investor Services Limited, at Shops 1712–1716, 17th Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong on or before 4:30 p.m. on Friday, 13 May 2016.
Subject to the approval of the relevant proposal at the AGM, the Dividends will be payable to the Shareholders whose names appear on the register of members for H Shares of the Company after the close of the market on Wednesday, 22 June 2016. The register of members for H Shares of the Company will be closed from Friday, 17 June 2016 to Wednesday, 22 June 2016 (both days inclusive) during which period no transfer of H shares will be registered. For the H Shareholders of the Company who wish to be entitled to receive the final dividends but have not registered the transfer documents, all transfer documents accompanied by the relevant share certificates must be lodged with the Company’s H Shares registrar, Computershare Hong Kong Investor Services Limited, at Shops 1712–1716, 17th Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong on or before 4:30 p.m. on Thursday, 16 June 2016.
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VOTING AT THE AGM AND THE 2016 FIRST H SHAREHOLDERS CLASS MEETING
According to Rule 13.39(4) of the Listing Rules, unless the Chairman decides on good faith that a show of hand is allowed for any resolution in relation to procedures or administrative issues, any vote by the Shareholders in any general meeting of the Company shall be conducted by poll. As such, the Chairman of the AGM and the 2016 first H Shareholders Class Meeting will, pursuant to Article 121 of the Articles of Association, demand vote by poll for every resolution proposed in the AGM and the 2016 first H Shareholders Class Meeting.
During a poll vote, every Shareholder present in person or by proxy (or, in the case of a member being a corporation, by its duly authorized representative) shall have one vote for each share registered in the shareholder’s name in the register for members. According to Article 123 of the Articles of Association, a shareholder (including proxy) entitled to two or over two votes is under no obligation to cast all his/her votes for or against any resolution.
(III) RECOMMENDATION
The Board believes that all the resolutions mentioned above are in the best interest of the Company and its Shareholders as a whole. Therefore, the Board recommends Shareholders to vote for the relevant resolutions to be proposed at the AGM and the 2016 first H Shareholders Class Meeting as set out in the notice of the AGM and the 2016 first H Shareholders Class Meeting respectively.
(IV) ADDITIONAL INFORMATION
Your attention is drawn to the additional information on Appendix I to VI of this circular.
By Order of the Board Zhengzhou Coal Mining Machinery Group Company Limited 鄭州煤礦機械集團股份有限公司 JIAO Chengyao Chairman
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Annex A:
THE REPORT OF THE INDEPENDENT NON-EXECUTIVE DIRECTORS ON THEIR PERFORMANCE IN THE YEAR 2015
Notice: On 10 February 2015, the resolution on the election of the new session of the Board was considered and approved by the Shareholders at the first extraordinary general meeting of 2015 of Zhengzhou Coal Mining Machinery Group Co., Ltd and the third session of the Board was formed. Prior to the formation of the new session of the Board, the second session of the Board had performed its obligations with commitment and diligence. The following is the report on the performance of LIU Yao, JIANG Hua, LI Xudong, WU Guangming, independent non-executive directors of the third session of the Board, for the year 2015, and considered and approved by the third session of the Board in its tenth meeting.
Being an independent non-executive director of Zhengzhou Coal Mining Machinery Group Co., Ltd (the “Company”), we strictly complied with the requirements of relevant laws, regulations and regulatory documents such as the “Company Law”, the “Guidelines for Introducing Independent Non-executive Directors to the Board of Directors of Listed Companies” and the “Code of Corporate Governance for Listed Companies in China”, as well as the Articles of Association of the Company and the “Code of Conduct of Independent non-executive directors” to perform our duties prudently, conscientiously and diligently, attended relevant meetings proactively, carefully considered each resolution, expressed independent opinions on material matters of the Company and effectively played the role of being an independent non-executive director and a member of all professional committees. On one hand, we strictly reviewed relevant matters presented to the Board by the Company to safeguard the statutory interests of the Company and the public shareholders and facilitated regulated operation of the Company. On the other hand, we leveraged on our advantages in our profession individually, proactively paid attention to and participated in research of the Company’s development so as to give opinions and advices regarding the auditing and internal control, remuneration and incentive, nomination and appointment, as well as strategic plan of the Company. I hereby report on my performance of duties as an independent non-executive director of the Company based on my basic situations in 2015:
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I. ATTENDANCE AT MEETINGS
The Company convened eight Board meetings and two general meetings in the year 2015. Our attendance at Board meetings and general meetings is as follows:
Number of Board meetings convened during the reporting period:
Whether unable to attend in Number of Number of Number of person for meeting(s) meeting(s) meeting(s) two Name of Specific should have attended in attended by Number of consecutive Directors duties attended person proxy absence meetings
LIU Yao Independent 8800No non-executive director LI Xudong Independent 8800No non-executive director JIANG Hua Independent 8800No non-executive director WU Guangming Independent 8620No non-executive director
Number of general meeting(s) convened during the reporting period:
Whether unable to attend in Number of Number of Number of person for meeting(s) meeting(s) meeting(s) two Name of Specific should have attended in attended by Number of consecutive Directors duties attended person proxy absence meetings
LIU Yao Independent 2200No non-executive director LI Xudong Independent 1100No non-executive director JIANG Hua Independent 1100No non-executive director WU Guangming Independent 1001No non-executive director
I attended the Board meetings and general meeting on time without being unable to attend in person for two consecutive meetings. I read the resolutions carefully at the meetings and communicated with the management of the Company sufficiently. I also gave reasonable suggestions and prudently exercised our voting rights so as to protect the
–61– LETTER FROM THE BOARD interests of the Company and also the minority shareholders as a whole. I considered the convention and holding of all the Board meetings and general meeting as well as the major business decisions and other material events were made according to relevant legal procedures, which were legal and valid. Therefore, we agreed with all the proposals at the Board meetings and other issues of the Company based on our careful review without any objection, opposition and abandonment.
II. EXPRESSION OF INDEPENDENT OPINIONS
In 2015, I performed my duties prudently, conscientiously and diligently pursuant to the “Working System of Independent non-executive directors” and participated in Board meetings of the Company. We made independent and clear judgments on the validity of relevant issues prior to the Company’s decisions, specified as follows:
(1) Connected transactions
We strictly complied with the requirements of regulations such as “Code of Corporate Governance for Listed Companies in China”, “Rules Governing the Listing of Stocks on Shanghai Stock Exchange” and the “Decision-making System of Connected Transactions” of the Company to make judgements regarding the aspects such as the necessity, objectiveness, benefits to the Company, fairness and reasonableness of pricing and the harm to the Company’s and the Shareholders’ interests of the connected transactions entered into in the ordinary course of business based on objective criteria and reviewed the transactions according to relevant procedures. During the reporting period, we expressed independent opinions on the resolutions regarding connected transactions and we all believed that these issues were strictly compliant with the requirements of relevant laws, followed suitable procedures, and were valid and without harming the interests of the Company and the Shareholders as a whole.
(2) External guarantees and capital occupation
We strictly complied with the systems and regulations such as “Code of Corporate Governance for Listed Companies in China”, “Rules Governing the Listing of Stocks on Shanghai Stock Exchange” and the Articles of Association of the Company to make judgements and review on external guarantees and capital occupation of the Company. We considered that the guarantees provided by the Company were strictly compliant with the requirements of relevant laws, followed suitable procedures, and were valid and without harming the interests of the Company and the Shareholders as a whole. No controlling shareholders of the Company occupied capital of the Company.
(3) Use of proceeds
We reviewed the use of proceeds by the Company. The Company has established a proceeds management system and regulations on use of capital. The actual use of proceeds was consistent with its commitment and no invalid behavior regarding the use of proceeds was discovered.
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(4) Nomination and remuneration of senior management
The Company strictly complied with the regulations regarding the remuneration of directors, supervisors and senior management. Relevant assessment and incentive were also executed in compliance with regulations. The procedures on assessment of operation results and distribution of remuneration were compliant with the requirements of relevant laws, the Articles of Association of the Company and regulatory systems.
(5) Advance announcements of results and result announcements
In view of the sustained weak market demand for coal, coal price continued to decrease and conditions of the coal industry continued to worsen, with the continual significant decline in the investment in coal mining and coal washing fixed assets. The coal mining machinery market was in adversity, with significant shrinkage in the demand for coal mining equipment. The market price of comprehensive coal mining and excavating equipment continued to decline, resulted in the substantial decline in results of the Company in 2015. After the preliminary estimation by the financial department, it is expected that the realized net profit attributable to shareholders of listed company will decrease by approximately 80% in 2015 as compared to the same period in last year. The Company made a profit warning regarding the results for 2015 on 30 January 2016.
(6) Appointment or change of auditor
We considered BDO China Shu Lun Pan Certified Public Accountants LLP and Deloitte Touche Tohmatsu, which are the PRC accountant and international accountant appointed by the Company, respectively, worked diligently when rendering their auditing services, strictly followed the standards of independence, objectiveness and fairness and completed all auditing tasks in due diligence.
(7) Cash dividends and other investor returns
The proposals of 2014 profit distribution plan and capital increase were considered and approved at the 2014 general meeting convened on 5 June 2015. Based on the 1,621,122,000 shares of total share capital of the Company as at 31 December 2014, the Company distributed cash dividends of RMB0.38 (inclusive of tax) to all registered shareholders for every 10 Shares held and effectively distributed cash profit of RMB61,602,636, representing 30.02% of the net profit attributable to the shareholders of listed company. The A share cash dividend distribution was completed on 30 June 2015. The H share cash dividend distribution was completed on 22 July 2015.
(8) Commitment of the Company and Shareholders
During the reporting period, there was no breach of commitment by the Company or relevant Shareholders.
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(9) Information disclosure
During 2015, the Company issued 52 temporary announcements and 4 regular announcements. The information disclosed in the Company’s disclosures of information was true, accurate, complete and without any false records, misleading statements or material omissions. Relevant personnel of the Company made the information disclosures in compliance with the requirements of laws and regulations and enabled the Company to perform its information disclosure obligations timely regarding material issues.
(10) Internal control
During the reporting period, the Company established a comprehensive internal control system and was able to implement the system effectively.
(11) Operation of the Board and its committees
Strategy Committee, Nomination Committee, Remuneration and Assessment Committee and Auditing Committee were established under the Board of the Company. During the reporting period, the committees made discussions and reviews regarding the issues in their respective aspects with standard operation.
III. WORKS ON PROTECTING INVESTORS’ INTERESTS
(1) We paid continuous attention on the information disclosure of the Company and monitored the Company to strictly comply with the requirements of laws and regulations such as “Rules Governing the Listing of Stocks on Shanghai Stock Exchange” and the “Administrative Measures on Information Disclosure by Listed Companies” to improve the information disclosure management system. We required the Company to strictly implement requirements regarding information disclosure to guarantee the truth, accuracy, completeness, timeliness and fairness of the Company’s disclosure of information.
(2) Being an independent non-executive director of the Company, I strictly performed the duties of an independent non-executive director. I proactively paid attention to the operation of the Company and actively obtained all the required information when making decisions and performed the duties of being an independent non-executive director. We also timely attended Board meetings of the Company, carefully reviewed the materials provided by the Company and made independent, fair and objective conclusions based on our professional knowledge and prudently exercised our voting rights.
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(3) I proactively learnt about relevant laws, regulations and regulatory systems so as to understand more intensively about relevant regulations, particularly those involving regulations on corporate governance structure and protection on the interests of public shareholders. I continuously enhanced our capacity to protect the interests of the Company and investors and our awareness of spontaneously protecting public shareholders was also promoted.
IV. OTHERS
(1) There was no proposal of convening Board meeting by independent non-executive directors during 2015;
(2) There was no proposal of terminating the service of an accountant by Independent non-executive directors;
(3) There was no proposal of appointing an auditing institution or a consultation institution by independent non-executive directors.
Zhengzhou Coal Mining Machinery Group Co., Ltd 鄭州煤礦機械集團股份有限公司 Liu Yao Li Xudong Jiang Hua Wu Guangming Independent non-executive directors
4 March 2016
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Annex B:
ZHENGZHOU COAL MINING MACHINERY GROUP COMPANY LIMITED DIVIDEND DISTRIBUTION PLAN FOR SHAREHOLDERS FOR THE NEXT THREE YEARS (2016–2018)
Pursuant to the requirements in the Notice Regarding Further Implementation of Cash Dividend Distribution of Listed Companies《關於進一步落實上市公司現金分紅有關 ( 事項的通知》) and Guideline No. 3 for the Supervision of Listed Companies – Cash Dividend Distribution of Listed Companies《上市公司監管指引第 ( 3號 – 上市公司現金分紅》) issued by China Securities Regulatory Commission, in order to better define the Company’s reasonable investment return to shareholders, enhance the transparency and ease of implementation of decision-making in relation to profit distribution, and facilitate shareholders’ supervision over the operation and profit distribution of the Company, the Company has formulated the Zhengzhou Coal Mining Machinery Group Company Limited – Dividend Distribution Plan for Shareholders for the Next Three Years (2016–2018), which has been considered and approved by the thirteenth meeting of the third session of the board of directors of the Company. Details of the dividend distribution plan for shareholders for 2016 to 2018 are as follows:
I. FACTORS CONSIDERED IN THE FORMULATION OF THE PLAN
The Company is committed to achieving stable, healthy and sustainable development. Taking into account key factors including the actual operating conditions, strategic development goals, operational plans and profitability of the Company, intention and requirements of the shareholders, external financing costs and financing environment and cashflow position of the Company, the Company strikes a balance between the short-term benefits of and long-term returns to shareholders and has established for its investors a sustainable, stable and scientific dividend distribution plan and mechanism so that arrangements concerning profit distribution are built-in to the system to ensure the continuity and stability of the profit distribution policy of the Company.
II. PRINCIPLES FOR FORMULATION OF THE PLAN
The plan has been formulated on the basis of rules concerning profit distribution stipulated under laws and regulations and normative documents including the Company Law as well as the Articles of Association, with due regard to the opinions of shareholders (particularly minority shareholders), independent directors and supervisors, and attaching importance to the reasonable investment returns to shareholders and the needs of the Company for sustainable development. It adheres to the basic principle of handling profit distribution in a proactive and scientific manner, to achieve continuity and stability in the profit distribution policy of the Company.
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III. THE DIVIDEND DISTRIBUTION PLAN OF THE COMPANY FOR THE NEXT THREE YEARS
1. Profit may be distributed by way of cash, stock or a combination of both, or otherwise in accordance with methods permitted under laws and regulations. Where the Company is in a position for distribution by way of cash, it shall do so by way of cash. Distribution of stock dividend shall be on genuine and reasonable grounds including the growth of the Company and the dilution of net assets per share. The board of directors of the Company may propose interim dividend distribution based on the profitability, cashflow and capital requirements for the current period.
2. Where the retained profit of the Company is positive and the distributable profit (i.e. the post-tax profit of the Company after making for losses and transferring to reserve funds) for the current period is positive and the cashflow of the Company is sufficient for the normal operation and sustainable development of the Company, distribution by way of cash is made once a year in principle. The cumulative profit distribution of the Company by way of cash for the next three years (2016 to 2018) shall in principle be not less than 30% of the average annual distributable profit to be achieved in the next three years. Details of the percentage of distribution for each year shall be proposed by the board of directors of the Company based on the annual profit and future plans for the use of funds.
3. Profit distribution proposals shall be devised by the board of directors of the Company taking into account factors including the Company’s operation and development, intention of shareholders, costs of social funds and external financing environment as well as the opinions of the independent directors of the Company. Profit distribution proposals shall be considered and approved by the board of directors of the Company before submitting to the general meeting of shareholders for consideration and approval. The Company remains open to suggestions of and supervision by shareholders, independent directors and supervisors regarding and over the Company’s profit distribution.
IV. MECHANISM FOR DECISION-MAKING REGARDING DIVIDEND DISTRIBUTION PLAN FOR SHAREHOLDERS
1. Proposals for dividend distribution plan for shareholders shall be formulated by the board of directors of the Company with due regard to the strategic development goals, actual operating conditions, profit scale and cashflow of the Company and taking into account the opinions of the shareholders (particularly minority shareholders), independent directors and supervisors of the Company. Proposals for dividend distribution plan for shareholders shall be considered and approved by the board of directors of the Company before submitting to the Company’s general meeting of shareholders for consideration and approval.
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2. Where adjustments need to be made to the dividend distribution plan for shareholders due to material changes in external operating environment or internal operating conditions, the Company shall prioritize the protection of shareholders’ interest and substantiate and elaborate on reasons therefor in detail. Decision-making procedures shall be strictly followed, and no contravention with relevant provisions of the Articles of Association shall be allowed. Any adjustment to the dividend distribution plan for shareholders shall be considered and approved by the board of directors of the Company before submitting to the general meeting of shareholders for consideration and approval.
3. Dividend distribution plan shall be reviewed at least once every three years. The plan for a particular period of time shall be devised based on the operating conditions and opinions of the shareholders (particularly minority shareholders) of the Company.
V. SUPPLEMENTARY PROVISIONS
In case of any matter that has not been covered in this plan, the laws, regulations, normative documents and the Articles of Association shall apply. The responsibility for providing explanation of this plan and its amendments shall be vested in the board of directors of the Company. This plan, and any amendments thereof, shall become effective from the date on which it is/they are considered and approved at the general meeting of shareholders of the Company.
Zhengzhou Coal Mining Machinery Group Company Limited
28 April 2016
–68– LETTER FROM THE INDEPENDENT BOARD COMMITTEE
Zhengzhou Coal Mining Machinery Group Company Limited 鄭州煤礦機械集團股份有限公司 (A joint stock limited company incorporated in the People’s Republic of China with limited liability) (Stock Code: 00564)
23 May 2016
To the Independent Shareholders
Dear Sir or Madam,
CONNECTED TRANSACTION
We refer to the circular of the Company dated 23 May 2016 (the ‘‘Circular’’) dispatched to the Shareholders of which this letter forms part. Unless the context requires otherwise, terms and expressions defined in the Circular shall have the same meanings in this letter.
As stated in the Circular, the Directors, supervisors and chief executives of the Company will acquire interests in the Placing Shares pursuant to their participation in the ESO Scheme, and such Subscription of Placing Shares by Connected Persons constitutes a non-exempt connected transaction of the Company. We have been appointed to advise the Independent Shareholders whether the connected transaction are fair and reasonable and in the interests of the Company and the Shareholders as a whole and make recommendation on voting. And Central China International Capital Limited has been appointed to advise the Independent Board Committee and the Independent Shareholders in respect of the connected transaction.
The connected transaction is not in the ordinary and usual course of business of the Company and we wish to draw your attention to the letter from the Board as set out on pages 9 to 68 of the Circular and the letter from Central China International Capital Limited as set out on pages 70 to 92 of the Circular.
Having considered the advice given by Central China International Capital Limited, we are of the opinion that the connected transaction is on normal commercial terms, fair and reasonable and in the interests of the Company and the Shareholders as a whole. Accordingly, we recommend the Independent Shareholders to vote in favour of the relevant resolutions to be proposed at the AGM and H Shareholders Class Meeting.
Yours faithfully, For and on behalf of the Independent Board Committee of Zhengzhou Coal Mining Machinery Group Company Limited Liu Yao Jiang Hua Independent Non-executive Director Independent Non-executive Director
Li Xudong Wu Guangming Independent Non-executive Director Independent Non-executive Director
–69– LETTER FROM THE INDEPENDENT FINANCIAL ADVISOR
The following is the text of a letter of advice from Central China International Capital Limited to the Independent Board Committee and the Independent Shareholders in respect of the Very Substantial Acquisition and Connected Transaction which has been prepared for the purpose of incorporation in this circular.
Central China International Capital Limited Unit 1504, 15th Floor The Center 99 Queen’s Road Central Central Hong Kong
23 May 2016
To the Independent Board Committee and the Independent Shareholders of Zhengzhou Coal Mining Machinery Group Company Limited
Dear Sirs,
CONNECTED TRANSACTION
INTRODUCTION
We refer to our engagement as the Independent Financial Adviser to advise the Independent Board Committee and the Independent Shareholders in connection with the acquisition of interests in the Placing Shares by certain Company officers and staff by virtue of their participation in the Company’s Employee Share Ownership Scheme (the “Scheme”), details of which are set out in the letter from the Board (the “Letter from the Board”) contained in the circular dated 23 May 2016 issued by the Company to the Shareholders (the “Circular”), of which this letter forms part. Capitalised terms used in this letter shall have the same meanings ascribed to them in the Circular unless the context otherwise requires.
As summarised in the Letter from the Board, on 24 March 2016, the Company, as the Purchaser, and the Sellers (together with their Guarantor) entered into the Equity Transfer Agreement, pursuant to which the Company conditionally agreed to acquire from the Sellers the Target Equity Interests for RMB2.2 billion in aggregate (equivalent to approximately USD337,164,751, based on the Applicable Exchange Rate of 6.525) (the “Transaction”). The consideration shall be settled by the Company by way of issue of the Consideration Shares to the Sellers and with all or part of the cash proceeds from the issue of the Placing Shares. The Transaction constitutes a very substantial acquisition for the Company under Chapter 14 of the Listing Rules and is subject to the reporting, announcement and Shareholders’ approval requirements thereunder.
–70– LETTER FROM THE INDEPENDENT FINANCIAL ADVISOR
The Letter from the Board also says, among others, that the Company will issue the Placing Shares to no more than 10 qualified targets including but not limited to securities investment and fund management firms, securities firms, finance companies and insurance institutional investors on a non-public basis by way of price consultation for fund raising (the “Fundraising”or“Placing”). One of the qualified targets is the Scheme and the subscription amount under the Scheme shall be no more than RMB57.36 million.
Some of the Directors, supervisors, senior management and other employees of the Company are participants of the Scheme (collectively the “Participants”) and will acquire interests in the Placing Shares through their participation in the Scheme. As the Participants are connected persons of the Company as defined under Chapter 14 of the Listing Rules, their subscription of the Placing Shares as described above (the “Scheme Subscription”) constitutes a non-exempt connected transaction of the Company (the “Connected Transaction”) and is subject to, among others, the approval by Independent Shareholders in the Shareholders’ General Meeting of the Company.
Since Mr. WANG Xinying, Mr. GUO Haofeng and Mr. LIU Qiang, all being directors of the Company, are materially interested in the Transaction by virtue of their participation in the Scheme, they are required to abstain from voting on the resolution to approve the Transaction and the Scheme Subscription under the Listing Rules. Save as disclosed above, none of the Directors are interested in the Transaction.
The Independent Board Committee comprising all the Independent Non-executive Directors, namely Ms. LIU Yao, Mr. JIANG Hua, Mr. LI Xudong and Mr. WU Guangming has been established (i) to advise the Independent Shareholders as to the fairness and reasonableness of the terms of the Scheme Subscription, and whether the Scheme Subscription is in the interests of the Company and the Shareholders as a whole; and (ii) to advise the Independent Shareholders on how to vote on the resolution(s) in respect of the Scheme Subscription and the transactions contemplated thereunder. As the Independent Financial Adviser in respect of the Scheme Subscription, our role is to give an independent opinion to the Independent Board Committee and the Independent Shareholders in such regard.
We have not acted as the independent financial adviser to the independent board committee and the independent shareholders of the Company for any transaction in the past two years. Neither did we have any relationship with or interest in the Company or any other parties that could reasonably be regarded as relevant to our independence as at the Latest Practicable Date. Apart from normal professional fees paid or payable to us in connection with this appointment as the Independent Financial Adviser, no arrangements exist under which we have received or will receive any fees or benefits from the Company or any other parties that could reasonably be regarded as relevant to our independence. Accordingly, we consider that we are independent pursuant to Rule 13.84 of the Listing Rules.
–71– LETTER FROM THE INDEPENDENT FINANCIAL ADVISOR
BASIS OF OUR OPINION AND RECOMMENDATION
In forming our opinion and recommendation, we have relied on the information, facts and representations contained or referred to in the Circular and the information, facts and representations provided by, and the opinions expressed by the Directors, management of the Company and its subsidiaries. We have assumed that all information, facts, opinions and representations made or referred to in the Circular were true, accurate and complete at the time they were made and continued to be true, accurate and complete as at the date of the Circular and that all expectations and intentions of the Directors, management of the Company and its subsidiaries, will be met or carried out as the case may be.
We have no reason to doubt the truth, accuracy and completeness of the information, facts, opinions and representations provided to us by the Directors, management of the Company and its subsidiaries. The Directors have confirmed to us that no material facts have been omitted from the information supplied and opinions expressed. We have no reason to doubt that any relevant material facts have been withheld or omitted from the information provided and referred to in the Circular or the reasonableness of the opinions and representations provided to us by the Directors, management of the Company and its subsidiaries.
The Directors jointly and severally accept full responsibility for the accuracy of the information contained in the Circular and confirm, having made all reasonable enquiries, that to the best of their knowledge, opinions expressed in the Circular have been arrived at after due and careful consideration and there are no other facts not contained in the Circular, the omission of which would make any statement in the Circular misleading.
We have relied on such information and opinions and have not, however, conducted any independent verification of the information provided, nor have we carried out any independent investigation into the business, financial conditions and affairs of the Group or its future prospect.
Our advice does not include the merit or suitability of the wealth management products, and we have not formed an opinion on the merit or suitability of the wealth management products in which the Company is considering investing.
Based on the foregoing, we confirm that we have taken all reasonable steps, which are applicable to the Scheme Subscription, as referred to in Rule 13.80 of the Listing Rules (including the notes thereto).
This letter is issued to the Independent Board Committee and the Independent Shareholders solely in connection with their consideration of the Scheme Subscription and, except for its inclusion in the Circular, is not to be quoted or referred to, in whole or in part, nor shall this letter be used for any other purposes, without prior written consent.
–72– LETTER FROM THE INDEPENDENT FINANCIAL ADVISOR
PRINCIPAL FACTORS AND REASONS CONSIDERED
In formulating our opinion and recommendation to the Independent Board Committee and the Independent Shareholders in relation to the Scheme Subscription, we have taken into consideration the following principal factors and reasons:
1. Background of the Scheme Subscription
(a) Information on the Group
The Company was established in the PRC in December 2008 as a joint stock company with limited liability under the laws of the PRC. The Company is principally engaged in the manufacturing and sales of hydraulic roof supports and related components for comprehensive coal mining and provision of related services. In August 2010, the Company listed its A shares on the Shanghai Stock Exchange. Two years later in December 2012, the Company was listed on the Main Board of the Stock Exchange.
Set out below is the Group’s audited financial information for the year ended 31 December 2015, as extracted from the Group’s annual reports for the years ended 31 December 2015 (the “AR2015”), 31 December 2014 (the “AR 2014”) and 31 December 2013 (the “AR 2013”).
For the year ended 31 December 2015 2014 2013 RMB’000 RMB’000 RMB’000 (audited) (audited) (audited)
Consolidated statement of profit and loss
Revenue 4,510,858 6,124,457 8,055,311 Profit for the year 10,609 193,334 836,981 Net profit attributable to Company’s shareholders 42,198 205,194 866,712
Consolidated statement of profit and loss
Total assets 12,049,487 12,195,873 12,651,442 Total liabilities 2,427,028 2,612,079 2,969,258 Net assets attributable to Company’s shareholders 9,502,572 9,432,318 9,518,848
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According to the AR 2015, the Group’s overall operations in 2015 were affected by the global economic doldrums and the sharp decrease in the performance of the coal industry. As a result, the Group’s key economic indicators including revenue and total profit dropped substantially. In 2015, the Company realised revenue was RMB4.511 billion, representing a decrease of 26.3% as compared with 2014. Net profit was RMB10.6 million, representing a decrease of 94.5% as compared with 2014.
The fall in revenue from RMB6,124.46 million for the year ended 31 December 2014 to RMB4,510.86 million for the year ended 31 December 2015 was mainly attributable to the fact that demand in domestic coal market continued to diminish in 2015, and fixed asset investment in the coal mining and processing industry persisted to decline at the same time, which resulted in a decrease in domestic market demand for the Group’s products and the corresponding decrease in the Group’s revenue from hydraulic roof supports. Hence, profit attributable to owners of the Company decreased by 79.4% from RMB205.19 million for 2014 to RMB42.2 million for 2015.
The AR 2015 also said that notwithstanding the above-mentioned difficulties, in 2015, the Group rode on its advantage in sales and collection of trade receivables externally, and fully fostered its market-oriented profit-based appraisal approach and enforced cost reduction by all staff members internally. Its production methods have been further optimized, which further enhanced product quality. Corporate reform continued to intensify. During the year under report, the Group had also been negotiating with relevant parties to acquire interests in certain companies in a different industry as part of its material asset re-organisation and further business development, which led to the entering into and signing of the Equity Transfer Agreement on 24 March 2016.
Based on the AR 2014, in the year under report, the Group realised revenue of RMB6,124.46 million, representing a decrease of 24% as compared with 2013. Net profit was RMB193.33 million, representing a decrease of 76.9% as compared with 2013. The Group’s revenue decreased by 24% from approximately RMB8,055.3 million for the year ended 31 December 2013 to approximately RMB6,124.5 million for the year ended 31 December 2014, which was mainly attributable to the fact that demand in domestic coal market continued to diminish in 2014, which resulted in a decrease in domestic market demand for the Group’s products and the corresponding decrease in the Group’s revenue from hydraulic roof supports. As a result of these factors, the Group’s profit decreased by 76.9% from RMB836.98 million for the year ended 31 December 2013 to RMB193.33 million for the year ended 31 December 2014. Profit attributable to owners of the Company decreased by 76.3% from RMB866.71 million for 2013 to RMB205.19 million for 2014.
–74– LETTER FROM THE INDEPENDENT FINANCIAL ADVISOR
2. Reasons for and benefits of the Scheme Subscription
(a) The legal basis of the Scheme
According to the Several Opinions of the State Council on Further Promoting the Healthy Development of the Capital Market (Guo Fa [2014] No. 17)《國務院關於進一步促進資本市場健康發展的若干意見》 ( )(國發[2014] 17 號)), listed companies in China are allowed to adopt employee stock ownership plans in various forms. The China Securities Regulatory Commission (the “CSRC”) issued the Guidelines on Pilot Implementation of Employee Stock Ownership Schemes by Listed Companies《關於上市公司實 ( 施員工持股計劃試點的指導意見》) (the “Guiding Opinions”) on 20 June 2014 on the basis of the Companies Law of the PRC《中華人民共和國公司法》 ( ) and the Law of the PRC on Securities《中華人民共和國證券法》 ( ) pursuant to the approval by the State Council of the PRC for the trial of employee stock ownership schemes of listed companies.
(b) The structure of the Scheme in brief
As set out in a Company’s document entitled “鄭州煤礦機械集團股份有 限公司員工持股計畫（認購本次配套發行）（草案）”, translated as “Zhengzhou Coal Mining Machinery Group Co., Ltd. – Employee Stock Ownership Scheme (draft)” (the “Scheme Document”), the objectives of the Scheme are to (i) incentivise the Company’s entire staff and establish a sound and comprehensive incentive mechanism for employees, (ii) improve the cohesion and competitiveness of the company employees; and (iii) effectively mobilise the enthusiasm and creativity of staff, so as to promote long-term, sustained and healthy development of the Group.
The Letter from the Board also mentions that the aggregate amount of funds to be raised from the Scheme Subscription should be no more than RMB57.36 million (i.e. 8,838,212 A Shares at RMB6.49 per Share). Such funds are derived from the lawful remuneration of the Participants as well as funds raised through other legal means. Eligible participants of the Scheme would be no more than 354 persons in number and include Directors (excluding independent non-executive Directors), supervisors, senior management and other employees of the Group. Proceeds from the Fundraising will be applied as cash consideration for the Transaction, replenishment of the working capital of the Target Companies and so forth.
The Scheme will be managed by the Company. After the Scheme is implemented, the first meeting of the Participants of the Scheme will be held at which the management committee (the “MC”) will be formed. The Participants meeting is the supreme power organ of the Scheme, and has the power to elect or dismiss any members in the MC. All Participants are entitled to attend the Participants meeting. The MC consists of three members, who have been elected at the Participants meeting. One of the MC members, in
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turn, will be elected by a majority vote to head the MC. It should be noted that no director, supervisor or senior management of the Company can stand for election as a member of the MC in the Participants meeting. Duties of the MC include convening Participants meeting, supervising the daily operation of the Scheme on behalf of the Participants and exercising shareholders’ rights on behalf of Participants of the Scheme. The MC is entitled by the Participants meeting to vote on behalf of the Participants on any resolution to be considered at the Shareholders’ meeting of the Company. The MC is independent from the Board of the Company.
If the Company intends to carry out any financing activity, e.g. through allotment of shares, additional issuance, convertible bonds and other means during the term of the Scheme, namely 48 months, and the Scheme is interested in becoming one of the subscribers, the MC, having discussed the matter with the asset manager, namely, Huatai Securities (Shanghai) Asset Management Co. Ltd (“Huatai”) shall submit the matter to the PC to consider and deliberate on whether or not to participate in the financing activity.
(c) Possible benefits of participation in the Scheme
In assessing the merits of participation in the Scheme, we, based on desk-top research, reviewed a number of publications of reputable sources which included but were not limited to (i) a review from one of the ‘Big 4’ international accounting firms; (ii) two research reports from two global industry market researchers; (iii) a newsletter from a Hong Kong-based award-winning (including Asian Fund House of the Year) fund management company and (iv) an official trade report issued by the US Department of Commerce, all in relation to the automotive parts and components industry (the “Industry”) in the PRC. This is necessary because, according to the Letter from the Board, the Company is interested in gaining entry to the Industry in China to enhance its profitability. Given that the six Target Companies are involved in different sectors along the automotive components industry chain, the acquisition of the Target Equity Interests by the Company will ensure that the Company can tap into the potentials of the Industry in China without delay, and at the same time further the Company’s business development by adding a new segment to the Company’s existing business.
–76– LETTER FROM THE INDEPENDENT FINANCIAL ADVISOR
From our review of the above-mentioned publications, the following observations are, in our view, representative of the Industry’s current status and thus worth noting.
• The development of the Industry is being driven by the strong growth in the number of more affordable vehicles – from luxury to everyday consumer product – as well as improved road infrastructure. This growth is based on (i) the increased disposable income for Chinese consumer; and (ii) the government’s stimulus policies increasingly oriented to sustaining private consumption. According to the US Department of Commerce trade report (http://trade.gov/topmarkets/pdf/autoparts_Top_Markets_Report.pdf), China had the highest average vehicle production (17.8 million) between 2012 and 2014, more than doubling the second largest vehicle producer and is projected to produce over 27 million vehicles by 2020. Based on such strong fundamentals, the Industry is expected to grow by more than 20% per year until 2018. (http://www.ipsosconsulting.com/pdf/Industry-Report-Trends- in-China’s-Automotive-Component-Manufacturing-Industry.pdf)
• The Industry is highly competitive and fragmented. There is a large amount of enterprises operating in the Industry, but few of them are of large scales and strong capabilities. There are also a number of barriers to entry such as funding barrier (due to the capital intensive nature of the Industry) and technological barrier (due to newcomers’ lack of production craftsmanship and technology).
• The Industry in China lags behind the developed countries in terms of the production capacity and research and development investment. In addition, domestic capability is limited in electronics systems, transmission systems, fuel efficiency and safety solutions. The central government has also identified over-capacity as a potential threat to this sector and has put it under observation since early 2012. Counterfeiting is also expected to increase as the market expands and continue to threaten manufacturer’s profits.
• Chinese auto parts manufacturers benefit from many Chinese government policies, including import restraints, domestic content rules, technology transfer policies, export requirements, and domestic and export subsidies.
• The evolution of the Industry is moving so fast that few local manufacturers can really be considered to be entrenched or unassailable. New entrants to the Industry can still become successful players as the government’s push on trends like “green” transportation is bound to open up even more
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opportunities in the near future. However, it should be noted that newcomers to the Industry generally cannot form an efficient management team and an orderly management mechanism, which would hinder the newcomers’ development.
(d) Our assessment of the Scheme
When considering the basis and nature of the Scheme (please refer to sub-section 2(b) headed “The structure of the Scheme in brief”), we have compared it with share option schemes within the meaning of Chapter 17 of the Listing Rules (“Chapter 17”), which are generally adopted by many companies listed on the Stock Exchange. We consider that the principles under the Scheme are generally in line with those of Chapter 17, and certain terms of the Scheme, as elaborated below, are more stringent than those of Chapter 17, which are in the interests of the Company and the Shareholders as a whole.
Specifically, with regard to share option schemes, Rule 17.03(6) and 17.03(7) of the Listing Rules does not prescribe (i) a fixed period for which an option must be held before it can be exercised; and (ii) performance targets attached to the options respectively. By contrast, the shares to be subscribed for by the Participants in the Fundraising under the Scheme are subject to a lock-up period of 36 months. During the lock-up period, the Scheme is not allowed to dispose of or transfer the underlying A Shares. It is understood that the length of the lock-up period of the Scheme tends to be consistent with that of similar employee stock ownership plans in China (please refer to sub-section 3(c) headed “Lock-up period” for further details), which arrangement, in short, encourages longer term commitment by the participating employees.
We consider that the Scheme is a practical alternative to share option schemes generally adopted by listed companies on the Stock Exchange (being those governed under Chapter 17), which are implemented with the intention of incentivising employees over the medium to long-term. In the case of the Company, which has got business operations and employee based in the PRC, it is logical that the Scheme targets A Shares, which are not listed on the Stock Exchange, as H Shares, which are instead listed on the Stock Exchange, cannot be generally owned or bought by employees who are nationals of the PRC. The CSRC issued “Announcement [2014] No. 33” in June 2014 to encourage PRC corporations to adopt employee stock ownership schemes with a view to providing greater flexibility to the design of employee compensation packages. The Scheme is therefore a method commonly adopted by PRC-incorporated companies listed on the Shanghai Stock Exchange and Shenzhen Stock Exchange.
Insofar as the possible merits of participation in the Scheme is concerned (please refer to sub-section 2(c) headed “Possible benefits of participation in the Scheme”), we note the observations in above sub-section 2(c). We further note
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the detailed description of the Target Companies which is set out in Appendix I to the Circular, particularly pages I-65–I-108 therein. In short, it is understood that the Target Companies mainly operate in the automotive component market (including piston rings, camshafts, cylinder blocks and covers, starter motors, sealants and noise reduction components) in China. Their major customers are domestically and internationally leading motor and auto manufacturers, and their major suppliers are suppliers of raw materials such as pig iron, scrap iron, rubber and copper coil. According to a newspaper report (http://www.reuters.com/article/idUS200211+01-Oct-2010+BW20101001), the ASIMCO brand is the first global automotive components company originated from China. It is the largest independent producer of diesel engine components in China with market leading positions in piston rings, fuel systems, blocks and heads, air brake compressors, starters and camshafts.
In light of (i) the Group’s relative poor performance in recent years (please refer to sub-section 1(a) headed “Information on the Group”) and the need to identify new sources for profit as a result; (ii) the fact that the Group and the Target Companies produce similar products such as foundry products and are engaging in like production process mainly involving casting, mechanical processing and component assembling; (iii) the Group’s own digital control processing, intelligent steel plate cutting production lines and automatic coating production lines will help the Target Companies become more automated; and (iv) the retention of most of the core management staff with Industry expertise in the Target Companies after the completion of the Acquisition to help smooth the Company’s transition into a different business activity, the Transaction, in our view, represents, on balance, a mutually beneficial and profitable proposition for the Group and the Target Companies.
Given that the outlook of the Industry in the PRC remains, on balance, positive and promising in the near future based on what was said before, we thus concur with the Directors’ view and are of the opinion that the Scheme Subscription, while not in the ordinary and usual course of business of the Group, will be beneficial not only to the Participants in the Scheme, but also the Company and Shareholders as a whole.
Having considered that (i) the Scheme is a sound medium to long-term incentive mechanism combining incentives and restraints; (ii) the Scheme is a practical alternative to share option schemes generally adopted by listed companies on the Stock Exchange as elaborated above and the principles underlying the Scheme are consistent with that of the share option schemes for listed companies on the Stock Exchange; (iii) capital could be raised by the Company immediately once the Placing is completed and capital may further increased through future corporate actions due to the increase in number of Shares, and (iv) the Participants in the Scheme may be able to reap the benefits of participating in the Scheme in light of the generally rosy prospect of the automotive components industry in China as described above, we consider that the terms of the Scheme, hence the Scheme Subscription, are on normal commercial terms and in the interests of the Company and the Shareholders as a whole.
–79– LETTER FROM THE INDEPENDENT FINANCIAL ADVISOR
3. Implementation of the Scheme
(a) Key terms
Class of shares to be issued as : A shares Placing Shares Number of Placing Shares to be : 338,983,050 issued in total Number of Placing Shares to be : 8,838,212 issued to the Scheme Issue price : RMB6.49 per Placing Share Method of issue and method of : The A Shares are to be issued subscription by way of the Placing on a non-public basis and shall be subscribed in cash
(b) Number of A Shares to be issued
Based on the issue price of RMB6.49 per Share (subject to possible adjustment), the issue to approximately 10 qualified investors including the Scheme is expected to be not more than 338,983,050 A Shares, representing 16.57% of the total number of Shares of the Company after the issue. Since only 8,838,212 A Shares out of the total number of 338,983,050 A shares to be issued in the Placing will be subscribed for by the Scheme, representing only 0.43% of the total number of Shares of the Company after the issue. Given that the Shares held under the Scheme does not amount to more than 10% of the Company’s total share capital, this is consistent with the requirements in Chapter 17 and is similar to the corresponding terms set out by other comparable listed companies as disclosed under the subsection headed “4(b) Comparison with other comparable companies” As such, we are of the view that the number of A Shares to be issued under the Scheme is acceptable and fair and reasonable.
(c) Lock-up period
According to the Letter from the Board, the A Shares to be subscribed for in the Fundraising under the Scheme pursuant to this Transaction shall not be transferred within 36 months upon completion of the issue. The Shares to be subscribed for in the Fundraising by other investors pursuant to this Transaction shall not be transferred within 12 months of the end of the issue. Upon completion of the issue, Shares to be acquired by specific investors pursuant to bonus Shares and capitalisation shall comply with the above- mentioned requirements.
We are of the view that the lock-up arrangement in relation to Scheme is in the interests of the Company and the Shareholders as a whole, after taking into account that (i) the lock-up arrangement applies to all Participants of the Scheme; (ii) the lock-up arrangement may help prevent unnecessary volatile movements to the Share price and trading volume of the Company as a result
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of the non-transferability of the Shares for the length of the lock-up period; and (iii) the lock-up arrangement is similar to the corresponding terms of the employee stock ownership plans adopted by the companies being used for comparison with the Company (please see the sub-section below headed “4(b) Comparison with other comparable companies” for details).
(d) Issue price
According to the Letter from the Board, the issue price per Share is equal to 90% of the average trading prices of the A Shares of the Company for 20 trading days preceding the price determination date, i.e. RMB6.49 per Share, which is in line with the requirement set out in the “Measures for the Administration of the Issuance of Securities by Listed Companies” issued by the CSRC, namely, the issue price of a listed company’s non-public offering of shares shall not be less than 90% of the company’s average stock transaction price during the 20 trading days prior to the price determination date. The price determination date is the date on which the resolution of the 11th Board meeting of the third session of the Board of the Company is announced.
The basis of determining the issue price under the Scheme of 20 trading days, while being longer than stipulated under Chapter 17 of the Listing Rules, which requires that the exercise price of options must be at least the higher of: (i) the closing price of the securities as stated in the Stock Exchange’s daily quotations sheet on the date of grant, which must be a business day; and (ii) the average closing price of the securities as stated in the Stock Exchange’s daily quotations sheets for the five business days immediately preceding the date of grant of options, is, however, similar to those of the comparable companies. Hence, we are of the view that the basis of determining the issue price of the A Shares under the Placing for the Scheme is, on balance, fair and reasonable.
–81– LETTER FROM THE INDEPENDENT FINANCIAL ADVISOR
4. Assessment of the Scheme Subscription
(a) Fairness and reasonableness of the issue price
In assessing the fairness and reasonableness of the issue price, we compared the issue price to the historical closing prices of the Company’s A Shares in a 12-month period including the date of signing the Equity Transfer Agreement, i.e. 24 March 2016 (Note 1) (the “Review Period”). The following chart depicts such comparison during the Review Period. The closing prices of the Company’s H Shares (presented in RMB equivalent based on the exchange rate of RMB1.0 to HK$1.2) are also included for reference.
Historical price performance
20.00 18.00 16.00 14.00 12.00 10.00 8.00 6.00 4.00 Share Price (RMB) 2.00 0.00
24/04/201524/05/2015 24/06/201524/07/2015 24/08/201524/09/201524/10/2015 24/11/201524/12/2015 24/01/2016 24/02/201624/03/2016 Date
SSE Closing Price (RMB) Issue Price (RMB) HKEx Share Price
Source: The Hong Kong Stock Exchange and the Shanghai Stock Exchange
Note 1: In respect of the Transaction, the Company’s A Shares were suspended from trading between 18 December 2015 and 7 April 2016, and its H Shares were also suspended from trading from 18 December 2015 to 11 January 2016.
–82– LETTER FROM THE INDEPENDENT FINANCIAL ADVISOR
As illustrated above, during the Review Period, the closing prices of the A Shares recorded lowest closing price of RMB5.83 on 15 September 2015 and highest closing price of RMB17.29 on 4 June 2015. Based on the chart above, the issue price of RMB6.49 per Share represents a premium of approximately 11.3% over and a discount of approximately 62.5% to such lowest closing price and highest closing price, respectively. The average of the closing prices of the A Shares during the Review Period was approximately RMB8.44, and the issue price of RMB6.49 per Share represents a discount of approximately 23% to such average closing price. In addition, it is noted that the price of the Shares has been on a general downward trend since August 2015.
We also compared the issue price to the historical closing prices of three companies, namely, Guangzhou Baiyunshan Pharmaceutical Holdings Company Limited (“Guangzhou Baiyunshan”), China Merchants Bank Company Limited (“China Merchants”) and Shandong Xinhua Pharmaceutical Company Limited (“Shandong Xinhua”) in a 12-month period ending on the dates in which each of the above-mentioned three companies adopted or announced the adoption of its respective employee share ownership plan (i.e. 13 January 2015 for Guangzhou Baiyunshan, 10 April 2015 for China Merchants, and 8 October 2015 for Shandong Xinhua). Please refer to the next sub-section for the reasons why these three companies were chosen for comparison with the Company.
Our findings revealed that the issue price to the average closing price of the Shares in the Review Period for the Company was at a higher discount to that of each of the three companies. In the cases of Guangzhou Baiyunshan and Shandong Xinhua, for example, the discount of the issue price to the average closing price of the shares of the companies in the 12-month period was approximately 9% and 14.75% respectively, as opposed to the Company’s discount of 23%. As for China Merchants, the issue price to the average closing price of the shares resulted in a premium of approximately 14.6%.
In light of the relatively unsatisfactory financial and share price performance of the Company recently, the Company is expected to set the issue price at a higher discount than otherwise would be the case so as to increase the attractiveness of the Scheme Subscription. This, together with the fact that (i) the issue price of the Placing is the same for all Participants of the Scheme; and (ii) the setting of the issue price complies with the guidelines issued by the CSRC, i.e., the issue price of a listed company’s non-public offering of shares shall not be less than 90% of the company’s average stock transaction price during the 20 trading days prior to the price determination date, we are of the view and concur with the Directors that the issue price of RMB6.49 per Share is, on balance, fair and reasonable and in the interests of the Company and the Shareholders as a whole.
–83– LETTER FROM THE INDEPENDENT FINANCIAL ADVISOR
(b) Comparison with other comparable companies
In identifying companies for comparison with the Company, we have set out the following criteria for companies listed on the Shanghai Stock Exchange and/or Shenzhen Stock Exchange which have, since 1 January 2015, (i) announced the adoption of the employee stock ownership plans; (ii) implemented it by way of a private placement of A shares; and (iii) included identified participants who were connected persons. We were able to identify four companies (including the Company) which met the above criteria. We consider that the list of Comparables to be exhaustive and a fair and sufficient sample for our analysis purpose. The length of the review period lasted for over a 12-month period, which is, in our view, a sufficiently long period of time to provide a reasonably well informed view of the Comparables.
(i) Analysis
Table 1: Comparison with other comparable companies
Approximate percentage of discount to the 20 day average closing price of the Announcement Stock code Stock code A shares prior to date of the on the on Shanghai/ the announcement adoption of the Hong Kong Shenzhen date of adoption of employee stock Stock Stock Size of the Issue price employee stock ownership plan Company name Exchange Exchange scheme per A share ownership plan
13 January 2015 Guangzhou Baiyunshan 874 600332:SS RMB505,145,760 RMB23.84 5%
10 April 2015 China Merchants 3968 600036:SS RMB6,000,000,000 RMB13.80 10%
8 October 2015 Shandong Xinhua 719 000756:SZ RMB35,047,584 RMB9.36 7%
25 March 2016 The Company 564 601717:SS RMB57,360,000 RMB6.49 8.7% (Note 2)
Source: Bloomberg
Note 2: As the Company’s A shares were suspended from 18 December 2015 to 7 April 2016, the calculation of the discount percentage is based on the closing prices of the A shares for 20 trading days before suspension.
–84– LETTER FROM THE INDEPENDENT FINANCIAL ADVISOR
It is noted that the issue price of RMB6.49 per Share represents a discount of approximately 8.7% and therefore falls within the range of approximately 5% to 10% of the Comparables.
We have examined the performance of the Company and the Comparables (excluding dividends paid, if any) relative to the performance of the Hang Seng China Enterprises Index (the “HSCEI”) since the dates of their respective last trading days before their respective announcements of the adoption of the employee stock ownership plans. We consider the HSCEI to be an appropriate benchmark for the performance of share prices of the Company and the Comparables since the HSCEI is a market capitalisation weighted index of 50 companies that are listed in Hong Kong and incorporated in China, as are the Company and the Comparables themselves. Neither the Company nor the Comparables, however, are constituents of the HSCEI.
Annualized performance of share price relative to index since last trading day before announcement of the Closing price on last adoption of trading day before employee announcement of the stock adoption of employee Change in Change in ownership Company stock ownership plan share price1 Index value2 plan3
Guangzhou Baiyunshan 12 January 2015 -37.8% -24.6% -10.4%
China Merchants 2 April 2015 -14.3% -28.2% +13.1%
Shandong Xinhua 23 July 2015 -1.2% -23.1% +32.4%
The Company 17 December 20154 -8.4% -5.9% -7.2%
1 Source: Bloomberg 2 Source: Bloomberg 3 Estimated by Central China International Capital Limited 4 As mentioned before, the Company’s A Shares were suspended from trading on 18 December 2015.
–85– LETTER FROM THE INDEPENDENT FINANCIAL ADVISOR
The Company has underperformed the HSCEI by an annualised rate approximately 7.2% since the closing price on the last trading day before the adoption. This relative decline is less than the underperformance shown by Guangzhou Baiyunshan of 10.4%. The Company has performed worse than China Merchants and Shandong Xinhua, which have outperformed the HSCEI on an annualized basis by 13.1% and 32.4%, respectively.
We believe that the relative performance of the Comparables shown in the table above indicates that the adoption of employee stock ownership plans by the Comparables has not led to material underperformance of the HSCEI by the Comparables as a group. Whilst the amount of share price data, since its announcement, available for the Company to date is less than the amount of data available for the Comparables, we consider that the relative performance of the Comparables indicates the adoption by the Company of the Scheme would not of itself a reason to expect share price underperformance by the Company.
Taking into account that (i) the issue price of the Placing is the same for all Participants of the Scheme; (ii) the determination of the issue price of the A Shares under the Placing for the Scheme is (a) similar to other comparable employee stock ownership plans; and (b) in compliance with the administrative measures issued by the CSRC; (iii) the issue price of RMB6.49 per A Share, which is 90% of the average trading price of the Shares over 20 trading days, would help incentivise employees over medium to long-term; and (iv) the above-mentioned 8.7% discount falls within the range of approximately 5% to 10% of the Comparables, we are of the view that the terms of the Scheme is on normal commercial terms, are fair and reasonable and in the interests of the Company and the Shareholders as a whole.
In summary, the proposed implementation of the Scheme will not have significant negative impact on the Company’s Share price performance, and the issue price of the Placing has also been fairly determined. In addition, all participating employees, including the Participants under the Scheme Subscription, will be subject to identical terms such as issue price as well as lock-up arrangements. For the above reasons, we are of the view that the terms of the Scheme and the Scheme Subscription have been fairly and reasonably determined.
(ii) Lock-up period
According to the Guiding Opinions, the holding period shall not be less than 36 months for the employee stock ownership scheme which is implemented by way of non-public issuance, commencing from the date when the listed company announces the ownership transfer of the underlying shares to the relevant installment of the employee stock ownership scheme.
–86– LETTER FROM THE INDEPENDENT FINANCIAL ADVISOR
We have compared the lock-up arrangement of the Company and with that of the Comparables and noted that while the contents of the arrangement may be different among each other, the length of the lock-up period of each of the Comparables is 36 months, hence in compliance with the CSRC’s requirements. As mentioned before, the imposition of a lock-up period of 36 months would serve to ease the burden on the part of the Company by incurring the reward compensation by phase. Such spread over 36 months’ time before the new A Shares can be fully unlocked would further help the Company to retain the dedicated and loyal service of the Participants in the long run.
5. Participants in the Scheme Subscription
According to the Letter from the Board, the number of employees participating in the Scheme shall be no more than 354, and the actual number of the employees participating in the Scheme and the subscription amount shall be subject to the actual payment of subscription prices by such employees.
The percentages of the directors (excluding independent directors), supervisors, senior management and other employees who maintain the employment contracts with the Company are as below:
Capital Holder Title contribution Percentage (RMB10,000) (%)
Directors, Fu Zugang General Manager 200 3.49 supervisors, Wang Xinying Director 150 2.62 senior Guo Haofeng Director 150 2.62 management Liu Qiang Director, Secretary of 10 0.17 Committee for Discipline Inspection Li Chongqing Chairman of the 150 2.62 Supervisory Board, Trade Union Chairman Ni Heping Employee Representative 60 1.05 Supervisor Xu Mingkai Employee Representative 30 0.52 Supervisor Zhang Jun Employee Representative 20 0.35 Supervisor Zhou Rong Supervisor 50 0.87 Liu Fuying Supervisor 50 0.87 Other employees 4,866 94.83
Total 5,736 100.00%
Note: The percentage of the units of Scheme actually held by the holders of the Scheme will be subject to the number of participants and payment of their subscription prices.
–87– LETTER FROM THE INDEPENDENT FINANCIAL ADVISOR
6. Proposed use of proceeds
Based on the Letter from the Board, the Company will invest in the relevant projects based on the sequence and amount below and the actual circumstances of each project upon the availability of proceeds from the Fundraising.
Proposed use of No. proceeds Amount Entity Means (RMB ten thousand)
1 Cash consideration 165,000 The Company N/A to be paid for this Transaction 2 Partial payment to 6,000 The Company N/A intermediaries 3 Replenishment of 18,000 N/A liquid capital of Target Companies 3.1 ASIMCO NVH 10,000 ASIMCO NVH Capital increase 3.2 ASIMCO Shanxi 8,000 ASIMCO Shanxai Capital increase 4 ASIMCO Anhui 25,000 ASIMCO NVH Capital Industrial Park Increase Project 5 Motor component 6,000 ASIMCO Shanxi Capital intelligent Increase processing project
Total 220,000
When the proceeds from the Fundraising become available, the Company will use them as set out in the above table. In the event that the availability of the net proceeds from the Fundraising is not consistent with the implementation schedule of the projects, the Company may utilize other funds based on the actual circumstances of the projects and swap such funds with the proceeds raised when they are available.
We have reviewed the information provided to us by the Company on its proposed use of proceeds and funding needs, and are satisfied with the bases of the Company’s allocated amounts for the business activities in the above table after reviewing such information. Accordingly, we are of the view that the use of proceeds from the Placing is in the interest of the Company and the Shareholders as a whole. We also wish to highlight that capital will be raised immediately once the
–88– LETTER FROM THE INDEPENDENT FINANCIAL ADVISOR
Placing is completed. By contrast, capital will only be raised from a share option scheme under Chapter 17 of the Listing Rules when the relevant options are exercised.
7. Effect of the Scheme Subscription on the Company’s shareholding structure
According to the Letter from the Board, the Company did not conduct any fundraising on issue of any equity securities in the 12 months immediately preceding the Latest Practicable Date.
Table 2 below is for illustrative purposes only and sets out the shareholding structure of the Company (i) before the issue of the Consideration Shares and the Placing Shares; (ii) after the issue of the Consideration Shares but before the issue of the Placing Shares; and (iii) after the issue of the Consideration Shares and the Placing Shares.
Table 2: Shareholding structure of the Company
After the issue of the Before the issue of the Consideration Shares but After the issue of the Class of Consideration Shares and before the issue of the Consideration Shares and Name shares the Placing Shares Placing Shares the Placing Shares %of %of %of No. of Shares No. of Shares No. of Shares Shares held in issue Shares held in issue Shares held in issue
Henan Machinery and A share 521,087,800 32.14 521,087,800 30.53 521,087,800 25.47 Equipment Investment Group Co Ltd National Council for Social H share 23,709,400 1.46 23,709,400 1.39 23,709,400 1.16 Security Fund CSI Capital Management H share 22,402,600 1.38 22,402,600 1.31 22,402,600 1.09 Limited ASIMCO China A share 85,803,432 5.03 85,803,432 4.19
Subscribers of the Fundraising • The Scheme A share 8,838,212 0.43 • Other subscribers A share 330,144,838 16.14
Other public shareholders 1,053,922,200 65.02 1,053,922,200 61.74 1,053,922,200 51.51
Total 1,621,122,000 100 1,706,925,432 100 2,045,908,482 100
As set out in the above table, the shareholding of the existing public Shareholders will be diluted from approximately 65.02% (i.e., before the issue of the Consideration Shares and the Placing Shares) to approximately 51.51% (i.e. after the issue of the Consideration Shares and the Placing Shares). Although the shareholding of the existing public Shareholders will be diluted by approximately 13.51% (i.e. 65.02% – 51.51%) after the Transaction and the Placing, the extent of such dilution must be balanced by the fact that the number of A Shares attributable to the Scheme Subscription represents only approximately 0.43% of the total
–89– LETTER FROM THE INDEPENDENT FINANCIAL ADVISOR enlarged issued share capital of the Company upon completion of the issue. As the Scheme will cause approximately 0.28% dilution (i.e. (0.43/4.19+0.43+16.14)x13.51) to the existing public Shareholders’ interest, we believe this extent of dilution is acceptable in view of the overall benefits of the Scheme. Given that the Scheme will have long-term benefits to the Company by motivating the employees of the Group and enhancing their sense of responsibility towards the Company as well as maintaining the stability of the workforce and the effectiveness of strategies implemented by the Company, which is in the interests of the Company and the Shareholders as a whole.
8. Possible financial effects of the Scheme Subscription
Assets and Liabilities
According to the AR 2015, the audited consolidated total assets and total liabilities of the Group as at 31 December 2015 were approximately RMB12,049,487,000 and approximately RMB2,427,028,000 respectively. Upon completion of the Scheme Subscription, assuming full subscription of the Shares, the cash level of the Group will be increased by approximately RMB57.36 million. As such, the Scheme is expected to have a positive impact on the assets of the Group. On the other hand, there should be no material effect on the liabilities of the Group under Scheme.
Working capital
As disclosed in the AR 2015, the aggregate balance of cash at bank and on hand of the Group as at 31 December 2015 was RMB2,011,221,000. As the Scheme Subscription will be fully settled in cash, upon its completion, the cash position of the Group would be improved by approximately RMB57.36 million, the Scheme is expected to have a positive impact on the working capital of the Group.
Gearing ratio
Similarly, Group’s the gearing ratio (defined as total liabilities divided by total assets), as disclosed in the AR 2015, was approximately 20%. Assuming the total liabilities of the Group remain the same, the cash level of the Group will be increased by approximately RMB57.36 million as a result of the Scheme Subscription. As such, the gearing ratio of the Group will be improved.
It should be noted that the above analyses are for illustrative purpose only and do not purport to represent how the financial position of the Group will be upon completion of the Scheme Subscription.
–90– LETTER FROM THE INDEPENDENT FINANCIAL ADVISOR
RECOMMENDATIONS
Having considered the principal factors discussed above and, in particular:
(i) the outlook of the automotive components industry in the PRC appears to be promising;
(ii) the Scheme is a long-term incentive and restriction scheme to (a) fully motivate the employee of the Group; (b) enhance their sense of responsibility; and (c) maintain the stability of the workforce and the effectiveness of its implementation of strategies;
(iii) the experience and potential contribution provided by the Participants that could enhance the sustainable growth of the Company moving forward;
(iv) the similar employee stock ownership plans adopted by other listed companies in China;
(v) the issue price of RMB6.49 per Share (subject to Price Adjustment) is within the range of closing prices of the A Shares during the Review Period;
(vi) The percentage of discount is within the range of the Comparables and there is no evidence that the adoption of the Scheme, hence Scheme Subscription, would lead to the Company’s Share price to underperform;
(vii) the lock-up period for a term of 36 months would help the Company to retain dedicated and performing connected Participants; and
(viii) the acceptable potential dilution to shareholdings of the Independent Shareholders, we consider that the Scheme Subscription, while not in the ordinary and usual course of the Group’s business, is on normal commercial terms, and that the terms of the Scheme Subscription are fair and reasonable. Therefore the Scheme Subscription is in the interest of the Company and the Shareholders as a whole. Public Shareholders are, however, reminded to note the potential dilution effect of the Placing on their shareholding interests in the Company.
–91– LETTER FROM THE INDEPENDENT FINANCIAL ADVISOR
Accordingly, we advise the Independent Board Committee to recommend the Independent Shareholders, and we also recommend the Independent Shareholders, to vote in favour of the resolutions to be proposed at the AGM and the H Shareholders class meeting to approve, among others, the Connected Transaction, hence, the Scheme Subscription.
Yours faithfully For and on behalf of Central China International Capital Limited Billy C. W. Cheung General Manager
Note: Mr. Cheung is licensed by the Securities and Futures Commission of Hong Kong as a Responsible Officer and a Principal licence holder of Central China International Capital Limited. He has over 20 years’ experience in the financial services industry in Hong Kong.
–92– NOTICE OF 2015 ANNUAL GENERAL MEETING
Zhengzhou Coal Mining Machinery Group Company Limited 鄭州煤礦機械集團股份有限公司 (A joint stock limited company incorporated in the People’s Republic of China with limited liability) (Stock Code: 00564)
NOTICE OF ANNUAL GENERAL MEETING
NOTICE IS HEREBY GIVEN THAT the 2015 Annual General Meeting (the “AGM”) of Zhengzhou Coal Mining Machinery Group Company Limited (the “Company”) will be held at the Convention Centre of Zhengzhou Coal Mining Machinery Group Company Limited, No. 167, 9th Street, Econ-Tech Development Zone, Zhengzhou, Henan Province, the PRC at 9:00 a.m. on 13 June 2016 for the following purposes:
ORDINARY RESOLUTIONS
1. To consider and approve the report of the board of directors of the Company for the year 2015.
2. To consider and approve the report of the board of supervisors of the Company for the year 2015.
3. To consider and approve the annual report of the Company for the year 2015.
4. To consider and approve the report of the independent non-executive directors on their performance of the Company for the year 2015.
5. To consider and approve the re-appointment of BDO China Shu Lun Pan Certified Public Accountants LLP and Deloitte Touche Tohmatsu as the PRC auditor and the international auditor of the Company, respectively, for the year 2016; and the proposal in relation to the remuneration of the Company’s PRC and international auditors for the year 2016, which amounts to RMB680,000 and RMB2,300,000, respectively. To authorize the management of the Company to negotiate and determine the relevant fees with the financial and audit firm based on the scope of the group and the changes in audit volume.
6. To consider and approve the provision of repurchase guarantee by the Company to customers under finance lease business.
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7. To consider and approve the use of self-owned idle funds and idle proceeds from the H shares of the Company for the investment of wealth management products issued by financial institutions.
8. To consider and approve the proposal on the profit distribution plan of the Company for the year 2015, namely the proposal for payment of a final dividend of RMB0.08 per ten shares (inclusive of tax) for the year ended 31 December 2015.
SPECIAL RESOLUTIONS
9. To consider and approve the fulfilment of the Company of the conditions in respect of the purchase of assets by share issue and cash payment and the fundraising.
10. To consider and approve that the purchase of assets by share issue and the fundraising of the Company constitutes a connected transaction.
11. To consider and approve the proposal of purchase of assets by share issue and cash payment and the fundraising (connected transaction) of the Company.
11.01 Counterparty of the transaction 11.02 Subject of the transaction 11.03 Means of transaction 11.04 Basis of pricing 11.05 Payment methods 11.06 Price adjustment proposals 11.07 Lock-up period arrangements 11.08 Expected proceeds from the fundraising and proportion to the total transaction amount 11.09 Methods of issue, ways of determining the share price and basis date of the fundraising 11.10 Targets, lock-up period and use of proceeds
12. To consider and approve the feasibility of the use of proceeds from the fundraising.
13. To consider and approve that the material asset reorganization of the Company satisfies the requirements of Article 4 of the Regulations Concerning the Standardization of Certain Issues of Material Asset Reorganization of Listed Companies《關於規範上市公司重大資產重組若干問 ( 題的規定》).
14. To consider and approve that the material asset reorganization of the Company satisfies the requirements of Article 43 of the Administrative Measures for Material Asset Reorganization of Listed Companies《上市公司 ( 重大資產重組管理辦法》).
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15. To consider and approve that the material asset reorganization of the Company does not constitute a back-door listing as specified in Article 13 of the Administrative Measures for Material Asset Reorganization of Listed Companies.
16. To consider and approve the conditional Agreement on Equity Transfer and Purchase of Assets by Cash Payment and Share Issue《股權轉讓及以現金、發 ( 行股份購買資產協定》) entered into between the Company and its counterparty.
17. To consider and approve the authorization of the board of directors of the Company to handle the matters in relation to the purchase of assets by share issue and cash payment and the fundraising (connected transaction) of the Company.
18. To consider and approve the description in respect of the completeness and compliance of legal procedures and the validity of the legal documents submitted in relation to the material asset reorganization of the Company.
19. To consider and approve the Employee Share Ownership Scheme of Zhengzhou Coal Mining Machinery Group Company Limited (Draft)《鄭州煤 ( 礦機械集團股份有限公司員工持股計劃（草案）》) and its summary.
20. To consider and approve the conditional Share Subscription Agreement《股 ( 份認購協議》) entered into between Zhengzhou Coal Mining Machinery Group Company Limited and Huatai Securities (Shanghai) Asset Management Co. Ltd.
21. To consider and approve the authorization of the board of directors of the Company to handle the matters in relation to the Employee Share Ownership Scheme of the Company.
22. To consider and approve the Report on the Purchase of Assets by Share Issue and Cash Payment and the Fundraising (Connected Transaction) of Zhengzhou Coal Mining Machinery Group Company Limited (Draft)《鄭州煤 ( 礦機械集團股份有限公司發行股份及支付現金購買資產並募集配套資金暨關聯交 易報告書（草案）》) and its summary.
23. To consider and approve the conditional Supplemental Agreement of the Agreement on Equity Transfer and Purchase of Assets by Cash Payment and Share Issue《股權轉讓及以現金、發行股份購買資產協議之補充協議》 ( ) entered into between the Company and its counterparty.
24. To consider and approve the independency of the appraiser, reasonableness of the assumptions used in the evaluation, relevance of the evaluation methods and evaluation purposes and fairness of the appraised price.
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25. To consider and approve the audit, review and evaluation reports on the purchase of assets by share issue and cash payment and the fundraising (connected transaction) of the Company.
26. To consider and approve the dilution effect of the reorganization on the current returns of the Company and the remedial measures adopted by the Company.
27. To consider and approve the letter of undertaking issued by all the directors and senior management members of the Company on the remedial measures adopted in relation to the dilution of current returns by the material asset reorganization of the Company.
28. To consider and approve the formulation of the dividend distribution plan for shareholders of the Company for the next three years (2016-2018).
29. To consider and approve the amendments to the Articles of Association of Zhengzhou Coal Mining Machinery Group Company Limited《鄭州煤礦機械 ( 集團股份有限公司章程》).
Notes:
(1) The form of proxy and the reply slip for the AGM as well as the 2015 Annual Report of the Company will be dispatched and posted in due course. Any shareholders of the Company (“Shareholders”) who intend to appoint a proxy to attend the AGM should read the 2015 Annual Report of the Company which is posted on the website of The Stock Exchange of Hong Kong Limited (“Hong Kong Stock Exchange”) and the Company’s website or dispatched to the Shareholders concerned. The 2015 Annual Report consists of the 2015 Report of the Board of Directors, the 2015 Report of the Board of Supervisors and the audited financial statements and the auditor’s report for the year 2015.
(2) All votes of resolutions at the AGM will be taken by poll pursuant to the Rules Governing the Listing of Securities on the Hong Kong Stock Exchange (the “Listing Rules”) and the results of the poll will be published on the websites of the Hong Kong Stock Exchange (www.hkexnews.hk) and the Company (www.zzmj.com) in accordance with the Listing Rules.
(3) The register of members of the Company will be closed from Saturday, 14 May 2016 to Monday, 13 June 2016 (both days inclusive), during which period no transfer of shares of the Company will be registered. Any H Shareholders of the Company who intend to attend and vote at the AGM but have not yet registered are required to deposit the transfer documents together with the relevant share certificates at the Company’s H share registrar, Computershare Hong Kong Investor Services Limited, at Shops 1712–1716, 17th Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong on or before 4:30 p.m. on Friday, 13 May 2016.
Upon the approval of the resolution in connection with the declaration of dividends at the 2015 AGM, the dividends will be paid to the Shareholders whose names appear on the register of members of the Company after the close of market on Wednesday, 22 June 2016. The register of members of the Company will be closed from Friday, 17 June 2016 to Wednesday, 22 June 2016 (both days inclusive), during which period no transfer of shares of the Company will be registered. Any H Shareholders of the Company who wish to be entitled to receive the final dividends but have not registered are required to deposit the transfer documents together with the relevant share certificates at the Company’s H share registrar, Computershare Hong Kong Investor Services Limited, at Shops 1712–1716, 17th Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong on or before 4:30 p.m. on Thursday, 16 June 2016.
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(4) Any Shareholders entitled to attend and vote at the AGM can appoint one or more proxies to attend and vote at the AGM on his/her/its behalf. A proxy need not be a Shareholder of the Company. If more than one proxy is so appointed, the appointment shall specify the number and type of shares in respect of which each proxy is so appointed.
(5) Shareholders shall appoint their proxies in writing. The form of proxy shall be signed by the Shareholder or his/her/its attorney who has been duly authorized in writing. If the Shareholder is a corporation, the form of proxy shall be affixed with the corporation’s seal or signed by its director, or its attorney duly authorized in writing. If the form of proxy is signed by the attorney of the Shareholder, the power of attorney or other authorization document under which it is signed shall be notarially certified. For H shareholders, to be valid, the aforementioned documents must be lodged with the H share registrar, Computershare Hong Kong Investor Services Limited, at 17M Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong not less than 24 hours before the time appointed for holding the AGM or any adjournment thereof. The completion and return of the form of proxy shall not preclude a Shareholder of the Company from attending and voting in person at the meeting and, in such event, the instrument appointing a proxy shall be deemed to be revoked.
(6) Shareholders who intend to attend the AGM (in person or by proxy) shall complete and return the reply slip enclosed with the AGM notice to the H share registrar of the Company, Computershare Hong Kong Investor Services Limited, at 17M Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong on or before Tuesday, 24 May 2016.
(7) Shareholders shall produce their identification documents when attending the AGM.
(8) If a proxy attends the AGM on behalf of a Shareholder, he/she should produce his/her identification document and the power of attorney or other documents signed by the appointer or his/her/its attorney, which specifies the date of its issuance. If a representative of a corporate shareholder attends the AGM, such representative shall produce his/her identification document and the notarially certified copy of the resolution passed by the board of directors or other authority or the notarially certified copy of any authorization documents issued by such corporate shareholder.
(9) The AGM is expected to last for half a day. Shareholders who attend the AGM (in person or by proxy) shall bear their own travelling, accommodation and other expenses.
(10) The contacts of the Company are as follows:
Address: Zhengzhou Coal Mining Machinery Group Company Limited, No. 167, 9th Street, Econ-Tech Development Zone, Zhengzhou, Henan Province, PRC Postal Code: 450016 Telephone: 86-371-6789 1017 Contact Person: Ms. Tao Xiaozhou Facsimile: 86-371-6789 1000
By Order of the Board Zhengzhou Coal Mining Machinery Group Company Limited 鄭州煤礦機械集團股份有限公司 JIAO Chengyao Chairman
Zhengzhou, PRC, 28 April 2016
As at the date of this notice, the executive directors of the Company are Mr. JIAO Chengyao, Mr. XIANG Jiayu, Mr. WANG Xinying, Mr. GUO Haofeng and Mr. LIU Qiang and the independent non-executive directors are Ms. LIU Yao, Mr. JIANG Hua, Mr. LI Xudong and Mr. WU Guangming.
–97– NOTICE OF 2016 FIRST H SHAREHOLDERS CLASS MEETING
Zhengzhou Coal Mining Machinery Group Company Limited 鄭州煤礦機械集團股份有限公司 (A joint stock limited company incorporated in the People’s Republic of China with limited liability) (Stock Code: 00564)
NOTICE OF 2016 FIRST H SHAREHOLDERS CLASS MEETING
NOTICE IS HEREBY GIVEN THAT the 2016 first H Shareholders Class Meeting (the “2016 First H Shareholders Class Meeting”) of Zhengzhou Coal Mining Machinery Group Company Limited (the “Company”) will be held at the Convention Centre of Zhengzhou Coal Mining Machinery Group Company Limited, No. 167, 9th Street, Econ-Tech Development Zone, Zhengzhou, Henan Province, the People’s Republic of China (“PRC”) at 9:00 a.m. on 13 June 2016 for the following purposes:
SPECIAL RESOLUTION
1. To consider and approve the proposal of purchase of assets by share issue and cash payment and the fundraising (connected transaction) of the Company.
1.01 Counterparty of the transaction 1.02 Subject of the transaction 1.03 Means of transaction 1.04 Basis of pricing 1.05 Payment methods 1.06 Price adjustment proposals 1.07 Lock-up period arrangements 1.08 Expected proceeds from the fundraising and proportion to the total transaction amount 1.09 Methods of issue, ways of determining the share price and basis date of the fundraising 1.10 Targets, lock-up period and use of proceeds
2. To consider and approve the Report on the Purchase of Assets by Share Issue and Cash Payment and the Fundraising (Connected Transaction) of Zhengzhou Coal Mining Machinery Group Co., Ltd. (Draft).
3. To consider and approve the conditional Agreement on Equity Transfer and Purchase of Assets by Cash Payment and Share Issue entered into between the Company and its counterparty.
–98– NOTICE OF 2016 FIRST H SHAREHOLDERS CLASS MEETING
4. To consider and approve the conditional Supplemental Agreement of the Agreement on Equity Transfer and Purchase of Assets by Cash Payment and Share Issue entered into between the Company and its counterparty.
Notes:
(1) All votes of resolutions at the 2016 First H Shareholders Class Meeting will be taken by poll pursuant to the Rules Governing the Listing of Securities on the Hong Kong Stock Exchange (the “Listing Rules”) and the results of the poll will be published on the websites of the Hong Kong Stock Exchange (www.hkexnews.hk) and the Company (www.zzmj.com) in accordance with the Listing Rules.
(2) The register of members of the Company will be closed from Saturday, 14 May 2016 to Monday, 13 June 2016 (both days inclusive), during which period no transfer of shares of the Company will be effected. Any H Shareholders of the Company who intend to attend and vote at the 2016 First H Shareholders Class Meeting but have not yet registered are required to deposit the transfer documents together with the relevant share certificates at the Company’s H Share registrar, Computershare Hong Kong Investor Services Limited, at Shops 1712–1716, 17th Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong no later than 4:30 p.m. on Friday, 13 May 2016.
(3) Any Shareholders entitled to attend and vote at the 2016 First H Shareholders Class Meeting can appoint one or more proxies to attend and vote at the H Shareholders Class Meeting on his/her behalf. A proxy need not be a Shareholder of the Company. If more than one proxy is so appointed, the appointment shall specify the number and type of shares in respect of which each proxy is so appointed.
(4) Shareholders shall appoint their proxies in writing. The form of proxy shall be signed by the Shareholder or his/her/its attorney who has been authorized in writing. If the Shareholder is a corporation, the form of proxy shall be affixed with the corporation’s seal or signed by its director, or its attorney duly authorized in writing. If the form of proxy is signed by the attorney of the Shareholder, the power of attorney or other authorization document shall be notarized. For shareholders of H shares, the aforementioned documents must be lodged with the H Share registrar, Computershare Hong Kong Investor Services Limited, at 17M Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong not less than 24 hours before the time appointed for holding the 2016 First H Shareholders Class Meeting or any adjournment thereof in order for such documents to be valid. Completion and delivery of the form of proxy shall not preclude a Shareholder of the Company from attending and voting in person at the meeting and, in such event, the instrument appointing a proxy shall be deemed to be revoked.
(5) Shareholders who intend to attend the 2016 First H Shareholders Class Meeting (in person or by proxy) shall complete and deliver the reply slip of 2016 First H Shareholders Class Meeting enclosed to the H Share registrar of the Company, Computershare Hong Kong Investor Services Limited, at 17M Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong on or before Tuesday, 24 May 2016.
(6) Shareholders shall produce their identification documents when attending the 2016 First H Shareholders Class Meeting.
(7) If a proxy attends the 2016 First H Shareholders Class Meeting on behalf of a Shareholder, he/she should produce his/her identification document and the power of attorney or other documents signed by the appointer or his/her attorney, which specifies the date of its issuance. If a representative of a corporate Shareholder attends the 2016 First H Shareholders Class Meeting, such representative shall produce his/her identification document and the notarized copy of the resolution passed by the board of directors or other authority or other notarized copy of any authorization documents issued by such corporate Shareholder.
(8) The 2016 First H Shareholders Class Meeting is expected to last for half a day. Shareholders who attend the H Shareholders Class Meeting (in person or by proxy) shall bear their own travelling, accommodation and other expenses.
–99– NOTICE OF 2016 FIRST H SHAREHOLDERS CLASS MEETING
(9) The contact of the Company:
Address: Zhengzhou Coal Mining Machinery Group Company Limited, No. 167, 9th Street, Econ-Tech Development Zone, Zhengzhou, Henan Province, The People’s Republic of China Postal Code: 450016 Telephone: (86371) 6789 1017 Contact Person: Ms. TAO Xiaozhou Facsimile: 86-371-6789 1000
By order of the Board Zhengzhou Coal Mining Machinery Group Company Limited 鄭州煤礦機械集團股份有限公司 Jiao Chengyao Chairman
Zhengzhou, PRC, 28 April 2016
As at the date of this notice, the executive directors of the Company are Mr. JIAO Chengyao, Mr. XIANG Jiayu, Mr. WANG Xinying, Mr. GUO Haofengand Mr. Liu Qiangand the independent non-executive directors are Ms.LIU Yao, Mr. JIANG Hua,Mr.LI Xudong and Mr. WU Guangming.
– 100 – APPENDIX I INFORMATION ABOUT THE TARGET COMPANIES — 1. GLOSSARY OF TECHNICAL TERMS
1. GLOSSARY OF TECHNICAL TERMS
“brake” a device for slowing or stopping an automobile through friction, which is controlled by the pedal in the cabin
“cast iron” a generic term describing a family of iron alloys containing 1.8-4.5% carbon. Cast iron is usually made into specified shapes, called castings, for direct use or for processing by machining, thermal treating or assembly
“casting” a manufacturing process whereby liquid iron is poured into a mould that contains a hollow cavity of desired shape; the process is completed once the liquid iron cools and forms the desired shape and is then broken out of the mould
“cutting” the separation of a physical object or portion thereof into two or more portions through the application of an acutely directed force
“GFA” gross floor area
“heat treatment” a group of industrial and metalworking processes used to alter the physical, and sometimes chemical, properties of a material that involve the use of heating or chilling to extreme temperatures to achieve the hardening or softening of a material
“ISO9001” ISO9001 certification is an internationally recognised standard for quality business management. As a family member of the ISO 9000, it sets out requirements for ongoing improvement of product quality and services and design
“ISO9002” ISO9002 certification is an internationally recognised standard for quality assurance model. As a family member of the ISO 9000, it sets out the quality system requirements for production, installation and servicing
– I-1 – APPENDIX I INFORMATION ABOUT THE TARGET COMPANIES — 1. GLOSSARY OF TECHNICAL TERMS
“ISO14001” ISO 14001 – Environmental Management Standard is the internationally recognised standard for the environmental management of businesses. It aims at recognising the desirable behavior of businesses concerning the environment. It prescribes controls for an encompassing range of corporate activities which include the use of natural resources, handling and treatment of waste and energy consumption
“ISO/TS16949” ISO/TS 16949 certification is an international quality management standard for automobile supply chains published by the International Automotive Task Force. It defines the quality system requirements for the design/development, production, installation, and servicing of automotive-related products
“NVH” noise, vibration and harshness, the study and modification of the noise and vibration characteristics of vehicles, particularly cars and trucks
“OEM” original equipment manufacturing, whereby products are manufactured in whole or in part in accordance with the customers’ specifications and are marketed under the customers’ own brand names
“OHSAS18001” the requirements for occupational health and safety management system developed for managing the occupational health and safety risks associated with a business
“polishing” a finishing process for smoothing a part’s surface using an abrasive and a work wheel
“tumbling” a technique for smoothing and polishing a rough surface on relatively small parts in which a horizontal barrel is filled with the parts and tumbling media
– I-2 – APPENDIX I INFORMATION ABOUT THE TARGET COMPANIES — 2. RISK FACTORS
2. RISK FACTORS
When considering the Acquisition, you should carefully consider the risk factors set out below and the other data set forth in this circular. The business, financial condition, results of operations and prospects of the Company could be adversely affected by any of the following events. The risks and uncertainties described below are not exhaustive of all the risks faced by the Company. Any other risk and uncertainties which the Company is not aware of or deems to be immaterial currently may also have an adverse impact on the business, financial condition, results of operations and prospects of the Company.
The Acquisition involves various risks, many of which are beyond the control of the Company. Such risks may be categorized into: (i) risks relating to the Transaction; (ii) risks relating to the industry the Target Companies operate in; (iii) risks relating to the operations of the Target Companies; (iv) risks relating to the PRC; and (v) risks relating to this circular.
RISKS RELATING TO THE TRANSACTION
The completion of the Transaction is subject to the satisfaction of certain conditions to the completion, and the Transaction may or may not be completed as expected or at all.
The completion of the Transaction is subject to the satisfaction of the effectiveness and completion conditions as set out in the Equity Transfer Agreement. For further details, please refer to “Letter from the Board – (I) Very substantial acquisition and connected transaction – 2. Equity Transfer Agreement” in this circular. Certain conditions to such completion involve the action and decision of third parties, including the relevant governmental and regulatory authorities, and the satisfaction of these conditions to completion are beyond the control of the parties to the Equity Transfer Agreement. Whether and when the approval, clearance or permission can be obtained for the Transaction are uncertain. Hence, the final successful implementation of the Transaction is exposed to the risk of approval. There is no guarantee that all or part of the conditions to completion as set out in the Equity Transfer Agreement can be satisfied or the Transaction will be completed as expected or at all. During the review and approval of the Transaction, the parties to the Transaction may need to refine the proposal of the Transaction continuously as required by the regulatory authorities. If the parties to the Transaction fail to reach any consensus on the measures for refining the proposals of the Transaction, the Sellers of the Transaction and/or the Company may choose to terminate the Transaction. Although the Company has established a set of stringent inside information management system and also tried to keep the inside information to as few people as possible during the negotiation process of the Transaction so as to minimize the transmission of inside information, the Company cannot rule out the possibility that the relevant institutions or persons may conduct insider dealing by making use of the inside information about the Transaction. There is a risk that the listed company may have to suspend, terminate or cancel the Transaction due to irregular fluctuations in share prices or trading irregularities which may be associated with insider dealings.
– I-3 – APPENDIX I INFORMATION ABOUT THE TARGET COMPANIES — 2. RISK FACTORS
There may not be sufficient proceeds from the Fundraising, and the Fundraising may not be implemented.
Pursuant to this Transaction, the Company has proposed to issue shares specifically to not more than 10 qualified investors including the ESO Scheme of the Company for raising not more than RMB2,200,000,000, the proceeds of which shall not be more than 100% of the consideration of this Transaction. The proceeds from the Fundraising shall be used for payment of the cash consideration for the Transaction and partial payment to intermediaries, replenishment of the working capital of the Target Companies, construction of the ASIMCO NVH Industrial Park Project and the motor component intelligent processing project. In particular, the subscription amount of the Fundraising under the ESO Scheme of the Company shall be no more than RMB57.36 million. The Company and Huatai Securities (Shanghai) Asset Management Co. Ltd., the trustee of the ESO Scheme of the Company, have entered into the Conditional Share Subscription Agreement entered into by and between Zhengzhou Coal Mining Machinery Group Company Limited and Huatai Securities (Shanghai) Asset Management Co. Ltd. The Fundraising, which is still subject to the approval of the CSRC, is exposed to a certain degree of approval risk and may be affected by the volatility of the stock market and the expectation of investors. It remains uncertain as to whether the Fundraising can be implemented successfully or whether sufficient funds can be raised.
The Company is exposed to the risk of integration.
Upon the completion of the Transaction, coal mining machinery and automotive components will become the dual principal operations of the Company. While the Company will maintain its leading position in the comprehensive coal mining hydraulic roof support industry, the Company will enter into the automotive components industry, which is characterized by larger market capacity and less cyclical risks, through the Transaction. Although the Target Companies to be acquired have leading edges in terms of technique, talents and sales, it remains uncertain as to whether the Company can continue to successfully complete its transition to dual principal operations through organic growth and external development after the completion of the Transaction. Upon the completion of the Transaction, to reap the synergistic benefits, certain degree of optimization and integration will be required on the customer resources management, marketing, technical research and development, financial accounting and human resources management of the Company and Target Companies. However, it is uncertain as to whether the integration can be successfully implemented. Such integration may not be able to achieve the expected results, and may even have adverse impact on the existing operation of the Target Companies and the Company.
The industry which the Company operated historically is different from that the Target Companies operate. To successfully integrate the operations of the Target Companies into the Company, the Company may need to, among others, (i) hire, train or retain competent staff members; (ii) develop, adopt and maintain the standards, control measures, procedures and policies appropriate to the operations of the Target Companies; and (iii) retain the existing suppliers and customers of the Target Companies. Moreover, there is no guarantee that the Company will be able to implement the original business
– I-4 – APPENDIX I INFORMATION ABOUT THE TARGET COMPANIES — 2. RISK FACTORS strategies of the Target Companies in an accurate and effective manner. The Company may not be able to integrate or operate the operations of the Target Companies successfully or make the best judgement when operating those operations. If the expected benefits fail to realize or the relevant risk of integration is not properly managed, the Company may risk losing its major employees, customers and/or key connections, which may have material and adverse effect on the financial conditions and results of operations of the Company.
Facing the risk of integration, below please see the details of the integration plan of the Company:
(I) Business and technological research and development
Upon the completion of the Transaction, on the basis of maintaining the operational independence of the Target Companies, the Company enhances the complementation and synergy between mining machinery and automotive components. The Company will take the advantage of the Company on financing and leverage on the management rationale and technological advantage of ASIMCO to continuously expand its commitment in automotive components industry. Target Companies currently own six independent R&D centers and hold top research and development and production technology of automotive core components across China. Upon the completion of this acquisition, the Company will, according to market demand, strengthen its advantage in technology and products by expanding the ongoing commitment in innovation and research and development of new products of the Target Companies to keep on increasing its market share in the automotive component sector.
(II) Customer resources management and marketing
As a leader in the industry of hydraulic roof supports for comprehensive coal mining in China, the Company established strong capacity in terms of customer resources management and marketing by targeting at customers’ characteristic in the long-term market competition and possesses strong talents with and rich experience in customer resources management and marketing. The Target Companies of this acquisition have leading technology and sound reputation in the automotive component industry, which sustains growth in line with the growth in the sales and ownership of automobiles in PRC. As a result, upon the completion of the Transaction, the Company will gain wider market space. Fully understanding the market conditions that the Target Companies are facing and the product characteristics, the Company is able to combine its strong capacity in terms of customer resources management and marketing with the leading technology, production and sound reputation of the Target Companies to further expand the customer base and market reach of the Target Companies.
(III) Financial auditing
Upon the completion of the Transaction, the Company will follow the financial management system of the Company to enhance the improvement and management of the Target Companies and further instill the standardized and sophisticated financial
– I-5 – APPENDIX I INFORMATION ABOUT THE TARGET COMPANIES — 2. RISK FACTORS management system of the Company into the finance work of the Target Companies and assist the Target Companies in aspects such as the establishment of internal control system and the deployment of financial personnel to build a financial management system that complies with the standard of the Company in accordance with the business models and financial conditions of each of the Target Companies so as to set up and implement a unified material accounting policy and financial management system. The Company will promote the application of unified information management system to ensure the timeliness and effectiveness of the operation management of the Company. In the meantime, the Company will set clear rules for the rights of financing decision, investment decision, disposal of material assets of the Target Companies and so forth, and plan the capital usage and external financing of the Target Companies to increase the operating efficiency of the Target Companies and prevent financial risk.
(IV) Human resources management
The Company will maintain the stability of the current management team and organization structure to facilitate the development of existing teams of the Target Companies, maintain existing senior management and core technicians and continue the relationship with core customers to secure smooth transition. During the consolidation of both parties, the Company intends to apply various measures to integrate the staff of the Target Companies into the human resources system of the Company gradually. The Company will set up and implement effective plan for company culture integration that advocates mutual respect and understanding of cultural background to facilitate the company culture base of mutual inclusiveness and trust during exchange, organization and decision-making among team members. Communication mechanism and targeted training programs at company level are set up to lower the risk of misunderstanding, enhance the mutual comprehension of staff in each grades and ensure the smooth communication and delivery of various messages within the organization.
(V) Organization structure
Upon the completion of the Transaction, Target Companies will operate in the main form of independent legal entities and maintain relatively independent in terms of the functions of the organization structure such as technological research and development, production, purchase, sales and after-sales service. In respect of governance structure, internal control, information disclosure and so forth, the Company will emerge the operation characteristics, business models and organization structures of the Target Companies to supplement and improve its original management system, so that it could reach the Company’s standard on those aspects. Upon the completion of the Transaction, Target Companies will become the subsidiaries of the Company, thereby the size and business management system of the Company will further enlarge, while the difficulty in communication and coordination among the Company and each subsidiaries and among each subsidiaries will increase along with the increase in number. Because of the disparity in development phases, industries and company cultural background between the Company and the Target Companies, there is a certain degree of uncertainty as to whether the Company and the Target Companies are able to perform greater integration in terms of business, finance and personnel to give full play to the synergy of the Transaction.
– I-6 – APPENDIX I INFORMATION ABOUT THE TARGET COMPANIES — 2. RISK FACTORS
Building ownership certificates have not been obtained for certain operating assets of the Target Companies.
As at the date of this circular, ASIMCO Camshaft has 162 sq. m. of buildings for which the building ownership certificates have not been obtained, representing 0.66% of the total GFA of ASIMCO Camshaft. ASIMCO Shuanghuan still has 12,358 sq. m. of buildings for which the building ownership certificates have not been obtained, representing 21.94% of the total GFA of ASIMCO Shuanghuan. ASIMCO Shanxi still has 8,101.23 sq. m. of buildings for which the building ownership certificates have not been obtained, representing 10.15% of the total GFA of ASIMCO Shanxi. ASIMCO NVH still has 12,564 sq. m. of buildings for which the building ownership certificates have not been obtained, representing 11.28% of the total GFA of ASIMCO NVH. ASIMCO Electric Motor still has 2,159 sq. m. of buildings for which the building ownership certificates have not been obtained, representing 6.59% of the total GFA of ASIMCO Electric Motor. Some of the buildings for which the building ownership certificates have not been obtained are operating assets. Although ASIMCO Camshaft, ASIMCO Shuanghuan, ASIMCO Shanxi, ASIMCO NVH and ASIMCO Electric Motor are expediting the process of obtaining the relevant building ownership certificates, there is still a risk that some of the buildings may fail to obtain the relevant building ownership certificates. In respect of the above buildings for which the building ownership certificates have not been obtained, the relevant Target Companies have already started the relevant processes. If the use of the relevant buildings is discontinued due to the failure in obtaining the building ownership certificates, for operating properties, the Target Companies will solve the problem by increasing the utilization of the existing plants so as to vacate the space required or renting third-party properties; for non-operating properties, the Target Companies will solve the problem by constructing staff quarters and renting third-party properties. Nevertheless, the above buildings for which the building ownership certificates have not been obtained may pose potential threat to the daily operations of the relevant Target Companies upon the completion of the Transaction, which may have material and adverse effect on the financial conditions and results of operations of the Company.
The due diligence performed by the Company on the Target Companies may be inaccurate or inadequate.
The Company cannot guarantee to you that the due diligence conducted by the Company prior to the material asset reorganization can fully and completely reflect the major financial, business and other information of the Target Companies. Hence, the assumptions made by the Company in relation to (i) the operations of the Target Companies, including the market and regulatory environment in which the Target Companies operate; and (ii) the intangible assets, contingent liabilities, share capital and debts of the Target Companies may not be accurate. All of the above factors may affect the market capitalization of the Target Companies and lead to a change in the financial conditions and results of operations of the Company.
– I-7 – APPENDIX I INFORMATION ABOUT THE TARGET COMPANIES — 2. RISK FACTORS
Fluctuations in exchange rates.
According to the Equity Transfer Agreement, the Company will settle the cash consideration of the Transaction in USD. Although the Company may purchase USD forward contracts to reduce its exchange risks, the fluctuations in the exchange rate between RMB and USD may still lead to an increase in the RMB amount required for the completion of the Transaction.
RISKS RELATING TO THE INDUSTRY THE TARGET COMPANIES OPERATE IN
A decrease or significant fluctuation in whole-auto prices will have an adverse effect on the demand for products the Target Companies supply.
The Target Companies mainly sell their products, directly or indirectly, to whole-auto manufacturers and count on the continuous growth of their customers to achieve sustainable business and sound finances. The auto industry comes under the influence of swift technical change, intense competition, short product lives and periodic spending demand. When the customers of the Target Companies are negatively affected by any such factors, the Target Companies will also experience the material adverse effects of the decline in the number of customers on the number of orders for their products.
The business of the Target Companies directly involves and is highly dependent on the manufacture and sales of automobiles. The spending on automobiles is affected by a numbers of factors, including employment levels, variation in disposable income due to salary growth, variation in income tax, fuel costs, the possibility that consumers can acquire finance and the resultant finance costs, auto-replacement cycles and worries over the global economy. The fluctuation or stagnancy of auto selling prices may affect the production plans of the customers of the Target Companies, which in turn may affect the sales of the Target Companies. A significant fluctuation in auto selling prices may be triggered by a mere alteration in, among others, the demand and supply of automobiles, government regulation, global economic conditions and technical advancement. Part or all of the above factors may also affect the quantity demanded of the products of the Target Companies. Therefore, the Target Companies may be forced to reduce product prices, which in turn may affect their profit margin and cash flows. Accordingly, their financial position and operating results may be adversely affected.
Since the customers of the Target Companies need to promptly respond to the ever-changing requirements and preferences of auto consumers, the Target Companies and their customers may need to raise additional capital. If the Target Companies and their customers fail to obtain the required capital or the costs of doing so are too high to cover, any increase in production volumes will be constrained and the Target Companies and their customers will be adversely affected in terms of business, which in turn will
– I-8 – APPENDIX I INFORMATION ABOUT THE TARGET COMPANIES — 2. RISK FACTORS materially and adversely affect the business, operating results and financial position of the Target Companies. The significant shrinking of auto sales and production volumes will reduce the sales of the customers of the Target Companies and consequently affect the sales of the Target Companies. On the basis of the above factors, if the sales and production volumes of automobiles are further squeezed by macro-economic factors or other factors, the business, operating results and financial position of the Target Companies will be materially and adversely affected.
Continuous pricing pressure and customers’ price-reduction measures may lead to a lower-than-expected profit margin or loss for the Target Companies.
The auto-supply industry is faced with enormous price pressure in terms of price. If the customers of the Target Companies adopt cost-cutting measures, the products of the Target Companies will come under the pressure of price reduction. This is attributable to the facts that the auto-component industry is highly competitive, only a limited number of customers are served and fixed costs have a high foundation. According to the above factors, since the product projects of whole-auto manufacturers generally last for several years and are expected to be sought in large numbers, whole-auto manufacturers have an obvious advantage in bargaining and are able to negotiate more favourable price terms. Therefore, as primary/secondary suppliers, the Target Companies face the continuous immense pressure from whole-auto manufacturers over reduction in product prices. The strain in price may deteriorate beyond the expectation of the Target Companies, as whole-auto manufacturers continuously adopt cost-cutting measures. If the Target Companies fail to save enough production costs to offset the reduction in price, the profit margin and profitability of the Target Companies may be materially and adversely affected.
The prices of auto-component products are largely associated with downstream prices. With the rapid development of China’s auto industry, competition has intensified. Auto manufacturers have more bargaining chips than component manufacturers as they lie at the top of the industry chain, and therefore can divert the pressure of market competition to upstream component manufacturers. Due to their high requirements in quality, the auto components produced by the Target Companies occupy a certain proportion of the values of whole autos and are more easily affected by price reduction in whole autos. Various factors such as macro-factors, cost factors and spending preferences lead to the aggravation of downstream competition, which presents a fluctuation risk to the average product price of the Target Companies.
A recall of products by whole-auto manufacturers may adversely affect their production levels, which in turn may have a material adverse effect on the business, operating results and financial position of the Target Companies.
A recall of products by whole-auto manufacturers may reduce the production levels of the Target Companies. This is attributable to the facts that (i) whole-auto manufacturers focus their effort on problems related to product recalls rather than creating new sales; and (ii) consumers opt not to buy from whole-auto manufacturers that have made recalls. If the production volumes of whole-auto manufacturers sink, especially those that are the
– I-9 – APPENDIX I INFORMATION ABOUT THE TARGET COMPANIES — 2. RISK FACTORS current customers of the Target Companies, the business, operating results and financial position of the Target Companies may be materially and adversely affected.
In addition, if any of the products of the Target Companies are faulty or alleged to be faulty, the Target Companies may need to recall their products. Any negative publicity arising from the recall may adversely affect the reputation and brand image of the Target Companies. Moreover, each whole-auto manufacturer has its own practices for dealing with recalls from its suppliers, in which case it may require them to share the loss. Accordingly, any claims against the customers of the Target Companies or against the Target Companies over product recalls may have a material adverse effect on the business, operating results and financial position of the Target Companies.
The Target Companies operate in a highly-competitive industry and there is no assurance that their products can stand out from competition.
The market of auto components is so competitive that the Target Companies cannot assure that their products can excel among competitors. Furthermore, the ever-changing market the Target Companies compete in may attract new participants, and the integration of the auto industry may reduce the number of products purchased from the Target Companies. Therefore, the sales and gross profit margin of the Target Companies may be adversely affect due to the pricing pressure of whole-auto manufacturers and the pricing activities of competitors. Certain competitors of associate whole-auto manufacturers may at the same time produce auto components for whole-auto manufacturers as their own brand products and therefore can forecast market demand more accurately. As competitors and whole-auto manufacturers benefit from their association or the Target Companies are short of other resources, the business of the Target Companies may also be adversely affected.
In addition, any of the competitors of the Target Companies may predict market development more precisely, develop better products than those of the Target Companies, be able to produce similar products at a lower cost or adapt to new technologies or the changing customer requirements. Hence the products of the Target Companies may not necessarily succeed among competitors. Those trends may pose a material adverse effect to the sales of the Target Companies, the profitability of their products, their business, operating results and financial position. As the sales of the Target Companies concentrate at certain whole-auto manufacturers, any loss or integration of such customers may reduce the gains of the Target Companies and have a material adverse effect on their business, operating results and financial position. Any bankruptcy, loss or integration of the customers of the Target Companies, or any significant decrease in business from one or more of those customers may also materially and adversely affect the business, operating results and financial position of the Target Companies.
Any consolidation or formation of strategic alliance among competitors may have adverse effect on the Target Companies.
The industries in which some of the Target Companies operate are capital-intensive industries which need substantial investments in production, machinery, research and
– I-10 – APPENDIX I INFORMATION ABOUT THE TARGET COMPANIES — 2. RISK FACTORS development, product design, engineering construction, technology and marketing to address customer preferences and meet regulatory requirements. Large-scale competitors may have investment and activities in various brands on a global basis to benefit from economy of scale. Any consolidation or formation of strategic alliance among competitors of the Target Companies may benefit them further in terms of economy of scale. In addition, the competitors of the Target Companies may enhance their competitiveness or liquidity by means of such consolidation or strategic alliance. Any consolidation or strategic alliance among competitors may have material adverse effect on the business and prospects of the Target Companies.
The Target Companies may be unable to adapt promptly to changes in regulations, technological advancement and technological risks.
Changes in laws, regulations or industry requirements or competitors’ technological advancement may make some products less attractive or obsolete. The ability of the Target Companies to forecast changes in technology and regulatory frameworks and the timely and successful development and introduction of new and improved products are critical to the Target Companies in maintaining their competitiveness and sustain or raise their revenues. The Target Companies cannot guarantee that their products will not become obsolete or be able to become more advanced technologically which would otherwise be essential for maintaining their competitiveness and sustaining or raising their revenues in future. The Target Companies are exposed to risks generally inherent in the introduction and use of new products, including the failure to win market acceptance, the delay in the development or production of new products or the failure of the products to function normally. The Target Companies’ pace in developing and introducing new and improved products is dependent on the success of technological innovation in design, engineering construction and manufacturing, and this will involve substantial capital investment. Any cut-down of capital expenditure in the relevant areas by the Target Companies may weaken their ability in developing and implementing technological innovations for improving their existing production lines, which may in turn largely suppress market demand for the products of the Target Companies.
In recent years, competition has been increasingly fierce in the niche markets of the auto parts manufacturing industry. In spite of the years of efforts made by the Target Companies, and their strengths in terms of quality and costs, if the product quality, price competitiveness or the ability of technological innovations of the Target Companies no longer satisfy the requirements under future market development, or if the Target Companies fail to maintain their existing strengths in terms of technological advancement, management or product quality subsequent to this Transaction, their results of operation or market position could decline, which will in turn weaken their competitiveness, limit their market expansion and reduce their profitability.
The Target Companies cannot assure you that they will be able to install the equipment needed to produce products for new product programs in time for the start of production, or that the transitioning of their manufacturing plants and resources to full production under new product programs will not affect the production rate for the
– I-11 – APPENDIX I INFORMATION ABOUT THE TARGET COMPANIES — 2. RISK FACTORS program or other operational efficiency measures at their facilities. Development and manufacturing schedules are difficult to predict, and the Target Companies cannot assure you that they will launch their new product programs on schedule or at all. Any failure of the Target Companies to successfully launch new products on schedule or at all, or a failure by the customers of the Target Companies to successfully launch new programs on schedule or at all, could adversely affect the business, results of operations and financial condition of the Target Companies.
RISKS RELATING TO THE BUSINESS OF THE TARGET COMPANIES
The Target Companies could be adversely affected by a shortage of supplies causing a production disruption.
The Target Companies, their customers, or their suppliers may experience supply shortages of, or delays in the supply of, raw materials, parts, components or other supplies. This could be caused by a number of factors, including insufficient production line capacity or manpower or working capital constraints, weather emergencies and natural or man-made disasters affecting the accessibility of raw materials, parts or components, labor or political unrest, commercial disputes, public health concerns, acts of terrorism or other hostilities or other factors.
If any of the customers of the Target Companies experience a material supply shortage, either directly or as a result of a supply shortage caused by the Target Companies or indirectly by a supplier, that customer may halt or limit its production and may halt or limit its purchase of their products. Similarly, if the Target Companies or one of their own suppliers experiences a supply shortage, the Target Companies may become unable to produce the affected products if they cannot procure the raw materials, parts or components from another source. When the Target Companies fail to make timely deliveries in accordance with their contractual obligations, they generally have to absorb their own costs for identifying and solving the problem as well as expeditiously producing replacement components or products. Such production interruptions could have a material adverse effect on the business, results of operations and financial condition of the Target Companies.
Additionally, if the Target Companies are the cause of a customer halting production, the customer may seek to recoup all of its losses and expenses from the Target Companies, which could be significant and may include consequential losses such as lost profits and damages. Any supply chain disruption, however small, could potentially cause the complete shutdown of an assembly line of one of their customers, and any such shutdown that is due to causes that are within their control could expose them to material claims of compensation. Where a customer halts production indirectly due to the failure of the suppliers to deliver on time, it is unlikely that the Target Companies will be fully compensated by their suppliers, if at all.
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Increase in costs of the raw materials, parts, components and other supplies that the Target Companies use in their products may have a negative effect on the business of the Target Companies.
Significant changes in the markets in which the Target Companies purchase raw materials, parts, components and other supplies for the production of their products may adversely affect their profitability, particularly in the event of significant increases in demand where there is not a corresponding increase in supply or other pricing increases. Continuing volatility in the prices of raw materials used in the manufacture of their products may have an adverse effect on their business, results of operations and financial condition. The Target Companies also face pricing pressure from their suppliers, which may from time to time threaten to stop shipments to us unless the Target Companies agree to price increases. The Target Companies will continue their efforts to pass certain raw materials, parts and components and supply cost increases on to their customers. However, to date, competition and market pressures have limited their ability to do so, and may prevent the Target Companies from doing so in the future, because their customers have significant bargaining power in pricing negotiations and are generally not obligated to accept such price increases. Even when they are able to pass price increases on to their customers, in some cases there is a delay before the Target Companies are able to do so effectively. Their inability to pass on or a delay in passing on price increases to their customers could adversely affect their operating margins and cash flow, resulting in lower operating income and profitability. The Target Companies cannot assure you that fluctuations in their supply prices will not have a material adverse effect on their business, results of operations and financial condition, or cause significant fluctuations in their results of operations from period to period.
The Target Companies may not be able to protect their intellectual property effectively and may be involved in intellectual property disputes.
Certain products and services of the Target Companies, and the processes they use to produce or provide them, are proprietary know-how and technology which represent one of their business strengths but may not qualify for or may not be suitable for protection by legal means. There can be no assurance that measures the Target Companies has taken to protect such intellectual property are adequate or effective to prevent or deter potential infringement or other misappropriation, in which case the business, results of operations and financial condition of the Target Companies may be adversely affected.
In addition, there is no assurance that the tools, techniques, methodologies, programmes and components used by the Target Companies will not be alleged to infringe upon issued patents, pending patent applications or other intellectual property rights. Infringement claims may result in significant legal and other costs and may distract management attention. If the Target Companies are adjudged to have infringed the intellectual property rights of others and is required to obtain a license, if available, to use such rights, royalty payments under licenses from third parties would increase their costs. If a license is not available, the Target Companies may not be able to continue to provide a particular product or service. In either case, their business, results of operations and financial conditions could be adversely affected.
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The Target Companies may lose or fail to attract and retain management personnel, engineers and other employees with the required expertise and skills.
The continued success of the Target Companies depends on their ability to attract and retain a competent management team, engineers and other employees with required expertise and skills. Their ability to do so is influenced by a variety of factors, including the structure of the compensation package that they award and the competitive market position of their overall compensation package. Their management team and skilled employees may leave us or they may terminate their employment at any time. They cannot assure you that the Target Companies will be able to retain their management team and skilled employees or find suitable or comparable replacements on a timely basis or at all. Moreover, if any of the management team or skilled employees of the Target Companies leaves them or joins a competitor, the Target Companies may lose customers, suppliers and know-how. The loss of services of any of their management team and skilled employees could have a material adverse effect on their business, results of operations and financial condition.
The Target Companies may be adversely affected by relevant laws, regulations and polices and their changes.
The Target Companies are required to comply with laws and regulations relating to the environment, work safety and healthy workplace, including:
• the production, storage, processing, use, transportation, existence or access to hazardous substances;
• the discharge of hazardous substances to land, air or water sources;
• the residue of chemical substances in products (including electronic equipment); and
• the health and safety of employees.
The Target Companies cannot assure you that they have complied or will comply fully with relevant laws, regulations and permissions. Any of the Target Companies’ violation of or failure to comply with relevant laws, regulations, licences or permissions may render the respective Target Companies liable to monetary penalty or sanctions imposed by relevant regulatory authorities. As confirmed by the directors of the Target Companies, there are no material historical non-compliance incident of the Target Companies during the last three years, and as advised by the PRC counsel of the Company, there are no material historical non-compliance incident of the Target Companies during the last two financial years.
The Target Companies are engaged in businesses which fall within the auto parts industry. In recent years, a series of encouragement policies for the automobile industry have been introduced by relevant PRC authorities, providing policy protection and support to the long term development of the auto parts industry and creating a favorable
– I-14 – APPENDIX I INFORMATION ABOUT THE TARGET COMPANIES — 2. RISK FACTORS environment for development. In line with the macroeconomic policies for increasing domestic demand and industry polices to facilitate the development of the automobile industry, policies and measures to encourage consumption of automobiles have been introduced by authorities in charge of automobile industry, financial institutions and local governments, such as the policies for tax reduction and exemption for purchases of automobiles, automobile subsidies for rural areas and polices to subsidize the purchase of energy-saving automobiles, loans to encourage automobile consumption and reduction of surcharges imposed on automobile consumption. From the perspective of the policy framework currently in force, the auto parts industry in which the Target Companies are engaged may be supported directly or indirectly by national polices. However, any overheating of the macroeconomic environment, deterioration of pollution caused by automobile consumption or worsening traffic congestion in cities could result in changes in polices which encourage automobile consumption. Any change in favorable policies may materially affect the business, results of operations and financial conditions of the Target Companies. The continual tightening of macroeconomic policies as well as the withdrawal and contraction of previous policies to stimulate consumption (including the policies for tax reduction and exemption for purchases of automobiles, automobile subsidies for rural areas and polices to subsidize the purchase of energy-saving automobiles) have resulted in the weaker engine to fuel growth in the automobile industry and in turn slackened growth in the sales and production volume of automobiles in the PRC in recent years. Meanwhile, environmental pollution, traffic congestion and in turn purchase restriction polices adopted in individual cities may have adverse effect on the growth of the automobile industry. Accordingly, we do not rule out the possibility that the Target Companies may be exposed to the risk of weakened demand for products due to the slackened growth of the automobile industry.
RISKS RELATING TO THE PRC
Economic, political and social conditions in the PRC, as well as government policies, could affect the business, financial condition, results of operations and prospects of the Target Companies.
The majority of the assets and business of the Target Companies are located in the PRC and their business, results of operations and financial conditions are subject to economic, political and legal developments in the PRC. China’s economy differs from the economies of developed countries in many respects, including the degree of government involvement, level of development, growth rate, and control over foreign exchange and allocation of resources. For the past two decades, the PRC government has implemented economic reform measures emphasising the utilisation of market forces in the development of the PRC economy. While China’s economy has experienced significant growth in the past 30 years, growth has been uneven across different regions and economic sectors and there is no assurance that such growth can be sustained. In addition, even if these measures benefit the overall PRC economy, they may adversely affect business, results of operations, financial conditions and prospects of the Target Companies.
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Natural disasters, epidemics, acts of war or terrorism or other factors beyond the control of the Target Companies may have a material adverse effect on their business operations, financial condition and results of operations.
Natural disasters, epidemics, acts of war or terrorism or other factors beyond the control of the Company may adversely affect the economy, infrastructure and livelihood of the people in the regions where the Target Companies conduct their business. These regions may be under the threat of flood, earthquake, sandstorm, snowstorm, fire or drought, power shortages or failures, or are susceptible to epidemics, such as Severe Acute Respiratory Syndrome (‘‘SARS’’), avian influenza, H5N1 influenza, H1N1 influenza or H7N9 influenza, potential wars or terrorist attacks. Serious natural disasters may result in a loss of lives and injury and destruction of assets and disrupt the Target Companies’ business and operations. Severe communicable disease outbreaks could result in a widespread health crisis that could materially and adversely affect economic systems and financial markets. Acts of war or terrorism may also injure the Target Companies’ employees, cause loss of lives, disrupt their business network and destroy their markets. Any of these factors and other factors beyond the control of the Target Companies could have an adverse effect on the overall business sentiment and environment, cause uncertainties in the regions where the Target Companies conduct business, cause their business to suffer in ways that they cannot predict and materially and adversely impact their business, financial condition and results of operations.
RISKS RELATING TO THIS CIRCULAR
Certain statistics, industry data and other information relating to general economy and industry environment contained in this circular are derived from various publications by official governmental authorities, industry associations and other entities, and the Company cannot assure the accuracy and completeness of such statistics, data and information.
Certain statistics, industry data and other information relating to the general economy and industry environment contained in this circular were derived from various publications by official governmental authorities, industry associations and other entities. The statistics, data and information contained in these publications is provided through channels such as governmental authorities and industry associations. As such, the Company or its Directors, agents and advisers cannot assure or make any representation as to the accuracy or completeness of such statistics, data and information.
None of the Company, its legal advisers or any of their respective associates, directors, employees, agents or advisers has prepared or independently verified the accuracy or completeness of such statistics, data and information directly or indirectly derived from sources and channels such as official governmental authorities and industry associations. Due to the possibility of flawed collection methods, discrepancies in published information, different market practices or other problems, the statistics, industry data and other information relating to the general economy and industry environment derived from sources from channels such as official governmental authorities and industry associations may be inaccurate or may not be comparable to
– I-16 – APPENDIX I INFORMATION ABOUT THE TARGET COMPANIES — 2. RISK FACTORS statistics produced from other sources, and thus should not be unduly relied upon. Shareholders should give careful consideration as to how much weight or importance to attach or place on such statistics, industry data and other information relating to the general economy and the industries.
This circular contains forward-looking statements relating to the Company’s plans, objectives, expectations and intentions, which may not represent its actual performance for the periods of time to which such statements relate.
This circular contains certain forward-looking statements relating to the Company’s plans, objectives, expectations and intentions. Such forward-looking statements involve known and possibly known risks, uncertainties and other factors which may cause actual performance or achievements of the Company to be materially different from the anticipated performance or achievements expressed or implied by the forward-looking statements in this circular. Such forward-looking statements are based on numerous assumptions as to the Company present and future business strategies and the environment in which the Company will operate in the future. The actual performance or achievements of the Company may differ materially from those disclosed in this circular.
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3. INDUSTRY OVERVIEW
The Target Companies primarily produce automotive parts and components, such as motors/generators for automobiles, shock absorption and braking systems products, aluminum-cast parts, piston rings, engine cylinder blocks and heads, and camshafts. They fall under the sector of automotive parts and components manufacturing industry. According to the Guidelines for the Industrial Classification of Listed Companies by the China Securities Regulatory Commission (CSRC Announcement [2012]31) (上市公司行業 分類指引（證監會公告[2012]31號）), the Target Companies operate in the automobile manufacturing industry (C36). The automobile manufacturing industry is a comprehensive industry involving various subject areas, such as electronics, mechanics, energy and material. The automobile manufacturing industry, by different production stages, can be divided into automobiles manufacturing industry and automotive parts and components manufacturing industry. Under the National Economic Industry Classification (國民經濟行業分類) (GB/T4754-2011), the Target Companies sit in the sub-category of automotive parts and components manufacturing (C3660) under the automobile manufacturing industry (C36).
(I) Industry Development Overview
1. Development of Automobile Industry
(1) Global Automobile Industry Overview
The automobile industry occupies a pivotal position in the economic and industrial systems of major developed countries including the United States, Germany and Japan. The automobile industry is a comprehensive assembling industry closely connected with numerous industrial sectors. Every automobile is composed of thousands of types of parts and components, and each automobile manufacturer has a large number of suppliers for such parts and components. The automobile industry is also a highly technology-intensive industry which gathers new materials, new equipment, new craftsmanship and new technologies from many scientific fields. The development level of the automobile industry can to a certain extent reflect a country’s comprehensive national power and overall competitiveness.
In recent years, the global total production volume of automobiles has presented a stable growth trend. Under the influence of the financial crisis, the global automobile market faltered in 2008 and 2009. The total production volume declined by 3.7% in 2008 and 12.4% in 2009 respectively. In 2010, the pick-up of the global economy spurred the recovery of the automobile industry and the gradual improvement of the global production and sales of automobiles. In 2010, the global automobile production volume reached 77,609,900, representing a
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25.80% increase compared to the previous year. From 2011 to 2014, the global automobile production volume grew mildly from 80,045,100 to 87,507,000, representing an overall steady movement.
2000–2014 World’s Auto Production Volume and Growth Rate
10,000 30
25
8,000 20
15 6,000 10
5 4,000 0
-5 2,000 -10
0 -15 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Production volume (in ten thousands) Year-on-year increase (%)
Source: China Association of Automobile Manufacturers
At present, the automobile markets of developed countries are on the brink of market saturation. A number of labour-intensive and resource-intensive automobile production activities are gradually undergoing an industrial shift from developed countries to developing countries, representative of which are such emerging developing countries as China, Brazil and India. Clearly, such developing countries’ automobile industries are growing more rapidly than those of developed countries. Thus, automobile manufacturers in developed countries and regions, such as North America, Western Europe and Japan, targeted the enormous development and growth potential of the Chinese market. Such automobile manufacturers cooperated with the PRC companies or set up factories by investing capital and technologies and many others. This brought huge opportunities to the development of China’s automobile industry.
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(2) China’s Automobile Industry Overview
After decades of development, China’s automobile industry has become an important pillar industry in the civil economy. The automobile industry played an integral part in driving economic growth, raising employment rate, increasing tax revenue and so on. In recent years, with the global industrial structure adjusted, production concentration shifted, and the growth potential of China’s automobile consumption market being immense, a large number of well-known multi-national automobile groups have been lured into launching automobile businesses in China. The global automobile industry’s shift towards emerging markets has considerably enhanced the technological strength and production capability of China’s automobile manufacturing industry and automotive parts and components manufacturing business.
2000–2014 China’s Auto Production Volume and Sales and Growth Rate of Production Volume
2,500 50
2,000 40
1,500 30
1,000 20
500 10
0 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Production volume (in ten thousands) Growth rate of production volume
Sales (in ten thousands)
Source: China Association of Automobile Manufacturers
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Since the beginning of the 21st century, China’s automobile industry has been developing rapidly. Over the 14 years between 2000 and 2014, the compound annual growth rate (“CAGR”) of the production volume and sales volume of automobiles in China were 19.04% and 18.89% respectively. The first decade of the 21st century witnessed a rapid development in China’s automobile industry, when the CAGR of the production volume and sales volume of automobiles were as high as 24.34% and 24.09% respectively. Since 2010, growth of the production volume and sales volume of automobiles in China became mild, the CAGR of which were 6.76% and 6.79% respectively. China’s present macro-economy is in the middle of a stable growth. As one of the pillar industries of the civil economy, the automobile industry will keep growing at a certain rate in the long run.
Accompanying a continuous growth in the economy and residents’ income in China, China’s automobile consumption, especially that of private passenger vehicles, shows a trend of popularization and is gradually becoming a consumption hot spot during a new round of citizen consumption upgradation. Therefore, passenger vehicles are increasing as a percentage of the production volume and sales volume of automobiles in China year by year and are occupying a leading position. From 2005 to 2014, passenger vehicles as a percentage of the automobile production volume in China increased from 68.92% to 83.97%, while they increased from 69.02% to 83.86% as a percentage of sales volume in China.
2. Overview Of Automotive Parts and Components Industry
(1) Overview of Global Automotive Parts and Components Industry
Over the past 20 years, most automobile manufacturers transformed from a production model of traditional vertical operation pursuing “large scale and comprehensive service” to a specialised production model which streamlines organisation and focuses on automobile development and assembly. The automobile manufacturers relied more and more on external independent suppliers of parts and components, who are gradually separating from automobile manufacturers and becoming independent and integrated corporate organizations. In recent years, manufacturers of automotive parts and components are becoming more involved in full set tasks including designing development, sample production and testing, quality control on massive production and market service, instead of conducting processing works based on supplied drawings, materials and samples only. In this context, multi-national parts and components giants such as Robert Bosch GmbH and Denso Corp emerged, while some other automotive parts and components enterprises, such as NEMAK of Mexico, INFUN of Spain, Pierburg GmbH of Germany and Montupe of
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France, all of which are multi-national giants in the parts and components market for automobile engines, focused on specific areas.
Japanese and Korean automobile enterprises adopted a capital-centred, multi-layer capital structural system. By investing in parts and components enterprises, Japanese and Korean automobile enterprises have formed extensive capital networks that incorporate large enterprises as core members along with many middle and small-sized enterprises, and are characterised by a large proportion of connected transactions. This cooperation mechanism can assure the parallel development of automobile manufacturers and parts and components enterprises. The business model makes the automobile manufacturing system relatively enclosed, where at times suppliers of automobile manufacturers are required not to provide goods for customers outside the system. However, due to the acceleration of upgrades of new automobile models and momentum platforms, some of the supply systems of Japanese and Korean automobile manufacturers are showing signs of opening up.
Automobile manufacturers in Europe and the United States maintain a contractual relationship with parts and components enterprises, under which they remain independent from each other and the parts and components enterprises provide goods for various automobile manufacturers. On the one hand, automobile manufacturers can invite bids from parts and components enterprises with given drawings. On the other hand, parts and components enterprises can also independently develop new products for automobile manufacturers to choose from, which allows a relatively independent development of them. Compared to Japanese and Korean enterprises, the European and American automobile manufacturing systems are more open and without excessive requirements on suppliers’ customer base. Such business model allows concentration on their respective areas and professional cooperation between the automobile manufacturers and parts and components manufacturers, which sped up the upgrades of new automobile models and new momentum platforms and promotion of new technologies, and will gradually become a mainstream cooperation model between automobile manufacturers and parts and components suppliers.
Meanwhile, to cope with the increasingly fierce market competition, international automotive parts and components enterprises have sped up their industrial shifts. Countries such as China and India are the major destinations of the shifts of the global automotive parts and components industry.
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(2) Overview of China’s Parts and Components Industry
Before the 1980s, the automotive parts and components industry in China developed rather slowly. After the 1980s, the domestic automotive parts and components industry separated itself from automobile plants, and continuously introduced and revamped technologies; private enterprises adopted measures such as cost reduction, production craftsmanship improvement and product quality enhancement. Because of this, the domestic automotive parts and components industry developed rapidly. As the automotive parts and components market further opened up after China joined the WTO, international automotive parts and components enterprises saw the advantages of rapid development and low costs in China’s automobile market, and have thus accelerated their progress of setting up plants in the forms of joint ventures or wholly foreign-owned enterprises in China The technological level and production management level of China’s automotive parts and components enterprises have risen drastically, which resulted in the emergence of a group of competitive parts and components manufacturers. Some of such enterprises already have strong market competitiveness; their products have already been included in the global procurement networks of automobile manufacturers, and have successfully entered the mainstream markets of Europe, the United States and Japan. In 2008, the sales of China’s automotive parts and components industry amounted to RMB837.9 billion, and rose to RMB2,907.3 billion in 2014, representing a CAGR of 19.45%.
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Revenue from Main Business of Above-scale Enterprises in Auto Parts and Components Industry and Components Scale and Growth 30,000 50
25,000 40
20,000 30
15,000
20 10,000
10 5,000
0 0 2008 2009 2010 2011 2012 2013 2014
Revenue from main business of above-scale Growth rate enterprises in auto parts and components industry
Since 2010, the poor performance of the automobile industry has been influencing its upstream automotive parts and components industry, and has impaired the profitability of domestic automotive parts and components manufacturers. At present, the automobile industry is still on the rise, but the pace is showing a downward trend.
As the domestic automobile industry matures, buyers are elevating their expectations on product quality, automobile manufacturers are making more rigorous requirements on the technological strengths and production management capabilities of parts and components suppliers, and implementation of policies such as the “three guarantees” are posing more risks to automobile manufacturers and parts and components suppliers in case of quality issues in their products. Those parts and components companies with stronger research and development expertise and better management skills will stand out from the competition. Although the overall competitiveness of the domestic automotive parts and components industry is weaker than that of international giants, domestic parts and components companies have made breakthroughs in some sub-industries and are ready to compete in the broad global parts and components supply market.
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(II) Specific Operation Mode and Cyclical, Regional and Seasonal Characteristics of the Industry
1. Industry Operational Mode
Depending on whom its downstream customers are, the automotive parts and components market can be divided into the automobile ancillary market and the after-sales service market. Among them, the automobile ancillary market accounts for a larger proportion; it is also the most important downstream market of China’s automotive parts and components market. Due to the complexity and the technical nature of the automobile component supply industry and the stringent requirements of the automobile manufacture for its upstream manufacturer, the automotive parts and components industry has gradually formed a multi-level supplier structure. In the multi-level structure, suppliers are categorized as first-tier suppliers, second-tier suppliers and third-tier suppliers. First-tier suppliers directly supply products to the automobile manufacturers and often maintain a long-term and steady cooperative relationship with them. The competitive landscape for the first-tier suppliers is relatively stable. Second-tier suppliers supply ancillary products to the automobile manufacturers via first-tier suppliers, third-tier suppliers supply component products via second-tier suppliers, and so on.
Automobile manufacturers
First-tier suppliers
Second-tier suppliers
Third-tier suppliers
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2. Cyclicity
There is a strong positive correlation between the automotive parts and components industry and the automobile manufacturing industry, whereas the cyclicity of the automobile manufacturing industry is closely related to the development cycle of the macro economy. In times of rapid economic development, automobile spending also increases, which in turn expedites the development of automotive parts and components industry. When the economy is subdued, spending on automobile and automotive components and parts shrinks accordingly. Therefore, automotive parts and components industry is subject to the cyclical volatility of the downstream automobile manufacturing industry and macro economy, and is characterized by cyclicity to a certain extent.
3. Regionality
To reduce transportation costs, shorten the delivery cycle and increase the synergistic production capacity of automobile manufacturers and components and parts manufacturers, it is often necessary for component manufacturers to set up their production base in the vicinity of where the automobile manufacturers locate. Hence, six major production areas for automobile and automotive parts and components, including the three provinces of Northeast China, Yangtze River Delta, Pearl River Delta, Beijing and Tianjin, Central China and the Southwest China, were progressively established.
4. Seasonality
There is a positive correlation between the seasonality of automotive parts and components industry and the seasonality of the manufacturing and sales of automobiles. Given the shortened cycle for rolling out new models of automobiles, there was no remarkable volatility in the automobile manufacturing industry and thus the automotive parts and components industry shows no seasonality.
(III) Relationships Between Upstream and Downstream Industries and their Impacts on the Industry
1. Upstream Industry
The major raw materials used by automotive parts and components industry in manufacturing are steel, petroleum, non-ferrous metal, natural rubber, fabrics and other materials. There is a relatively close relationship between the manufacturing cost of automotive parts and components and raw material prices. The profitability of automotive parts and components manufacturing is subject to the price fluctuations of bulk commodities including petrochemicals, steel, non-ferrous metal and natural rubber.
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2. Downstream Industry
The downstream automotive parts and components industry consists of automobile manufacturing and automobile repair services. The development of automobile manufacturing enterprises can directly influence the production and the operation of automotive parts and components manufacturers. As competition in the downstream automobile manufacturing industry intensifies, the selling price of automobile generally is manifesting a downward trend. This brought pressure to the upstream parts and components manufacturers and adversely impacted the profit level of the parts and components manufacturing industry as a whole. Enterprises in the industry with more advanced technology and management skills, however, are able to maintain a high profit level through developing new products and adopting lean production. Furthermore, with the continuous increase in car parc in China, development of the automobile repair services industry will to some extent drive the growth of automotive parts and components industry, especially when a large number of automobiles come into the maintenance period.
(IV) Competitive Landscape
An automobile consists of thousands of components and parts. It is highly technical, its craftsmanship is complex, and its manufacturing process is characterized with a detailed division of labor and a high-level specialism. Manufacturers often have to procure components and parts from numerous suppliers around the world. From the perspective of the history of development in the global automotive parts and components industry, a development model primarily dependent on the automobile ancillary market has basically been formed. It is a pyramid supplier system with automobile manufacturers as its core and component suppliers as its support. The top layer of the pyramid lies the first-tier manufacturers, who directly supply products to automobile manufacturers. The cooperative relationship between the two parties is long-term and stable. Second-tier suppliers supply products to automobile manufacturers through the first-tier suppliers and so on. The lower the layer level is, the larger the number of suppliers is.
Generally speaking, the automotive parts and components industry in China is highly competitive and fragmented. There is a large amount of enterprises operating in this industry while few of them are of large scales and strong capabilities. The automotive parts and components enterprises are classified into three main categories in terms of their capital structure, including state-owned enterprises, private enterprises and foreign-owned enterprises. State-owned enterprises are generally within the supply system formed in the past, and their business focus is on internal supplies. However, in recent years, state-owned enterprises have been positively exploring into new markets beyond the original supply system. Most private enterprises are second-tier or third-tier suppliers that
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rarely have direct business relationships with automobile manufacturers; only few businesses of a relatively large scale are competitive. Most foreign-owned components and parts suppliers are controlled by highly-competitive world class parts and components suppliers. They possess high operating management skills, advanced production technologies and strong customer relationships with multinational automobile manufacturers.
In the automotive parts and components industry of China, few businesses possess comprehensive production capabilities. The majority of China’s parts and components manufacturers are second-tier and third-tier suppliers with no advantage over world renowned global suppliers such as Johnson Controls, Faurecia and Bosch in terms of operating scales or technological capabilities. Normally, China’s automotive parts and components enterprises can only be relatively competitive in a specific segment of component or part production.
(V) Factors Affecting Industry Development
1. Favourable Factors
(1) The automotive parts and components industry still has a large growth potential
In a mature automobile market, the ratio of investment in automobile market to investment in parts and components industry ranges from 1:1.3 to 1:2. At present, such ratio is only 1:0.3 in China, far below those of developed countries. China’s automotive parts and components industry lags behind the developed countries in terms of the production capacity and research and development investment. This is an indication of a large growth potential of China’s automotive parts and components industry.
(2) The rise of Chinese automobile brands will drive the development of the automotive parts and components industry
Foreign-owned enterprises or joint ventures have advantage over Chinese brand enterprises in aspects of technology and management, and claim the majority of market share in the automotive parts and components market. In recent years, however, the Chinese brand enterprises have developed rapidly. Some strong domestic enterprises possessing advanced technologies have been included in the automotive parts and components procurement system and found their place in the market competition one after another due to their further improvement of technology, product quality control and cost control. Replacement of foreign imports with Chinese products became a major trend during the industrial transformation process.
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(3) The after-sales market will become one of the major future growth points for the automotive parts and components industry
Depending on the time phase of being installed into the automobiles, automotive parts and components can be divided into the automobile ancillary market and the after-sales repair market. The automobile ancillary market refers to the market where automotive parts and components manufacturers supply the automobile manufacturers with all types of parts and components to manufacture new automobiles. The after-sales repair market refers to the market formed by the demand to replace used parts and components due to wear and tear.
2. Unfavourable Factors
(1) The production volume and sales of China’s automobile industry are slowing down in growth
Since the 21st century, demand in China’s automobile industry has risen rapidly. Over the 10 years from 2000 to 2010, the production volume and sales of Chinese automobiles shot up from below 2.1 million to 18.0 million, each with a CAGR above 24%. From then on, the growth of Chinese automobiles’ production volume and sales started to slow down with a CAGR of only 6.7% from 2010 to 2014. The slowing down of the increase of Chinese automobiles’ production volume and sales may adversely impact the automotive parts and components industry which is the upstream industry in the automobile manufacturing business.
(2) Negative impacts attributing to traffic congestions
Since the 21st century, the fast growth of automobile consumption in China has simulated a dramatic increase of car parc in China. More or less, major large and medium cities all face traffic congestion problems. The lack of research on urban planning in automobile societies and traffic patterns of different cities rapidly deteriorated the traffic congestion problems and brought various economic, social and environmental issues to certain areas. Traffic congestion has become a hurdle to the sustainable development of the automobile industry. Some large cities have implemented traffic control measures; the Chinese government might reassess its policies on the development of the automobile industry and introduce restrictive measures; environmental awareness and consumption concepts might change accordingly. The aforementioned factors might adversely impact automobile consumption.
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(3) Intensive market competition
Generally speaking, the automotive parts and components industry in China is highly competitive and fragmented. There is a large amount of enterprises operating in this industry, but few of them are of large scales and strong capabilities. Meanwhile, after years of development, complete competition in China’s automobile market compressed the profit margin of automobile manufacturers. In order to shift the cost pressure to upstream automotive parts and components manufacturers, automobile manufacturers would require them to reduce the price of automotive parts and components while ensuring product quality.
(VI) Industrial Barriers
After years of development of the automotive parts and components industry, suppliers in sub-industries formed a stable structure, presenting the following impediments to new plants wishing to enter:
1. Customer Relations
Because the quality of automotive parts and components can remarkably influence the operational costs and market prestige of automobile manufacturers, a mutual reliance generally exists between whole-automobile plants and parts and components plants. Whole-automobile plants usually have high entry standards over the production scale, product quality and safety, simultaneous and advanced technology development, follow-up supporting services, and other aspects of their supporting suppliers. Thus, once a mutual cooperative relationship is established, whole-automobile plants normally do not replace their supporting parts and components suppliers without good reasons.
2. Ability to Develop Parallel Products
As market competition heightens and demands in consumption markets tends to become more diversified, personalized and fashionable, the life cycles of new automobiles have been curtailed. The timeliness of whole-automobile manufacturers’ research and development on new automobiles has become one of the key factors to their market competitiveness. The parallel development model between overall system design and overall resolutions is becoming the mainstream development direction for the global automobile industry.
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Under these circumstances, whole-automobile plants usually require their core parts and components suppliers jointly conduct tests and research and development on products, and parts and components suppliers must participate in the whole-automobile development as much as they can. There are already core parts and components plants in the industry with relatively strong parallel development capacities, and it takes time for whole-automobile plants to nurture the parallel development ability of a new plant. Therefore, whole-automobile plants do not replace parts and components suppliers with cooperative development abilities without good reasons.
3. Stringent Quality Certification Systems of Downstream Plants
In selecting upstream parts and components plants, whole-automobile plants and downstream parts and components plants usually forge a set of rigorous quality certification standards. Normally, automotive parts and components suppliers can only be listed as whole-automobile plant candidates after they pass the quality management system certification review established by international institutions, national automobile associations and regional automobile associations.
In addition, whole-automobile plants will conduct on-site craftsmanship review and rating review over every production and management aspect of parts and components suppliers based on their respectively-formulated supplier selecting procedures. Finally, before going into mass production, supporting parts and components have to comply with the strict Advanced Product Quality Planning (APQP) and Production Part Approval Process (PPAP), and undergo repeated loading tests.
The process to acquire qualified supplier credentials could be lengthy; this is also one of the major barriers to new plants entering the automotive parts and components industry.
4. Funding Barriers
The automotive parts and components industry is a typical capital-intensive industry. For one thing, parts and components suppliers have relatively high funding needs when erecting plants, acquiring production and testing equipment, and maintaining requisite inventories of raw materials and finished articles. For another, whole-automobile plants usually get the upper hand in their negotiations with parts and components plants. They require parts and components plants maintain a certain level of inventories, and their payment might take a rather long time. This places a cash-flow strain on parts and components enterprises.
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5. Management Barriers
With whole-automobile plants continuously squeezing costs and orders from downstream markets in a tendency of becoming smaller in size but larger in number, parts and components plants need to adopt step by step a streamlining management model in raw material acquisition, production operation, marketing and other such management aspects, so as to cope with inventory and operational risks and enhance their overall competitiveness. Only with overall systematic management abilities can parts and components plants gain higher profits and expand on the basis of quality stability.
Innovation of management skills and the efficiency of management teams are among the core competitive edges of automotive parts and components plants. New comers to the industry generally cannot form an efficient management team and an orderly management mechanism. This would result in another barrier against industry entrance.
6. Technological Barriers
Automotive parts and components enterprises accumulate craftsmanship and experience in their production process, bringing them stronger delicate-processing abilities and higher function-testing levels. Therefore, a lack of production craftsmanship and technology is one of the barriers to new enterprises entering the industry.
(VII) Technology Levels and Technical Features of the Industry
Accompanying the rapid development of China’s automobile industry, China’s technology levels, research and development abilities and production capacities in automotive parts and components have improved significantly. In the main aspects of parts and components such as power components and accessories systems, electronic and lighting systems, suspension and motion systems, transmission systems, braking systems, steering systems, bodies and accessories and universal parts, many outstanding backbone enterprises have emerged, all of which basically have the ability to provide parts and components for domestic plants of various types. Yet, in the sphere of parts and components for high-end automobiles, foreign and joint capital parts and components plants still take up leading positions.
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Most automotive parts and components manufacturers formed and gained unique production craftsmanship and experience in their production process, which could bring unique competitive advantages in aspects of improving product performance, product reliability and production efficiency and reducing costs. Whole-automobile manufacturers expect parts and components suppliers to have stronger new technologies, new product development capabilities and an initiative to take part in the parallel product development of whole-automobile manufacturers. The present technological development directions for the automobile and parts and components industry include:
1. Safety
Automobile safety technologies are developing in the direction of being integrated, intellectualized, systematic and systemic. In the future, automobile active safety technologies will merge with passive safety technologies. Equipments such as GPS (Global Positioning System), intelligent anti-collision systems, intelligent driving systems, intelligent wheels, intelligent suspension and intelligent air bags will be widely used. Intelligent braking, intelligent speed reduction and intelligent steering will be realised. Automobile safety technologies will develop towards a systemic direction in which the safety of people both outside and inside the automobile are cared for.
2. Comfort
The development of technologies such as shock absorption, noise reduction and temperature control will enhance comfort during automobile driving. The NVH performance can best represent the general technological strength of an automobile plant. Fierce market competition strictly confined the weight, price and other factors of large and medium automobiles. This gives more importance to researches over the NVH characteristics of automobiles with the aim of increasing comfort when sitting in automobiles.
3. Energy Conservation and Emission Reduction
On 1 January 2016, “Fuel consumption limits for passenger car” and “Fuel consumption evaluation method and targets for passenger car” came into effect. This fully demonstrates China’s determination to reduce fuel consumption to 5L/100km by 2020, which was proposed to “Development Plan for the Energy Conservation and New Energy Vehicle Industry (2012–2020)” as the fourth phase. Under the trend towards tougher fuel standards, each domestic automobile manufacturer continuously developed new energy-efficient and environment-friendly technologies, in an attempt to win the market during the 13th Five Year Plan period when “green manufacturing, intelligent manufacturing” is emphasized.
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4. Light Weight
The light weight of automobiles is achieved by using the fewest materials to produce the highest performance. On the one hand, the consumption of oil and energy decreases. On the other hand, a lighter automobile body has more advantages in movement, braking and control. Meanwhile, the light weight of material and design also help save production costs and reduce automobile prices.
5. Economy
Automobile economy means an automobile’s ability to complete a single transport unit with the least fee paid. The running costs of an automobile include fuel fees, lubricant fees, wheel fees, etc. Reducing automobile running costs and raising automobile running efficiency is one of the future technological development directions for the automobile and parts and components industry.
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4. REGULATORY OVERVIEW
Overview
This section summarizes selected key current laws and regulations in the PRC that are relevant to the Target Companies’ business and operations.
Automobile Safety
The U.S. National Traffic and Motor Vehicle Safety Act of 1966 (the “Safety Act”) regulates automobiles and automobile equipment in two primary ways. First, the Safety Act prohibits the sale in the U.S. of any new automobile or equipment that does not conform to applicable automobile safety standards established by the National Highway Traffic Safety Administration. Meeting or exceeding many safety standards is costly, in part because the standards tend to conflict with the need to reduce automobile weight in order to meet emissions and corporate average fuel economy standards. Second, the Safety Act requires that defects related to automobile safety be remedied through safety recall campaigns. A manufacturer is obligated to recall automobiles if it determines the automobiles or their components do not comply with a safety standard. Finally, a manufacturer is also required to notify owners and provide a remedy if an automobile defect creates an unreasonable safety risk.
Automobile Emissions Standards
The U.S. Clean Air Act imposes stringent limits on the amount of regulated pollutants that may be emitted by new automobiles and engines produced for sale in the U.S. The current (“Tier 2”) emissions regulations promulgated by the U.S. Environmental Protection Agency (“EPA”) set fuel emissions standards for cars and light trucks. The EPA also has stringent emissions standards and requirements for heavy duty automobiles and engines.
The California Air Resources Board’s low-emission automobile emissions standards require light-duty trucks and passenger cars to meet stringent new emissions requirements, the most recent of which (known as LEV III) were adopted in 2012 and include updated smog rules that apply to automobiles starting in model year 2014. California law also requires that a certain percentage of cars and certain light duty trucks sold in the state must be zero emission vehicles such as electric automobiles or hydrogen fuel cell automobiles. The California Air Resources Board has proposed requirements for increasing volumes of zero emission vehicles over the next several years in order to achieve greenhouse gas (“GHG”) and pollution emission reductions.
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Automobile manufacturers must obtain certification that their automobiles will meet emissions requirements from the EPA and from the California Air Resources Board before they can sell automobiles in the U.S. or in California (and other states that have adopted the California emissions requirements) respectively. Suppliers of automobile parts to such manufacturers may be indirectly subject to such requirements.
Contamination and Permitting
Under the U.S. Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), the U.S. Resource Conservation and Recovery Act, the U.S. Clean Water Act, the U.S. Safe Drinking Water Act and similar state laws, among others, strict, joint, several and retroactive liability may be imposed for the costs of removing or remediating releases of hazardous substances including at currently or formerly owned or operated property or facilities, facilities to which hazardous substances have been sent for disposal, or into or upon waters of the U.S. Under certain of these laws, liability for remediation costs may be imposed regardless of whether the release or disposal of hazardous substances was in compliance with law at the time it occurred, and regardless of whether the facility was owned or operated by the current owner or operator at the time of the release. Liability may also be imposed for damages to natural resources.
The U.S. Resource Conservation and Recovery Act and similar state programs impose requirements on the management, treatment, storage and disposal of both hazardous and nonhazardous solid wastes. The U.S. Clean Air Act and similar state laws require certain sources of air pollutants to obtain permits prior to commencing construction or major modification of facilities. Major sources of air pollutants are subject to more stringent, federally imposed requirements including operating permits and the installation of additional controls. The U.S. Clean Water Act and similar state laws require permits for certain discharges of water and effluents, such as the discharge of wastewater and storm water from facilities.
In December 2012, the EPA finalized amendments to its National Emissions Standards for Hazardous Air Pollutants for Major Sources: Industrial, Commercial and Institutional Boilers and Process Heaters. The rule, known as the Boiler MACT rule, governs emissions of air toxins from boilers and process heaters at industrial facilities. Boilers subject to the new rule may be required to have emissions limited and/or to have additional pollution controls installed.
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GHG Regulations
In June 2010 the EPA published its so-called GHG tailoring rule phasing in federal prevention of significant deterioration and Title V operating permit requirements for new sources and modifications to existing facilities with the potential to emit specific quantities of GHGs. Obligations relating to Title V permits include recordkeeping and monitoring requirements. With respect to prevention of significant deterioration permits, projects that cause a significant increase in GHG emissions (currently defined to be 75,000 tons or more per year of carbon dioxide equivalents or 100,000 tons or more per year, depending on various factors), are required to implement best available control technology. The EPA has issued guidance on what best available control technology entails for the control of GHGs and individual states are now required to determine what controls are required for facilities within their jurisdiction on a case-by-case basis. In October 2009, the EPA also published a rule establishing GHG reporting, monitoring and recordkeeping requirements associated with certain GHG emissions sources that emit 25,000 metric tons or more per year of carbon dioxide equivalents.
Employee Health and Safety
U.S. companies are subject to various health and safety laws and regulations, including the U.S. Occupational Safety and Health Act, and similar state statutes, which laws and regulations govern employee health and safety matters. In addition, the U.S. Occupational Safety and Health Act hazard communication standard, the EPA community right-to-know regulations under Title III of CERCLA and similar state statutes require that information be maintained concerning hazardous materials used or produced and that this information be provided to employees and certain government authorities, among others. Environmental, health and safety regulations, including ones promulgated pursuant to the U.S. Occupational Safety and Health Act, are also designed to prevent or minimize the consequences of catastrophic releases of toxic, reactive, flammable or explosive chemicals.
Laws and Regulations of the PRC
Target Companies, except CACG I, are situated in the PRC which are mainly engaged in the manufacture of auto parts. These companies are subject to all industry policies, relevant laws, regulations, rules and extensive government regulatory policies in the PRC which are presently valid and effective. With respect to their current business operations, these companies are mainly subject to the following laws, regulations and rules.
Overview of the PRC Legal System
The PRC legal system is based on the PRC Constitution (中國憲法) and is made up of laws, rules and regulations. Decided court cases do not constitute binding precedents.
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At the national level, the legislative branch consists principally of the National People’s Congress (the “NPC”) and the Standing Committee of the NPC, which are empowered by the PRC Constitution to exercise the legislative powers. The NPC has the power to amend the PRC Constitution, supervise the implementation of the PRC Constitution, and promulgate specific laws governing government institutions, civil matters and criminal matters. The Standing Committee of the NPC is empowered to interpret laws promulgated by the NPC and to promulgate laws other than those specifically required to be promulgated by the NPC.
The State Council is the highest institution in the administrative branch and has the power to promulgate administrative rules.
Ministries and commissions under the direct control of the State Council have the delegated powers to promulgate regulations for matters within their respective jurisdictions. Any regulations promulgated by such ministries and commissions, however, must not conflict with the PRC Constitution, national laws, or any administrative rules promulgated by the State Council. In the event of a conflict, the Standing Committee of the NPC and the State Council have the power to nullify the relevant regulations.
At the provincial and municipal level, each province and municipality consists principally of a People’s Congress and its standing committee (which constitute the legislative division) and a local government and its agencies (which constitute the administrative division). The People’s Congress and its standing committee have the power to promulgate local rules, while the local government has the power to promulgate administrative rules applicable to its administrative area. These local rules and regulations must not conflict with the PRC Constitution, national laws, or any administrative rules promulgated by the State Council.
Foreign Investment Access
According to the Interim Provisions on the Promotion of Industrial Restructuring (促進產業結構調整暫行規定) promulgated by the State Council and effective on 2 December 2005, the PRC government directs the investment orientation of all types of enterprises in different industries within the territory of the PRC, manages investment programs, and formulates and implements financial, taxation, credit, land, import, export and other policies by means of formulating the Catalog for Guiding Industrial Restructuring (產業結構調整指導目錄) (the “IR Catalog”) and the Catalog of Industries for Guiding Foreign Investment,(外商投資產業指導目錄) (the “FI Catalog”).
The IR Catalog (Version 2011) was promulgated by the NDRC together with the relevant authorities of the State Council on 27 March 2011, and effective on 1 June 2011. The IR Catalog classifies industries into three categories: encouraged, restricted and prohibited. Any industries not falling under any of the three aforementioned categories and conforming to relevant laws, regulations and
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policies as stipulated by the PRC government will be classified as belonging to the permitted category. Principally, a foreign investor must comply with the regulations of the FI Catalog. The FI Catalog was promulgated on 28 June 1995, and has been amended several times since then. The Catalog of Industries for Guiding Foreign Investment (2015 Amendment) (外商投資產業指導目錄（2015年修訂）) was promulgated by the NDRC together with the MOFCOM on 10 March 2015. The FI Catalog divides industries into three categories: encouraged, restricted and prohibited. Unless otherwise stipulated by laws or regulations, a foreign investor may invest in industries that are not classified as prohibited. In the case of restricted industries, a foreign investor must apply to establish a Sino-foreign equity joint venture, Sino-foreign contractual joint venture or other agreement in which the Chinese party should be the controlling shareholder. No foreign investor is allowed to invest in a prohibited industry under the FI Catalog. Any content excluded from the encouraged, restricted and prohibited categories under the FI Catalog, and conforming to relevant laws, regulations and policies stipulated by the PRC government, will be regarded as falling within the permitted category. The industries under the permitted category are not listed within the FI Catalog.
According to the regulations mentioned above, the automobile drive shaft, the drive system and the automobile electronic power steering system industries are all classified as industries in which foreign investment is permitted. Among the above, energy absorption type steering systems are classified as encouraged while the other steering systems are classified as permitted.
Incorporation of Foreign-invested Enterprises
Foreign-invested enterprises within the PRC are divided into wholly foreign-owned enterprises, Sino-foreign equity joint ventures and Sino-foreign contractual joint ventures, and are regulated by
• the Wholly Foreign-Owned Enterprise Law of the People’s Republic of China (中華人民共和國外資企業法), promulgated on 12 April 1986 and amended on 31 October 2000;
• the Detailed Implementing Rules for the Wholly Foreign-Owned Enterprise Law of the People’s Republic China (中華人民共和國外資企業法實施細則), promulgated on 12 December 1990 and amended on 12 April 2001;
• the Sino-Foreign Equity Joint Venture Enterprise Law of the People’s Republic of China (中華人民共和國中外合資經營企業法), promulgated on 1 July 1979 and amended on 15 March 2001;
• the Implementing Regulations for the Sino-Foreign Equity Joint Venture Enterprise Law of the People’s Republic of China (中華人民共和國中外合資經 營企業法實施條例), promulgated on 20 September 1983 and amended on 22 July 2001;
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• the Sino-Foreign Contractual Joint Venture Enterprise Law of the People’s Republic of China (中華人民共和國中外合作經營企業法), promulgated on 13 April 1988 and amended on 31 October 2000; and
• the Detailed Rules of Implementation of the Law of the People’s Republic of China on Sino-Foreign Contractual Joint Ventures (中華人民共和國中外合作 經營企業法實施細則), promulgated on 4 September 1995 and amended on 31 October 2000.
Pursuant to the regulations mentioned above, the MOFCOM or its relevant local counterparts will examine and approve a foreign-invested enterprise’s joint venture contract, articles of association and any significant changes such as changes in registered capital and transfers of equity. All wholly foreign-owned enterprises, Sino-foreign equity joint ventures and Sino-foreign contractual joint ventures must obtain a business license from the industrial and commercial administrative department of MOFCOM before commencing business operations.
According to the Certain Provisions on Change of the Equity Interests of the Investors of A Foreign-Invested Enterprise ([1997] Wai Jing Mao Fa Fa No.267) (外商投資 企業投資者股權變更的若干規定([1997]外經貿法發第267號)) (the “Provisions”), promulgated by the Ministry of Foreign Trade and Economic Cooperation and the State Administration for Industry and Commerce and effective on 28 May 1997, a “change of the equity interests held by the investors in a foreign-invested enterprise” refers to a change in the investors of a Sino-foreign equity joint venture, Sino-foreign cooperative joint venture, or wholly foreign-owned enterprise established in the PRC under the laws of the PRC (“Enterprise”) or a change in the share of the investors’ capital contribution (including the cooperation conditions provided by them) in the Enterprise (“Equity Interests”). A change of the Equity Interests held by the investors in an Enterprise must conform to the relevant laws and regulations of the PRC, and will be subject to approval by the relevant examination and approval authority as well as registration of changes with the relevant registration authority pursuant to the Provisions. Any change of Equity Interests without the approval of the examination and approval authority will be considered invalid.
Approval and Recording of Production Projects
The Decision of the State Council on Investment System Reform (Guo Fa [2004] No.20) (國務院關於投資體制改革的決定 (國發[2004]20號)) promulgated by the State Council and effective on 16 July 2004, requires that the PRC government would: (i) reform project examination and approval systems, (ii) transform PRC government’s administrative functions and (iii) confirm an enterprise’s status as an investor. The examination and approval system does not apply to projects that are not invested in by the PRC government; instead, they are subject to either the ratification system or the recording system, as the case may be.
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According to the Catalog of Investment Projects Ratified by Governments (Version 2014) (政府核准的投資項目目錄（2014年本）) ratified by the State Council, to invest in the construction of fixed-asset investment projects listed in the Catalogue, enterprises must report the relevant projects to the project confirmation authorities for confirmation in accordance with the relevant provisions. Where enterprises invest in the construction of projects beyond this Catalogue, such projects shall be subject to recordation administration.
Pursuant to the provisions of the Administrative Measures for the Verification and Approval of Foreign Investment Projects (Order of NDRC No.12) (外商投資項目核准 暫行管理辦法（國家發改委令第 12號）), promulgated by the NDRC on 17 May 2014 and effective on 17 June 2014, which was revised on 27 December 2014, and in accordance with the categorizations of the Industry Catalog for Guiding Foreign Investment (外商投資產業指導目錄), (1) The encouraged projects in the Catalogue of Industries for Guiding Foreign Investment with a total investment (including capital increase) of 300 million US dollars or more and requiring that the Chinese party has a controlling share (including having a comparatively controlling share) and the restricted projects (excluding real estate projects) in the same catalogue with a total investment (including capital increase) of 50 million US dollars or more shall be subject to confirmation by the NDRC. (2) Real estate projects falling under the restricted category in the Catalogue of Industries for Guiding Foreign Investment and other restricted projects in the same catalogue with a total investment (including capital increase) of less than 50 million US dollars shall be subject to confirmation by provincial governments. The encouraged projects in the Catalogue of Industries for Guiding Foreign Investment with a total investment (including capital increase) of less than 300 million US dollars and requiring that the Chinese party has a controlling share (including having a comparatively controlling share) shall be subject to confirmation by local governments. (3) The foreign-funded projects that are not covered by the preceding two paragraphs but listed in items (1) through (11) of the Catalog of Investment Projects Ratified by Governments shall be subject to confirmation according to items (1) through (11) of the Catalogue. (4) The provincial government may, in light of actual local circumstances, determine the specific confirmation authority of local governments at all levels for the projects subject to confirmation by local governments. The authority of the provincial government to confirm projects shall not be delegated to the governments at lower levels. The foreign-funded projects other than those set forth above shall be subject to recordation with the competent investment departments of local governments. Restricted projects must be verified and approved by provincial development and reform departments. The verification and approval authority for such types of projects must not be delegated to a lower level. If a local government has otherwise formulated, in accordance with the relevant regulations, any provisions on the verification and approval of projects referred to in the preceding paragraph, such provisions will apply.
PRC Laws and Regulations Relating to the Industry
The competent department of industry for the production of automobile components and parts is the Ministry of Industry and Information Technology of the PRC (“MIIT”).
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In 1994, the State Council issued the Industrial Policies for the Automobile Industry (汽車工業產業政策) (the “1994 Automobile Policy”) as an overall policy guideline for the automotive industry (including the automotive components and parts industry) in the PRC. Although the 1994 Automobile Policy does not have the force of law, it is the cornerstone of the overall regulatory regime of the PRC automotive industry. In 2004, the NDRC issued the Automotive Industry Development Policy (汽車產業發展政策) amended in 2009 according to the Circular 10 promulgated by the NDRC and the MIIT to replace the 1994 Automobile Policy.
In addition to the Automotive Industry Development Policy, the General Office of the State Council issued the Restructuring and Rejuvenation Program of the Automobile Industry (汽車產業調整和振興規劃) in March 2009 (the “Program”), as a guiding policy for the automotive industry from 2009 to 2011. The Program affects the development of the automobile and automotive components and parts industries by:
• promoting the restructuring of the automotive industry by encouraging the primary manufacturers of automotive components and parts to expand their scale through mergers, acquisitions and reorganization, and to increase their market share in the domestic and overseas markets;
• encouraging the achievement of technological independence in the production of key automotive components and parts such as the engine, transmission, steering system, braking system, drivetrain system, suspension system and automobile bus control system; to encourage the development of key automotives components and parts that can improve the performance of the whole automobile; and
• implementing automotive product export strategies; and
• accelerating the construction of national export bases for automobiles and automotive components and parts.
There are no other related industrial policies issued by the State Council, the General Office of the State Council, NDRC or the MIIT currently in force.
Production Permits, Work Safety and Product Quality
Current PRC laws and regulations do not have compulsory standards or orders with respect to production permits and product quality apply to automotive components and parts such as automobile drive shafts and steering systems. However, certain production laws may affect the manufacture of such automotive components.
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According to the Regulations of the People’s Republic of China on the Administration of Industrial Product Production Licenses (工業產品生產許可證管理條例), promulgated by the State Council on 9 July 2005 and effective on 1 September 2005, and the Implementing Measures for the Regulations of the People’s Republic of China on the Administration of Industrial Product Production Licenses (工業產品生產許可證管理條例實施辦法) amended by the General Administration of Quality Supervision, Inspection and Quarantine of the PRC (the “GAQSIQ”) (國家品質監督檢驗檢疫總局) promulgated on 21 April 2010 and effective on 1 June 2010, the PRC government has adopted a production licensing administration system for important industrial products. According to the Announcement of GAQSIQ on Releasing the Catalog of Products Subject to the Administration of the Production Permit System (Order of GAQSIQ [2012] No.181),((關於 公佈實行生產許可證制度管理的產品目錄的公告)(總局2012年181號公告)) automobile components and parts such as automobile drive shafts and steering systems do not belong to the category of products listed in the catalog that requires a production license.
According to the Provisions on the Administration of Compulsory Product Certification (Decree No.117 of GAQSIQ) ((強制性產品認證管理規定)(國家質檢總局令 第117號)) promulgated by GAQSIQ on 3 July 2009 and effective on 1 September 2009, the PRC government implements a policy whereby the relevant products must pass a certification process (“Compulsory Product Certification”) and be affixed with a mark of certification before they can be delivered from factories, marketed, imported or used in any commercial activities. According to Compulsory Product Certification, automobile components and parts such as automobile drive shafts and steering systems do not belong to the category of products listed in the catalog that requires Compulsory Product Certification.
Current PRC laws and regulations do not have compulsory standards or orders with respect to work safety apply to automotive components and parts such as automobile drive shafts and steering systems.
The Law of the People’s Republic of China on Work Safety (the “Work Safety Law”)(安全生產法), effective on 1 November 2002, is the principal law governing the supervision of work safety, and requires manufacturing entities to abide by certain laws and regulations concerning work safety. The Work Safety Law establishes a responsibility system for work safety and improving conditions to promote work safety. No special orders with respect to work safety apply to the production of automotive components and parts such as automobile drive shafts and steering systems.
The Regulations on Work Safety Permits (安全生產許可證條例), promulgated by the State Council and effective on 13 January 2004 adopts a licensing system for work safety in mining enterprises, construction enterprises and enterprises manufacturing hazardous chemicals, fireworks, firecrackers or demolition apparatus for civil use. Enterprises without a work safety permit must not conduct manufacturing activities. No work safety permit is necessary for the production of automotive components and parts such as automobile drive shafts and steering systems.
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Environmental Protection
According to the Environmental Protection Law of the People’s Republic of China (中華 人民共和國環境保護法) (the “EPL”), promulgated by the Standing Committee of the NPC and effective on 26 December 1989, the competent department of environmental protection administration under the State Council will conduct the unified supervision and management of environmental protection matters in the PRC. The relevant local departments of environmental protection administration at or above the county level must conduct the unified supervision and management of environmental protection work within areas under their jurisdiction.
According to the EPL, enterprises that cause environmental pollution must adopt effective measures to prevent and control the pollution as well as any damage to the environment. Installations for the prevention and control of pollution at a construction project must be designed, built and commissioned together with the principal part of a project. No permission will be given for a construction project to be commissioned or used until its installations for the prevention and control of pollution are examined and considered to be in accordance with standards by the competent department of environmental protection administration that examined and approved the project’s environmental impact statement.
Installations for the prevention and control of pollution must not be dismantled or left idle without authorization. If it is necessary to dismantle such installations or leave them idle, prior approval must be obtained from the competent local department of environmental protection administration.
Enterprises and institutions discharging pollutants must report to and register with the relevant authorities in accordance with the provisions of the competent department of environmental protection administration under the State Council.
Enterprises and institutions discharging pollutants in excess of the prescribed national or local discharge standards must pay a fee for excessive discharge in accordance with state provisions and must assume responsibility for eliminating and controlling the pollution. The provisions of the Law on Prevention and Control of Water Pollution (水污染防治法) must be complied with to the extent applicable.
For the technological transformation of newly-constructed industrial enterprises and existing industrial enterprises, facilities and processes that result in a high rate of resource utilization and a low rate of pollutant discharge must be used, along with economical and rational technology for the comprehensive utilization of waste and the treatment of pollutants.
The Law of the People’s Republic of China on Evaluation of Environmental Effects (中華人 民共和國環境影響評價法), promulgated on 28 October 2002 and effective on 1 September 2003, requires entities to prepare a written report setting forth the environmental impact of the proposed project and the proposed protective and
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mitigating measures, as well as obtain the approval of the environmental authorities to construct the relevant project. Operations are prohibited until the installations are inspected and confirmed to have satisfied environmental standards by the relevant environment protection authorities.
According to the Law of the People’s Republic of China on the Prevention and Control of Environmental Pollution by Solid Waste (中華人民共和國固體廢物污染環境防 治法), promulgated and amended by the Standing Committee of the NPC on 29 December 2004 and effective on 1 April 2005, units generating industrial solid waste must establish and enhance a responsibility system for the prevention and control of environmental pollution as well as adopt measures for the prevention and control of environmental pollution by industrial solid waste. The PRC government institutes a system of reporting and registration of industrial solid waste. Units generating industrial solid waste must, in accordance with the regulations of the department of environmental protection administration under the State Council, provide information about the types, quantity, flow, storage and treatment (among other things) of industrial solid waste to the local departments of environmental protection administration at or above the county level in the areas where they are located.
According to the Law of the People’s Republic of China on the Prevention and Control of Water Pollution (中華人民共和國水污染防治法) amended by the Standing Committee of the NPC on 28 February 2008 and effective on 1 June 2008, new construction projects, reconstruction or expansion projects and all other installations that directly or indirectly discharge pollutants into waters will be subject to an environmental impact assessment in accordance with the law. Facilities for the prevention and control of water pollution must be designed, constructed and put into operation or use simultaneously with the main part of a construction project. Such facilities will be inspected by the department of environmental protection administration. If they do not pass the inspection, the project must not be put into operation or use. The PRC government implements the pollutant discharge permit rules. Any enterprise or institution that directly or indirectly discharges industrial sewage, medical sewage or any other types of sewage, the discharge of which is subject to a pollutant discharge permit, must obtain the relevant pollutant discharge permit. Any entity that operates facilities for the centralized treatment of urban sewage is required to obtain a pollutant discharge permit. The specific measures and procedures for implementation of pollutant discharge permit will be stipulated by the State Council. No enterprise or institution is allowed to discharge the aforementioned sewage into waters without the requisite pollutant discharge permit or in violation of the provisions set forth on the pollutant discharge permit.
According to the aforementioned provisions and other relevant laws and regulations on environmental protection, environmental protection authorities may levy charges on enterprises that discharge waste. If a manufacturer fails to obtain the necessary approvals through the relevant procedures, or discharges waste illegally, a fine and a penalty will be imposed by the PRC environmental authorities, including but not limited to the suspension of its operations.
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Intellectual Property Laws
Copyright Law
According to the Copyright Law of the People’s Republic of China (中華人民共和國 著作權法), promulgated on 1 June 1991 and amended on 26 February 2010, and the Copyright Law Implementing Regulations of the People’s Republic of China (中華人民共和 國著作權法實施條例) promulgated on 2 August 2002 (collectively, the “PRC Copyright Law and Regulations”), PRC citizens, legal persons, or other organizations will enjoy copyright in their works, whether published or not. Where a foreigner or stateless person enjoys copyright in his or her work under an agreement concluded between the PRC and the author’s country of origin or country of habitual residence, or an international treaty to which both that country and the PRC have acceded, such copyright will be protected. In addition, a foreigner or stateless person will enjoy copyright in his or her work where the work is first published in the PRC. Furthermore, where an author is a person whose country has not concluded an agreement with the PRC or is not a party to an international treaty to which the PRC has acceded, or a is stateless person, his or her work will be protected under the PRC Copyright Law and Regulations if the work is first published in a member country to an international treaty to which the PRC has acceded, or is simultaneously in a member and non-member country.
According to the PRC Copyright Law and Regulations, “work(s)” include work(s) of literature, art, natural science, social science, engineering technology, etc., existing in any of the following forms: (1) written works; (2) oral works; (3) musical, dramatic, quyi, choreographic, and acrobatic works; (4) fine art and architectural works; (5) photographic works; (6) cinematographic works and works created by means similar to cinematography; (7) graphic works including engineering design drawings, product design drawings, maps, schematic drawings, etc., as well as model works; (8) computer software; and (9) other works specified in laws and administrative regulations.
The PRC joined the Berne Convention for the Protection of Literary and Artistic Works on 5 October 1992. The Berne Convention for the Protection of Literary and Artistic Works is relevant to authors of cinematographic works whose headquarters or habitual residences are in one of the countries of the EU. These authors will, in respect of works for which they are protected under this Convention, in countries of the EU other than the country of origin, enjoy the rights granted to nationals by the current and future laws of the respective country, as well as the rights specially granted by this Convention.
According to the Agreement of the World Trade Organization on Trade-Related Aspects of Intellectual Property Rights, which the PRC signed on 1 January 1994, computer programs, whether in source or object code, will be protected as literary works under the Berne Convention (1971). Compilations of data or other material, whether in machine readable form or other form, as long as the selection or arrangement of their contents constitute intellectual creations, it will be protected.
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Such protection, which will not extend to the data or material itself, is without prejudice to any copyright subsisting in the data or material itself.
Patent Law
According to the Patent Law of the People’s Republic of China (中華人民共和國專 利法), promulgated on 12 March 1984 and amended on 27 December 2008 (the “Patent Law”), and the Rules for the Implementation of the Patent Law of the People’s Republic of China (專利法實施細則), promulgated on 15 June 2001 and amended on 9 January 2010, patents are divided into three categories: invention patents, utility model patents and design patents.
The duration of an invention patent right is 20 years from the date of application and the duration of a utility model patent right and a design patent right is 10 years from the date of application. After an invention, utility model or design patent right is granted, unless otherwise specified in the Patent Law, no organization or individual may exploit the patent without licensing from the patentee. Entities may not, for the purposes of production and business operation, produce, use, offer to sell, sell, or import the patented products, nor use the patented method or use, offer to sell, sell or import products that are acquired directly through the patented method.
Trademark Law
According to the Trademark Law of the People’s Republic of China (中華人民共和國 商標法), amended on 27 October 2001, the Trademark Office of the State Council’s administrative department for industry and commerce will oversee trademark registration and administration in the PRC. Any of the following acts will be deemed infringement of the exclusive right to use a registered trademark:
• use of a trademark that is the same as or similar to a registered trademark for identical or similar goods without the permission of the trademark registrant;
• sale of any goods that have infringed the exclusive right to use any registered trademark;
• counterfeit or unauthorized production of the label of another’s registered trademark, or sale of any such label that is counterfeited or produced without authorization;
• change of any trademark of a registrant without the registrant’s consent, and selling goods bearing such replaced trademark on the market; or
• other acts that have caused any other damage to another’s exclusive right to use a registered trademark.
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Taxation
Enterprise Income Tax
According to the EIT Law, effective on 1 January 2008, enterprises are classified as either resident enterprises or non-resident enterprises for tax purpose. Resident enterprises are enterprises which have been formed in the PRC in accordance with domestic law, or which have been formed in accordance with the law of a foreign country but which are actually under the control of institutions in the PRC. A resident enterprise must pay enterprise tax on its worldwide income a rate of 25%.
A non-resident enterprise with institutions or establishments in the PRC must pay enterprise tax at a rate of 25% on income of its institutions or establishments within the PRC as well as its income generated from outside the PRC that is derived by its PRC institutions or establishments.
With respect to a high and new technology enterprise, the tax levied on its income will be at a rate of 15% after obtaining the High-tech Certificate and the filing with the competent tax authorities. According to the Administrative Measures for the Determination of High and New Technology Enterprises (Guo Ke Fa Huo [2008] No.172) (高新技術企業認定管理辦法 (國科發火[2008]172號)), promulgated by the Ministry of Science and Technology, Ministry of Finance and SAT and effective on 1 January 2008, high and new technology enterprise qualification is determined by the relevant governmental authorities with the Catalog of the High and New Technology Sector under the Key Support of the State (’國家重點支援的高新技術領域’目錄) and other relevant standards of judgment. The new key automotive components and parts with independent intellectual property rights, such as the drivetrain system, the steering system, new models of hybrid drivetrain system, new models of pure electric drivetrain system and the hub motor, are included in the catalog mentioned above.
The Circular of the State Council on the Implementation of Transitional Preferential Policies with Regard to the Enterprise Income Tax (Guo Fa [2007] No.39) (國務院關於實施 企業所得稅過渡優惠政策的通知 (國發[2007] 39號)), promulgated by the State Council and effective on 26 December 2007, states that effective from 1 January 2008, such preferential tax policies and the enterprise entitled to that will undergo the following transition:
(1) those enterprises formerly entitled to preferential policies of lower taxation will undergo a gradual transition to statutory tax rates within five years of the EIT entering into effect. For enterprises formerly entitled to an enterprise income tax rate of 15%, new tax rates will be 18%, 20%, 22%, 24% and 25% in 2008, 2009, 2010, 2011 and 2012, respectively; for enterprises formerly entitled to a tax rate of 24%, the new tax rate will be 25% as of 2008.
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(2) enterprises formerly entitled to preferential income tax reductions such as “two-years exempt and three-years halved” and “five-years exempt and five-years halved” will continue to enjoy such preferential policies as stipulated in the former taxation laws, administrative regulations and relevant documents until expiry of such the preferential treatment thereunder. For those enterprises not making any profit and was therefore not entitled to said tax preferences, the period of the preferential treatment will commence in 2008.
Enterprises entitled to the aforementioned transitional preferential policies are those duly established via registration with the relevant registration administration authorities such as bureaus of industry and commerce prior to 16 March 2007. The implementation of transitional preferential policies will be applied to the items and to the scope laid out in the Table of the Implementation of Transitional Preferential Policies with Regard to the Enterprise Income Tax (實施企業所得稅過渡優惠 政策表).
Business Tax
According to the Interim Regulations of the People’s Republic of China on Business Tax (中華人民共和國營業稅暫行條例), promulgated by the State Council on 10 November 2008 and effective on 1 January 2009, and the Detailed Rules for the Implementation of the Interim Regulations of the People’s Republic of China on Business Tax (中華人民共和國營業稅暫行條例實施細則) promulgated by the MOF, effective on 1 January 2009 and amended on 28 October 2011, entities and individuals engaged in the provision of services as prescribed in these Regulations, or the transfer of intangible assets or the sale of real estate within the territory of the PRC, will be subject to the business tax, and must pay the business tax in accordance with the Regulations. The items and rates of the business tax will be subject to the Schedule of Items and Rates of the Business Tax (營業稅稅目稅率表) to the Regulations. Any adjustment to the tax items and tax rates will be subject to the decision of the State Council.
Value-added Tax
According to the Tentative Regulations on the Value-added Tax of the PRC (中華人 民共和國增值稅暫行條例)(“Value-added Tax Regulations”), promulgated by the State Council on 10 November 2008 and effective on 1 January 2009, and the Detailed Implementation Rules of the Tentative Regulations on the Value-added Tax of the PRC (中 華人民共和國增值稅暫行條例實施細則), promulgated by the MOF, effective on 1 January 2009 and amended on 28 October 2011, organizations or individuals who sell commodities, provide processing, repairing or replacement services, or import commodities within the territory of the PRC are subject to the Value-added Tax, and must pay the Value-added Tax pursuant to the Value-added Tax Regulations. The rate of the Value-added Tax is either 17% or 13%, depending on the goods being sold. For taxpayers exporting goods, the tax rate is zero percent.
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Tentative Regulations on the Urban Maintenance and Construction Tax and the Surcharge for Education
According to the Tentative Regulations on the Urban Maintenance and Construction Tax of the PRC (中華人民共和國城市維護建設稅暫行條例) (the “Urban Maintenance and Construction Tax Regulations”), promulgated by the State Council on 8 February 1985 and effective on 1 January 1985, all organizations and individuals who pay the consumption tax, Value-added Tax and business tax (“taxpayers”) are subject to the urban maintenance and construction tax and must pay the urban maintenance and construction tax pursuant to the provisions the Urban Maintenance and Construction Tax Regulations. The tax rates of the urban maintenance and construction tax vary with the regions where taxpayers are located. Taxpayers in cities are levied at a rate of 7%; in counties or towns at a rate of 5%; and outside cities, counties or towns at a rate of 1%.
According to the Decision of the State Council on Amending the Interim Provisions on Collecting the Surcharge for Education (國務院關於修改”徵收教育費附加的暫行規定” 的決定), promulgated by the State Council on 20 August 2005 and effective on 1 October 2005, all organizations and individuals who pay the product tax, Value-added Tax and business tax are subject to the education surcharge, apart from organizations that pay the rural education surcharge pursuant to the Circular of the State Council Concerning Financing Rural School Operation (Guo Fa [1984] No.174) ((國 務院關於籌措農村學校辦學經費的通知)(國發[1984]174號文)). The amount of tax payment of the Value-added Tax, business tax and consumption tax will form the base of the education surcharge levy on organizations and individuals. The tax rate of the education surcharge is 3%, and must be paid at the same time as the payment of the Value-added Tax, business tax and consumption tax.
According to the Notice of the Ministry of Finance on Issues Concerning the Uniformity of Local Education Surcharge Policies (Cai Zong [2010] No.98) (關於統一地方 教育附加政策有關問題的通知(財綜 [2010] 98號)) issued by the MOF on 7 November 2010, the rates for local education surcharges must be standardized and set at 2% of the actual payment of the Value-Added tax, business tax and consumption tax by an enterprise or an individual (including foreign-invested enterprises, foreign enterprises and foreign individuals). The provinces in which the rate is lower than 2% (having previously received approval from the MOF) must raise the rate to 2%, and the scheme for raising the rate must be submitted by the People’s governments at the provincial level to the MOF before 31 December 2010 for approval.
Tax on Dividends from Foreign-invested PRC Enterprises
According to the Notice of the Ministry of Finance and the State Taxation Administration on Several Preferential Policies Relevant to the Enterprise Income Tax (Cai Shui [2008] No.1) (財政部、國家稅務總局關於企業所得稅若干優惠政策的通知 (財稅 [2008]1號)), the undistributed profits earned by foreign-invested enterprises prior to 1 January 2008 and subsequently distributed to foreign investors will be exempt from the PRC income tax, whereas the profits earned and distributed after 1 January 2008, will be subject to the PRC income tax.
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According to the EIT Law and its Implementation Measures, where a non-resident enterprise does not have any institutions or establishments in the PRC, or the income it earns is not derived by such institutions or establishments, it must pay enterprise income tax on the portion of its income derived in the PRC at the tax rate of 10%.
According to the Arrangement between the Government of the People’s Republic of China and the Government of the Republic of Singapore for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion With Respect to Taxes on Income signed by the PRC and Singapore on 11 July 2007, no more than a 5% income tax rate applies to dividends, provided that the beneficial owner is a company that holds at least 25% of the capital of the PRC company.
According to the Notice of the State Administration of Taxation Concerning the Meaning and Determination of the Identity of “Beneficial Owner” in Tax Treaties (Guo Shui Han [2009] No.601) (國家稅務總局關於如何理解和認定稅收協定中”受益所有人”的 通知 (國稅函[2009]601號)), issued by the SAT on 27 October 2009 (the “Tax Treaties Notice”), a “beneficial owner” refers to a person having the ownership and right of control over the income or the right or property derived from the income. In general, a “beneficial owner” is engaged in actual operating activities and may be an individual, a company or any other group. An agent or a conduit company does not belong to a “beneficial owner.” A “conduit company” refers to a company normally established for the purpose of the evasion, reduction or transfer of tax or the accumulation of profit. This type of company only registers in the country where it is located, so as to exist in an organizational form required by the law, and is not engaged in actual operating activities, such as manufacturing, distribution or management.
According to the Administrative Measures for the Application of Tax Treaties to Non-residents (for Trial Implementation)(非居民享受稅收協定待遇管理辦法（試行）) (the “Measures”) promulgated by the SAT on 24 August 2009 and effective on 1 October 2009, non-residents who are entitled to preferential tax rates under applicable tax treaties must undertake the examination and approval process or record-filing formalities in accordance with the Measures. Those failing to do so will not enjoy the treatments of relevant tax treaties. A non-resident who seeks the treatments of dividend clauses of the applicable tax treaties must apply to the competent tax authority, or obtain approval of the tax authority with the right to examine and approve its application for enjoying the treatments of Tax Treaties.
Foreign Exchange
Foreign exchange administration is principally governed by two pieces of legislation, namely, the PRC Foreign Exchange Control Regulations (中華人民共和國外 匯管理條例), promulgated by the State Council on 29 January 1996 and amended on 1 August 2008, and the Regulations on the Administration of Foreign Exchange Settlement, Sale and Payment (結匯、售匯及付匯管理規定), promulgated by the People’s Bank of China on 20 June 1996. Under these regulations, upon payment of the applicable taxes, foreign-invested enterprises may convert the dividends they receive in Renminbi into foreign currencies and remit such amounts outside the PRC through their foreign exchange bank accounts.
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In general, the PRC government does not set a limit on the regular exchange international payment and transfer accounts. Foreign-invested enterprises are allowed to convert Renminbi into foreign currencies and remit abroad without the prior approval of the SAFE or its local branches: (i) when settling current account items in foreign currencies (in such case, payments must be made from their foreign exchange accounts and valid receipts and other related documents must be provided); and (ii) when distributing dividends to foreign investors (in such case, payments must be made from their foreign exchange accounts and the written resolutions of the board of directors on divided distribution and other related documents must be provided).
In other cases, including the settlement of foreign exchange under capital accounts (such as direct investment and increases in registered capital), foreign-invested enterprises may not convert Renminbi into foreign currencies or convert foreign currencies into Renminbi without the prior approval of SAFE or its local branches.
Labor and Social Insurance
Enterprises within the PRC are subject to the following PRC labor laws and regulations: the PRC Labor Law (中華人民共和國勞動法), the PRC Labor Contract Law (中華人民共和國勞動合同法), the Regulations on Work-Related Injury Insurance (工傷保 險條例), the Regulations on Unemployment Insurance (失業保險條例), the Provisional Measures on Employee Maternity Insurance (企業職工生育保險試行辦法), the PRC Social Insurance Law (社會保險法) and related regulations, rules and provisions on enterprises promulgated from time to time by related governmental departments.
The PRC Labor Law and the PRC Labor Contract Law stipulates that labor contracts in written form must be executed in order to establish a labor relationship between employers and employees. Salaries must not be lower than the minimum wage in the place where the enterprises are located. The enterprises must establish a system for labor safety and sanitation, strictly abide by state standards, and provide relevant education to their employees. Employees are also required to work in safe and sanitary conditions meeting PRC rules and standards.
The PRC Social Insurance Law, Regulations on Work-Related Injury Insurance, the Provisional Measures on Employee Maternity Insurance and the Interim Regulation on the Collection and Payment of Social Insurance Premiums, require that enterprises pay the related social insurance for PRC employees, which include elderly pension insurance, unemployment insurance, maternity insurance, injury insurance and medical insurance. A fine or other penalty will be imposed if an enterprise fails to pay the related social insurance premiums for its workers in accordance with law.
According to the Regulations on Management of Housing Provident Fund (住房公 積金管理條例), amended on 24 March 2002, enterprises must register with the housing provident fund management center as well as pay and deposit an amount equal to a certain proportion of their employees’ wages to the housing provident fund.
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5. HISTORY AND REORGANIZATION
ASIMCO Camshaft
Establishment
On 31 May 2004, ASIMCO Camshaft was established in Yizheng under the relevant laws and regulations of the PRC, with a total investment amount of USD10 million and registered capital of USD5 million. The scope of operation of ASIMCO Camshaft covers the fabrication and processing of camshafts for use in automobiles and motorcycles and raw components of related motors, sale of internally-manufactured products and provision of related technical consultation services and after-sale services. Its investor is ASIMCO Investments XIII Limited, which is its sole shareholder.
On 31 March 2005, the total investment amount of ASIMCO Camshaft increased from USD10 million to USD18 million, and its registered capital increased from USD5 million to USD9 million. Capital contribution was made in cash in USD. An “Approval Letter for the Increase in Total Investment and Registered Capital of ASIMCO Camshaft (Yizheng) Co., Ltd”《關於同意亞新科凸輪軸 ( （儀征）有限公司增加 投資總額和註冊資本的批覆》) has been obtained from Yizheng Bureau of Economic Cooperation and Foreign Trade in respect of this capital increase.
On 29 August 2009, ASIMCO Investments XIII Limited and Jiangsu Yizheng Piston Ring Factory (江蘇省儀征活塞環廠) entered into a share transfer agreement, pursuant to which ASIMCO Investments XIII Limited transferred its 37% shareholding interest in ASIMCO Camshaft to Jiangsu Yizheng Piston Ring Factory at a total consideration of USD1. On 30 August 2009, Jiangsu Yizheng Piston Ring Factory and ASIMCO Camshaft entered into a debt-for-equity swap agreement, pursuant to which Jiangsu Yizheng Piston Ring Factory converted its loans receivable from ASIMCO Camshaft amounting to RMB10,562,100 (equivalent to USD1,545,885) as at 30 August 2009 to shares in ASIMCO Camshaft. On 30 August 2009, ASIMCO Investments XIII Limited and ASIMCO Camshaft entered into a debt-for-equity swap agreement, pursuant to which ASIMCO Investments XIII Limited converted its loans receivable from ASIMCO Camshaft amounting to USD4,098,121 as at 30 August 2009 to shares in ASIMCO Camshaft.
Accordingly, on 31 August 2009, the total investment amount of ASIMCO Camshaft increased from USD18 million to USD25 million, and its registered capital increased from USD9 million to USD15,504,954. Among the addition of USD6,504,954 to the registered capital, USD4,098,121 was injected by ASIMCO Investments XIII Limited with its loans receivable from ASIMCO Camshaft, while USD2,406,833 was injected by Jiangsu Yizheng Piston Ring Factory with its loans receivable from ASIMCO Camshaft amounting to USD1,545,855 together with cash amounting to USD860,948. The shareholding structure of ASIMCO Camshaft has changed, with 63% and 37% of its equity interests being held by ASIMCO
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Investments XIII Limited and Jiangsu Yizheng Piston Ring Factory, respectively. An “Approval Letter for the Share Transfer, Capital Increase and Commencement of New Contract and Articles of Association of ASIMCO Camshaft (Yizheng) Co., Ltd”《關於同 ( 意亞新科凸輪軸（儀征）有限公司股權轉讓、增資及啟用新合同、章程的批覆》) has been obtained from Yizheng Bureau of Economic Cooperation and Foreign Trade in respect of this share transfer and capital increase.
On 23 December 2013, ASIMCO Investments XIII Limited merged with CACG LTD. VI, Axle ATL, Axle AMTL Cayman Limited, ASIMCO Metals Technologies Limited, ASIMCO Metals Technologies Limited, CACG LTD. VII, ATL Financing Limited, ASIMCO Technologies Services Limited, A/E Chinese Components Investment Corporation, ASIMCO Investments II Ltd., ASIMCO Investments X Ltd., ASIMCO Investments IV Ltd. and CACG LTD. X to form Axle ATL (“Merger of Overseas Companies of ASIMCO Group”). As a result, the shareholder of ASIMCO Camshaft changed from ASIMCO Investments XIII Limited to Axle ATL. A “Filing, Reporting and Approval Form for Unsubstantial Changes of Foreign-invested Enterprises in Jiangsu Province”《江蘇省外商投資企業非實質性變更備案申報審核 ( 表》) was obtained from Yizheng Bureau of Commerce on 11 April 2014 in respect of the aforesaid change of shareholders. Upon completion of the change of shareholders, the shareholding structure of ASIMCO Camshaft will be as follows:
Name of Amount Contribution by Percentage of shareholder subscribed Pain-in capital way of shareholding (in ten thousand (in ten thousand USD) USD)
Axle ATL 976.8121 976.8121 Cash and loans 63% receivable Jiangsu Yizheng 573.6833 573.6833 Cash and loans 37% Piston Ring receivable Factory
Total 1,550.4954 1,550.4954 – 100%
Save as disclosed above, Jiangsu Yizheng Piston Ring Factory and its ultimate beneficial owner are third parties independent of Axle ATL and their connected persons.
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Milestones
2007: ASIMCO Camshaft passed the TS16949 certification.
2009: ASIMCO Camshaft passed the ISO14001 certification.
2010: ASIMCO Camshaft was recognized as the “Best Supplier of Beijing Foton”.
2012: ASIMCO Camshaft was awarded the “SFH Outstanding Supplier”.
2014: ASIMCO Camshaft received the “Cummins ABO 6Sigma Progress Award”.
2015: ASIMCO Camshaft purchased its foundry production line from the United Kingdom.
ASIMCO Shuanghuan
Establishment
On 17 August 1995, ASIMCO Shuanghuan was established in Yizheng under the relevant laws and regulations of the PRC and was then named as YIZHENG SHUANG HUAN PISTON RING CO., LTD., with a total investment amount of RMB250 million (converted into USD29,412,000 at the agreed exchange rate of 1:8.5) and registered capital of RMB180 million. The scope of operation of ASIMCO Shuanghuan covers the manufacturing, processing and sale of piston rings and components for internal combustion engines. Jiangsu Yizheng Piston Ring Factory injected RMB66.60 million, representing 37% of the registered capital, in the form of assets assessed and determined by state-owned asset management authorities, while CACG LTD. VI injected RMB113.40 million, representing 63% of the registered capital, in the form of cash converted into USD. The difference of RMB70 million between the total investment amount and registered capital was injected by the Chinese party and foreign party in the form of assets and cash in USD, respectively, in proportion to their capital contribution.
On 27 December 2013, ASIMCO Shuanghuan was renamed as ASIMCO Shuanghuan Piston Ring (Yizheng) Co., Ltd.
On 23 December 2013, pursuant to the Merger of Overseas Companies of ASIMCO Group, the foreign shareholder of ASIMCO Shuanghuan changed from CACG LTD. VI to Axle ATL. An “Approval Notice for the Change in Registration of Foreign-invested Enterprises”《外商投資公司准予變更登記通知書》 ( ) was obtained on 1 April 2014 from Yangzhou Yizheng Bureau of Administration for Industry & Commerce in respect of the aforesaid change of shareholders.
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Upon completion of the change of shareholders, the shareholding structure of ASIMCO Shuanghuan will be as follows:
Name of Amount Contribution by Percentage of shareholder subscribed Pain-in capital way of shareholding (in ten thousand (in ten thousand RMB) RMB)
Jiangsu Yizheng 6,660 6,660 Assets 37% Piston Ring Factory Axle ATL 11,340 11,340 Cash 63%
Total 18,000 18,000 – 100%
Save as disclosed above, Jiangsu Yizheng Piston Ring Factory and its ultimate beneficial owner are third parties independent of Axle ATL and their connected persons.
Milestones
1997: ASIMCO Shuanghuan introduced the technique of NPR steel rings from Japan.
2002: ASIMCO Shuanghuan joined the sales force with Nippon Piston Ring Co., Ltd.
2006: ASIMCO Shuanghuan was recognized as the “Environmentally Friendly Enterprise in China” by the State Environmental Protection Bureau.
2010: PVD piston rings were launched to the market.
2014: DLC piston rings were launched to the market.
Major Subsidiaries
1. YANGZHOU WINWAY AUTO PARTS CO., LTD (“YANGZHOU WINWAY”) (揚州映煒汽車零部件有限公司 (“揚州映煒”))
On 20 February 2013, Yangzhou Winway was established in Yizheng under the relevant laws and regulations of the PRC, with a registered capital of RMB2 million. Its scope of operation covers the processing, assembling, warehousing and sale of components for automobiles and motorcycles, import and export trading and agency of various goods and techniques (other than the goods and techniques restricted from being operated or prohibited from being imported or exported by
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the state). Its registered capital is fully subscribed for by ASIMCO Shuanghuan by the injection of cash. The shareholding is 100%.
2. ASM ALLOY MATERIALS (YIZHENG) CO., LTD. (“ASM”) (愛斯姆合金材料 （儀征）有限公司(“愛斯姆”))
On 23 January 2007, ASM was established in Yangzhou under the relevant laws and regulations of the PRC, with an investment amount of USD4.8 million, registered capital of USD2.4 million. Its scope of operation covers the production of new alloy materials, raw components for casting for use in automobiles and motorcycles, sale of internally-manufactured products and provision of services in product engineering development, technical services and after-sale services. Its registered capital is fully subscribed for by ASM Holding Limited (愛斯姆控股有限公司) by the injection of cash in USD. The shareholding is 100%.
On 23 October 2008, the investment amount of ASM increased from USD4.8 million to USD5.59 million, and its registered capital increased from USD2.4 million to USD2.953 million. Capital contribution was made by ASM Holding Limited in cash in USD. An “Approval Letter for the Capital Increase and Amendment of Articles of Association of ASM Alloy Materials (Yizheng) Co., Ltd.”《關於同意愛斯 ( 姆合金材料（儀征）有限公司增資及修改章程的批覆》) has been obtained from Yizheng Bureau of Economic Cooperation and Foreign Trade in respect of this capital increase.
On 10 March 2011, ASM and ASM Holding Limited entered into a share transfer agreement, pursuant to which ASM Holding Limited agreed to provide to ASM a loan of USD2.4 million as its injection to the registered capital of ASM. An “Approval Letter for the Capital Increase and Amendment of Articles of Association of ASM Alloy Materials (Yizheng) Co., Ltd.”《關於同意愛斯姆合金材料 ( （儀征）有限 公司增資及修改章程的批覆》) has been obtained from Yizheng Bureau of Commerce (儀 征市商務局) in respect of this capital increase.
On 15 June 2011, the investment amount of ASM increased from USD5.59 million to USD6.3 million, with its registered capital remained unchanged. An “Approval Letter for the Capital Increase and Amendment of Articles of Association of ASM Alloy Materials (Yizheng) Co., Ltd.”《關於同意愛斯姆合金材料 ( （儀征）有限 公司增資及修改章程的批覆》) has been obtained from Yizheng Bureau of Commerce in respect of this addition of investment amount. On 12 July 2011, the investment amount of ASM increased from USD6.3 million to USD10.09 million, and its registered capital remained unchanged. This addition of investment amount has obtained an “Approval Letter for the Capital Increase and Amendment of Articles of Association of ASM Alloy Materials (Yizheng) Co., Ltd.”《關於同意愛斯姆合金材料 ( （儀征）有限公司增資及修改章程的批覆》) from Yizheng Bureau of Commerce. On 9 July 2012, the investment amount of ASM increased from USD10.09 million to USD10.89 million, and its registered capital increased from USD5.353 million to USD5.913 million. The addition of USD0.56 million to the registered capital was
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fully injected by shareholder ASM Holding Limited in cash in USD. An “Approval Letter for the Capital Increase and Amendment of Articles of Association of ASM Alloy Materials (Yizheng) Co., Ltd.”《關於同意愛斯姆合金材料 ( （儀征）有限公司增資及修改章 程的批覆》) has been obtained from Yizheng Bureau of Commerce in respect of this addition of investment amount and increase in registered capital.
On 22 February 2013, ASM Holding Limited and ASIMCO Shuanghuan entered into a share transfer agreement, pursuant to which ASM Holding Limited transferred its 80% shareholding interest in ASM, corresponding to USD4,730,400 in registered capital, to ASIMCO Shuanghuan at a consideration of RMB11,523,000. An “Approval Letter for the Share Transfer and Commencement of New Contract and Articles of Association of ASM Alloy Materials (Yizheng) Co., Ltd.”《關於同意愛斯姆合 ( 金材料（儀征）有限公司股權轉讓及啟用新合同、章程的批覆》) has been obtained from Yizheng Bureau of Commerce in respect of this share transfer.
Upon completion of the share transfer, the shareholding structure of ASM will be as follows:
Name of Amount Contribution by Percentage of shareholder subscribed Pain-in capital way of shareholding (in ten thousand (in ten thousand USD) USD)
ASM Holding 118.26 118.26 Cash and loans 20% Limited receivable ASIMCO 473.04 473.04 Cash and loans 80% Shuanghuan receivable
Total 591.30 591.30 – 100%
Save as disclosed above, ASM Holding Limited and its ultimate beneficial owner are third parties independent of ASIMCO Shuanghuan and their connected persons.
ASIMCO Foundry
Establishment
On 7 January 2004, ASIMCO Foundry was established in Yizheng under the relevant laws and regulations of the PRC, with an investment amount of USD12 million and registered capital of USD6 million, out of which USD1.8 million or 30% of the registered capital was contributed by Jiangsu Yizheng Piston Ring Factory in cash in RMB, and USD4.2 million or 70% of the registered capital was contributed by CACG LTD. VI by the injection of profit in RMB generated from the share of investment return in the PRC. The scope of operation of ASIMCO Foundry primarily covers the provision of raw components of piston rings to ASIMCO Shuanghuan.
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On 23 December 2013, pursuant to the Merger of Overseas Companies of ASIMCO Group, the shareholder of ASIMCO Foundry changed from CACG LTD. VI to Axle ATL. An “Approval Certificate for Foreign-invested Enterprises”《外商投資 ( 企業批准證書》) has been renewed and issued by People’s Government of Jiangsu Province in respect of the aforesaid change of shareholders.
Upon completion of the change of shareholders, the shareholding structure of ASIMCO Foundry will be as follows:
Name of Amount Contribution by Percentage of shareholder subscribed Pain-in capital way of shareholding (in ten thousand (in ten thousand USD) USD)
Jiangsu Yizheng 180 180 Cash 30% Piston Ring Factory Axle ATL 420 420 Cash 70%
Total 600 600 – 100%
Save as disclosed above, Jiangsu Yizheng Piston Ring Factory and its ultimate beneficial owner are third parties independent of Axle ATL and their connected persons.
ASIMCO Shanxi
Establishment
On 4 September 1997, ASIMCO Shanxi was established as a Sino-foreign equity joint venture under the relevant laws and regulations of the PRC, with the investments from CITIC Machinery Manufacturing Inc. (“CITIC MMI”) (中信機電 製造公司(”中信機電”)), CACG LTD. VII and Caterpillar (HK) Co., Ltd. (“Caterpillar”) (卡特彼勒（香港）有限公司(”卡特彼勒”)), in Jiang County in Shanxi Province, under the name Shanxi International Casting Co., Ltd (山西國際鑄造有限 公司) at the time. It has an investment amount of RMB820 million and registered capital of RMB367.531 million, out of which RMB82.011 million or 22.31% was contributed from CITIC MMI by injecting existing assessed assets including plant and equipment; RMB207.50 million or 56.46% was contributed from CACG LTD. VII by injecting cash in USD; RMB78.02 million or 21.23% was contributed from Caterpillar by injecting cash in USD. The scope of operation of ASIMCO Shanxi primarily covers the production and processing of motor chambers, chamber lids and other iron casting components, sales and after-sales services.
On 20 March 2003, ASIMCO Shanxi was renamed as ASIMCO International Casting Co., Ltd. (Shanxi) (亞新科國際鑄造（山西）有限公司).
On 18 November 2010, CACG LTD. VII and Caterpillar converted their respective loan receivables from ASIMCO Shanxi to shares in ASIMCO Shanxi.
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Upon conversion, the registered capital of ASIMCO Shanxi increased to RMB420,362,000, out of which RMB242,236,035 or 57.63% of registered capital was contributed from CACG LTD. VII; RMB96,114,965 or 22.86% of registered capital was contributed from Caterpillar; RMB82,011,000 or 19.51% of registered capital was contributed from CITIC MMI. An “Approval Letter for the Change of Shareholding in ASIMCO International Casting Co., Ltd. (Shanxi)”《關於同意亞新 ( 科國際鑄造（山西）有限公司股權變更的批覆》) has been obtained from Shanxi Office of Commerce in respect of the conversion.
On 19 October 2010, Caterpillar and CACG LTD. VII entered into a share transfer agreement, pursuant to which Caterpillar transferred its 22.86% interest in ASIMCO Shanxi to CACG LTD. VII at a consideration of USD10.30 million. On 20 March 2013, CITIC MMI transferred its 19.51% interest in ASIMCO Shanxi by public offer for sale through China Beijing Equity Exchange (北京產權交易所). On 5 June 2013, CITIC MMI and ASIMCO China entered into a property transaction contract, pursuant to which CITIC MMI transferred its 19.51% interest in ASIMCO Shanxi to ASIMCO China at a consideration of RMB86 million. An approval letter has been obtained from Shanxi Office of Commerce in respect of the aforesaid share transfer.
On 23 December 2013, pursuant to the Merger of Overseas Companies of ASIMCO Group, CACG LTD. VII, being shareholder of ASIMCO Shanxi, changed to Axle ATL.
On 2 April 2014, Axle ATL and ASIMCO HK entered into a share transfer agreement, pursuant to which Axle ATL transferred its 80.49% interest in ASIMCO Shanxi to ASIMCO HK at consideration of HKD380.3524 million. An “Approval Letter for the Change of Shareholding in ASIMCO International Casting Co., Ltd. (Shanxi)”《關於同意亞新科國際鑄造 ( （山西）有限公司股權變更的批覆》) has been obtained from Yuncheng Bureau of Commerce in respect of the share transfer.
On 23 August 2014, ASIMCO HK and ASIMCO China entered into an agreement for contribution by way of injection of shareholding interest, pursuant to which ASIMCO HK made its contribution to ASIMCO China by injecting 80.49% interest in ASIMCO Shanxi. An “Approval Letter for the Change of Shareholding in ASIMCO International Casting Co., Ltd. (Shanxi)”《關於同意亞新科國際鑄造 ( （山西） 有限公司股權變更的批覆》) has been obtained from Shanxi Office of Commerce in respect of the share transfer.
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Upon completion of the share transfer, the shareholding structure of ASIMCO Shanxi will be as follows:
Name of Amount Pain-in Percentage of No. shareholder subscribed capital contribution (in ten (in ten thousand RMB) thousand RMB)
1 ASIMCO 42,036.2 42,036.2 100% China
Total 42,036.2 42,036.2 100%
Milestones
2000: ASIMCO Shanxi passed the ISO9002 certification.
2005: ASIMCO Shanxi was recognized as an “Outstanding Supplier of the Year of Dongfeng Cummins Engines Co., Ltd. (東風康明斯發動機有限公司)”.
2006: Amicable communication between ASIMCO Shanxi and Shanghai Hino Engine Co., Ltd. began.
2011: ASIMCO Shanxi was recognized as one of the “Thousand Core Enterprises in the Casting Industry in the PRC” by China Foundry Association (中國 鑄造協會).
2013: ASIMCO Shanxi was granted the “Supreme Quality Award 2012 by Shanghai Hino Engine Co., Ltd. (上海日野發動機有限公司)”.
ASIMCO NVH
Establishment
On 1 August 1994, ASIMCO NVH was established in Ningguo City, Anhui Province with the joint investments from Ningguo Zhongding Corp. (“Ningguo Zhongding”) (寧國中鼎股份有限公司(”寧國中鼎”)) and ASIMCO Investment II Ltd. under the relevant laws and regulations of the PRC, under the name Anhui Ningguo Zhongding Automotive Components Co., Ltd. (安徽寧國中鼎汽車零部件有限公司)at the time. It has an investment amount of RMB250 million and registered capital of RMB160 million, out of which RMB64 million or 40% of registered capital was contributed from Ningguo Zhongding by injecting fixed assets and current assets; RMB96 million or 60% of registered capital was contributed from ASIMCO Investment II Ltd. by injecting cash in USD. The scope of operation of ASIMCO NVH primarily covers the production and sales of self-made rubber products, plastic products, hydraulic tools and molds for use in automobiles and automotive components.
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On 8 June 1998, Ningguo Zhongding transferred 50% of its shares in ASIMCO NVH, namely RMB32 million, to ASIMCO INVESTMENT X LTD. Upon completion of the transfer, RMB32 million or 20% was contributed from Ningguo Zhongding; RMB96 million or 60% was contributed from ASIMCO Investment II Ltd.; and RMB32 million or 20% was contributed from ASIMCO INVESTMENT X LTD. An “Approval Letter for the Change of Shareholding in Anhui Ningguo Zhongding Automotive Components Co., Ltd.”《關於同意安徽寧國中鼎汽車零部件有限公司變 ( 更股權的批覆》) has been obtained from Auhui Foreign Trade and Economy Committee in respect of the transfer.
On 28 June 1999, ASIMCO NVH was renamed as ASIMCO Components Co., Ltd. (Anhui) (亞新科零部件（安徽）有限公司).
On 24 November 2000, Ningguo Zhongding, ASIMCO Investment II Ltd. and ASIMCO INVESTMENT X LTD entered into a share transfer agreement, pursuant to which Ningguo Zhongding transferred its 20% interest in ASMICO NVH to ASIMCO INVESTMENT X LTD at a consideration of RMB10 million. An “Approval Letter for the Transfer of Shares in ASIMCO Components Co., Ltd. (Anhui)”《關於 ( 同意亞新科零部件（安微）有限公司轉股的批覆》) has been obtained from Auhui Office of Foreign Trade and Economic Cooperation in respect of the share transfer.
On 17 February 2006, ASIMCO NVH was renamed as ASIMCO NVH Technologies Co., Ltd. (Anhui) (亞新科噪聲與振動技術（安徽）有限公司).
On 19 December 2013, the investment amount of ASIMCO NVH increased from RMB250 million to RMB299.20 million and its registered capital increased from RMB160 million to RMB209.20 million. The addition to the registered capital was fully injected by the new shareholder ASIMCO China in the amount of USD8 million at the exchange rate of USD1: RMB6.15. ASIMCO Investment II Ltd., ASIMCO INVESTMENT X LTD and ASIMCO China, which are shareholders, contributed 46%, 31% and 23% respectively.
On 23 December 2013, pursuant to the Merger of Overseas Companies of ASIMCO Group, ASIMCO Investment II Ltd. and ASIMCO INVESTMENT X LTD, being shareholders of ASIMCO NVH, changed to Axle ATL. The 46% interest formerly held by ASIMCO Investment II Ltd. and the 31% interest formerly held by ASIMCO INVESTMENT X LTD, totally 77% interest, changed to be held by Axle ATL.
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On 2 April 2014, Axle ATL and ASIMCO HK entered into a share transfer agreement, pursuant to which Axle ATL transferred its 77% interest in ASIMCO NVH to ASIMCO HK. Upon completion of the share transfer, the shareholding structure of ASIMCO NVH will be as follows:
Percentage Amount Pain-in of Name of shareholder subscribed capital contribution (in ten (in ten thousand thousand RMB) RMB)
ASIMCO China 4,920 4,920 23.52% ASIMCO HK 16,000 16,000 76.48%
Total 20,920 20,920 100%
Major Subsidiaries
ASIMCO METAL PRODUCTS (NINGGUO) CO., LTD (“ASIMCO Metal”) (寧國市亞 新科五金製品有限公司 (“亞新科五金”))
On 7 August 2008, ASIMCO Metal was established in Ningguo under the relevant laws and regulations of the PRC, with registered capital of RMB20 million. Its scope of operation covers the production and sale of and the provision of after-sale services for hydraulic tools, automotive assembly, industrial equipment, molds and automotive components and hardware. Its entire registered capital has been subscribed for by ASIMCO NVH with the injection of RMB15 million in cash and RMB5 million in specie, totally 100% shareholding in the company.
CACG I
Establishment
CACG I was established on 26 May 1994 as an investment holding company incorporated under the laws of the Cayman Islands. The authorised capital of CACG I is US$50,000 divided into 50,000 shares of a nominal or par value of US$1.00 each.
ASIMCO Technologies Limited is the sole registered member of CACG I holding 100 shares of par value of US$1.00 each in CACG I as of 7 April 2016.
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Major Subsidiaries
Hubei Super-Elec Auto Electric Motor Co. Ltd. (“ASIMCO Electric Motor”)
On 13 April 1995, Hubei Super-Elec Auto Electric Motor Co. Ltd. was established in Jingzhou City, Hubei Province under the relevant laws and regulations of the PRC, with total investment of RMB237,205,000 and registered capital of RMB100 million. It is primarily engaged in the production and sale of electric motors and appliances for use in automobiles. Its shares are held as to 49% by Hubei Super Electric Auto Motor Co., Ltd. (“Super Electric”) (湖北神電汽車電機 股份有限公司(”神電股份”)), which injected machinery and equipment in the amount of RMB49 million as registered capital; and as to 51% by CACG I, which injected cash in USD equivalent to RMB51 million as registered capital.
On 18 April 2005, Super Electric transferred its 49% interest in ASIMCO Electric Motor to Jingzhou Super Electric Industry Co., Ltd. (“Jingzhou Industry”) (荊州神電實業 有限公司(”荊州實業”)). On 8 December 2015, the registered capital of ASIMCO Electric Motor increased from RMB100 million to RMB206 million. The addition to registered capital was subscribed for by Jingzhou Industry as to RMB52 million and by CACG I as to RMB54 million, while the proportion of shareholding held by both companies remained unchanged. ASIMCO Electric Motor underwent change of shareholders from Jingzhou Industry to Jingzhou Super Electric Industry Corporation (荊州神電實業股份有限公司) on 28 March 2016, and further to Hubei Jingsheng Technologies Co., Ltd. (湖北精昇科技有限公司) on 29 March 2016. Mr. Zhou Haiping (周海平), controlling shareholder of Hubei Jingsheng Technologies Co., Ltd., is concurrently director and general manager of ASIMCO Electric Motor.
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6. BUSINESS
I. ASIMCO CAMSHAFT
Business Operations
Founded in May 2004, ASIMCO Camshaft is an important supplier for domestic and international well-known engine manufacturers, providing more than 80 kinds of products. ASIMCO Camshaft mainly engages in the development, manufacturing, and sales of various types of engine camshafts, which can be categorised into two groups, steel shafts and cast iron shafts. Equipped with the technology and capability of processing complex cam profile, ASIMCO Camshaft has designed and developed various high-end engine camshafts. Its main product line include: chilled alloy cast iron, cold shock ball graphite cast iron, high strength nodular cast iron and steel material camshaft.
ASIMCO Camshaft’s products are utilised on a broad range of vehicles from motorcycles to automobiles. As one of the connecting parts of the engine, the camshaft is a key component for the opening and closing of the intake and exhaust valves. Driven by a crankshaft, the camshaft constantly rotates and compresses the air door with a rocker arm or an ejector rod, so as to control the opening and closing of the intake valve and exhaust valve.
For the years ended 31 December 2013, 2014 and 2015, ASIMCO Camshaft’s revenue was RMB86.0 million, RMB103.0 million and RMB103.8 million, respectively.
The following table sets forth the breakdown of ASIMCO Camshaft’s revenue by business (in RMB millions):
Year ended 31 December 2013 2014 2015 RMB millions RMB millions RMB millions
Sales of automotive products 85.2 102.2 103.5 Others 0.8 0.8 0.3
Total 86.0 103.0 103.8
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During the Track Record Period, ASIMCO Camshaft has received a number of awards in recognition of its camshaft production business, including two prestigious awards by SAIC FIAT and Cummins. Some of the significant awards and certifications ASIMCO Camshaft has received from independent entities are listed as below:
• Excellent Dynamic Strategic Cooperation Award from SAIC Fiat Hongyan Assembly Co., Ltd. in 2015;
• Best Supplier from Cummins (China) in 2010 and 2014;
• Best Quality Award from Beijing Foton Cummins in 2011;
• Best Supplier from Beijing Foton Cummins in 2011;
• Six Sigma Progress Award from Cummins ABO in 2014;
• Jiangsu Province High-Tech Products for Cummins ESP13L chilled nodular cast iron camshaft; and
• Hualing Xingma outstanding supplier in 2015.
Production
Manufacture Product and Provide Services
ASIMCO Camshaft aims to manufacture products and deliver services that meet or exceed customers’ needs and expectations. The production process begins after ASIMCO Camshaft acquires the necessary materials or expertise to meet the customer requirements and produces the prototypes based on its initial product designs.
ASIMCO Camshaft operates under two production models: purchase order and cooperative development, and maintains direct control over the design of products under both models.
(1) Purchase Order by OEM Customers
In the purchase order model, ASIMCO Camshaft supplies products to its OEM customers through purchase orders for specific products designed for particular engines. Such orders are typically governed by general terms and conditions established by each OEM customer. ASIMCO Camshaft then determines its production output according to each customer’s order. In particular, ASIMCO Camshaft tailors its production according to customers’ design drawings; it also co-develops new prototypes with customers to satisfy the specific requirements of customers. Each month, the sales department sets sales plans based on the number of customers’ orders, and the manufacture
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department arranges production plans accordingly, after which the purchasing department sets raw material procurement plans.
(2) Cooperative Development
In the cooperative development model, ASIMCO Camshaft’s development department conducts research and provides designs according to customer requirements. In product development and process designs, ASIMCO Camshaft’s team take into account inputs from the customer, such as technical specifications and project timetables. Based on these inputs, ASIMCO Camshaft then validates a set of designs for the project.
Customers, sales and marketing
ASIMCO Camshaft has established strong relationships with many of the world’s leading automobile companies as a result of its strength in offering high-quality products and customer service at competitive prices. ASIMCO Camshaft’s customers mainly consist of manufacturers of automotive engines, including subsidiary engine factories of vehicle manufacturers. Throughout the years, ASIMCO Camshaft has diversified its customer base and, as of the Latest Practicable Date, ASIMCO Camshaft’s global customers include market leaders such as Cummins and Naveco, as well as local OEMs in China.
As a well-recognized engine camshaft manufacturer, ASIMCO Camshaft is a second tier supplier of car manufacturers. Generally, ASIMCO Camshaft becomes a supplier after several rounds of technical examinations, business negotiations, product trial development, prototype production, sample test, as well as small batch inspection and certification. ASIMCO Camshaft has established long-term stable cooperative relations with several well-known domestic and foreign automobile manufacturers, and sells products directly to its customers.
ASIMCO Camshaft enjoys a stable client base primarily due to the nature of camshaft production, as it is uncommon for vehicle manufacturers to change their models of design frequently, nor do they easily replace the current supplier for engine parts. In view of the production schedules, internal policies of OEMs, and the extra time and costs involved in securing an alternative supply during an engine’s program life, it is not common for an OEM to terminate a cooperative relationship with a supplier during an engine’s program life, which typically lasts five to seven years.
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Customers
As of the Latest Practicable Date, ASIMCO Camshaft supplied its products to more than 40 customers.
For the years ended 31 December 2013 (combining revenues of ASIMCO Camshaft’s predecessor and ASIMCO Camshaft’s Group), 2014 and 2015, sales to ASIMCO Camshaft’s five largest customers accounted for 72.0%, 71.4% and 74.2% of its total revenues, respectively.
ASIMCO Camshaft focuses on forming close working relationship with, and increasing sales to OEMs by offering cost-effective solutions tailored to the individual needs of each customer. ASIMCO Camshaft targets potential customers and tracks selected opportunities through various marketing initiative, such as to follow and assess potential customer program bookings that ASIMCO Camshaft intends to secure.
ASIMCO Camshaft plans to continue diversifying its customer base in anticipation of potential risk of a decrease in customer demand. To mitigate the adverse impact of a potential reduction in purchases from customers, ASIMCO Camshaft adjusts the size of its workforce to match anticipated production needs and continues to seek new cooperative opportunities from other customers. In addition, ASIMCO Camshaft evaluates the pricing of purchase orders with customers, in order to discover new business opportunities from such customer and make alternative uses for the available production capacity to the extent possible.
Procurement and Suppliers
ASIMCO Camshaft’s Procurement Process
ASIMCO Camshaft purchases high quality, cost-effective parts in its procurement process. If a new customer program or product initiative requires purchased parts, ASIMCO Camshaft first determines whether the part is already in production by a current supplier and whether the current supplier has performed well in the past. If so, ASIMCO Camshaft negotiates with the current supplier regarding cost and technical requirements. If the required part is not in production by a current supplier or the current supplier’s past performance is deemed unsatisfactory, ASIMCO Camshaft starts a bidding process with a number of suppliers, and then evaluates the supplier proposals to select one that best meets the production needs.
Once the selected supplier passes its technical review and quality inspection, ASIMCO Camshaft starts to analyse the cost structure, and its supplier selection team makes a recommendation to the management board, which consists of a cross section representation of commercial, supplier quality and commodity supervisors and managers. If the management board
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approves the recommendation of the selected supplier, and the supplier accepts the business opportunity, ASIMCO Camshaft then proceeds to develop the specifics of the production process and issues purchase orders to the supplier for the parts.
Procurement of raw materials, parts and components
ASIMCO Camshaft uses various kinds of raw materials in its camshaft production, including cast iron, alloy, and hot rolled steel bar. In the purchase order production model, procurement of raw material is determined on a monthly basis, as a result, ASIMCO Camshaft is able to maintain a relatively low stock of raw materials and reduce the cost of storage and maintainance.
• Processing of raw materials, parts and components. Raw materials, parts and components are processed according to the necessary technical specifications to form the specified components. Such treatment process includes cutting, drilling, tumbling, polishing, zoning, in-process coating, painting, machining and heat treatment.
• Assembly of parts and components into semi-finished products. Raw materials, parts and components are further processed to produce semi-finished parts ready for final assembly.
• Final assembly. The semi-finished parts and components are assembled in the final assembly to produce the final products.
• Warehousing. Final products are either sent directly to the customer or sent to a warehouse for storage and final distribution to ASIMCO Camshaft’s customers, depending on cost efficiency and customer requirements.
In order to utilise its manufacturing facilities more effectively and enhance manufacturing efficiency, ASIMCO Camshaft has developed and implemented an advanced manufacturing system that focuses on lean production methodology and zero-defect manufacturing measures. ASIMCO Camshaft believes that such systems enables its business divisions to tailor implementation of the strategies and improve their respective manufacturing processes, thus allocating resources more efficiently and better adapting to practical business needs.
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Suppliers
For the years ended 31 December 2013, 2014 and 2015, ASIMCO Camshaft’s five largest suppliers accounted for approximately 54.9%, 45.7% and 40.8% of its total purchases, respectively. For the years ended 31 December 2013, 2014 and 2015, ASIMCO Camshaft’s largest supplier accounted for approximately 20.8%, 19.5% and 20.2% of ASIMCO Camshaft’s total purchases, respectively.
Although the terms and conditions vary from supplier to supplier, ASIMCO Camshaft typically places orders for the amount required of specific components or parts through purchase orders that are governed by the terms and conditions. The terms and conditions of ASIMCO Camshaft’s agreements with its suppliers may provide:
• termination for breach and termination for convenience with notice;
• suppliers shall provide raw materials, parts or components that meets ASIMCO Camshaft’s production requirements;
• a requirement that suppliers comply with all applicable laws, rules, regulations, orders, conventions, ordinances and standards of the country or countries of origin and destination or that relate to the manufacture, labelling, transportation, importation, exportation, licensing, approval, performance and/or certification of the goods or services; and
• payment be due between 20 and 120 days following shipment, except for certain imported equipment spare parts that requires a payment in cash.
R&D
With years of experience in camshaft manufacturing, ASIMCO Camshaft has accumulated extensive technical knowledge and developed a high degree of expertise, with a consistent focus on research and development. ASIMCO Camshaft possesses strong skills and capabilities in the research, development, and manufacturing of chilled alloy cast iron, cold shock ball graphite cast iron, high strength nodular cast iron, steel material camshaft and combined camshaft. ASIMCO Camshaft is also equipped with the skills and abilities of machining complex cam profiles. Working closely with Cummins and other well-known engine R&D centres, ASIMCO Camshaft has designed and developed a variety of high-end engine camshaft.
As of 31 December 2015, for recognition of its innovative capabilities, ASIMCO Camshaft was awarded by the Yangzhou City ASIMCO Camshaft
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Engineering Technology Research Centre, and obtained memberships in selected well-recognized industry organizations.
Ever since its inception, ASIMCO Camshaft has placed great importance on building R&D infrastructure. It has set up a 500 sq.m technology R&D centre with an advanced material testing lab, and invests significant resources in the research and development of new technology and new products each year. These testing facilities allow ASIMCO Camshaft to solve complex modelling problems and develop product designs that can be tailored to meet customers’ specific requirements.
ASIMCO Camshaft is committed to results-driven research and development initiatives and employs advanced processes in order to respond promptly to customer needs and competitions. ASIMCO Camshaft’s expertise, together with its emphasis on innovation and efficiency, allows it to use advanced technologies, to efficiently offer solutions to customers and to bring relevant, innovative products to market.
ASIMCO Camshaft establishes its product portfolio and develops core product designs and manufacturing processes in its engineering centre. Customer prototypes are generally produced within a single ISO certified pre-production facility. ASIMCO Camshaft has its own comprehensive vehicle test track for product development and customer product evaluation in its hundred-acre production site in Yizheng, Jiangsu Province. As of the Latest Practicable Date, ASIMCO Camshaft’s core team of advanced engineers in Yizheng had ten members, who focus on early-stage product development. As of 31 December 2015, ASIMCO Camshaft employed over 22 engineers, scientists, designers and technicians in its research and development team, and all members have undergraduate and graduate degrees in engineering or sciences. Most of them have between 15 to 30 years of experience in the automotive industry. In addition, ASIMCO Camshaft operates a customer service centre and a regional application engineering centre that provides customers with regional and customer-specific design, application and technical capabilities.
ASIMCO Camshaft’s total research and development expenses were RMB1.0 million, RMB3.0 million, and RMB6.0 million for the year 2013, 2014, and 2015, respectively.
In recognition of ASIMCO Camshaft’s technological achievements, ASIMCO Camshaft has won several industry awards, including the excellent dynamic strategic cooperation award from SAIC Fiat Hongyan Assembly Co., Ltd. in 2015 and the Cummins (China) best supplier award in 2010 and 2014.
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Intellectual property rights
ASIMCO Camshaft has acquired various intellectual property rights through research and development. ASIMCO Camshaft protects its intellectual property rights by obtaining patents and contractual rights. As at the Latest Practicable Date, ASIMCO Camshaft held 12 PRC patents, including 12 utility patents.
Production facilities and production capacity
As of the Latest Practicable Date, ASIMCO Camshaft has one manufacturing plant with an aggregate GFA of approximately 10,604.89 sq.m. ASIMCO Camshaft conducts onsite inventory tests at least once a year.
Quality Control
The camshaft is an important part of an automobile engine; its production process must meet strict quality control standards, including standards of quality management system and product quality standard.
ASIMCO Camshaft’s quality control plan is designed to monitor the quality of its products from development to production, and is implemented by the quality control team. Some of ASIMCO Camshaft’s quality control team members have more than 20 years of experience in the industry, and six of them hold engineering degrees.
In addition to ASIMCO Camshaft’s internal quality standards, its OEM customers often have their own specific requirements or warranty metrics regarding quality control. ASIMCO Camshaft’s plant is ISO/TS16949 certified, which is a quality certification in the automotive industry that is recognised by most of ASIMCO Camshaft’s customers. In launching new products and customer programs, ASIMCO Camshaft’s development managers and engineers are responsible for quality control in its design of product and manufacturing systems and advanced product development planning. During production, ASIMCO Camshaft’s parts approval process aims to ensure that customer requirements are fully understood and satisfied before any new or revised parts are produced. ASIMCO Camshaft also conducts risk analysis to identify potential problems early in the development cycle. In addition, ASIMCO Camshaft’s system establishes specific quality benchmarks for its products to enhance safety, assure regulatory compliance, and optimise vehicle functionality.
ASIMCO Camshaft’s annual quality control plan promotes its culture of quality control by setting specific objectives, initiatives and timing targets that require individual ownership and responsibility. ASIMCO Camshaft measures the progress towards such objectives using metrics which includes factors such as the percentage of quality parts for each production run, customer returns per million parts sold, and the volume of quality complaints.
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HSE
ASIMCO Camshaft’s production does not involve high risk, nor does it involve a high degree of environmental pollution. ASIMCO Camshaft has passed the ISO14001 environmental system certification and OHSAS18001 occupational health and safety management system certification. Its plant is currently operating effectively abiding with both standards. In addition, ASIMCO Camshaft assigns plant managers to implement compliance of the foregoing standards at the production plant.
Competition
The automotive engine components industries are competitive. OEMs typically evaluates Tier 2 suppliers closely on the basis of various factors such as product quality, price, reliability and timeliness of delivery, product design capability, technical expertise and development capability, new product innovation, financial viability, operational flexibility and quality, customer service and overall management. ASIMCO Camshaft believes that it competes effectively with other Tier 2 suppliers. In the engine camshaft market, ASIMCO Camshaft has several domestic competitors, along with whom comprises approximately 60% of the market in terms of sales revenue in 2015.
The barriers to entry to the engine system market include the competitive nature of the market, the cost to OEMs of changing steering suppliers and the capital and technical capability required for the continuous research and development of new products.
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Employees
As of 31 December 2015, ASIMCO Camshaft employed 281 salaried employees. The sales and marketing team had seven employees, and the technique team had ten employees. The following table sets forth a breakdown of ASIMCO Camshaft’s employees by business function as of 31 December 2015:
Number of Employees as of 31 December Functions 2015 % of total
Human Resource 4 1.42% Finance 4 1.42% Technology 8 2.85% Quality Assurance 1 0.36% Quality Control 21 7.47% Sales 6 2.14% Procurement 4 1.42% Production Management 4 1.42% Equipment Power 3 1.07% Foundry 65 23.13% Metal Working 120 42.70% Foundry-1 16 5.69% Metal Working-1 18 6.41% TPM Propulsion Lab 2 0.71% Administration 5 1.78%
Total 281 100.00%
Properties
ASIMCO Camshaft is headquartered in Yizheng, Jiangsu Province, China. As of the Latest Practicable Date, ASIMCO Camshaft owned two parcels of land in China, with a total site area of approximately 60,001.4 sq.m. ASIMCO Camshaft owned two buildings or units in China, with a total GFA of approximately 43,937.89 sq.m.
Owned Land
As of the Latest Practicable Date, ASIMCO Camshaft owned two parcels of land located in Jiangsu Province in China with a total site area of approximately 60,001.4 sq.m. ASIMCO Camshaft has obtained land use right certificates regarding all of such land. ASIMCO Camshaft-owned land is mainly used for production facilities and ancillary facilities.
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Owned Buildings and Units
As of the Latest Practicable Date, ASIMCO Camshaft owned two buildings or units in China with a total GFA of approximately 43,937.89 sq.m., located in Jiangsu Province. ASIMCO Camshaft had not obtained the appropriate ownership certificates for premises with a total GFA of approximately 162 sq.m. All these premises are used for offices, production facilities and ancillary facilities, and represented approximately 0.66% of the total premises or units owned by ASIMCO Camshaft as of Latest Practicable Date. Part of the aforementioned premises are operating assets. ASIMCO Camshaft is accelerating the procedures of obtaining the ownership certificates, but the possibility of not being able to obtain the ownership certificates for part of the premises remains.
II. ASIMCO Shuanghuan
Business Operations
Founded in August 1995, ASIMCO Shuanghuan is a well-recognised supplier in the PRC market for piston ring products. ASIMCO Shuanghuan mainly engages in the development, manufacturing, and sales of various types of piston rings. Equipped with the technology and capability of processing complex product profile, ASIMCO Shuanghuan has designed and developed a series of piston ring products. These products are utilised on a broad range of vehicles from small passenger cars to full-size trucks.
The piston ring is a key part of the internal combustion engine, which connects the piston and the cylinder liner to form the engine power source module. The quality requirement of piston rings increases as the combustion engine develops with high strength, low emission with a longer lifespan, following the industry trend.
For the years ended 31 December 2013, 2014 and 2015, ASIMCO Shuanghuan’s revenue was RMB543.0 million, RMB520.3 million and RMB477.6 million, respectively.
The following table sets forth the breakdown of ASIMCO Shuanghuan’s revenue by business (in RMB millions):
Year ended 31 December 2013 2014 2015 RMB millions RMB millions RMB millions
Sales of automotive products 526.1 502.2 464.1 Sales of materials and others 16.9 18.1 13.5
Total 543.0 520.3 477.6
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During the Track Record Period, ASIMCO Shuanghuan has won a number of awards in recognition of its outstanding production ability, including two prestigious awards from JMC and Yamaha. Some of the significant awards and certifications ASIMCO Shuanghuan has received from independent entities are listed as below:
(1) Social honours: Famous Trademark in Jiangsu Province, the Top Hundred Industrial Corporations in Yangzhou, the Pacesetter Civilised Unit of Yizheng;
(2) Host plant honours: JMC Development and Collaboration Award, JAC Navistar Quality Contribution Award, DEUTZ Superior Quality Award, Yamaha (Taizhou) Supplier Outstanding Contribution Award, Weichai Group Best Quality Award, SFH Supplier Strategy Seminar Memorial Award; and
(3) Product honours: Patent Golden Prize of Yangzhou, Certificate of High and New Technological Product, Science and Technology Award of Yizheng.
Production
Featured Products
One of ASIMCO Shuanghuan’s featured products is the piston ring, which consists of four major functions in an internal combustion engine:
(1) Sealing
In a reciprocating internal combustion engine, the piston ring is a moving part and a sealing element. Under the high-speed reciprocating motion state and the high-temperature and high-pressure gas, the piston ring functions as a seal between the combustion chamber and the crankcase, in order to prevent combustion in the cylinder from generating high-temperature and high-pressure gas channelling into the crankcase.
gas
80-90%
10-20%
5%
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(2) Lubricating oil controlling
For the piston ring to slide normally, lubricating oil must be applied constantly to the cylinder wall, and the piston ring shall be able to scrape the extra lubricating oil off the cylinder wall. The movement must ensure a sufficient amount of lubricating oil for the piston ring to slide, and meanwhile maintain a relatively low consumption of it, so as to prevent excess oil from flowing up to the combustion chamber.
Oil scraping by the oil ring Oil scraping by the gas ring (80-90%) (10-20%)
(3) Heat transference
The piston ring functions as a heat transferor in the cylinder. When the engine is working, the piston temperature rises to a very high level. The heat is partially transferred to the cylinder wall through the piston ring, and then transmits to the cooling water through the cylinder wall, so as to reduce the temperature of the piston.
heat heat
50-70%
20-30%
5-10%
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(4) Support and guidance
A piston’s motion in the cylinder is supported by the ring. As the piston swells after being heated by the gas, there is a gap between the cylinder and the piston. Due to the existence of the gap, the piston relies on the piston ring to keep motion balance in the cylinder to prevent the piston from hitting the wall of the cylinder. When the supporting function of the piston ring is weakened or damaged, the piston component loses balance, resulting in malfunctions such as noise, eccentric wear and abrasion failure, and even serious malfunctions such as welding, wrecking and scuffing of cylinder bore.
Production modes
ASIMCO Shuanghuan currently operates under three production modes: safety stock, non-safety stock, and new production mode. The sales department issues weekly plans on safety stock products and non-safety stock products to the production and marketing department. For the safety storage products, the production and marketing department decides on weekly production plans according to existing inventory and sales targets; for non-safety stock products, production plans are made according to customers’ specific orders. The R&D department organises a new product review, and then reports to the sales and marketing department for production planning. The production and marketing department organises monthly sales analysis plan realise rate, production plan fulfilment rate, inventory quantity and other performance data, and arranges new production plans accordingly.
Customers, sales and marketing
Compared with foreign piston ring manufacturers, ASIMCO Shuanghuan enjoys advantages in cost efficiency and technology independency, as well as a broad customer base both domestic and abroad. ASIMCO Shuanghuan has established a long-term and stable relation of cooperation with a number of well-recognized diesel engine companies. As of
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the Latest Practicable Date, ASIMCO Shuanghuan supplied its products to more than 900 customers, including Sinotruk, FAW, Foton Auman, Great Wall, Geely, and JAC.
For the years ended 31 December 2013 (combining revenues of ASIMCO Shuanghuan’s predecessor and ASIMCO Shuanghuan’s Group), 2014 and 2015, sales to ASIMCO Shuanghuan’s five largest customers accounted for 24.8%, 22.7% and 21.7% of its total revenues, respectively.
Procurement and Suppliers
The terms and conditions of ASIMCO Shuanghuan’s agreements with its suppliers may provide that payment be due in 90 days following shipment, except for part of the imported equipment spare parts that requires a payment in cash.
ASIMCO Shuanghuan’s top five suppliers are manufacturers of automotive components. For the years ended 31 December 2013, 2014 and 2015, ASIMCO Shuanghuan’s five largest suppliers accounted for approximately 74.9%, 67.0% and 73.3% of its total purchases, respectively. For the years ended 31 December 2013, 2014 and 2015, ASIMCO Shuanghuan’s largest supplier accounted for approximately 58.8%, 52.2% and 53.5% of ASIMCO Shuanghuan’s total purchases, respectively. The top five suppliers have maintained business relationships with ASIMCO Shuanghuan for an estimated range of eight to over 20 years.
R&D
With years of experience in piston ring manufacturing, ASIMCO Shuanghuan has accumulated extensive technical knowledge and developed a high degree of technical expertise, with a consistent focus on research and development. ASIMCO Shuanghuan invests significant resources in the research and development of new technology and new products each year. ASIMCO Shuanghuan works closely with academic institutions and universities with national recognition, and has established a number of research institutions through cooperation, including:
• Yizheng Shuanghuan High-Performance Piston Ring Joint Research and Development Centre, which was established in cooperation with Lanzhou Institute of Chemical Physics, Chinese Academy of Sciences;
• Piston Ring Technology Research Institution which was established in cooperation with Southeast University; and
• Piston Ring Technology Research Centre, which was established in cooperation with Jiangsu University.
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The R&D centres with a total size area of approximately 2,520 sq.m. and advanced engine testing labs allow ASIMCO Shuanghuan to solve complex modelling problems and develop product designs that can be tailored to meet customers’ specific requirements.
In recent years, ASIMCO Shuanghuan invested a total of approximately RMB10 million in building the enterprise information system. Using software such as AutoCAD, CAXA, Creo and CATIA, ASIMCO Shuanghuan developed various sets of special piston ring design software and independently designed piston rings, and obtained intellectual property rights. In order to acquire the ability of conducting static and dynamic analysis of the piston ring, ASIMCO Shuanghuan also introduced AnyCasting, Excite Piston&Ring and other CAE analysis software.
ASIMCO Shuanghuan’s total research and development expenses were RMB16.8 million, RMB15.3 million and RMB13.3 million for the year 2013, 2014 and 2015, respectively.
In recognition of its technological achievements, ASIMCO Shuanghuan has won several industry awards, including the Patent Golden Prize of Yangzhou in 2015 and the first prize of Science and Technology Award of Yizheng.
As of the Latest Practicable Date, ASIMCO Shuanghuan’s core team of advanced engineers in Yizheng had 27 members, who focus on early-stage product development. Thirty-nine members of ASIMCO Shuanghuan’s research and development team have undergraduate and graduate degrees in engineering or sciences, and most of them have between ten to 20 years of experience in the automotive industry.
Intellectual property rights
ASIMCO Shuanghuan has acquired various intellectual property rights through research and development. As at the Latest Practicable Date, ASIMCO Shuanghuan held 33 PRC patents, including three patents of invention, 26 utility patents and five design patents. ASIMCO Shuanghuan has applied for 12 additional patents, including eight patents of invention and four utility patents.
As at the Latest Practicable Date, ASIMCO Shuanghuan and its subsidiaries held exclusive rights to 52 PRC registered trademarks and five trademarks registered outside of the PRC.
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Production facilities and production capacity
As of the Latest Practicable Date, ASIMCO Shuanghuan had two manufacturing plants with an aggregate GFA of approximately 42,565.32 sq.m. ASIMCO Shuanghuan conducts onsite inventory tests at least once per year.
Quality Control
Quality Control Standard
The piston ring is a core part of an automobile engine. The production enterprise must meet strict quality control standards, including standards of quality management system and product quality standard.
ASIMCO Shuanghuan has established and implemented a quality management system in automobile engine piston ring manufacturing that meets the ISO/TS16949:2009 technical standard; its environmental management system for automobile engine piston ring manufacturing has received the certification of ISO14001:2004. The quality management system has received the certification of ISO10012:2003. In recognition of its fine quality control system, various well-recognised prizes have been awarded to ASIMCO Shuanghuan, such as the National Top Hundred Automobile Parts and Components Supplier, the Yangzhou Mayor Quality Award and Jiangsu Quality Award.
In terms of product quality standards, ASIMCO Shuanghuan follows standards that satisfy national standards, industry standards and customer specifications. ASIMCO Shuanghuan’s customers usually adopt more rigorous quality standards than the national and industrial standards. ASIMCO Shuanghuan’s products exceed all requirements from such industry-leading customers.
Some of ASIMCO Shuanghuan’s quality control employees have more than 20 years of experience in the industry, and 14 of them hold engineering degrees.
Quality Control Measures
As a leading enterprise in China’s professional piston ring industry, ASIMCO Shuanghuan adopts the quality system standard of industry-leading automobile manufacturer and parts and components manufacturing industry, and accepts strict examination conducted by customers and third party certification bodies.
ASIMCO Shuanghuan has set up a quality management department to lead the procurement of raw materials and equipment, product production and quality control during delivery. ASIMCO Shuanghuan has also formulated details of the quality management system; each step in production and operation is to strictly follow with the requirements of the quality management system in implementing the quality control measures.
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In the procurement process, ASIMCO Shuanghuan warns or eliminates suppliers of poor supply capacity through its qualified sub-supplier management system to ensure the quality of the raw materials and equipment. ASIMCO Shuanghuan conducts inspection on all of the raw materials procured, and only qualified raw materials are warehoused and put into production. If a frontline worker timely reports on the substandard goods among the raw materials provided by the supplier he or she discovers in the production process, ASIMCO Shuanghuan rewards this worker, and recourses against the supplier.
In the production process, ASIMCO Shuanghuan mainly performs its quality control by conducting product quality appraisal and key imported machinery and equipment management, as well as offering incentives.
In the delivery process, the quality management department is responsible for the final quality inspection of outgoing products, communication with customers, after-sales service coordination and implementation of corrective measures.
HSE
ASIMCO Shuanghuan’s production does not involve high risks, nor does it involve a high degree of environmental pollution. ASIMCO Shuanghuan has passed the ISO14001 environmental system certification and OHSAS18001 occupational health and safety management system certification. ASIMCO Shuanghuan’s plant is currently operating effectively abiding with the standards.
Competition
In the piston ring market, ASIMCO Shuanghuan has several major domestic competitors, along with whom comprises more than 50% of the steering market in terms of sales revenue in 2015.
Employees
As of 31 December 2015, ASIMCO Shuanghuan employed 1,208 employees, with 67 in the sales and marketing team, nine of whom have an engineering background.
Properties
ASIMCO Shuanghuan is headquartered in Yizheng, Jiangsu Province, China. As of the Latest Practicable Date, ASIMCO Shuanghuan owned two parcels of land in China, with a total site area of approximately 156,908.4 sq.m. ASIMCO Shuanghuan owned four buildings or units in China with a total GFA of approximately 56,571.64 sq.m., and also leased three buildings or units.
Owned Land
As of the Latest Practicable Date, ASIMCO Shuanghuan owned two parcels of land located in Jiangsu Province in China with a total site area of
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approximately 156,908.4 sq.m. ASIMCO Shuanghuan has obtained land use right certificates regarding all of such land. ASIMCO Shuanghuan-owned land is mainly used for industrial purposes.
Owned Buildings and Units
As of the Latest Practicable Date, ASIMCO Shuanghuan owned four buildings or units in China with a total GFA of approximately 56,571.64 sq.m., located in Jiangsu Province. ASIMCO Shuanghuan had not obtained the appropriate ownership certificates for premises with a total GFA of approximately 6,810.57 sq.m. These premises represented approximately 12.04% of the total premises or units owned by ASIMCO Shuanghuan as of Latest Practicable Date. Part of the aforementioned premises are operating assets. ASIMCO Shuanghuan is accelerating the procedures of obtaining the ownership certificates, but the possibility of not being able to obtain the ownership certificates for part of the premises remains.
Leased Land
As of the Latest Practicable Date, ASIMCO Shuanghuan leased a total of three buildings or units with a total GFA of approximately 10,705.53 sq.m. in China, which were mainly for offices, residential and ancillary purposes. ASIMCO Shuanghuan-leased buildings in China are located in Jiangsu Province.
III. ASIMCO Foundry
Business Operations
Founded in January 2004, ASIMCO Foundry mainly engages in the development, manufacturing and sales of various types of automotive castings, offering more than 2,000 products.
The following table sets forth the breakdown of ASIMCO Foundry’s revenue by business (in RMB millions):
Year ended 31 December 2013 2014 2015 RMB millions RMB millions RMB millions
Sales of automotive products 123.0 104.5 84.7 Sales of materials and semi-products 0.7 0.2 0
Total 123.7 104.7 84.7
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Production
Functions of the main products and changes during the reporting period
During the reporting period, ASIMCO Foundry mainly functions as the casting piston ring work-factory for ASIMCO Shuanghuan. For features of piston rings, see “Business — II. ASIMCO Shuanghuan — Featured Products.”
Manufacturing measures of main products
ASIMCO Foundry’s manufacturing measures can be broadly categorized into the following steps:
Sand processing Modelling
Inoculation casting Physical and (balling) chemical testing
Batching Melting
Bland storage and Appearance Cleaning Sand mixing warehousing Inspection
Production mode
In general, ASIMCO Foundry’s production plans are arranged by ASIMCO Shuanghuan. For ASIMCO Shuanghuan’s production model, see “Business — II. ASIMCO Shuanghuan — Business Operations — Production Mode.”
Customers, sales and marketing
ASIMCO Foundry’s products are generally sold directly to ASIMCO Shuanghuan.
Procurement and Suppliers
Procurement
ASIMCO Foundry’s major raw materials are procured by ASIMCO Shuanghuan. See “Business — II. ASIMCO Shuanghuan — Business — Procurement and Suppliers.”
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Suppliers
For the years ended 31 December 2013, 2014 and 2015, ASIMCO Foundry’s five largest suppliers accounted for approximately 72.1%, 69.9% and 74.6% of its total purchases, respectively. For the years ended 31 December 2013, 2014 and 2015, ASIMCO Foundry’s largest supplier accounted for approximately 31.8%, 35.1% and 39.4% of ASIMCO Foundry’s total purchases, respectively.
The terms and conditions of ASIMCO Foundry’s agreements with its suppliers provide that payment be due within 90 days following shipment, except for part of the imported equipment spare parts that requires a payment in cash.
R&D
ASIMCO Foundry’s products are mainly developed by ASIMCO Shuanghuan. See “Business — II. ASIMCO Shuanghuan — Business — R&D.”
Intellectual property rights
ASIMCO Foundry’s production is mainly based upon ASIMCO Shuanghuan’s technology.
Production facilities and production capacity
As of the Latest Practicable Date, ASIMCO Foundry had one manufacturing plant with an aggregate GFA of approximately 8,467.70 sq.m. ASIMCO Foundry conducts onsite inventory tests at least once per year.
Quality Control
ASIMCO Foundry’s quality control methods are the same with those of ASIMCO Shuanghuan. See “Business — II.ASIMCO Shuanghuan — Business — Quality Control.”
HSE
ASIMCO Foundry’s production process does not entail high risk, nor does it involve high degree of environmental pollution.
Properties
ASIMCO Foundry is headquartered in Yizheng, Jiangsu Province, China. As of the Latest Practicable Date, ASIMCO Foundry owned two parcels of land in China, with a total site area of approximately 57,144 sq.m. ASIMCO Foundry owned two buildings or units in China, with a total GFA of approximately 24,425.76 sq.m.
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Owned Land
As of the Latest Practicable Date, ASIMCO Foundry owned two parcels of land located in Jiangsu Province in China with a total site area of approximately 57,144 sq.m. ASIMCO Foundry has obtained land use right certificates regarding all of such land. ASIMCO Foundry-owned land is mainly used for offices, production facilities and ancillary facilities.
Owned Buildings and Units
As of the Latest Practicable Date, ASIMCO Foundry owned two buildings or units in China with a total GFA of approximately 24,425.76 sq.m., located in Jiangsu Province.
ASIMCO Foundry has obtained building ownership certificates for all of the above buildings or units, which were primarily used for offices, production facilities, ancillary facilities, and dormitories for its employees.
IV. ASIMCO Shanxi (山西)
Business Operations
Founded in September 1997, ASIMCO Shanxi conducts its business in OEM production and sales of engine cylinder block and heads. ASIMCO Shanxi is a provider of automobile casting plans and an independent and professional supplier of cylinder block and heads, flywheels, flywheel covers, etc. It offers more than 180 kinds of products.
The following table sets forth the breakdown of ASIMCO Shanxi’s revenue by business:
Year ended 31 December 2013 2014 2015 RMB in RMB in RMB in millions millions millions
Sales of automotive component products 439.8 562.7 542.9 Others 8.9 2.7 5.2
Total 448.7 565.4 548.1
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In recent years, ASIMCO Shanxi achieved the following awards:
(1) Government awards: Environmental Protection Advanced Unit in 2009 and 2010, Advanced Enterprise of Technical Innovation and Efficiency in 2011, Advanced Enterprise of Import and Export in 2011, Outstanding Contribution Enterprise in 2011, Outstanding Enterprise in 2012; and
(2) Industry association awards: Outstanding Foreign-invested Enterprise in 2011, Thousand Core Enterprises in the Casting Industry in the PRC, Shanxi Province Foundry Industry 30 Strong Enterprises with Comprehensive Strength.
Production
ASIMCO Shanxi bases its production on sales prospects. It generally takes two to five years for an engine host plant to put an engine product on the market. The cylinder block and cylinder head is the core of an engine. The process from providing cylinder block and head samples according to drawings to passing the PPAP generally takes one to three years. An engine cylinder head mould normally costs RMB5 million, while the development cost usually amounts to RMB10 million.
Host plant conducts Seek potential parts research and Negotiation and Mold Research and and components development of contract execution development produce a sample suppliers new engine models
Product mass Payment Pass PPAP Host plant testing Provide the sample production
Customers, sales and marketing
Customers
As of the Latest Practicable Date, ASIMCO Shanxi supplied its products to more than 40 customers, including substantially all of the world’s top five major OEMs in terms of production volume in 2015.
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For the years ended 31 December 2013 (combining revenues of ASIMCO Shanxi’s Predecessor and ASIMCO Shanxi’s Group), 2014 and 2015, sales to ASIMCO Shanxi’s five largest customers accounted for 73.2%, 60.0% and 75.6% of its total revenues, respectively. Each of ASIMCO Shanxi’s five largest customers for the year ended 31 December 2015 has maintained business relationships with it for over four years.
Sales
ASIMCO Shanxi’s main sales model is map processing, through which ASIMCO Shanxi negotiates the price based on the cost, difficulty coefficient and profit. The price might fluctuate along with the price of pig iron and steel scraps. ASIMCO Shanxi’s OEM business targets host manufacturers instead of end customers.
Procurement and Suppliers
Procurement
ASIMCO Shanxi’s department of procurement concentrates its procurement activities of procuring raw materials, and makes payment according to the contract. Procurement of raw materials is based upon customer orders, and driven by the material requirement planning (MRP). It is subject to inventory control, and spare parts are procured on an on-demand basis. Parts of the materials are produced under a Just in Time System (JIT), which decides the supply according to the needs.
Suppliers
ASIMCO Shanxi’s top five suppliers are manufacturers of automotive components. For the years ended 31 December 2013, 2014 and 2015, ASIMCO Shanxi’s five largest suppliers accounted for approximately 43.0%, 42.9% and 35.2% of its total purchases, respectively. For the years ended 31 December 2013, 2014 and 2015, ASIMCO Shanxi’s largest supplier accounted for approximately 12.8%, 11.7% and 8.5% of its total purchases, respectively. ASIMCO Shanxi’s five largest suppliers for the year ended 31 December 2015 have maintained business relationships with it for an estimated range of five to over 10 years.
The terms and conditions of ASIMCO Shanxi’s agreements with its suppliers provides that payments be due between 20 and 120 days following shipment, except for part of the imported equipment spare parts that requires a payment in cash.
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R&D
ASIMCO Shanxi is a high-tech enterprise in Shanxi Province and a National Foundry 1000 Backbone Enterprise, possessing 23 utility models in production to ensure the efficiency and product quality stability of its production process.
ASIMCO Shanxi has established its 330 sq.m. R&D centre. As of the Latest Practicable Date, ASIMCO Shanxi’s core team of advanced engineers in Yizheng had 55 members, who focus on early-stage product development. As of 31 December 2015, ASIMCO Shanxi employed over 100 engineers of various specialties, scientists, designers and technicians nationwide. Twenty-seven members of ASIMCO Shanxi’s research and development team have undergraduate and graduate degrees in engineering or sciences.
ASIMCO Shanxi’s total research and development expenses were RMB11.0 million, RMB19.5 million, and RMB20.2 million for the year 2013, 2014, and 2015, respectively.
In recognition of its technological achievements, ASIMCO Shanxi has achieved several industry awards, including the Outstanding Foreign-invested Enterprise in 2011.
Intellectual property rights
ASIMCO Shanxi has acquired various intellectual property rights through its research and development, and protects such rights by obtaining patents and contractual rights. As of the Latest Practicable Date, ASIMCO Shanxi held 16 PRC patents, including 16 utility patents, and has applied for seven additional patents.
Production facilities and production capacity
As of the Latest Practicable Date, ASIMCO Shanxi had one manufacturing plant with an aggregate GFA of approximately 73,177.76 sq.m. ASIMCO Shanxi conducts onsite inventory tests at least once per year.
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Quality Control
ASIMCO Shanxi has passed the TS16949 quality system certification. Its internal management is conducted through the Fourth Shift Management Information System (MIS) on the computer. It has established an independent casting technology R&D centre. ASIMCO Shanxi has also passed second party quality audits conducted by a number of international and domestic units. Detection instrument includes German ARL3460 vacuum direct reading spectrometer, German Carl Zeiss inverted intelligent digital materials microscopists, Germany Smartscan-R5 3D scanner, Germany 3D scanner, and many other kinds of professional testing equipments for casting process and casting products.
Quality control standards
ASIMCO Shanxi gained the ISO9002 quality system certification in 2000, the ISO9001 quality system certification in 2003, the ISO/TS16949: 2002 quality system certification in 2007, and the ISO/TS16949: 2009 quality system certification in 2010.
Quality control measures
ASIMCO Shanxi has set up a quality department to control the quality of product production and delivery. The quality department’s responsibilities include participation in new product development and product quality planning; ASIMCO Shanxi’s continuous project improvement and operation optimisation; inspection, testing and discipline inspection works based on control plans; processing unqualified products and hosting hearings with the product engineering department on unqualified products; final inspection of products; dealing with customer complaints; conducting tracking surveys on customer quality complaints; establishing and maintaining the laboratory quality system; raw material incoming inspection and final inspection; maintenance of measuring and test equipment; calibration of measuring and test equipment; establishing the quality system, compiling quality manuals and procedure documents, and internally promoting the quality system; internal audit of the quality system; putting forward corrective action requirements and tracking the implementation of measures; measurement system analysis; important qualified supplier quality assurance audit; SPC technology application and promotion. Some of the quality control employees have more than ten years of experience in the industry.
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In the actual operation, aside from meeting the quality system standards, ASIMCO Shanxi also conducts the following quality control measures:
For the process of purchasing, ASIMCO Shanxi developed standards of raw materials management, unqualified raw material punishment procedures and other systems for the effective control of raw materials, and standardised the management. ASIMCO Shanxi clearly defined the punishment to the supplier in case of compromised acceptance of unqualified raw material, so as to push suppliers improve material quality. For the process of production, ASIMCO Shanxi formulated quality control documents on the metrology management procedure of receipt of materials, product sample management procedure, casting machine and remedial management procedure, reclaimed sand storage management procedure, internal brush plating casting management procedure, product quality and technological discipline reward and punishment system, and other quality control documents so as to standardise ASIMCO Shanxi’s production processes. For the product delivery process, ASIMCO Shanxi formulated files on a quality abriormity handling procedure, instructions on audition before exported products’ shipment, internal complaint handling procedure, customer complaints responsibility division system, and other control files.
HSE
ASIMCO Shanxi has passed ISO14001 environmental system certification and OHSAS18001 occupational health and safety management system certification, both of which are currently effective. In addition, ASIMCO Shanxi assigns each plant manager to promote at least five safety programs and implement compliance of the foregoing standards at the production plant.
Competition
In the engine cylinder block and heads market, ASIMCO Shanxi has several global competitors, along with whom comprises more than 50% of the engine cylinder block and heads market in terms of sales revenue in 2015.
Employees
As of 31 December 2015, ASIMCO Shanxi employed 928 employees, with 32 in the sales and marketing team, ten of whom have an engineering background.
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The following table sets forth a breakdown of ASIMCO Shanxi’s employees by business function as of 31 December 2015:
Number of Employees as of 31 December Functions 2015 % of total
213 Mold maintenance division 11 1.19% 402 Engineering department 26 2.80% EHS & manufacturing support department 1 0.11% Safety and environmental protection division 4 0.43% Security division 8 0.86% Material testing lab 15 1.62% Finance/ Accounting 10 1.08% Procurement department 6 0.65% Forklift operation and maintenance class 31 3.34% Product technology department 17 1.83% Power division 3 0.32% Second casting cylinder core industry system 102 10.99% Second casting production and operation 4 0.43% Second casting shaping engineering department 51 5.50% Second casting maintenance department 21 2.26% Engineering technology division 17 1.83% Administration and human resources department 15 1.62% Planning division 1 0.11% Warehousing management division 8 0.86% Cleaning and maintenance department 19 2.05% Melting department 46 4.96% Melting and maintenance department 6 0.65% Sand preparation department 7 0.75% Maintenance facility engineering department 5 0.54% Maintenance centre division 13 1.40%
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Number of Employees as of 31 December Functions 2015 % of total
Sales services and logistics department 16 1.72% R&D centre 14 1.51% No.1 modelling department 45 4.85% First casting production and operation 3 0.32% Modelling maintenance department 21 2.26% Core-making department 21 2.26% Core-making maintenance department 17 1.83% Quality department 35 3.77% Casting cleaning department 227 24.46%
Total 928 100.00%
Properties
ASIMCO Shanxi is headquartered in Jiangxian, Shanxi Province, China. As of the Latest Practicable Date, ASIMCO Shanxi owned one parcel of land in China, with a total site area of approximately 268,117.48 sq.m. ASIMCO Shanxi owned nine buildings or units in China, with a total GFA of approximately 62,260.46 sq.m.
Owned Land
As of the Latest Practicable Date, ASIMCO Shanxi owned one parcel of land located in Shanxi Province in China with a total site area of approximately 268,117.48 sq.m. ASIMCO Shanxi has obtained land use right certificates regarding all of such land. ASIMCO Shanxi-owned land is mainly used for offices, production facilities, and ancillary facilities.
Owned Buildings and Units
ASIMCO Shanxi has obtained building ownership certificates for eight of its buildings or units, which were primarily used for offices, production facilities, ancillary facilities, and dormitories for its employees. ASIMCO Shanxi had not obtained the appropriate ownership certificates for premises with a total GFA of approximately 8,101.23 sq.m. These premises represented approximately 10.15% of the total premises or units owned by ASIMCO
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Shanxi as of Latest Practicable Date. Part of the aforementioned premises are operating assets. ASIMCO Shanxi is accelerating the procedures of obtaining the ownership certificates, but the possibility of not being able to obtain the ownership certificates for part of the premises remains.
V. ASIMCO NVH
Business Operations
Founded in August 1994, ASIMCO NVH focuses on the automobile (passenger cars and commercial vehicles) market. ASIMCO NVH engages in the research and development, manufacturing and production of, and provides services and perfect solutions for, vehicle NVH and braking system rubber products and modules. NVH system rubber products mainly include vibration reducing rubber parts, such as engine mount, top link bracket, torsional vibration damper (TVD), liner bushing, and exhaust lifting lug. Braking system rubber products mainly include coating, rubber bowl, dust cover, junction block, and 0-shape ring.
ASIMCO NVH’s revenue increased by 17.7% from RMB506.5 million for the year ended 31 December 2013 to RMB596.4 million for the year ended 31 December 2014, mainly because of the development in new projects and new products and the growing demand for passenger vehicles.
The following table sets forth the breakdown of ASIMCO NVH’s revenue by business:
Year ended 31 December 2013 2014 2015 RMB in RMB in RMB in millions millions millions
Sales of automotive parts and components 489.5 576.6 641.6 Sales of materials and semi-products 13.7 15.4 19.7 Others 3.3 4.4 5.8
Total 506.5 596.4 667.1
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During the Track Record Period, ASIMCO NVH has received a number of awards in recognition of its rubber products solutions, including two prestigious awards by SGMW and CBYD. The following sets forth some of the significant awards and certifications ASIMCO NVH has won from independent entities:
(1) Government incentives: 2011 Anhui Province Top 200 Private Enterprises, 2011 Anhui Province Top 50 Export Private Enterprises, 2011 National Excellent Foreign-invested Enterprise, Contract-keeping Units of Credibility from 2011 to 2012, 2012 Anhui Province Top 50 Import and Export Enterprise, 2012 Top Ten Enterprise of Scientific and Technique Innovation, 2012 Top 20 Industrial Enterprise of Comprehensive Strength of the City, 2012 Outstanding Private Enterprise; and
(2) Host plant awards: Bosch Outstanding Supplier in 2012 and 2013, SGMW Supplier Award for Outstanding Quality in 2013 and 2014, 2011 BYD Best Cooperation Award, 2013 Quality Excellence Award from Chassis Brakes International.
Representative Projects
ASIMCO NVH’s main products include vibration damping series products and brake series products, both of which involve the rubber compound preparation process during the production process. In the subsequent processing, vibration damping series products go through the skeleton processing process and vibration damping products machining process. Brake series products do not require the skeleton processing process because they are pure rubber products; the machining processes is followed only by brake products machining processes. ASIMCO NVH’s manufacturing measures can be broadly categorized into the following steps:
Vibration reduction Skeleton Vibration reduction and subsequent processing series products processing
Preparation of rubber compounds
Braking subsequent Braking series processing products
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Purchase Order by Customers
ASIMCO NVH mainly supplies products to its customers through purchase orders for specific products supplied for particular engines, which are typically governed by general terms and conditions established by each customer. ASIMCO NVH determines its production output according to customers’ orders. In particular, ASIMCO NVH provides customised services according to customers’ design drawings; it also co-develops new prototypes with customers to satisfy the specific demands of customers. The sales department sets sales plans based on customers orders, and then the manufacture department makes production plans accordingly, after which the purchasing department sets raw material procurement plans.
Customers, sales and marketing
Customers
As of the Latest Practicable Date, ASIMCO NVH supplied its products to more than 398 customers, including Bosch and SGMW.
For the years ended 31 December 2013 (combining revenues of ASIMCO NVH’s Predecessor and ASIMCO NVH’s Group), 2014 and 2015, sales to ASIMCO NVH’s five largest customers accounted for 37.3%, 39.3% and 35.8% of ASIMCO NVH’s total revenues, respectively. Each of ASIMCO NVH’s five largest customers for the year ended 31 December 2015 has maintained business relationships with it for over five years.
Sales
ASIMCO NVH’s sales team consists of the export department, the domestic sales department and the planning department. Its main customers are domestic and foreign automobile manufacturing enterprises and first level supporting equipment suppliers. ASIMCO NVH’s domestic sales of products are conducted via a direct sales model; for exported products, both the sales agency model and direct sales model are used.
Procurement and Suppliers
Procurement
ASIMCO NVH suppliers are divided into two categories, one of which is independently developed by ASIMCO NVH, the other of which is designated by OEM customers.
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In the supplier selection process, for non-OEM customer-designated suppliers’ products, ASIMCO NVH conducts different levels of review or investigation according to their levels of importance. For category A products (external), potential suppliers shall be assessed. As for category B and C products, the potential supplier assessment is not compulsive, but the potential suppliers shall be inspected, and ASIMCO NVH will require such suppliers to establish and improve their quality management systems during supply processes in the future. ASIMCO NVH’s supplier management organisation leads the quality department, product R&D department and financial department conduct on-site risk assessments, and audits according to the “supplier’s quality system audit form.” Only those products that meet ASIMCO NVH’s quality system requirements will proceed into business inquiry and agreement execution. After the customer submits the sample, the office of sample inspection of the product R&D department will conduct inspections and provide inspection reports, and present them to the product R&D project engineer to conduct performance tests. Samples qualified under the inspections and tests proceed into the phase of small batch trials. If the samples are confirmed to be qualified, the R&D department will convert their drawings into a production map, and they will proceed to the production approval stage. After they have passed the production approval stage, the new products go on a batch trial of no less than three months; the supplier management department will conduct the supplier performance evaluation. Suppliers that pass the evaluation may be incorporated into the qualified supplier directory for products offerings.
In the procurement process, ASIMCO NVH makes the procurement plan according to the sales plan. To control the cost and prevent the risk of the project, ASIMCO NVH selects two suppliers for each project. For ordinary procurement projects, ASIMCO NVH usually calls upon three suppliers to assess the cost and price. If none of the three suppliers reaches the target price that controls costs, a bargaining process will be initiated. For key projects, the suppliers shall be selected through a bidding process.
For the year ended 31 December 2015, approximately 0.66% of ASIMCO NVH’s total purchases of raw materials, parts and components were from sole source suppliers who were the only suppliers that provides the required raw material, part or component.
Suppliers
ASIMCO NVH’s top five suppliers are manufacturers of automotive components. For the years ended 31 December 2013, 2014 and 2015, ASIMCO NVH’s five largest suppliers accounted for approximately 18.0%, 19.0% and 22.8% of ASIMCO NVH’s total purchases, respectively. For the years ended 31 December 2013, 2014 and 2015, ASIMCO NVH’s largest supplier accounted for approximately 4.9%, 5.1% and 7.5% of ASIMCO NVH’s total purchases, respectively. ASIMCO NVH’s five largest suppliers for the year ended 31
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December 2015 have maintained business relationships with it for an estimated range of five to over 15 years.
The terms and conditions of ASIMCO NVH’s agreements with its suppliers may provide that payment be due within 90 days following shipment, except for part of the imported equipment spare parts that requires a payment in cash.
R&D
The R&D centre is a key department of ASIMCO NVH, and mainly engages in new product and process development. This 2,200 sq.m. R&D centre is equipped with an advanced raw material testing lab, rubber formula design lab, finished product testing lab, and vehicle testing lab. There are five departments under the R&D centre, namely the product R&D department, the process technology R&D department, the testing centre, the CAE department and the general management department. The R&D centre mainly provides technical support such as product design, formulation design, mold design, raw material/rubber formulation/products/vehicle examination and testing, sample manufacturing, mold verification, small batch production, and verification before batch production.
ASIMCO NVH is now cooperating with University of Science and Technology Beijing and Qingdao University of Science and Technology to carry out theoretical training and project cooperation in its technology centre in Anhui Province, which possesses the ability of product development and synchronous development, and the ability of FEA software secondary development.
As of 31 December 2015, ASIMCO NVH’s core team of advanced engineers had 55 members, who focus on early-stage product development. All 55 of ASIMCO NVH’s research and development team have undergraduate and graduate degrees in engineering or sciences.
ASIMCO NVH’s total research and development expenses were RMB28.8 million, RMB36.1 million, and RMB36.7 million for the year 2013, 2014, and 2015, respectively.
In recognition of ASIMCO NVH’s technological achievements, ASIMCO NVH has received several industry awards, including the Outstanding Foreign-invested Enterprise in 2011 and the Science and Technology Top Ten Enterprise.
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Intellectual property rights
ASIMCO NVH has acquired various intellectual property rights through research and development. ASIMCO NVH protects its intellectual property rights by obtaining patents and contractual rights. As of the Latest Practicable Date, ASIMCO NVH held 36 PRC patents, including ten patents of invention and 26 utility patents
Quality Control
Quality control standard
In recognition of its fine quality control standard, ASIMCO NVH has received various quality certifications, such as ISO14001:2004, BS OHSAS 18001, ISO 9001:2008, and ISO/TS 16949:2009.
Quality control measures
As a global supplier of automotive parts and components supporting enterprise, ASIMCO NVH adopts the international automobile industry TS16949:2009 quality system standard, and meets the quality requirements from international leading automobile manufacturers and parts and components companies. ASIMCO NVH has 30 international customers in total, including Bosch, TENNECO, GM, TRW, Continental and other large international companies. Its major domestic customers are Changan, Dongfeng Peugeot Citroen, Dongfeng Nissan, SAIC GM Wuling, Chery and other host plants, as well as more than 150 first level parts and components suppliers.
ASIMCO NVH has a sound quality management system, and accepts strict examination of numerous international customers and the third party authentication institutions every year. Aside from meeting the standard quality system, ASIMCO NVH has also set up an independent quality management department to strictly manage and control the quality of raw materials, external parts, production, delivery and the after-sales market.
ASIMCO NVH also has a highly competent quality control team. Some of the quality control team members have more than three years of experience in the industry, and five of them have a degree in engineering.
HSE
ASIMCO NVH has established its company management system according to the industrial standard. Product design, development, manufacturing processes shall strictly comply with the relevant management system. ASIMCO NVH’s internal operation safety guidelines provide detailed instructions for the purchase, production, sales and production procedures.
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ASIMCO NVH also regularly performs safety inspections on personnel, equipment, tools, materials and technology in the product manufacturing process.
ASIMCO NVH has received the ISO14001 environment system certification in 2004 and the OHSAS18001 occupational health and safety management system certification in 2007, both of which are currently effective. In addition, ASIMCO NVH assigns plant managers to promote at least three safety programs and implement compliance of the foregoing standards at the production plant.
Competition
In the vehicles (passenger car and commercial vehicle) market, ASIMCO NVH has 20 such global competitors, along with whom comprises approximately 85% and 95% of the vibration damping series product and brake series product markets in terms of sales revenue in 2015, respectively.
Employees
As of 31 December 2015, ASIMCO NVH employed 1,952 employees in total, with 44 in the sales and marketing team, eight of whom have an engineering background. The following table sets forth a breakdown of ASIMCO NVH’s employees by business function as of 31 December 2015:
Number of Employees as of 31 December Function 2015 % of total
Finance 30 1.54% Labour union/party committee 3 0.15% Business 67 3.43% Hardware product 232 11.89% Administration/Human resources 96 4.92% R&D centre 273 13.99% Manufacturing engineering system 47 2.41% Quality system 39 2.00% Department of vibration reduction at Zhongxi factory 494 25.31% Department of braking at Zhongxi factory 671 34.38%
Total 1,952 100.00%
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Properties
ASIMCO NVH is headquartered in Ningguo, Anhui Province. As of the Latest Practicable Date, ASIMCO NVH owned nine parcels of land in the PRC, with a total site area of approximately 291,693.10 sq.m. ASIMCO NVH also leased one building or unit with a total GFA of approximately 2,260 sq.m. in China.
Owned Land
As of the Latest Practicable Date, ASIMCO NVH owned nine parcels of land located in Anhui Province in China with a total site area of approximately 291,693.10 sq.m. ASIMCO NVH has obtained land use right certificates regarding all of such land. ASIMCO NVH’s land is primarily used for offices, production facilities, ancillary facilities and dormitories.
Owned Buildings and Units
ASIMCO NVH has obtained building ownership certificates for 11 of the buildings or units it owns, which were primarily used for offices, production facilities and ancillary facilities. ASIMCO NVH had not obtained the appropriate ownership certificates for premises with a total GFA of approximately 12,564 sq.m. These premises represented approximately 11.28% of the total premises or units owned by ASIMCO NVH as of Latest Practicable Date. Part of the aforementioned premises are operating assets. ASIMCO NVH is accelerating the procedures of obtaining the ownership certificates, but the possibility of not being able to obtain the ownership certificates for part of the premises remains.
Leased Buildings and Units
As of the Latest Practicable Date, ASIMCO NVH leased one building or unit with a total GFA of approximately 2,260 sq.m. in the PRC, which is located in Anhui Province.
VI. CACG I
Founded in April 1995, CACG I is a holding company. Its main asset is 51% share holding in ASIMCO Electric Motor, a company that mainly engages in the manufacturing and sales of motors and electrical equipment for vehicles.
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The following table sets forth the breakdown of ASIMCO Electric Motor’s revenue by business:
Year ended 31 December 2013 2014 2015 RMB in RMB in RMB in millions millions millions
Sales of automotive products 562.9 698.5 653.1 Sales of materials and semi-products 3.9 15.6 16.3 Others 0.1 – 0.5
Total 566.9 714.1 669.9
Business Operations
ASIMCO Electric Motor mainly engages in providing engineering machinery, tractors and other diversified starter and generator products for passenger cars and commercial vehicles, offering more than 132 kinds of products. As for passenger cars, ASIMCO Electric Motor mainly produces traditional electrical machinery products. ASIMCO Electric Motor has also succeeded in developing new energy starting and stopping motors, and has received recognition from globally leading vehicle manufacturers. For commercial cars, ASIMCO Electric Motor mainly provides high-power decelerating starters.
The starter provides external support for engine to start by transforming the electricity in the battery into mechanical energy, which drives the engine’s flywheel to rotate. The automobile’s generator is the main power source for the automobile, as it supplies electricity for all electrical equipment (other than the starter) in the normal operation of the engine (above the idle speed) and meanwhile charges the battery.
In recognition of its outstanding production capabilities, ASIMCO Electric Motor has received the awards listed from independent entities:
(1) Industry association awards: Top Ten Enterprise in the Chinese Automobile Electronic and Electrical Motors Industry from 2013 to 2015; and
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(2) Host plant awards: SAIC Volkswagen Outstanding Supplier Merit Award from of 2013, 2014 and 2015, Guangxi Yuchai Machinery Outstanding Supplier Award of 2013, FAW-Volkswagen Outstanding Quality Award of 2013, Dongfeng Chaoyang Diesel Outstanding Supplier Award of 2013, Tianjin Lovol Engines Outstanding Supplier Award of 2013.
Purchase Order by Customers
ASIMCO Electric Motor typically supplies products to its customers through purchase orders for specific products supplied for particular engines, which are mainly governed by general terms and conditions established by each customer. ASIMCO Electric Motor determines its production output based on customers’ orders. In particular, ASIMCO Electric Motor provides customised services according to customers’ design drawings; it also co-develops new prototypes with customers to satisfy the specific demands of customers. The sales department sets sales plans according to customers’ orders, and the manufacture department arranges production plans accordingly, after which the purchasing department sets raw material procurement plans.
Customers, sales and marketing
Customers
As of the Latest Practicable Date, ASIMCO Electric Motor supplied its products to more than 30 customers, including FAW-Volkswagen and SAIC Volkswagen.
For the years ended 31 December 2013 (combining revenues of ASIMCO Electric Motor’s Predecessor and ASIMCO Electric Motor), 2014 and 2015, sales to ASIMCO Electric Motor five largest customers accounted for 72.4%, 83.1% and 84.9% of ASIMCO Electric Motor’s total revenues, respectively. Each of ASIMCO Electric Motor’s five largest customers for the year ended 31 December 2015 has maintained business relationships with it for over 30 years.
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Sales
ASIMCO Electric Motor adopts a direct sales model in supplying to domestic and foreign customers, specifically as the following:
A. Commercial vehicles
In supplying products related to commercial vehicles to domestic customers, ASIMCO Electric Motor follows the sales process listed below:
Comprehensive Identification of Offering of design Feasibility review of Quotation on assessment of potential suppliers drawings by the product by the product price by the company by for project products the engine factory R&D department finance department engine factory
Confirmation of the demand plan Negotiation and Insurance of according to the Sample testing and confirmation with production drawings type of product verification by the engine by R&D and production cycle R&D department manufacturer by department by sales department sales department on a weekly basis
Providing products according to Arrangement of production plan shipment by by production sales department department
In offering products related to commercial vehicles to overseas customers, ASIMCO Electric Motor skips the three steps of “obtaining drawings from the engine manufacturer”, “sales employees negotiate and confirm with the engine manufacturer” and “R&D conduct sample testing and verification.”
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B. Passenger cars
In supplying products related to passenger cars to domestic customers, ASIMCO Electric Motor follows the sales process listed below:
Comprehensive Identification of Offering of design Feasibility review of Quotation on assessment of potential suppliers drawings by the product by the product price by the company by for project products the engine factory R&D department finance department engine factory
Confirmation of the demand plan Negotiation and Insurance of according to the Sample testing and confirmation with production type of product verification by the engine drawings by R&D and production cycle R&D department manufacturer by department by sales department sales department on a weekly basis
Providing products according to Arrangement of production plan shipment by by production sales department department
In sales of products related to passenger cars to overseas customers, ASIMCO Electric Motor usually skips the three steps of “obtaining drawings from the engine manufacturer”, “sales employees negotiate and confirm with the engine manufacturer” and “R&D conduct sample testing and verify.”
Procurement and Suppliers
Procurement
The major raw materials that ASIMCO Electric Motor procures are enameled wire, copper flat wire, aluminium processing and commutator. ASIMCO Electric Motor directly procures such raw materials from the factory. Except for oil and grease paper and some other raw materials, there are usually no middlemen in the procurement process.
ASIMCO Electric Motor’s procurement department generally compiles next year’s distribution proportion table at the end of the year according to production and business plans and annual supplier performance evaluation results.
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According the distribution proportion table, ASIMCO Electric Motor and the supplier sign a quarterly, semi-annual or annual contract of intention. Every month, ASIMCO Electric Motor’s procurement department compiles the monthly purchasing implementation plan according to the production planning, the procurement department distribution proportion table and the purchase orders.
Suppliers
ASIMCO Electric Motor’s top five suppliers are manufacturers of automotive components. For the years ended 31 December 2013, 2014 and 2015, ASIMCO Electric Motor’s five largest suppliers accounted for approximately 44.7%, 49.4% and 58.2% of ASIMCO Electric Motor’s total purchases, respectively. For the years ended 31 December 2013, 2014 and 2015, ASIMCO Electric Motor’s largest supplier accounted for approximately 19.1%, 18.0% and 24.2% of ASIMCO Electric Motor’s total purchases, respectively. ASIMCO Electric Motor’s five largest suppliers for the year ended 31 December 2015 have maintained business relationships with ASIMCO Electric Motor for an estimated range of seven to over 30 years.
The terms and conditions of ASIMCO Electric Motor’s agreements with its suppliers may provide that payment be due between 60 and 90 days following shipment, except for part of the imported equipment spare parts that requires a payment in cash.
R&D
ASIMCO Electric Motor possesses a full range of research and development tools from the simulation to the test bench, with 3D modelling, electromagnetic computing, prototyping, testing, simulation and identification capabilities.
ASIMCO Electric Motor has established a 1,500 sq.m. R&D centre, with an advanced passenger vehicle product room, commercial vehicle product room, process development room, project management office and testing division. As of the Latest Practicable Date, ASIMCO Electric Motor’s core team of advanced engineers consists of 22 members, who focus on early-stage product development. Twenty members of ASIMCO Electric Motor’s research and development team have undergraduate and graduate degrees in engineering or sciences; most of them have experience in the automobiles industry for three to 25 years.
ASIMCO Electric Motor’s total research and development costs were RMB16.7 million, RMB22.6 million, and RMB22.7 million for the year 2013, 2014, and 2015, respectively.
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Intellectual property rights
ASIMCO Electric Motor has acquired various intellectual property rights through research and development. As of the Latest Practicable Date, ASIMCO Electric Motor held 13 PRC patents, all of which were utility patents , and has applied for two additional patents.
Production facilities and production capacity
As of the Latest Practicable Date, ASIMCO Electric Motor has one manufacturing plant with an aggregate GFA of approximately 30,469.40 sq.m. ASIMCO Electric Motor conducts onsite inventory tests at least once per year.
Quality Control
The starter is an important part of the automobile engine. Its production must meet strict quality control standards, including standards of quality management system and product quality standard.
ASIMCO Electric Motor established and implemented the quality management system in the car engine starter manufacturing field and achieved the ISO/TS16949:2009 certification in product quality standards. ASIMCO Electric Motor follows the industry related national standards, industry standards and customer specifications. At the same time, ASIMCO Motor’s products mainly match the needs of large joint ventures, well-known domestic and foreign engine or automobile production enterprises. Its quality control system and production process accept the customers’ strict audit. ASIMCO Electric Motor products are in line with the customer’s product and enterprise standards; shipment of each batch of products must be accompanied by a valid product testing report. Customers will also conduct random inspections on ASIMCO Electric Motor. If a quality abnormality occurs, customers will communicate with ASIMCO Electric Motor immediately or even go directly to the scene for a comprehensive review of the quality management system and production process. Because ASIMCO Electric Motor’s major customers are of a leading position in the industry, these customers have far higher quality requirements ASIMCO Electric Motor than those of China’s national and industry standards.
Some of ASIMCO Electric Motor’s quality control employees have more than 30 years of experience in the industry, and nine of them hold engineering degrees.
HSE
Health and Safety
Each plant manager is assigned to promote at least three safety programs and implement compliance at the production plant.
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Competition
In the starter market, ASIMCO Electric Motor has several global competitors, along with whom comprises approximately 40% of the domestic starter market in terms of sales revenue in 2015.
In the generator market, ASIMCO Electric Motor has several global competitors, along with whom comprises approximately 50% of the domestic generator market in terms of sales revenue in 2015.
Employees
As of 31 December 2015, ASIMCO Electric Motor employed 758 employees, with 23 in the sales and marketing team, eight of whom have an engineering background.
Properties
ASIMCO Electric Motor is incorporated in Jinzhou, Hubei Province. As of the Latest Practicable Date, ASIMCO Electric Motor owned one parcel of land in China, with a total site area of approximately 80,799.64 sq.m. ASIMCO Electric Motor owned one building or unit, with a total GFA of approximately 30,469.40 sq.m.
Owned Land
As of the Latest Practicable Date, ASIMCO Electric Motor owned one parcel of with a total site area of approximately 80,799.64 sq.m. Its land is mainly used for production and operation.
Owned Buildings and Units
ASIMCO Electric Motor has obtained building ownership certificates for one building or unit, which were primarily used for offices, production facilities and ancillary facilities. ASIMCO Electric Motor had not obtained the appropriate ownership certificates for premises with a total GFA of approximately 2,159 sq.m. These premises represented approximately 6.59% of the total premises or units owned by ASIMCO Electric Motor as of Latest Practicable Date. Part of the aforementioned premises are operating assets. ASIMCO Electric Motor is accelerating the procedures of obtaining the ownership certificates, but the possibility of not being able to obtain the ownership certificates for part of the premises remains.
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7. DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT
Subsequent to the Transaction, the following persons are expected to remain as the directors, supervisors and senior management of the Target Companies. The aggregate of the remuneration payable to and benefits in kind receivable by the directors of the Target Companies will not be varied in consequence of the Acquisition.
ASIMCO Camshaft
Directors
Date of Name Age Position Date of joining appointment Duty
Mr. Wang Bin 57 Chairman October 2010 October 2010 Chairman (汪濱) Mr. Wu Yingxue 49 Vice Chairman August 2009 November 2013 Vice chairman (吳映雪) Mr. Ding 49 Director June 2008 June 2008 Director Zhengdong (丁正東) Mr.NiWei 51 Director August 2009 August 2009 Director (倪威) Mr. Li Gongwei 51 Director August 2009 August 2009 Director (李功偉) Mr. Zhou Jiaruo 60 Director August 2009 November 2013 Director (周加若)
Mr. Wang Bin (汪濱), aged 57, has been serving as the chairman of the company since October 2010 and is mainly responsible for the strategies of the company.
Mr. Wang has over 20 years of experience in the operation and management of the automobile parts and components manufacturing operation. He has been serving as the president and chief executive officer of ASIMCO Group since October 2010. Mr. Wang acted as the general manager of Cummins Post-treatment Emission (China) Co., Ltd. (康明斯後處理排放（中國）公司) from September 2005 to December 2009, general manager of ASIMCO Group from September 1997 to September 2005, marketing manager of General Electric (China) Company Limited from March 1990 to September 1997 and engineer of the Graduate School of the State Ministry of Construction from July 1982 to March 1990.
Mr. Wang obtained a master’s degree in business management from Tsinghua University in September 1998.
Mr. Wang does not, at present, nor did he in the past three years, hold any directorship in any other listed companies.
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Mr. Wu Yingxue (吳映雪), aged 49, has been serving as the vice chairman of the company since October 2013 and is mainly responsible for the strategic planning of ASIMCO Camshaft.
Mr. Wu has over 27 years of experience in the operation and management of the automobile parts and components manufacturing operation. He has been serving as the vice president of ASIMCO Group, secretary of the Party Committee, general manager and director of Yizheng Shuang Huan Piston Ring Co., Ltd. (儀征雙 環活塞環有限公司), and deputy secretary of the Party Committee of Yizheng Piston Ring Factory (儀征活塞環廠) since March 2011. Mr. Wu acted as the secretary of the Party Committee, general manager, director and deputy secretary of ASIMCO Shuanghuan Piston Ring (Yizheng) Co., Ltd. from September 2010 to March 2011, and general manager and director of ASIMCO Shuanghuan Piston Ring (Yizheng) Co., Ltd. and deputy secretary of the Party Committee of Yizheng Piston Ring Factory from February 2005 to September 2010. From January 2002 to February 2005, he was the deputy general manager of ASIMCO Shuanghuan Piston Ring (Yizheng) Co., Ltd. and deputy secretary of the Party Committee of Yizheng Piston Ring Factory. He acted as the deputy general manager, assistant to general manager and head of the quality control department, and head of the foundry II workshop of ASIMCO Shuanghuan Piston Ring (Yizheng) Co., Ltd. from January 1999 to January 2002, October 1996 to January 1999 and January 1996 to October 1996, respectively. Mr. Wu served various positions in Yizheng Piston Ring Factory, including deputy head of the new product development department from August 1993 to January 1996, deputy technical officer of foundry I workshop from August 1991 to August 1993 and technician of foundry I workshop from August 1989 to August 1991.
Mr. Wu obtained a bachelor’s degree in foundry from Harbin Institute of Technology in July 1989.
Mr. Wu does not, at present, nor did he in the past three years, hold any directorship in any other listed companies.
Mr. Ding Zhengdong (丁正東), aged 49, has been serving as a director of the company since June 2008 and is mainly responsible for the strategic planning and finance of the company.
Mr. Ding has over 25 years of experience in the operation and management of the automobile parts and components manufacturing operation. He has been serving as the executive vice president of ASIMCO Group since December 2007. Mr. Ding acted as the executive vice president and chief financial officer of ASIMCO Shuanghuan Piston Ring (Yizheng) Co., Ltd. from July 2005 to December 2007, executive vice president and financial representative of ASIMCO NVH Technologies Co., Ltd (Anhui) from January 2002 to June 2005, internal control supervisor of Delphi Saginaw Xiaoshan Steering Gear Co., Ltd. (德爾福蕭山沙基諾轉向機有限公司) from January 1998 to October 1999 and technical division head of Aerosun Group (航 天部晨光集團) from October 1990 to December 1997.
Mr. Ding obtained a master’s degree in business management from China Europe International Business School in September 2005.
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Mr. Ding does not, at present, nor did he in the past three years, hold any directorship in any other listed companies.
Mr.NiWei(倪威), aged 51, has been serving as a director of the company since August 2009 and is mainly responsible for the strategic planning and sales of the company.
Mr. Ni has over 30 years of experience in the operation and management of the automobile parts and components manufacturing operation. He has been serving as the vice president in global sales and marketing of ASIMCO Technologies Limited since March 2004. Mr. Ni acted as the president of ASIMCO International Limited (亞新科國際有限公司) from September 2001 to March 2004, deputy general manager of Hubel Super-Elec Auto Electric Motor Co. Ltd. (湖北神電汽車電機有限公司)from October 1998 to August 2001, service engineer and manufacturing and production manager of General Motors from July 1995 to September 1998 and training lecturer of Mercedes-Benz from August 1991 to 1995.
Mr. Ni obtained a bachelor’s degree in automobile from Tsinghua University in July 1988, a master’s degree in architecture from Tsinghua University in July 1991 and an EMBA degree from Tsinghua University School of Economics and Management in 2011.
Mr. Ni does not, at present, nor did he in the past three years, hold any directorship in any other listed companies.
Mr. Li Gongwei (李功偉), aged 51, has been serving as a director of the company since August 2009 and is mainly responsible for the strategic planning of the company.
Mr. Li has been serving as the deputy plant manager of Jiangsu Yizheng Piston Ring Factory since October 1995 to date. He acted as a workshop technician and workshop officer of Jiangsu Yizheng Piston Ring Factory from 1987 to September 1995. Mr. Li has also been serving as the general manager of Yizheng Shuanghuan Equipment Manufacturing Co., Ltd. (儀征雙環設備製造有限公司) since October 2005 to date.
Mr. Li does not, at present, nor did he in the past three years, hold any directorship in any other listed companies.
Mr. Zhou Jiaruo (周加若), aged 60, has been serving as a director of the company since November 2013 and is mainly responsible for the labor union of the company.
Mr. Zhou has served as the deputy secretary and secretary of the Party Committee and chairman of the labor union of Yizheng Piston Ring Factory since February 2005 to date. He acted as the head and deputy general manager of Shuanghuan Piston Ring Company (雙環活塞環公司) from September 1995 to January 2005 and division head and assistant to plant manager of Yizheng Piston Ring Factory from December 1978 to September 1995.
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Mr. Zhou does not, at present, nor did he in the past three years, hold any directorship in any other listed companies.
Supervisor
Date of Name Age Position Date of joining appointment Duty
Mr. Chen Yujin 44 Supervisor November 2013 November 2013 Supervisor (陳玉金)
Mr. Chen Yujin (陳玉金), aged 44, has been appointed as the supervisor of the company since November 2013.
Mr. Chen has been serving as the head of sales III department of ASIMCO Shuanghuan since March 2016 to date. He was head of the marketing department of ASIMCO Shuanghuan and Yizheng Shuanghuan Piston Ring Company (儀征雙環活 塞環公司) from February 2006 to February 2016, head of the secretary section of the company office of Yizheng Shuanghuan Piston Ring Company from January 2000 to February 2006, and secretary of the plant office and company office of ASIMCO Shuanghuan and Yizheng Shuanghuan Piston Ring Company from October 1992 to March 1999.
Mr. Chen does not, at present, nor did he in the past three years, hold any directorship in any other listed companies.
Senior Management Members
Date of Name Age Position Date of joining appointment Duty
Mr. Chen Aiguo 47 General Manager October 2009 October 2009 General (陳愛國) manager Mr. Dai 49 Technical and May 2004 October 2009 Technical and Hongxing Quality quality (戴紅星) Director director Mr. Ji Youqun 48 Production May 2004 March 2010 Production (吉友群) Director director Mr. Ren 45 Chief Financial May 2008 January 2014 Chief financial Wenyuan Officer officer (任文元) Mr. Zhou Quan 51 Sales Director May 2004 May 2004 Marketing and (周權) sales director
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Mr. Chen Aiguo (陳愛國), aged 47, has been serving as the general manager of the company since October 2009 and is mainly responsible for managing the daily production and operations of the enterprise.
Mr. Chen has over 25 years of experience in the operation of the automobile parts and components manufacturing operation. From October 1995 to October 2009, he served various positions in ASIMCO Shuanghuan Piston Ring (Yizheng) Co., Ltd., including division head, deputy head, head, assistant to general manager and deputy general manager, and managed its various aspects, such as research and development, technology, quality, technical innovation investment and production. He was a technician of Jiangsu Yizheng Piston Ring Factory from July 1991 to September 1995.
Mr. Chen obtained a bachelor’s degree in mechanical manufacturing techniques and equipment from Shanghai Jiao Tong University in July 1991 and a master’s degree in engineering from the department of mechanical engineering of Southeast University in October 2004. He became a qualified senior engineer in 2004. He was appointed as a leading middle-aged and young scientist under the “333 High Level Talent Training Programme” of Jiangsu Province in April 2007 and obtained the “qualification of senior professional manager of enterprises in Jiangsu Province” in October 2007.
Mr. Chen does not, at present, nor did he in the past three years, hold any directorship in any other listed companies.
Mr. Dai Hongxing (戴紅星), aged 49, has been serving as the technical and quality director of the company since October 2009 and is mainly responsible for technology, research and development and quality assurance.
Mr. Dai has over 26 years of experience in the operation of the automobile parts and components manufacturing operation. From May 2004 to date, he has served as the production director and technology and quality director of the company. He was the workshop officer and head of the technology and quality division of Jiangsu Yizheng Camshaft Factory (江蘇儀征凸輪軸廠) from January 1992 to May 2004 and a technician of Jiangsu Yizheng Piston Ring Factory from July 1990 to January 1992.
Mr. Dai graduated from Chengdu University of Science and Technology in July 1990.
Mr. Dai does not, at present, nor did he in the past three years, hold any directorship in any other listed companies.
Mr. Ji Youqun (吉友群), aged 48, has been serving as the production director of the company since March 2010 and is mainly responsible for production management.
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Mr. Ji has over 25 years of experience in the operation of the automobile parts and components manufacturing operation. From May 2004 to date, he has served as the officer of the production department, officer of the procurement department and production director of the company. He was the workshop officer of Yizheng Camshaft Factory (儀征凸輪軸廠) from April 2000 to April 2004 and a technician and workshop officer of Jiangsu Yizheng Piston Ring Factory from August 1991 to April 2000.
Mr. Ji obtained a bachelor’s degree in mechanical design and manufacturing from Jiangsu University in July 1991 and became a qualified engineer certified by the Job Title and Qualifications Committee of Yangzhou City (揚州市職稱資格評審委 員會) in December 1997.
Mr. Ji does not, at present, nor did he in the past three years, hold any directorship in any other listed companies.
Mr. Ren Wenyuan (任文元), aged 45, has been serving as the chief financial officer of the company since January 2014 and is mainly responsible for financial management.
Mr. Ren has over 20 years of experience in finance. From May 2008 to date, he has served as the officer of the finance department and chief financial officer of ASIMCO Camshaft (Yizheng) Co., Ltd. From 1996 to April 2008, he acted as the head of the financial and accounting division, comprehensive statistics division, cost control division and financial planning division of ASIMCO Shuanghuan Piston Ring (Yizheng) Co., Ltd.
Mr. Ren obtained a bachelor’s degree in statistics from Lanzhou Business College in June 1996. He became a qualified statistician and a qualified accountant in October 2002 and September 2003, respectively.
Mr. Ren does not, at present, nor did he in the past three years, hold any directorship in any other listed companies.
Mr. Zhou Quan (周權), aged 51, has been serving as the sales director of the company since October 2004 to date and is mainly responsible for corporate marketing and sales.
Mr. Zhou has over 30 years of experience in the operation of the automobile parts and components manufacturing operation. He acted as the deputy plant manager of Jiangsu Yizheng Camshaft Factory from January 1998 to September 2004 and a technician and division head of Jiangsu Yizheng Piston Ring Factory from August 1983 to December 1997.
Mr. Zhou graduated from Jiangsu Radio and TV University in August 1983, specialized in mechanics.
Mr. Zhou does not, at present, nor did he in the past three years, hold any directorship in any other listed companies.
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ASIMCO Shuanghuan
Directors
Date of Name Age Position Date of joining appointment Duty
Mr. Wang Bin 57 Chairman October 2010 October 2010 Chairman (汪濱) Mr. Wu Yingxue 49 Vice Chairman August 1989 February 2005 General (吳映雪) manager Mr. Ding 49 Director December 2008 December 2008 Vice president Zhengdong of ASIMCO (丁正東) Mr.NiWei 51 Director December 2008 December 2008 Vice president (倪威) of ASIMCO Mr. Li Gongwei 51 Director July 1987 February 1998 Deputy plant (李功偉) manager of Yizheng Piston Ring Factory Mr. Zhou Jiaruo 60 Director December 1978 January 2013 Secretary of the (周加若) Party Committee of Yizheng Piston Ring Factory
For the biographical information of all of the above directors, please refer to the relevant disclosures in “ASIMCO Camshaft” of this section.
Supervisor
Date of Name Age Position Date of joining appointment Duty
Mr. Chen Yujin 44 Supervisor October 1992 October 2013 Head of (陳玉金) sales III department
For the biographical information of Mr. Chen Yujin, please refer to the relevant disclosures in “ASIMCO Camshaft” of this section.
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Senior Management Members
Date of Name Age Position Date of joining appointment Duty
Mr. Wu Yingxue 49 General Manager August 1989 February 2005 General (吳映雪) manager Mr. Liu Qianxi 47 Deputy General September 1991 February 2005 Deputy general (劉千喜) Manager manager of technical research and development Mr. Lin 47 Deputy General January 2014 January 2014 Deputy general Xianghua Manager manager of (林祥華) quality Mr. Li Kaishun 36 Deputy General May 2006 July 2015 Deputy general (李開順) Manager manager of production Mr. Hu 48 Head of Financial March 1999 January 2008 Finance Changlin Department (胡昌林) Mr. Sheng 45 Financial January 2015 January 2015 Financial Qinglong Representative management (盛晴龍)
For the biographical information of Mr. Wu Yingxue, please refer to the relevant disclosures in “ASIMCO Camshaft” of this section.
Mr. Liu Qianxi (劉千喜), aged 48, has been serving as the deputy general manager of the company since January 2014 and is mainly responsible for technology, research and development.
Mr. Liu has over 20 years of experience in the operation of the automobile parts and components manufacturing operation. Mr. Liu has served various positions in the company since 1991, including the deputy general manager of technology and quality from January 2007 to December 2013 and deputy general manager of production from February 2005 to December 2006. He acted as the head of the quality control department from October 2003 to December 2004, engineer and officer of the chromate treatment workshop from July 2001 to September 2003, and engineer of the finished product workshop from November 1999 to June 2001. Mr. Liu was an engineer of the technology division from July 1995 to October 1999, an assistant engineer of the chief engineering office from April 1992 to June 1995 and a technician of the chromate treatment workshop from September 1991 to March 1992.
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Mr. Liu obtained a degree in electrochemistry from Shanghai Jiao Tong University in July 1991.
Mr. Liu does not, at present, nor did he in the past three years, hold any directorship in any other listed companies.
Mr. Lin Xianghua (林祥華), aged 47, has been serving as the deputy general manager, manager representative and general manager of the foundry company of the company since January 2014 and is mainly responsible for the quality management of the company and the operation and management of the foundry company.
Mr. Lin has over 25 years of experience in the operation of the automobile parts and components manufacturing operation. Mr. Lin was previously the deputy general manager and general manager of ASIMCO Foundry (Yizheng) Co., Ltd. from September 2006 to January 2013, division head and workshop officer of ASIMCO Shuanghuan Piston Ring (Yizheng) Co., Ltd. from September 1995 to August 2006, and engineer of Jiangsu Yizheng Piston Ring Factory from August 1989 to August 1995.
Mr. Lin obtained a master’s degree in business management from Tongji University in September 2008. He became a qualified senior engineer certified by the Jiangsu Mechanical Engineering Society in December 2004 and a qualified senior professional manager in Jiangsu Province in December 2014. He was granted the qualification of international quality management engineer of the American Certification Institute (ACI) certified by Beijing Yinglian Corporate Consultation Company (北京營聯企業諮詢公司) in August 2015 and the qualification of chief quality operations officer certified by Jiangsu Quality and Technical Supervision Bureau in January 2016.
Mr. Lin does not, at present, nor did he in the past three years, hold any directorship in any other listed companies.
Mr. Li Kaishun (李開順), aged 36, has been serving as the deputy general manager of production of the company since July 2015 and is mainly responsible for the production and management of the company.
Mr. Li has over 10 years of experience in the operation of the automobile parts and components manufacturing operation. Mr. Li has served various positions in the company since 2006, including the production director of the company from September 2012 to July 2015, head of the technical department of the company from January 2012 to September 2012, deputy head of the technical department and officer of the chromate treatment workshop of the company from February 2010 to January 2012, deputy officer of the technical innovation room of the company from January 2009 to February 2010, and deputy section level cadre of the mechanical processing room of the company from May 2006 to January 2009.
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Mr. Li obtained a master’s degree in mechanical design, manufacture and automation from Yangzhou University in July 2005. He became a qualified engineer certified by Yangzhou Mechanical Engineering Society in 2010.
Mr. Li does not, at present, nor did he in the past three years, hold any directorship in any other listed companies.
Mr. Hu Changlin (胡昌林), aged 48, has been serving as the head of the financial department of the company since January 2008 and is mainly responsible for financial management.
Mr. Hu has over 17 years of experience in finance. He acted as the deputy head of the finance department of the company from October 2006 to December 2007 and head of the financial planning division of the company from March 1999 to September 2006.
Mr. Hu graduated from the Open University of China with a post-secondary certificate in 2004 and became a qualified assistant accountant in 2001.
Mr. Hu does not, at present, nor did he in the past three years, hold any directorship in any other listed companies.
Mr. Sheng Qinglong (盛晴龍), aged 45, has been serving as the financial representative of the company since January 2015 and is mainly responsible for the financial management of the company.
Mr. Sheng has over 20 years of experience in the financial management operation. Mr. Sheng acted as the financial controller of Jiangsu Uniwell Electronic Ltd. (江蘇同昌電路科技有限公司) from March 2014 to November 2014, financial controller of Atlas Copco (Nanjing) Construction and Mining Equipment Ltd. (阿特 拉斯科普柯（南京）建築礦山機械有限公司) from September 2008 to March 2014, financial controller of a subsidiary of I.M. Skaugen (挪威斯考根集團)from November 2006 to May 2008, internal control manager of the Asia-Pacific Region of Emerson Climate Technologies (Suzhou) Co. Ltd. (艾默生環境優化技術（蘇州）有限公 司) from November 2004 to October 2006 and financial officer of Sinopec Corp. Jiangsu Oilfield Company (中石化江蘇油田分公司) from July 1992 to August 2003.
Mr. Sheng obtained a master’s degree in business management from Shanghai Donghua University in 2005 and became a qualified accountant in 1998.
Mr. Sheng does not, at present, nor did he in the past three years, hold any directorship in any other listed companies.
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ASIMCO Foundry
Directors
Date of Name Age Position Date of joining appointment Duty
Mr. Wang Bin 57 Chairman October 2010 October 2010 Chairman (汪濱) Mr. Wu Yingxue 49 Vice Chairman August 1989 December 2008 Vice Chairman (吳映雪) Mr. Ding 49 Director May 2009 May 2009 Vice president Zhengdong of ASIMCO (丁正東) Mr.NiWei 51 Director December 2003 December 2003 Vice president (倪威) of ASIMCO Mr. Li Gongwei 51 Director July 1987 December 2003 Deputy plant (李功偉) manager of Yizheng Piston Ring Factory Mr. Zhou Jiaruo 60 Director December 1978 October 2013 Secretary of the (周加若) Party Committee of Yizheng Piston Ring Factory
For the biographical information of all of the above directors, please refer to the relevant disclosures in “ASIMCO Camshaft” of this section.
Supervisor
Date of Name Age Position Date of joining appointment Duty
Mr. Chen Yujin 44 Supervisor October 1992 November 2013 Head of (陳玉金) sales III department
For the biographical information of Mr. Chen Yujin, please refer to the relevant disclosures in “ASIMCO Camshaft” of this section.
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Senior Management Member
Date of Name Age Position Date of joining appointment Duty
Mr. Wu Yingxue 49 General Manager August 1989 May 2009 General (吳映雪) manager
For the biographical information of Mr. Wu Yingxue, please refer to the relevant disclosures in “ASIMCO Camshaft” of this section.
ASIMCO Shanxi
Directors
Date of Name Age Position Date of joining appointment Duty
Mr. Wang Bin 57 Chairman December 2010 December 2010 Chairman (汪濱) Mr. Ding 49 Director December 2010 December 2010 Director Zhengdong (丁正東) Mr.NiWei 51 Director February 2013 February 2013 Director (倪威) Mr. Cao Yancun 49 Director February 2005 March 2011 Director (曹彥存)
For the biographical information of Mr. Wang Bin, Mr. Ding Zhengdong and Mr. Ni Wei, please refer to the relevant disclosures in “ASIMCO Camshaft” of this section.
Mr. Cao Yancun (曹彥存), aged 49, has been serving as the director of the company since March 2011 and is mainly responsible for the operation and management of the company.
Mr. Cao has been serving as the general manager of ASIMCO Meilian Brake Technology (Langfang) Co., Ltd. since November 2014 to date. He acted as the general manager of ASIMCO Shanxi from February 2005 to November 2014, deputy general manager of Ingersoll Rand Road Machinery Co., Ltd. (英格索蘭道路機械有限 公司) from February 2004 to February 2005, and engineer of the state-run 5419 factory from July 1989 to September 1997.
Mr. Cao obtained a bachelor’s degree in engineering from Taiyuan University of Science and Technology in July 1989 and became a qualified metallurgical mechanical engineer certified by the Office of Industry of National Defence in September 1991.
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Mr. Cao does not, at present, nor did he in the past three years, hold any directorship in any other listed companies.
Senior Management Members
Date of Name Age Position Date of joining appointment Duty
Mr. Tian 52 General Manager August 1997 November 2014 Operation and Guozhu management (田國柱) Mr. Wang Lijun 45 Deputy General November 2006 March 2015 Production (王立軍) Manager operation and management Mr. Ji Yingqu 45 Deputy General January 2000 December 2013 Management of (姬應渠) Manager technical quality Mr. Wu Shihua 42 Chief Financial February 2012 December 2012 Chief financial (武時華) Officer officer
Mr. Tian Guozhu (田國柱), aged 52, has been serving as the general manager of the company since November 2014 and is mainly responsible for the operation and management of the company.
Mr. Tian has over 29 years of experience in the operation of the automobile parts and components manufacturing operation. He served various positions in the company, including general manager from December 2004 to November 2014, deputy general manager from March 2004 to November 2004, and director of the planning, power and facilities department combined with quality and technological duties from March 2004 to November 2004. Mr. Tian acted as the senior manager and deputy director of the technical innovation, quality, sales and production department of Shanxi International Casting Co., Ltd (山西國際鑄造有限公司)from March 1997 to February 2004. He was an engineer of the state-run 5419 factory and officer of the engineering department from September 1987 to February 1997.
Mr. Tian obtained a bachelor’s degree from Northeastern Engineering College in July 1987. He graduated from a business management senior manager programme certified by Tsinghua University in October 2004.
Mr. Tian does not, at present, nor did he in the past three years, hold any directorship in any other listed companies.
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Mr. Wang Lijun (王立軍), aged 45, has been serving as the deputy general manager of the company since February 2015 and is mainly responsible for production operation.
Mr. Wang has over 20 years of experience in the operation of the automobile parts and components manufacturing operation. He acted as an engineer of the state-run 5419 factory from July 1992 to May 1998. He was a melting engineer of ASIMCO Shanxi from 1998 to 2005, production manager of ASIMCO Shanxi from 2006 to 2007, deputy production director of ASIMCO Shanxi from 2008 to 2011, and foundry production director (II) of ASIMCO Shanxi and assistant to general manager of the company from 2011 to 2015.
Mr. Wang obtained post-secondary qualifications from Tianjin Normal University in July 1992. He was granted the Black Belt qualification certified by Juran Academy of Quality Management (朱蘭質量管理科學院) in January 2006.
Mr. Wang does not, at present, nor did he in the past three years, hold any directorship in any other listed companies.
Mr. Ji Yingqu (姬應渠), aged 45, has been serving as the deputy general manager of the company since December 2013 and is mainly responsible for technology and quality assurance.
Mr. Ji has over 18 years of experience in the operation of the automobile parts and components manufacturing operation. He has served various positions in the company since January 2004, including the assistant to general manager from August 2013 to January 2014, director of the tooling department from March 2008 to June 2013, deputy director of the tooling department from September 2006 to March 2008, deputy director of the quality department from October 2005 to September 2006, and deputy production director from January 2004 to September 2006.
Mr. Ji obtained a bachelor’s degree from Shenyang Institute of Technology in July 1996. He graduated from a senior manager programme certified by Tsinghua University in May 2012.
Mr. Ji does not, at present, nor did he in the past three years, hold any directorship in any other listed companies.
Mr. Wu Shihua (武時華), aged 42, has been serving as the chief financial officer of the company since December 2012 and is mainly responsible for financial management.
Mr. Wu has over 19 years of experience in finance. He acted as the internal control manager of the headquarters from February 2012 to December 2012. He served as the head of finance department and internal control department of Shanshan Holdings Co. Ltd. from August 2009 to January 2012, finance manager of Jiangsu Kunshan Fugui Group (江蘇昆山富貴集團) from May 2004 to August 2009 and finance officer of Anhui Ante Group from September 1997 to April 2004.
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Mr. Wu obtained a degree in accounting from University of International Business and Economics in 1997. He became a qualified accountant certified by the Anhui Provincial Department of Finance and Department of Human Resources in 2003, and was granted the qualification of international internal control professional certified by the Internal Control Institute of China in 2011.
Mr. Wu does not, at present, nor did he in the past three years, hold any directorship in any other listed companies.
ASIMCO NVH
Directors
Date of Name Age Position Date of joining appointment Duty
Mr. Wang Bin 57 Chairman 31 October 2010 31 October 2010 Chairman (汪濱) Mr. Ding 49 Director 10 June 2008 10 June 2008 Director Zhengdong (丁正東) Mr.NiWei 51 Director 7 March 2001 7 March 2001 Director (倪威) Mr. Zheng Jiadong 49 Director 1 October 2003 12 January 2010 General manager (鄭家東)
For the biographical information of Mr. Wang Bin, Mr. Ding Zhengdong and Mr.NiWei, please refer to the relevant disclosures in “ASIMCO Camshaft” of this section.
Mr. Zheng Jiadong (鄭家東), aged 49, has been serving as the general manager of the company since January 2010 and is mainly responsible for the operation and management of the company.
Mr. Zheng has over 20 years of experience in the operation and management of the automobile parts and components manufacturing operation. He has been serving as the general manager of ASIMCO NVH Technologies Co., Ltd (Anhui) since October 2003. Mr. Zheng acted as the internal control manager of Beijing ASIMCO Consultant Limited (北京亞新科諮詢有限公司) from December 2000 to October 2003 and financial personnel of Huainan Mining Group (淮南礦業集團) from July 1990 to November 2000.
Mr. Zheng obtained a bachelor degree of science from Xi’an Jiaotong University in July 1990. He obtained a master’s degree in business management certified by China Europe International Business School in October 2013.
Mr. Zheng does not, at present, nor did he in the past three years, hold any directorship in any other listed companies.
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Supervisor
Date of Name Age Position Date of joining appointment Duty
Ms. Song 47 Supervisor September 2013 September 2013 Internal control Qianru director (宋倩茹)
Ms. Song Qianru (宋倩茹), aged 47, was appointed as the supervisor of the company in September 2013. She has been serving as the group internal control director of ASIMCO Group since May 2011. From April 2009 to April 2011, Ms. Song acted as the group head of internal control of Shanshan Group Co., Ltd. (杉杉集團有 限公司). She was the group financial controller of Ningbo Conda Investment Co., Ltd. (寧波康大投資有限公司) from June 2006 to March 2009, audit manager of ASIMCO Group from August 2004 to January 2006, chief financial officer of ASIMCO Yuanfeng Braking Systems Wuhan Company Limited (武漢亞新科元豐制動 系統有限公司) from April 2003 to August 2004, and finance manager and internal control manager of ASIMCO Braking Systems (Zhuhai) Co., Ltd. (亞新科制動系統 （珠海）有限公司) from May 1996 to March 2003.
Ms. Song obtained a bachelor’s degree in economics from Jilin University of Finance and Economics in June 1991.
Ms. Song does not, at present, nor did she in the past three years, hold any directorship in any other listed companies.
Senior Management Members
Date of Name Age Position Date of joining appointment Duty
Mr. Zheng 49 General Manager 1 October 2003 12 January 2010 General Jiadong manager Mr. Gong 40 Deputy General 1 August 1995 1 February 2009 Deputy general Huabing Manager of manager of (龔華兵) Technology technology Mr. Wu 43 Deputy General 1 July 1999 15 March 2010 Deputy general Zhangfeng Manager of manager of (吳長豐) Commerce commerce Mr. Shu Feng 50 Deputy General March 2000 July 2008 Deputy general (舒峰) Manager of manager of Quality quality Ms. Yang 37 Chief Financial February 2001 February 2010 Chief financial Junrong Officer officer (楊君榮)
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For the biographical information of Mr. Zheng Jiadong, please refer to the relevant disclosures in “ASIMCO NVH” of this section.
Mr. Gong Huabing (龔華兵), aged 40, has been serving as the deputy general manager of the company since February 2009 and is mainly responsible for technology.
Mr. Gong has over 20 years of experience in the operation and management of the automobile parts and components manufacturing operation. He has served various positions in the company since August 1995, including the technical director from February 2008 to January 2009, manager of the technical department from March 2003 to January 2008, product design engineer from January 1996 to February 2003 and an intern of the company from August 1995 to January 1996.
Mr. Gong graduated from Hefei University of Technology in July 1995.
Mr. Gong does not, at present, nor did he in the past three years, hold any directorship in any other listed companies.
Mr. Wu Zhangfeng (吳長豐), aged 43, has been serving as the deputy general manager of the company since March 2010 and is mainly responsible for commerce.
Mr. Wu has over 20 years of experience in the operation and management of the automobile parts and components manufacturing operation. He has served various positions in the company since July 1999, including the sales director from December 2006 to December 2009, project manager from December 2005 to December 2006, head of the domestic development department from December 2004 to December 2005, sales manager of the Guangdong region from May 2003 to December 2004, salesperson of the Guangdong region from February 2002 to May 2003, and project manager from July 1997 to February 2002.
Mr. Wu obtained a bachelor’s degree in industrial electric automation from Anhui Polytechnic University in July 1999.
Mr. Wu does not, at present, nor did he in the past three years, hold any directorship in any other listed companies.
Mr. Shu Feng (舒峰), aged 50, has been serving as the deputy general manager of quality of the company since July 2008 and is mainly responsible for quality management.
Mr. Shu has over 28 years of experience in the design, manufacture and quality management of rubber products. He was the deputy general manager of quality of ASIMCO Anhui Company (亞新科安徽公司) from 2000 to 2014, deputy general manager of technology of CTCI (中鼎公司) from 1994 to 2000, and plant manager of the mould factory of Ningguo Sealing Co., Ltd. (寧國密封件有限公司) from 1988 to 1994.
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Mr. Shu obtained a bachelor’s degree from Hefei University of Technology in 1988 and became a qualified engineer certified by the Human Resources Bureau of Xuancheng City (宣城市人事局) in July 1994.
Mr. Shu does not, at present, nor did he in the past three years, hold any directorship in any other listed companies.
Ms. Yang Junrong (楊君榮), aged 37, has being the chief financial officer of the company since February 2010 and is mainly responsible for finance functions.
Ms. Yang has over 15 years of experience in finance. She acted as the finance manager of the company from May 2006 to February 2010, general ledger accountant and deputy finance manager of the Wuhu subsidiary of the company from May 2003 to May 2006 and a cashier of the company from February 2001 to May 2003.
Ms. Yang graduated from Anhui Open University in 2001 and obtained an EMBA degree from the School of Management of Zhejiang University in 2013.
Ms. Yang does not, at present, nor did she in the past three years, hold any directorship in any other listed companies.
CACG I
Directors
Date of Name Age Position Date of joining appointment Duty
Mr. Wang Bin 57 Chairman December 2010 December 2010 Chairman (汪濱) Mr. Ding 49 Director April 2008 April 2008 Director Zhengdong (丁正東) Mr.NiWei 51 Director April 2008 April 2008 Director (倪威)
For the biographical information of Mr. Wang Bin, Mr. Ding Zhengdong and Mr. Ni Wei, please refer to the relevant disclosures in “ASIMCO Camshaft” of this section.
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8. FINANCIAL INFORMATION
Management Discussion and Analysis of ASIMCO Camshaft
Overview
Founded in May 2004, ASIMCO Camshaft is an important supplier for domestic and international well-known engine manufacturers, providing more than 80 kinds of products. ASIMCO Camshaft mainly engages in the development, manufacturing, and sales of various types of engine camshafts, which can be categorised into two groups, steel shafts and cast iron shafts. Equipped with the technology and capability of processing complex cam profile, ASIMCO Camshaft has designed and developed various high-end engine camshafts. Its main product line include: chilled alloy cast iron, cold shock ball graphite cast iron, high strength nodular cast iron and steel material camshaft.
Set out below are the management discussion and analysis of ASIMCO Camshaft for the three years ended 31 December 2015.
Year ended 31 December 2015 compared with the year ended 31 December 2014
Revenue
ASIMCO Camshaft’s revenue increased by 0.8% from RMB103.0 million for the year ended 31 December 2014 to RMB103.8 million for the year ended 31 December 2015. Even though the demand in the commercial vehicle market declined for the year of 2015, the sales of the company’s certain customers, which mainly consist of famous motor manufacturers, remained on a strong upward trend due to the high quality of their products. As a result, ASIMCO Camshaft’s revenue remained at the same level as the preceding year with increasing sales to such customers which outperformed their competitors in the commercial vehicle market. In addition, ASIMCO Camshaft recorded an increase in its export sales to a customer in the United States.
The following table sets forth the breakdown of ASIMCO Camshaft’s revenue by business (in RMB millions):
Year ended 31 December 2015 2014
Sales of automotive products 103.5 102.2 Others 0.3 0.8
Total 103.8 103.0
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Cost of Sales
ASIMCO Camshaft’s cost of sales decreased by 4.7% from RMB74.1 million for the year ended 31 December 2014 to RMB70.6 million for the year ended 31 December 2015 primarily due to (i) the fall of the market price of raw materials; and (ii) the rebates and discounts provided by certain major suppliers.
Gross Profit
Driven by the above factors, ASIMCO Camshaft’s gross profit increased by 14.9% from RMB28.9 million for the year ended 31 December 2014 to RMB33.2 million for the year ended 31 December 2015.
ASIMCO Camshaft’s gross profit margin increased from 28.1% for the year ended 31 December 2014 to 32.0% for the year ended 31 December 2015 primarily due to (i) the fall of the market price of raw materials; and (ii) the higher percentage of sales of product with higher profit margin like chilled cast iron camshaft.
Other Income
ASIMCO Camshaft’s other income decreased by 6.7% from RMB120.0 thousand for the year ended 31 December 2014 to RMB112.0 thousand for the year ended 31 December 2015.
Other Gains and Losses
ASIMCO Camshaft’s other losses was RMB0.2 million for the year ended 31 December 2014, and its other gains was RMB0.4 million for the year ended 31 December 2015, primarily as a result of the decrease in ASIMCO Camshaft’s loss on disposal of property, plant and equipment and increase in net foreign exchange gains.
Selling and Distribution Costs
ASIMCO Camshaft’s selling and distribution costs increased by 8.0% from RMB2.5 million for the year ended 31 December 2014 to RMB2.7 million for the year ended 31 December 2015, primarily as a result of an increase in transportation and logistics expenses as ASIMCO Camshaft’s sales volumes increased which was partially offset by the decrease in sales personnel costs.
Administrative Expenses
ASIMCO Camshaft’s administrative expenses increased by 7.5% from RMB8.0 million for the year ended 31 December 2014 to RMB8.6 million for the year ended 31 December 2015, primarily as a result of the increase in salary costs and depreciation and amortization.
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Profit Before Income Tax
As a result of the foregoing factors, ASIMCO Camshaft’s profit before income tax increased by 9.0% from RMB12.2 million for the year ended 31 December 2014 to RMB13.3 million for the year ended 31 December 2015.
Income Tax Expense
ASIMCO Camshaft’s income tax expense was RMB0.06 million for the year ended 31 December 2015 and it recorded an income tax credit of RMB2.5 million for the year of 2014, primarily due to decrease of utilisation of previous unrecognised deductible temporary differences in the year ended 31 December 2015. ASIMCO Camshaft’s effective tax rate were -20.5% and 0.5% for the year ended 31 December 2014 and 2015, respectively.
Profit for the Year
As a result of the foregoing factors, ASIMCO Camshaft’s profit for the year decreased by 10.1% from RMB14.8 million for the year ended 31 December 2014 to RMB13.3 million for the year ended 31 December 2015.
Profit Attributable to Owners of ASIMCO Camshaft
Accordingly, profit attributable to owners of the Company decreased by 10.1% from RMB14.8 million for 2014 to RMB13.3 million for 2015.
Net Current Position
The net current assets of ASIMCO Camshaft increased by 150.0% from RMB3.6 million as of 31 December 2014 to RMB9.0 million as of 31 December 2015, primarily due to increases in (i) the trade and other receivables by RMB7.3 million; (ii) pledged bank deposits by RMB2.5 million; and (iii) cash and cash equivalents by RMB0.9 million.
Year ended 31 December 2014 compared with the year ended 31 December 2013
Revenue
ASIMCO Camshaft’s revenue increased by 19.8% from RMB86.0 million for the year ended 31 December 2013 to RMB103.0 million for the year ended 31 December 2014. Despite the contraction of the commercial vehicle market, certain high quality customers of the company remained on a strong growth in the year of 2014 and increased their orders from ASIMCO Camshaft. In addition, by taking proactive marketing measures, ASIMCO Camshaft expanded its customer base to include some new customers including certain well-known motor manufacturers, which subsequently brought increased sales to the company during the year of 2014.
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The following table sets forth the breakdown of ASIMCO Camshaft’s revenue by business (in RMB millions):
Year ended 31 December 2014 2013
Sales of automotive products 102.2 85.2 Others 0.8 0.8
Total 103.0 86.0
Cost of Sales
As ASIMCO Camshaft recorded an increase in its revenue, ASIMCO Camshaft’s cost of sales increased by 13.1% from RMB65.5 million for the year ended 31 December 2013 to RMB74.1 million for the year ended 31 December 2014.
Gross Profit
Driven by the above factors, ASIMCO Camshaft’s gross profit increased by 41.0% from RMB20.5 million for the year ended 31 December 2013 to RMB28.9 million for the year ended 31 December 2014.
ASIMCO Camshaft’s gross profit margin increased from 23.8% for the year ended 31 December 2013 to 28.1% for the year ended 31 December 2014 primarily due to (i) the fall of the market price of raw materials; and (ii) the higher percentage of sales of product with higher profit margin like chilled cast iron camshaft.
Other Income
ASIMCO Camshaft’s other income decreased by 50% from RMB0.2 million for the year ended 31 December 2013 to RMB0.1 million for the year ended 31 December 2014.
Other Gains, Net
ASIMCO Camshaft’s other losses decreased by 33.3% from a loss of RMB0.3 million for the year ended 31 December 2013 to a loss of RMB0.2 million for the year ended 31 December 2014, primarily as a result of the decrease in ASIMCO Camshaft’s assets impairment losses and increase in net foreign exchange gains.
Selling and Distribution Costs
ASIMCO Camshaft’s selling and distribution costs remained the same level for the years of 2013 and 2014 and recorded RMB2.5 million for the year ended 31 December 2013 and RMB2.5 million for the year ended 31 December 2014, primarily as a result of a decrease of warranty fees and an increase in transportation and logistics expenses.
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Administrative Expenses
ASIMCO Camshaft’s administrative expenses increased by 25.0% from RMB6.4 million for the year ended 31 December 2013 to RMB8.0 million for the year ended 31 December 2014, primarily as a result of the increase in salary costs and utilities costs.
Profit Before Income Tax
As a result of the foregoing factors, ASIMCO Camshaft’s profit before income tax increased by 54.4% from RMB7.9 million for the year ended 31 December 2013 to RMB12.2 million for the year ended 31 December 2014.
Income Tax Expense
ASIMCO Camshaft recorded an income tax credit of RMB2.5 million for the year of 2014 primarily due to the increase of deferred tax assets of RMB2.9 million and the utilisation of previously unrecognised deferred tax assets of RMB3.6 million in the year ended 31 December 2014. Its income tax was RMB1.3 million for the year of 2013. ASIMCO Camshaft’s effective tax rate were 16.5% and nil for the year ended 31 December 2013 and 2014, respectively.
Profit for the Year
As a result of the foregoing factors, ASIMCO Camshaft’s profit for the year increased by 127.7% from RMB6.5 million for the year ended 31 December 2013 to RMB14.8 million for the year ended 31 December 2014.
Profit Attributable to Owners of the ASIMCO Camshaft
Accordingly, profit attributable to owners of the company increased by 127.7% from RMB6.5 million for 2013 to RMB14.8 million for 2014.
Net Current Position
The net current assets of ASIMCO Camshaft were RMB3.6 million as of 31 December 2014 with a positive working capital movement from the net current liabilities of RMB11.6 million as of 31 December 2013, primarily due to the decrease in loans from fellow subsidiaries by RMB21.0 million.
Cash Flows
Operating Activities
Net cash generated from operating activities in 2015 was RMB28.1 million. Cash inflow primarily comprised profit before taxation of RMB13.3 million, adjusted for: (i) certain non-cash items, mainly including depreciation of property,
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plant and equipment of RMB15.2 million; (ii) finance cost of RMB3.0 million; and (iii) an increase in trade and other payables of RMB5.5 million. The cash inflow was partially offset by: (i) an increase in trade and other receivables of RMB7.4 million; and (ii) income tax paid of RMB2.1 million.
Net cash generated from operating activities in 2014 was RMB30.4 million. Cash inflow primarily comprised profit before taxation of RMB12.2million, adjusted for: (i) certain non-cash items, mainly including depreciation of property, plant and equipment of RMB13.6 million; (ii) finance cost of RMB3.2 million; (iii) a decrease in inventories of RMB0.8 million; and (iv) an increase in trade and other payables of 3.3 million. The cash inflow was partially offset by: (i) an increase in trade and other receivables of RMB1.1 million; and (ii) income tax paid of RMB1.6 million.
Net cash generated from operating activities in 2013 was RMB18.9 million. Cash inflow primarily comprised profit before taxation of RMB7.9million, adjusted for: (i) certain non-cash items, mainly including depreciation of property, plant and equipment of RMB11.3 million; (ii) finance cost of RMB2.7 million; and (iii) an increase in trade and other payables of RMB2.0 million. The cash inflow was partially offset by: (i) an increase in inventories of RMB3.6 million; and (ii) an increase in trade and other receivables of RMB1.7 million.
Investing Activities
Net cash used in investing activities in 2015 was RMB21.1 million, primarily comprising: (i) purchase of property, plant and equipment of RMB18.6 million; and (ii) payment of pledged bank deposits of RMB2.5 million.
Net cash used in investing activities in 2014 was RMB22.0 million, primarily due to purchase of property, plant and equipment of RMB22.7million. The cash outflow was offset by proceeds from disposal of property, plant and equipment amounting to RMB0.7 million.
Net cash used in investing activities in 2013 was RMB17.2 million, primarily due to purchase of property, plant and equipment of RMB17.2 million.
Financing Activities
Net cash used in financing activities in 2015 was RMB6.2 million, primarily consisting of (i) repayment of borrowings of RMB16.0 million; (ii) repayment of loans from a fellow subsidiary of RMB16.0 million. The cash outflow was offset by the proceeds to borrowings of RMB28.0 million.
Net cash used in financing activities in 2014 was RMB8.1 million, primarily comprising: (i) repayment of borrowings of RMB11.5 million; (ii) repayment of borrowings from a fellow subsidiary of RMB34.0 million; and (iii) payment of interest of RMB3.1 million. The cash outflow was offset by the proceeds from borrowings of RMB14.5 million and loans from a fellow subsidiary of RMB26.0 million.
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Net cash used in financing activities in 2013 was RMB4.0 million, primarily comprising: (i) repayment of borrowings to a fellow subsidiary of RMB9.1 million; and (ii) payment of interest of RMB2.9 million. The cash outflow was offset by the proceeds from borrowings of RMB8.0 million.
Staff Costs and Remuneration Policy
As of 31 December 2013, 2014 and 2015, ASIMCO Camshaft had 261, 282 and 283 employees, respectively. The company’s employee benefit expenses were RMB17.3 million, RMB20.8 million and RMB22.3 million for the years ended 31 December 2013, 2014 and 2015. The remuneration, promotion and salary increments of employees were assessed according to the individual’s performance, as well as professional and working experience, and in accordance with prevailing industry practices.
Significant Investments, Acquisitions and Disposals
ASIMCO Camshaft did not conduct any significant investment, nor did it make any material acquisition or disposal of subsidiaries and associates throughout the year ended 31 December 2013, 2014 and 2015.
Charges on Assets
Save as disclosed in the accountant’s report of ASIMCO Camshaft for the three years ended 31 December 2015 attached as Appendix III-2 to this circular, ASIMCO Camshaft had no other charge on its assets as at 31 December 2013, 2014 and 2015.
Capital Structure
There was no change in the paid-in capital of ASIMCO Camshaft during the three years ended 31 December 2013, 2014 and 2015.
Capital Expenditure
In 2013, 2014 and 2015, the cash payment for purchase of property, plant and equipment of ASIMCO Camshaft was RMB17.2 million, RMB22.7 million and RMB18.6 million, respectively.
Capital Commitments
The following table below sets forth the capital commitments of ASIMCO Camshaft as of the dates indicated:
31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Contracted, but not provided for: Property, plant and equipment 3,346 6,770 2,398
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Contingent Liabilities
As of 31 December 2015, saved as disclosed, ASIMCO Camshaft did not have any material purchase commitments, guarantees or material contingent liabilities.
Indebtedness
As at 31 December 2015, ASIMCO Camshaft had outstanding borrowings of RMB23.0 million.
Management Discussion and Analysis of ASIMCO Shuanghuan
Overview
Founded in August 1995, ASIMCO Shuanghuan is a well-recognised supplier in the PRC market for piston ring products. ASIMCO Shuanghuan mainly engages in the development, manufacturing, and sales of various types of piston rings. Equipped with the technology and capability of processing complex product profile, ASIMCO Shuanghuan has designed and developed a series of piston ring products. These products are utilised on a broad range of vehicles from small passenger cars to full-size trucks.
Set out below are the management discussion and analysis of ASIMCO Shuanghuan for the three years ended 31 December 2015.
Year ended 31 December 2015 compared with the year ended 31 December 2014
Revenue
ASIMCO Shuanghuan’s revenue decreased by 8.2% from RMB520.3 million for the year ended 31 December 2014 to RMB477.6 million for the year ended 31 December 2015, mainly due to (i) the decrease of the demand in the commercial vehicle market which subsequently led to a decrease in the demand for ASIMCO Shuanghuan’s products; and (ii) the contraction of automobile parts and components market because car parc significantly declines from the year of 2013 due to the mandatory retirement of millions of automobiles which failed to meet emissions standards in China. Such decrease in revenue was partly offset by the growth of the company’s valve retainer business.
The following table sets forth the breakdown of ASIMCO Shuanghuan’s revenue by business (in RMB millions):
Year ended 31 December 2015 2014
Sales of automotive products 464.1 502.2 Sales of materials and others 13.5 18.1
Total 477.6 520.3
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Cost of Sales
As ASIMCO Shuanghuan recorded a decrease in ASIMCO Shuanghuan’s revenue, ASIMCO Shuanghuan’s cost of sales decreased by 8.3% from RMB368.9 million for the year ended 31 December 2014 to RMB338.2 million for the year ended 31 December 2015.
Gross Profit
Driven by the above factors, ASIMCO Shuanghuan’s gross profit decreased by 7.9% from RMB151.4 million for the year ended 31 December 2014 to RMB139.4 million for the year ended 31 December 2015.
ASIMCO Shuanghuan’s gross profit margin remained the same level for the years of 2014 and 2015 and recorded 29.1% for the year ended 31 December 2014 and 29.2% for the year ended 31 December 2015.
Other Income
ASIMCO Shuanghuan’s other income decreased by 12.0% from RMB7.5 million for the year ended 31 December 2014 to RMB6.6 million for the year ended 31 December 2015.
Other Gains and Losses
ASIMCO Shuanghuan’s recorded other losses of was RMB2.1 million for the year ended 31 December 2014, and its other gains was RMB2.4 million for the year ended 31 December 2015, primarily as a result of the decrease in ASIMCO Shuanghuan’s loss on disposal of property, plant and equipment and increase in net foreign exchange gains.
Selling and Distribution Costs
ASIMCO Shuanghuan’s selling and distribution costs increased by 7.9% from RMB28.0 million for the year ended 31 December 2014 to RMB30.2 million for the year ended 31 December 2015, primarily as a result of an increase in the marketing expenses.
Administrative Expenses
ASIMCO Shuanghuan’s administrative expenses decreased by 13.4% from RMB37.2 million for the year ended 31 December 2014 to RMB32.2 million for the year ended 31 December 2015, primarily as a result of the decrease in salary costs and maintenance and repair cost.
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Profit Before Income Tax
As a result of the foregoing factors, ASIMCO Shuanghuan’s profit before income tax decreased by 3.0% from RMB72.7 million for the year ended 31 December 2014 to RMB70.5 million for the year ended 31 December 2015.
Income Tax Expense
ASIMCO Shuanghuan’s income tax expense decreased by 4.5% from RMB11.1 million for the year ended 31 December 2014 to RMB10.6 million for the year ended 31 December 2015, primarily as a result of a decrease in ASIMCO Shuanghuan’s taxable profit for the year. ASIMCO Shuanghuan’s effective tax rate for the year ended 31 December 2015 decreased to 15.0% from 15.3% for the year ended 31 December 2014.
Profit for the Year
As a result of the foregoing factors, ASIMCO Shuanghuan’s profit for the year decreased by 2.6% from RMB61.6 million for the year ended 31 December 2014 to RMB60.0 million for the year ended 31 December 2015.
Profit Attributable to Owners of ASIMCO Shuanghuan
Accordingly, profit attributable to owners of the company decreased by 4.5% from RMB62.4 million for 2014 to RMB59.6 million for 2015.
Net Current Position
The net current assets of ASIMCO Shuanghuan decreased by 61.2% from RMB171.7 million as of 31 December 2014 to RMB66.7 million as of 31 December 2015, primarily due to an increase in trade and other payables of RMB169.5 million, of which the effect was partially offset by increases in loans to a joint venture of RMB8.0 million, pledged bank deposits of RMB5.4 million, term deposits of RMB38.0 million and cash and cash equivalents of RMB35.3 million.
Year ended 31 December 2014 compared with the year ended 31 December 2013
Revenue
ASIMCO Shuanghuan’s revenue decreased by 4.2% from RMB543.0 million for the year ended 31 December 2013 to RMB520.3 million for the year ended 31 December 2014, mainly due to (i) the decrease of demand in the commercial vehicle market which subsequently led in a decrease in the demand for ASIMCO Shuanghuan’s products; and (ii) the contraction of automobile parts and components market because car parc significantly declines from the year of 2013 due to the mandatory retirement of millions of automobiles which failed to meet emissions standards in China. Such decrease in revenue was partly offset by the growth of the company’s valve retainer business.
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The following table sets forth the breakdown of ASIMCO Shuanghuan’s revenue by business (in RMB millions):
Year ended 31 December 2014 2013
Sales of automotive products 502.2 526.1 Sales of materials and others 18.1 16.9
Total 520.3 543.0
Cost of Sales
As ASIMCO Shuanghuan recorded a decrease in ASIMCO Shuanghuan’s revenue, ASIMCO Shuanghuan’s cost of sales decreased by 3.8% from RMB383.3 million for the year ended 31 December 2013 to RMB368.9 million for the year ended 31 December 2014.
Gross Profit
Driven by the above factors, ASIMCO Shuanghuan’s gross profit decreased by 5.2% from RMB159.7 million for the year ended 31 December 2013 to RMB151.4 million for the year ended 31 December 2014.
ASIMCO Shuanghuan’s gross profit margin remained the same level for the years of 2014 and 2013 and recorded 29.1% for the year ended 31 December 2014 and 29.4% for the year ended 31 December 2013.
Other Income
ASIMCO Shuanghuan’s other income decreased by 27.2% from RMB10.3 million for the year ended 31 December 2013 to RMB7.5 million for the year ended 31 December 2014.
Other Gains and Losses
ASIMCO Shuanghuan’s other gains amounted to RMB1.4 million for the year ended 31 December 2013 and its other losses was amount to RMB2.1 million for the year ended 31 December 2014, primarily as a result of (i) the company’s gains on acquisition of a subsidiary in the year of 2013; (ii) the increases in ASIMCO Shuanghuan’s impairment of trade and other receivables and loss on disposal of property, plant and equipment in 2014.
Selling and Distribution Costs
ASIMCO Shuanghuan’s selling and distribution costs decreased by 33.5% from RMB42.1 million for the year ended 31 December 2013 to RMB28.0 million for the year ended 31 December 2014, primarily as a result of the decrease of warranty fees.
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Administrative Expenses
ASIMCO Shuanghuan’s administrative expenses increased by 6.9% from RMB34.8 million for the year ended 31 December 2013 to RMB37.2 million for the year ended 31 December 2014, primarily as a result of the increases in salary costs and utilities costs.
Profit Before Income Tax
As a result of the foregoing factors, ASIMCO Shuanghuan’s profit before income tax decreased by 4.5% from RMB76.1 million for the year ended 31 December 2013 to RMB72.7 million for the year ended 31 December 2014.
Income Tax Expense
ASIMCO Shuanghuan’s income tax expense increased by 1.8% from RMB10.9 million for the year ended 31 December 2013 to RMB11.1 million for the year ended 31 December 2014, primarily as a result of a decrease in ASIMCO Shuanghuan’s taxable profit for the year. ASIMCO Shuanghuan’s effective tax rate for the year ended 31 December 2014 increased to 15.3% from 14.3% for the year ended 31 December 2013.
Profit for the Year
As a result of the above factors, ASIMCO Shuanghuan’s profit for the year decreased by 5.5% from RMB65.2 million for the year ended 31 December 2013 to RMB61.6 million for the year ended 31 December 2014.
Profit Attributable to Owners of ASIMCO Shuanghuan
Accordingly, profit attributable to owners of the company decreased by 5.5% from RMB66.0 million for 2013 to RMB62.4 million for 2014.
Net Current Position
The net current assets of ASIMCO Shuanghuan decreased by 16.7% from RMB206.1 million as of 31 December 2013 to RMB171.7 million as of 31 December 2014, primarily due to the decrease of term deposits of RMB50 million in 2014.
Cash Flows
Operating Activities
Net cash generated from operating activities in 2015 was RMB105.9 million. Cash inflow primarily comprised profit before taxation of RMB70.5 million, adjusted for: (i) certain non-cash items, mainly including depreciation of property, plant and equipment of RMB29.7 million, amortisation of prepaid land lease payments and other intangible assets of RMB0.6 million and provision of
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impairment for inventories and trade receivables of RMB1.1 million; (ii) share of loss of a joint venture of RMB2.2 million; and (iii) a decrease in inventories of RMB5.2 million, a decrease in trade and other receivables of RMB15.0 million, an increase in advances from customers of RMB2.5 million. The cash inflow was partially offset by: (i) interest income on loans to fellow subsidiaries and a joint venture of RMB3.0 million; (ii) a decrease in trade and other payables of RMB9.5 million; and (iii) income tax paid of RMB8.4 million.
Net cash generated from operating activities in 2014 was RMB85.7 million. Cash inflow primarily comprised profit before taxation of RMB72.7 million adjusted for: (i) certain non-cash items, mainly including depreciation of property, plant and equipment of RMB28.7 million, amortisation of prepaid land lease payments and other intangible assets of RMB0.6 million; (ii) finance costs of RMB1.1 million; (iii) share of loss of a joint venture of RMB2.5 million; (iv) a decrease in inventories of RMB7.1 million; and (v) an increase in trade and other payables of RMB4.4 million. The cash inflow was partially offset by: (i) interest income on loans to fellow subsidiaries and a joint venture of RMB3.6 million; (ii) an increase in trade and other receivables of RMB14.1 million; (iii) a decrease in advances from customers of RMB1.4 million; (iv) a decrease in provisions of RMB4.8 million; and (v) income tax paid of RMB11.2 million.
Net cash generated from operating activities in 2013 was RMB105.1 million. Cash inflow primarily comprised profit before taxation of RMB76.1 million, adjusted for: (i) certain non-cash items, mainly including depreciation of property, plant and equipment of RMB27.2 million and amortisation of prepaid land lease payments and other intangible assets of RMB0.6 million; (ii) finance costs of RMB1.7 million; (iii) a decrease in inventories of RMB2.2 million; (iv) an increase in trade and other payables of RMB40.7 million; and (v) an increase in provisions of RMB3.1 million. The cash inflow was partially offset by: (i) interest income on loans to fellow subsidiaries and a joint venture of RMB5.2 million, (ii) gains on acquisition of a subsidiary of RMB2.1 million; (iii) an increase in trade and other receivables of RMB31.3 million; and (iv) income tax paid of RMB8.6 million.
Investing Activities
Net cash used in investing activities in 2015 was RMB71.6 million, primarily due to (i) purchase of property, plant and equipment of RMB14.2 million; (ii) loans to fellow subsidiaries and a joint venture of RMB35.0 million; and (iii) term deposits of RMB38.0 million. The cash outflow was offset by loan repayments from fellow subsidiaries of RMB18.0 million.
Net cash generated from in investing activities in 2014 was RMB24.6 million, primarily due to (i) purchase of property, plant and equipment of RMB23.3 million; and (ii) loans to fellow subsidiaries and a joint venture of RMB43.2 million. The cash outflow was offset by (i) loan repayments from fellow subsidiaries of RMB40.7 million; and (ii) term deposits of RMB50.0 million.
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Net cash used in investing activities in 2013 was RMB78.1 million, primarily due to (i) purchase of property, plant and equipment of RMB26.1 million; (ii) loans to fellow subsidiaries and a joint venture of RMB6.7 million; (iii) term deposits of RMB50.0 million; (iv) purchase of a shareholding in a joint venture of RMB27.5 million; and (iv) acquisition of a subsidiary of RMB11.1 million. The cash outflow was offset by loan repayments from fellow subsidiaries of RMB37.7 million.
Financing Activities
Net cash used in financing activities in 2015 was nil.
Net cash used in financing activities in 2014 was RMB111.4 million, primarily consisting of (i) payment of dividends of RMB79.0 million; (ii) repayment of loans from shareholders of RMB30.0 million.
Net cash used in financing activities in 2013 was RMB92.5 million, primarily consisting of (i) payment of dividends of RMB57.7 million; (ii) repayment of loans from shareholders of RMB33.1 million.
Staff Costs and Remuneration Policy
As of 31 December 2013, 2014 and 2015, ASIMCO Shuanghuan had 1,800, 1,757 and 1,655 employees, respectively. The company’s employee benefit expenses were RMB103.6 million, RMB97.1 million and RMB95.1 million for the years ended 31 December 2013, 2014 and 2015. The remuneration, promotion and salary increments of employees were assessed according to the individual’s performance, as well as professional and working experience, and in accordance with prevailing industry practices.
Significant Investments, Acquisitions and Disposals
On 22 February 2013, ASMICO Shuanghuan and ASM Holding Limited entered into an equity transfer agreement according to which ASMICO Shuanghuan agreed to acquire 80% of the issued shares of ASM Alloy Materials (Yizheng) Co., Ltd. (愛斯姆合金材料（儀征）有限公司) for a consideration of RMB11,523,000 (“ASM Acquisition”). ASM Acquisition was completed in April 2013.
On 8 August 2013, ASMICO Shuanghuan and National Piston Ring Co., Ltd. (“NPR”) entered into an equity transfer agreement according to which ASMICO Shuanghuan agreed to acquire 50% issued shares of Rihuan Powder Metallurgy Manufacturing (Yizheng) Co., Ltd. (日環粉末冶金製造（儀征）有限公司)(“Rihuan”) for a total consideration of RMB27,494,976 (the “Rihuan Acquisition”). Rihuan Acquisition was completed in August 2013, after which Rihuan was then owned as to 50% by the Company and 50% by NPR and had become a joint venture of the ASIMCO Shuanghuan.
Saved as disclosed above, ASIMCO Shuanghuan did not conduct any significant investment, nor did it make any material acquisition or disposal of subsidiaries and associates throughout the year ended 31 December 2013, 2014 and 2015.
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Charges on Assets
Save as disclosed in the accountant’s report of ASIMCO Shuanghuan for the three years ended 31 December 2015 attached as Appendix III-6 to this circular, ASIMCO Shuanghuan had no other charge on its assets as at 31 December 2013, 2014 and 2015.
Capital Structure
There was no change in the paid-in capital of ASIMCO Shuanghuan during the year.
Capital Expenditure
In 2013, 2014 and 2015, the cash payment for purchase of property, plant and equipment of ASIMCO Shuanghuan was RMB26.1 million, RMB23.3 million and RMB14.2 million, respectively.
Capital Commitments
The following table below sets forth the capital commitments of ASIMCO Shuanghuan as of the dates indicated:
31 December 31 December 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Contracted, but not provided for： Property, plant and equipment 3,023 – 1,769
Contingent Liabilities
As of 31 December 2015, saved as disclosed, ASIMCO Shuanghuan did not have any material purchase commitments, guarantees or material contingent liabilities.
Indebtedness
As at 31 December 2015, ASIMCO Shuanghuan had no outstanding borrowings.
Management Discussion and Analysis of ASIMCO Foundry
Overview
Founded in January 2004, ASIMCO Foundry mainly engages in the development, manufacturing and sales of various types of automotive castings, offering more than 2,000 products.
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Set out below are the management discussion and analysis of ASIMCO Foundry for the three years ended 31 December 2015.
Year ended 31 December 2015 compared with the year ended 31 December 2014
Revenue
ASIMCO Foundry’s revenue decreased by 19.1% from RMB104.7 million for the year ended 31 December 2014 to RMB84.7 million for the year ended 31 December 2015, mainly due to the decrease of the sales of ASIMCO Shuanghuan which is the only customer of ASIMCO Foundry and the change of the product mix of ASIMCO Shuanghuan leading to a decrease in the demand for the products of the company.
The following table sets forth the breakdown of ASIMCO Foundry’s revenue by business (in RMB millions):
Year ended 31 December 2015 2014
Sales of automotive foundry products 84.7 104.5 Others 0 0.2
Total 84.7 104.7
Cost of Sales
As ASIMCO Foundry recorded a decrease in ASIMCO Foundry’s revenue, ASIMCO Foundry’s cost of sales decreased by 16.4% from RMB95.9 million for the year ended 31 December 2014 to RMB80.2 million for the year ended 31 December 2015.
Gross Profit
Driven by the above factors, ASIMCO Foundry’s gross profit decreased by 48.9% from RMB8.8 million for the year ended 31 December 2014 to RMB4.5 million for the year ended 31 December 2015.
As a result of the decrease in sales, the fixed cost for each unit of product was increasing and ASIMCO Foundry’s gross profit margin decreased from 8.4% for the year ended 31 December 2014 to 5.3% for the year ended 31 December 2015.
Other Income
ASIMCO Foundry’s other income remained RMB0.004 million for each of the years ended 31 December 2014 and 2015.
Other Gains, Net
ASIMCO Foundry’s other gains increased by 100.0% from a gain of RMB0.3 million for the year ended 31 December 2014 to a gain of RMB0.6 million for the year
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ended 31 December 2015, primarily as a result of the increase in compensations from suppliers and insurance companies.
Administrative Expenses
ASIMCO Foundry’s administrative expenses increased by 16.2% from RMB3.7 million for the year ended 31 December 2014 to RMB4.3 million for the year ended 31 December 2015, primarily as a result of the increase in salary costs.
Profit Before Income Tax
As a result of the foregoing factors, ASIMCO Foundry’s profit before income tax decreased by 85.2% from RMB5.3 million for the year ended 31 December 2014 to RMB0.8 million for the year ended 31 December 2015.
Income Tax Expense
ASIMCO Foundry’s income tax expense decreased by 85.7% from RMB1.4 million for the year ended 31 December 2014 to RMB0.2 million for the year ended 31 December 2015, primarily as a result of a decrease in ASIMCO Foundry’s taxable profit for the year. ASIMCO Foundry’s effective tax rate for the year ended 31 December 2015 decreased to 25% from 26.4% for the year ended 31 December 2014.
Profit for the Year
As a result of the foregoing factors, ASIMCO Foundry’s profit for the year decreased by 85.0% from RMB4.0 million for the year ended 31 December 2014 to RMB0.6 million for the year ended 31 December 2015.
Profit Attributable to Owners of ASIMCO Foundry
Accordingly, profit attributable to owners of the company decreased by 85.0% from RMB4.0 million for 2014 to RMB0.6 million for 2015.
Net Current Position
The net current assets of ASIMCO Foundry increased by 24.3% from RMB44.4 million as of 31 December 2014 to RMB55.2 million as of 31 December 2015, primarily due to (i) an increase in trade and other receivables of RMB7.6 million; (ii) a decrease in trade and other payables of RMB2.5 million.
Year ended 31 December 2014 compared with the year ended 31 December 2013
Revenue
ASIMCO Foundry’s revenue decreased by 15.4% from RMB123.7 million for the year ended 31 December 2013 to RMB104.7 million for the year ended 31 December 2014, mainly due to the decrease of the sales of ASIMCO Shuanghuan which is the only customer of ASIMCO Foundry and the change of the product mix of ASIMCO Shuanghuan leading to a decrease in the demand for the products of the company.
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The following table sets forth the breakdown of ASIMCO Foundry’s revenue by business (in RMB millions):
Year ended 31 December 2014 2013
Sales of automotive products 104.5 123.0 Sales of materials and semi-products 0.2 0.7
Total 104.7 123.7
Cost of Sales
As ASIMCO Foundry recorded a decrease in ASIMCO Foundry’s revenue, ASIMCO Foundry’s cost of sales decreased by 11.1% from RMB107.9 million for the year ended 31 December 2013 to RMB95.9 million for the year ended 31 December 2014.
Gross Profit
Driven by the above factors, ASIMCO Foundry’s gross profit decreased by 44.3% from RMB15.8 million for the year ended 31 December 2013 to RMB8.8 million for the year ended 31 December 2014.
As a result of the decrease in sales, the fixed cost for each unit of product was increasing, ASIMCO Foundry’s gross profit margin decreased from 12.8% for the year ended 31 December 2013 to 8.4% for the year ended 31 December 2014.
Other Income
ASIMCO Foundry’s other income decreased by 20.0% from RMB0.005 million for the year ended 31 December 2013 to RMB0.004 million for the year ended 31 December 2014.
Other Gains, Net
ASIMCO Foundry’s other gains increased by 50.0% from a gain of RMB0.2 million for the year ended 31 December 2013 to a gain of RMB0.3 million for the year ended 31 December 2014, primarily as a result of the increase in compensations from suppliers and insurance companies.
Administrative Expenses
ASIMCO Foundry’s administrative expenses decreased by 32.7% from RMB5.5 million for the year ended 31 December 2013 to RMB3.7 million for the year ended 31 December 2014, primarily as a result of the decrease in salary costs.
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Profit Before Income Tax
As a result of the foregoing factors, ASIMCO Foundry’s profit before income tax decreased by 49.0% from RMB10.4 million for the year ended 31 December 2013 to RMB5.3 million for the year ended 31 December 2014.
Income Tax Expense
ASIMCO Foundry’s income tax expense decreased by 41.7% from RMB2.4 million for the year ended 31 December 2013 to RMB1.4 million for the year ended 31 December 2014, primarily as a result of a decrease in ASIMCO Foundry’s taxable profit for the year. ASIMCO Foundry’s effective tax rate for the year ended 31 December 2014 increased to 26.4% from 23.1% for the year ended 31 December 2013.
Profit for the Year
As a result of the foregoing factors, ASIMCO Foundry’s profit for the year decreased by 50.6% from RMB8.1 million for the year ended 31 December 2013 to RMB4.0 million for the year ended 31 December 2014.
Profit Attributable to Owners of ASIMCO Foundry
Accordingly, profit attributable to owners of the company decreased by 50.6% from RMB8.1 million for 2013 to RMB4.0 million for 2014.
Net Current Position
The net current assets of ASIMCO Foundry increased by 48.0% from RMB30.0 million as of 31 December 2013 to RMB44.4 million as of 31 December 2014, primarily due to (i) an increase in trade and other receivables of RMB10.4 million; (ii) a decrease in trade and other payables of RMB4.1 million.
Cash Flows
Operating Activities
Net cash generated from operating activities in 2015 was RMB0.6 million. Cash inflow primarily comprised profit before taxation of RMB0.8 million, adjusted for: (i) certain non-cash items, mainly including depreciation of property, plant and equipment of RMB10.3 million, (ii) a decrease in inventory of RMB0.02 million. The cash inflow was offset by (i) an increase in trade and other receivables of RMB7.6 million; (ii) a decrease in trade and other payables of RMB2.4 million; and (iii) income tax paid of RMB0.7 million.
Net cash used in operating activities in 2014 was RMB0.3 million. Cash inflow primarily comprised profit before taxation of RMB5.3 million, adjusted for: (i) certain non-cash items, mainly including depreciation of property, plant and
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equipment of RMB10.4 million, (ii) a decrease in inventory of RMB0.4 million. The cash inflow was offset by (i) an increase in trade and other receivables of RMB10.4 million; (ii) a decrease in trade and other payables of RMB4.1 million; and (iii) income tax paid of RMB2.1 million.
Net cash generated from operating activities in 2013 was RMB2.5 million. Cash inflow primarily comprised profit before taxation of RMB10.4 million, adjusted for: (i) certain non-cash items, mainly including depreciation of property, plant and equipment of RMB10.3 million, (ii) a decrease in inventory of RMB1.7 million; and (iii) an increase in trade and other payables of RMB0.9 million. The cash inflow was offset by an increase in trade and other receivables of RMB19.3 million; and (iv) income tax paid of RMB1.7 million.
Investing Activities
Net cash used in investing activities in 2015 was RMB0.4 million due to purchase of property, plant and equipment of RMB0.4 million.
Net cash used in investing activities in 2014 was RMB0.1 million primarily due to purchase of property, plant and equipment of RMB0.1 million.
Net cash used in investing activities in 2013 was RMB2.2 million due to purchase of property, plant and equipment of RMB2.2 million.
Staff Costs and Remuneration Policy
As of 31 December 2013, 2014 and 2015, ASIMCO Foundry had 390, 382 and 365 employees, respectively. The company’s employee benefit expenses were RMB27.4 million, RMB27.0 million and RMB23.1 million for the years ended 31 December 2013, 2014 and 2015. The remuneration, promotion and salary increments of employees were assessed according to the individual’s performance, as well as professional and working experience, and in accordance with prevailing industry practices.
Significant Investments, Acquisitions and Disposals
ASIMCO Foundry did not conduct any significant investment, nor did it make any material acquisition or disposal of subsidiaries and associates throughout the year ended 31 December 2013, 2014 and 2015.
Charges on Assets
ASIMCO Foundry had no other charge on its assets as at 31 December 2013, 2014 and 2015.
Capital Structure
There was no change in the paid-in capital of ASIMCO Foundry during the year.
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Capital Expenditure
In 2013, 2014 and 2015, the cash payment for purchase of property, plant and equipment of ASIMCO Foundry was RMB2.2 million, RMB0.1 million and RMB0.4 million, respectively.
Capital Commitments
ASIMCO Foundry did not have any capital commitments for the years ended 31 December 2013, 2014 and 2015.
Contingent Liabilities
As of 31 December 2015, saved as disclosed, ASIMCO Foundry did not have any material purchase commitments, guarantees or material contingent liabilities.
Indebtedness
As at 31 December 2015, ASIMCO Foundry had no outstanding borrowings.
Management Discussion and Analysis of ASIMCO Shanxi
Overview
Founded in September 1997, ASIMCO Shanxi conducts its business in OEM production and sales of engine cylinder block and heads. ASIMCO Shanxi is a provider of automobile casting plans and an independent and professional supplier of cylinder block and heads, flywheels, flywheel covers, etc. It offers more than 180 kinds of products.
Set out below are the management discussion and analysis of ASIMCO Shanxi for the three years ended 31 December 2015.
Year ended 31 December 2015 compared with the year ended 31 December 2014
Revenue
ASIMCO Shanxi’s revenue decreased by 3.1% from RMB565.4 million for the year ended 31 December 2014 to RMB548.1 million for the year ended 31 December 2015, mainly because of the decline in market demand on commercial vehicles and ASIMCO Shanxi proactively lowered the product prices in responding to the fall of the market price of raw materials.
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The following table sets forth the breakdown of ASIMCO Shanxi’s revenue by business:
Year ended 31 December 2015 2014 RMB in RMB in millions millions
Sales of automotive component products 542.9 562.7 Others 5.2 2.7
Total 548.1 565.4
Cost of Sales
As ASIMCO Shanxi recorded a decrease in revenue, the effect of which is greater than the savings in purchase cost due to fall of market price of raw materials, ASIMCO Shanxi’s cost of sales decreased by 6.9% from RMB435.2 million for the year ended 31 December 2014 to RMB405.1 million for the year ended 31 December 2015.
Gross Profit
Driven by the above factors, ASIMCO Shanxi’s gross profit increased by 9.8% from RMB130.2 million for the year ended 31 December 2014 to RMB143.0 million for the year ended 31 December 2015.
Due to the decreased market price for raw materials and the increased sales in products with higher profit margin, ASIMCO Shanxi’s gross profit margin increased from 23.0% for the year ended 31 December 2014 to 26.1% for the year ended 31 December 2015.
Other Income
ASIMCO Shanxi’s other income decreased by 15.4% from RMB1.3 million for the year ended 31 December 2014 to RMB1.1 million for the year ended 31 December 2015.
Other Losses, Net
ASIMCO Shanxi’s other losses increased by 142.1% from RMB1.9 million for the year ended 31 December 2014 to RMB4.6 million for the year ended 31 December 2015, primarily as a result of the increase in ASIMCO Shanxi’s net foreign exchange losses and increase in fines.
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Selling and Distribution Costs
ASIMCO Shanxi’s selling and distribution costs increased by 14.2% from RMB33.8 million for the year ended 31 December 2014 to RMB38.6 million for the year ended 31 December 2015, primarily as a result of the growth in new products.
Administrative Expenses
ASIMCO Shanxi’s administrative expenses decreased by 4.1% from RMB24.2 million for the year ended 31 December 2014 to RMB23.2 million for the year ended 31 December 2015, primarily as a result of the decreased salary and bonus payment to the company’s management.
Finance Costs
ASIMCO Shanxi’s finance costs decreased by 27.8% from RMB9.0 million for the year ended 31 December 2014 to RMB6.5 million for the year ended 31 December 2015, primarily as a result of the decrease in interest on bank borrowings.
Profit Before Income Tax
As a result of the foregoing factors, ASIMCO Shanxi’s profit before income tax increased by 18.3% from RMB43.1 million for the year ended 31 December 2014 to RMB51.0 million for the year ended 31 December 2015.
Income Tax Expense
ASIMCO Shanxi’s income tax expense increased by 1.5% from RMB6.8 million for the year ended 31 December 2014 to RMB6.9 million for the year ended 31 December 2015, primarily as a result of an increase in ASIMCO’s taxable profit for the year. ASIMCO Shanxi’s effective tax rate for the year ended 31 December 2015 decreased to 13.5% from 15.8% for the year ended 31 December 2014.
Profit for the Year
As a result of the above factors, ASIMCO Shanxi’s profit for the year increased by 21.5% from RMB36.2 million for the year ended 31 December 2014 to RMB44.2 million for the year ended 31 December 2015.
Profit Attributable to Owners of ASIMCO Shanxi
As a result of the above factors, profit attributable to owners of ASIMCO Shanxi increased by 21.5% from RMB36.2 million for 2014 to RMB44.2 million for 2015.
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Net Current Position
The net current assets of ASIMCO Shanxi increased by 43.0% from RMB92.3 million as of 31 December 2014 to RMB132.0 million as of 31 December 2015, primarily due to: (i) an increase in loan to a fellow subsidiary of RMB28.0 million, (ii) an increase in cash and cash equivalents of RMB1.3 million, (iii) a decrease in borrowings of RMB62.4 million, which was partially offset by: (i) an increase in trade and other payables of RMB34.9 million, (ii) an increase in provisions of RMB7.2 million.
Year ended 31 December 2014 compared with the year ended 31 December 2013
Revenue
ASIMCO Shanxi’s revenue increased by 26.0% from RMB448.7 million for the year ended 31 December 2013 to RMB565.4 million for the year ended 31 December 2014, mainly as a result of the introduction of new products, such as the cylinder body and cover for a new type of high-performance motor, which significantly contributed to the increase of the company’s revenue.
The following table sets forth the breakdown of ASIMCO Shanxi’s revenue by business:
Year ended 31 December 2014 2013 RMB in RMB in millions millions
Sales of automotive component products 562.7 439.8 Others 2.7 8.9
Total 565.4 448.7
Cost of Sales
As ASIMCO Shanxi recorded an increase in revenue, its cost of sales increased by 21.7% from RMB357.6 million for the year ended 31 December 2013 to RMB435.2 million for the year ended 31 December 2014.
Gross Profit
Driven by the above factors, ASIMCO Shanxi’s gross profit increased by 42.9% from RMB91.1 million for the year ended 31 December 2013 to RMB130.2 million for the year ended 31 December 2014.
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Due to the decreased market price for raw materials and the increased sales in products with high profit margin, ASIMCO Shanxi’s gross profit margin increased from 20.3% for the year ended 31 December 2013 to 23.0% for the year ended 31 December 2014.
Other Income
ASIMCO Shanxi’s other income increased by 30.0% from RMB1.0 million for the year ended 31 December 2013 to RMB1.3 million for the year ended 31 December 2014.
Other Losses, net
ASIMCO Shanxi’s other losses increased by 375.0% from a loss of RMB0.4 million for the year ended 31 December 2013 to loss of RMB1.9 million for the year ended 31 December 2014, primarily because it recorded foreign exchange losses of RMB1.0 million 2014, compared to the gains of RMB2.1 million in 2013.
Selling and Distribution Costs
ASIMCO Shanxi’s selling and distribution costs increased by 46.3% from RMB23.1 million for the year ended 31 December 2013 to RMB33.8 million for the year ended 31 December 2014, primarily as a result of the growth of new products.
Administrative Expenses
ASIMCO Shanxi’s administrative expenses increased by 15.8% from RMB20.9 million for the year ended 31 December 2013 to RMB24.2 million for the year ended 31 December 2014, primarily as a result of the increased salary and audit expenses.
Finance Costs
ASIMCO Shanxi’s finance costs increased by 12.5% from RMB8.0 million for the year ended 31 December 2013 to RMB9.0 million for the year ended 31 December 2014, primarily as a result of the increase in interest on bank borrowings.
Profit Before Income Tax
As a result of the above factors, ASIMCO Shanxi’s profit before income tax increased by 50.2% from RMB28.7 million for the year ended 31 December 2013 to RMB43.1 million for the year ended 31 December 2014.
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Income Tax Expense
ASIMCO Shanxi’s income tax expense increased by 6.3% from RMB6.4 million for the year ended 31 December 2013 to RMB6.8 million for the year ended 31 December 2014, primarily as a result of an increase in ASIMCO Shanxi’s taxable profit for the year. ASIMCO Shanxi’s effective tax rate for the year ended 31 December 2014 decreased to 15.8% from 22.3% for the year ended 31 December 2013.
Profit for the Year
As a result of the above factors, ASIMCO Shanxi’s profit for the year increased by 62.8% from RMB22.3 million for the year ended 31 December 2013 to RMB36.3 million for the year ended 31 December 2014.
Profit Attributable to Owners of ASIMCO Shanxi
As a result of the above factors, profit attributable to owners of ASIMCO Shanxi increased by 62.3% from RMB22.3 million for 2013 to RMB36.2 million for 2014.
Net Current Position
The net current assets of ASIMCO Shanxi decreased by 26.3% from RMB125.3 million as of 31 December 2013 to RMB92.3 million as of 31 December 2014, primarily due to: (i) a decrease in cash and cash equivalents of RMB25.2 million, (ii) an increase in borrowings of RMB35.1 million, which was partially offset by an increase in trade and other receivables of RMB39.3 million.
Cash Flows
Operating activities
Net cash flow generated from operating activities in 2015 was RMB133.4 million. Cash inflow primarily comprised profit before tax of RMB51.0 million, mainly adjusted for: (i) certain non-cash items, mainly including depreciation of property, plant and equipment of RMB33.4 million, amortisation of prepaid land lease payments and other intangible assets of RMB0.3 million; (ii) finance costs of RMB6.5 million and exchange losses of RMB1.2 million; (iii) a decrease in trade and other receivables of RMB5.5 million; (iv) an increase in trade and other payables of RMB32.4 million; and (v) an increase in provisions of RMB7.2 million. The cash inflow was partially offset by: (i) a decrease in advances from customers of RMB1.5 million; and (ii) income tax paid of RMB3.6 million.
Net cash flow generated from operating activities in 2014 was RMB60.1 million. Cash inflow primarily comprised profit before tax of RMB43.1 million, mainly adjusted for: (i) certain non-cash items, mainly including depreciation of property, plant and equipment of RMB36.4 million, amortisation of prepaid land
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lease payments and other intangible assets of RMB0.3 million; (ii) finance costs of RMB9.0 million; (iii) a decrease in inventories of RMB6.3 million; (iv) an increase in trade and other payables of RMB6.7 million; and (vi) an increase in advances from customers of RMB1.5 million. The cash inflow was partially offset by: (i) an increase in trade and other receivables of RMB40.2 million; and (ii) income tax paid of RMB5.1 million.
Net cash flow generated from operating activities in 2013 was RMB80.6 million. Cash inflow primarily comprised profit before tax of RMB28.7 million, mainly adjusted for: (i) certain non-cash items, mainly including depreciation of property, plant and equipment of RMB30.9 million; (ii) finance costs of RMB8.0 million; (iii) gain on disposal of items of property, plant and equipment of RMB3.1 million; and (iv) an increase in trade and other payables of RMB38.2 million. The cash inflow was partially offset by: (i) exchange gains of RMB2.1 million; (ii) an increase in inventories of RMB1.4 million; (iii) an increase in trade and other receivables of RMB22.4 million; and (iv) a decrease in provisions of RMB2.9 million.
Investing activities
Net cash used in investing activities in 2015 was RMB36.8 million, primarily comprising: (i) purchase of property, plant and equipment of RMB8.9 million, (ii) loans to fellow subsidiaries of RMB28.0 million, which was partially offset by proceeds from disposal of property, plant and equipment of RMB0.1 million.
Net cash used in investing activities in 2014 was RMB18.0 million, primarily comprising purchase of property, plant and equipment of RMB18.5 million, which was partially offset by proceeds from disposal of property, plant and equipment of RMB0.6 million.
Net cash used in investing activities in 2013 was RMB51.8 million, primarily comprising purchase of property, plant and equipment of RMB52.0 million, which was partially offset by proceeds from disposal of property, plant and equipment of RMB0.2 million.
Financing activities
Net cash used in financing activities in 2015 was RMB94.1 million, primarily consisting of repayment of borrowings of RMB86.6 million and interest paid of RMB7.5 million.
Net cash used in financing activities in 2014 was RMB66.4 million, primarily consisting of repayment of borrowings of RMB57.9 million and interest paid of RMB8.5 million.
Net cash used in financing activities in 2013 was RMB27.0 million, primarily consisting of repayment of borrowings of RMB29.0 million and interest paid of RMB8.1 million, which was partially offset by proceeds from borrowings of RMB10.0 million.
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Staff Costs and Remuneration Policy
As of 31 December 2013, 2014 and 2015, ASIMCO Shanxi had 833, 967 and 922 employees, respectively. The company’s employee benefit expenses were RMB49.8 million, RMB72.2 million and RMB67.4 million for the years ended 31 December 2013, 2014 and 2015. The remuneration, promotion and salary increments of employees were assessed according to the individual’s performance, as well as professional and working experience, and in accordance with prevailing industry practices.
Significant Investments, Acquisitions and Disposals
ASIMCO Shanxi did not conduct any significant investment, nor did it make any material acquisition or disposal of subsidiaries and associates throughout the year ended 31 December 2013, 2014 and 2015.
Charges on Assets
Save as disclosed in the accountant’s report of ASIMCO Shanxi for the three years ended 31 December 2015 attached as Appendix III-5 to this circular, ASIMCO Shanxi had no other charge on its assets as at 31 December 2013, 2014 and 2015.
Capital Structure
There was no change in the paid-in capital of ASIMCO Shanxi during the year.
Capital Expenditure
In 2013, 2014 and 2015, the cash payment for purchase of property, plant and equipment of ASIMCO Shanxi was RMB52.0 million, RMB18.6 million and RMB8.9 million, respectively.
Capital Commitments
The following table below sets forth the capital commitments of ASIMCO Shanxi as of the dates indicated:
31 December 31 December 31 December 2013 2014 2015 RMB in RMB in RMB in millions millions millions
Contracted, but not provided for: Property, plant and equipment 22.0 – 0.06
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Contingent Liabilities
As of 31 December 2015, saved as disclosed, ASIMCO Shanxi did not have any material purchase commitments, guarantees or material contingent liabilities.
Indebtedness
As at 31 December 2015, ASIMCO Shanxi had no outstanding borrowings.
Management Discussion and Analysis of ASIMCO NVH
Overview
Founded in August 1994, ASIMCO NVH focuses on the automobile (passenger cars and commercial vehicles) market. ASIMCO NVH engages in the research and development, manufacturing and production of, and provides services and perfect solutions for, vehicle NVH and braking system rubber products and modules. NVH system rubber products mainly include vibration reducing rubber parts, such as engine mount, top link bracket, torsional vibration damper (TVD), liner bushing, and exhaust lifting lug. Braking system rubber products mainly include coating, rubber bowl, dust cover, junction block, and 0-shape ring.
Year ended 31 December 2015 compared with the year ended 31 December 2014
Revenue
ASIMCO NVH’s revenue increased by 11.9% from RMB596.4 million for the year ended 31 December 2014 to RMB667.1 million for the year ended 31 December 2015, mainly because of (i) the commencement of mass production of new products which could meet higher requirements of customers; and (ii) the growing demand in passenger vehicle market.
The following table sets forth the breakdown of ASIMCO NVH’s revenue by business:
Year ended 31 December 2015 2014 RMB in RMB in millions millions
Sales of automotive products 641.6 576.6 Sales of materials and semi-products 19.7 15.4 Others 5.8 4.4
Total 667.1 596.4
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Cost of Sales
As ASIMCO NVH recorded an increase in revenue, its cost of sales increased by 14.2% from RMB434.6 million for the year ended 31 December 2014 to RMB496.2 million for the year ended 31 December 2015.
Gross Profit
Driven by the above factors, ASIMCO NVH’s gross profit increased by 5.6% from RMB161.8 million for the year ended 31 December 2014 to RMB170.9 million for the year ended 31 December 2015.
ASIMCO NVH’s gross profit margin decreased from 27.1% for the year ended 31 December 2014 to 25.6% for the year ended 31 December 2015 mainly due to (i) the improvement of production and management efficiencies and economy of scale; (ii) the increasing sale of newly developed products with higher profit margin; and (iii) the fall of the market price of raw materials.
Other Income
ASIMCO NVH’s other income increased by 1.9% from RMB5.2 million for the year ended 31 December 2014 to RMB5.3 million for the year ended 31 December 2015.
Other Losses, Net
ASIMCO NVH’s other losses decreased by 56.1% from RMB4.1 million for the year ended 31 December 2014 to RMB1.8 million for the year ended 31 December 2015, primarily as a result of the decrease in ASIMCO NVH’s impairment of property, plant and equipment and the fact that ASIMCO NVH recorded net foreign exchange gains in 2015 compared to the losses in 2014.
Selling and Distribution Costs
ASIMCO NVH’s selling and distribution costs increased by 13.6% from RMB36.1 million for the year ended 31 December 2014 to RMB41.0 million for the year ended 31 December 2015, primarily as a result of the increase in transportation cost and marketing cost following the growth in sales volume.
Administrative Expenses
ASIMCO NVH’s administrative expenses decreased by 7.5% from RMB36.0 million for the year ended 31 December 2014 to RMB33.3 million for the year ended 31 December 2015, primarily as a result of the decrease in maintenance cost and other expenses.
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Finance Costs
ASIMCO NVH’s finance costs increased by 2% from RMB5.1 million for the year ended 31 December 2014 to RMB5.2 million for the year ended 31 December 2015, primarily as a result of the increase in interest on bank borrowings.
Profit Before Income Tax
Being affected by the factors referred to above in aggregate, ASIMCO NVH’s profit before income tax increased by 17.4% from RMB49.5 million for the year ended 31 December 2014 to RMB58.1 million for the year ended 31 December 2015.
Income Tax Expense
ASIMCO NVH’s income tax expense increased by 14.7% from RMB6.8 million for the year ended 31 December 2014 to RMB7.8 million for the year ended 31 December 2015, primarily as a result of a increase in ASIMCO NVH’s taxable profit for the year. ASIMCO NVH’s effective tax rate for the year ended 31 December 2015 decreased to 13.4% from 13.7% for the year ended 31 December 2014.
Profit for the Year
As a result of the above factors, ASIMCO NVH’s profit for the year increased by 17.8% from RMB42.7 million for the year ended 31 December 2014 to RMB50.3 million for the year ended 31 December 2015.
Profit Attributable to Owners of ASIMCO NVH
As a result of the above factors, profit attributable to owners of ASIMCO NVH increased by 17.8% from RMB42.7 million for 2014 to RMB50.3 million for 2015.
Net Current Position
The net current assets of ASIMCO NVH decreased by 63.6% from RMB130.0 million as of 31 December 2014 to RMB47.3 million as of 31 December 2015, primarily due to (i) a decrease in cash and cash equivalents of RMB11.0 million, (ii) an increase in trade and other payables of RMB114.4 million, which was partially offset by (i) an increase in inventories of RMB27.4 million, (ii) an increase in trade and other receivables of RMB22.1 million.
Year ended 31 December 2014 compared with the year ended 31 December 2013
Revenue
ASIMCO NVH’s revenue increased by 17.7% from RMB506.5 million for the year ended 31 December 2013 to RMB596.4 million for the year ended 31 December 2014, mainly because of (i) the commencement of mass production of new products which could meet higher requirements of customers; and (ii) the growing demand in passenger vehicle market.
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The following table sets forth the breakdown of ASIMCO NVH’s revenue by business:
Year ended 31 December 2014 2013 RMB in RMB in millions millions
Sales of automotive products 576.6 489.5 Sales of materials and semi-products 15.4 13.7 Others 4.4 3.3
Total 596.4 506.5
Cost of Sales
As ASIMCO NVH recorded an increase in revenue, its cost of sales increased by 15.1% from RMB377.6 million for the year ended 31 December 2013 to RMB434.6 million for the year ended 31 December 2014.
Gross Profit
Driven by the above factors, ASIMCO NVH’s gross profit increased by 25.5% from RMB128.9 million for the year ended 31 December 2013 to RMB161.8 million for the year ended 31 December 2014.
ASIMCO NVH’s gross profit margin increased from 25.5% for the year ended 31 December 2013 to 27.1% for the year ended 31 December 2014 mainly due to (i) the improvement of production and management efficiencies and economy of scales; (ii) the increasing sale of newly developed products with higher profit margin; and (iii) the fall of the market price of raw materials.
Other Income
ASIMCO NVH’s other income increased by 23.8% from RMB4.2 million for the year ended 31 December 2013 to RMB5.2 million for the year ended 31 December 2014.
Other Losses, Net
ASIMCO NVH’s other losses increased by 51.9% from a loss of RMB2.7 million for the year ended 31 December 2013 to loss of RMB4.1 million for the year ended 31 December 2014, primarily as a result of the increase in ASIMCO NVH’s impairment of property, plant and equipment and loss on disposal of property, plant and equipment.
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Selling and Distribution Costs
ASIMCO NVH’s selling and distribution costs increased by 5.9% from RMB34.1 million for the year ended 31 December 2013 to RMB36.1 million for the year ended 31 December 2014, primarily as a result of the increase in transportation cost and marketing cost following the growth in sales.
Administrative Expenses
ASIMCO NVH’s administrative expenses increased by 25.4% from RMB28.7 million for the year ended 31 December 2013 to RMB36.0 million for the year ended 31 December 2014, primarily as a result of the increased salaries and other benefits to employees, depreciation and amortisation cost and maintenance cost and the termination indemnities incurred in 2014.
Finance Costs
ASIMCO NVH’s finance costs decreased by 16.4% from RMB6.1 million for the year ended 31 December 2013 to RMB5.1 million for the year ended 31 December 2014, primarily as a result of the decrease in interest on bank borrowings.
Profit Before Income Tax
As a result of the above factors, ASIMCO NVH’s profit before income tax increased by 51.4% from RMB32.7 million for the year ended 31 December 2013 to RMB49.5 million for the year ended 31 December 2014.
Income Tax Expense
ASIMCO NVH’s income tax expense increased by 11.5% from RMB6.1 million for the year ended 31 December 2013 to RMB6.8 million for the year ended 31 December 2014, primarily as a result of an increase in ASIMCO NVH’s taxable profit for the year. ASIMCO NVH’s effective tax rate for the year ended 31 December 2014 decreased to 13.7% from 18.7% for the year ended 31 December 2013.
Profit for the Year
As a result of the above facotrs, ASIMCO NVH’s profit for the year increased by 60.5% from RMB26.6 million for the year ended 31 December 2013 to RMB42.7 million for the year ended 31 December 2014.
Profit Attributable to Owners of ASIMCO NVH
As a result of the above factors, profit attributable to owners of ASIMCO NVH increased by 60.5% from RMB26.6 million for 2013 to RMB42.7 million for 2014.
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Net Current Position
The net current assets of ASIMCO NVH increased by 21.5% from RMB107.0 million as of 31 December 2013 to RMB130.0 million as of 31 December 2014, primarily due to (i) an increase in inventories of RMB17.5 million, (ii) an increase in trade and other receivables of RMB39.0 million, (iii) an increase in loans to fellow subsidiaries of RMB13.0 million, (iv) a decrease in borrowings of RMB19.2 million, which was partially offset by (i) a decrease in cash and cash equivalents of RMB19.5 million and (ii) an increase in trade and other payables of RMB53.0 million.
Cash Flows
Operating Activities
Net cash generated from operating activities in 2015 was RMB35.1 million. Cash inflow primarily comprised cash generated from operations of RMB46.2 million, which was partially offset by income tax paid of RMB11.2 million.
Net cash generated from operating activities in 2014 was RMB50.1 million. Cash inflow primarily comprised cash generated from operations of RMB63.3 million, which was partially offset by income tax paid of RMB13.3 million.
Net cash generated from operating activities in 2013 was RMB24.5 million. Cash inflow primarily comprised cash generated from operations of RMB32.0 million, which was partially offset by income tax paid of RMB7.6 million.
Investing Activities
Net cash used in investing activities in 2015 was RMB48.1 million, primarily comprising: (i) purchase of property, plant and equipment of RMB50.1 million, (ii) purchase of prepaid lease payments, and intangible assets of RMB5.7 million, which was partially offset by proceeds from disposal of property, plant and equipment of RMB2.9 million, interest income on loans to fellow subsidiaries of RMB1.7 million and changes in pledged bank deposits of RMB3.1 million.
Net cash used in investing activities in 2014 was RMB44.2 million, primarily comprising: (i) purchase of property, plant and equipment of RMB31.6 million, (ii) loans to fellow subsidiaries of RMB33.0 million, which was partially offset by proceeds from disposal of property, plant and equipment of RMB0.5 million, loans repayments from fellow subsidiaries of RMB20.0 million, proceeds from disposal of available-for-sale financial assets of RMB0.5 million, and interest income on loans to fellow subsidiaries of RMB1.5 million.
Net cash used in investing activities in 2013 was RMB42.5 million, primarily comprising: (i) purchase of property, plant and equipment of RMB23.1 million, (ii) loans to fellow subsidiaries of RMB30.4 million, which was partially offset by proceeds from disposal of property, plant and equipment of RMB0.4 million, loans
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repayments from fellow subsidiaries of RMB10.0 million, interest income on loans to fellow subsidiaries of RMB0.2 million and changes in pledged bank deposits of RMB0.4 million.
Financing Activities
Net cash generated from financing activities in 2015 was RMB0.2 million, primarily consisting of proceeds from borrowings of RMB107.9 million, which was partially offset by repayment of borrowings of RMB102.4 million and interest paid of RMB5.3 million.
Net cash used in financing activities in 2014 was RMB24.9 million, primarily consisting of (i) repayment of borrowings of RMB141.0 million, (ii) interest paid of RMB5.7 million, which was partially offset by the proceeds from borrowing of RMB121.8 million.
Net cash generated from financing activities in 2013 was RMB39.3 million, primarily consisting of (i) contributions by the owners of the Company of RMB49.1 million, (ii) proceeds from borrowings of RMB184.3 million, which was partially offset by repayment of borrowings of RMB188.5 million and interest paid of RMB5.6 million.
Staff Costs and Remuneration Policy
As of 31 December 2013, 2014 and 2015, ASIMCO NVH had 1,943, 1,937 and 1,952 employees, respectively. The company’s employee benefit expenses were RMB121.9 million, RMB129.6 million and RMB131.1 million for the years ended 31 December 2013, 2014 and 2015. The remuneration, promotion and salary increments of employees were assessed according to the individual’s performance, as well as professional and working experience, and in accordance with prevailing industry practices.
Significant Investments, Acquisitions and Disposals
ASIMCO NVH started to invest in ASIMCO Anhui Industry Park Project (the “Industry Park Project”) in the year of 2014. The Industry Park Project consists of two phases which will last for five years and phase I will commence in June 2016.
Saved as disclosed above, ASIMCO NVH did not conduct any significant investment, nor did it make any material acquisition or disposal of subsidiaries and associates throughout the year ended 31 December 2013, 2014 and 2015.
Charges on Assets
Save as disclosed in the accountant’s report of ASIMCO NVH for the three years ended 31 December 2015 attached as Appendix III-4 to this circular, ASIMCO NVH had no other charge on its assets as at 31 December 2013, 2014 and 2015.
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Capital Structure
There was no change in the paid-in capital of ASIMCO NVH during the year.
Capital Expenditure
In 2013, 2014 and 2015, the cash payment for purchase of property, plant and equipment of ASIMCO NVH was RMB23.1 million, RMB31.6 million and RMB55.8 million, respectively.
Capital Commitments
The following table below sets forth the capital commitments of ASIMCO NVH as of the dates indicated:
31 December 31 December 31 December 2013 2014 2015 RMB in RMB in RMB in millions millions millions
Contracted, but not provided for: Property, plant and equipment 4.7 12.2 25.2
Contingent Liabilities
As of 31 December 2015, saved as disclosed, ASIMCO NVH did not have any material purchase commitments, guarantees or material contingent liabilities.
Indebtedness
As at 31 December 2015, ASIMCO NVH had outstanding borrowings of RMB83.4 million.
Management Discussion and Analysis of CACG I
Overview
Founded in April 1995, CACG I is a holding company. Its main asset is 51% share holding in ASIMCO Electric Motor, a company that mainly engages in the manufacturing and sales of motors and electrical equipment for vehicles.
Set out below are the management discussion and analysis of CACG I for the three years ended 31 December 2015.
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Year ended 31 December 2015 compared with the year ended 31 December 2014
Revenue
CACG I’s revenue decreased by 6.2% from RMB714.1 million for the year ended 31 December 2014 to RMB669.9 million for the year ended 31 December 2015, mainly because of the decrease in sales volume as a result of the market demand decrease for commercial vehicles. The decrease in revenue was also attributed to the change of a major customer’s order from general motor to start-stop motor, which was still under the company’s internal test and cannot be put into commercial production.
The following table sets forth the breakdown of CACG I’s revenue by business:
Year ended 31 December 2015 2014 RMB in RMB in millions millions
Sales of automotive products 653.1 698.5 Sales of materials and semi-products 16.3 15.6 Others 0.5 –
Total 669.9 714.1
Cost of Sales
As CACG I recorded a decrease in revenue, its cost of sales decreased by 5.9% from RMB553.6 million for the year ended 31 December 2014 to RMB521.2 million for the year ended 31 December 2015.
Gross Profit
Driven by the above factors, CACG I’s gross profit decreased by 7.4% from RMB160.5 million for the year ended 31 December 2014 to RMB148.7 million for the year ended 31 December 2015.
As a result of the decrease in sales, the fixed cost for each unit of product was increasing and CACG I’s gross profit slightly margin decreased from 22.5% for the year ended 31 December 2014 to 22.2% for the year ended 31 December 2015.
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Other Income
CACG I’s other income increased by 2.6% from RMB3.9 million for the year ended 31 December 2014 to RMB4.0 million for the year ended 31 December 2015.
Other Losses, Net
CACG I’s other losses decreased by 73.7% from RMB3.8 million for the year ended 31 December 2014 to RMB1.0 million for the year ended 31 December 2015, primarily as a result of the decrease in impairment of trade and other receivables and decrease in impairment of property, plant and equipment.
Selling and Distribution Costs
CACG I’s selling and distribution costs decreased by 17.9% from RMB31.2 million for the year ended 31 December 2014 to RMB25.6 million for the year ended 31 December 2015, primarily as a result of a decrease in provision of warranties following the decrease in CACG I’s sales volume of commercial vehicles.
Administrative Expenses
CACG I’s administrative expenses increased by 4.6% from RMB17.5 million for the year ended 31 December 2014 to RMB18.3 million for the year ended 31 December 2015, primarily as a result of the increase in employee benefit expenses and travel expenses.
Profit Before Income Tax
Based on the above factors, CACG I’s profit before income tax decreased by 4.7% from RMB89.2 million for the year ended 31 December 2014 to RMB85.0 million for the year ended 31 December 2015.
Income Tax Expense
CACG I’s income tax expense decreased by 8.6% from RMB22.0 million for the year ended 31 December 2014 to RMB20.1 million for the year ended 31 December 2015, primarily as a result of a decrease in CACG I’s taxable profit for the year. CACG I’s effective tax rate for the year ended 31 December 2015 decreased to 23.6% from 24.7% for the year ended 31 December 2014.
Profit for the Year
Based on the above factors, CACG I’s profit for the year decreased by 3.4% from RMB67.2 million for the year ended 31 December 2014 to RMB64.9 million for the year ended 31 December 2015.
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Profit Attributable to Owners of CACG I
Based on the factors referred to above, profit attributable to owners of CACG I decreased by 4.8% from RMB31.0 million for 2014 to RMB29.5 million for 2015.
Net Current Position
The net current assets of CACG I decreased by 55.6% from RMB191.6 million as of 31 December 2014 to RMB85.1 million as of 31 December 2015, primarily due to (i) a decrease in cash and cash equivalents of RMB17.0 million, (ii) an increase in trade and other payables of RMB220.9 million, which was partially offset by (i) an increase in trade and other receivables of RMB80.1 million and (ii) a decrease in loan from non-controlling interests of RMB52.0 million.
Year ended 31 December 2014 compared with the year ended 31 December 2013
Revenue
CACG I’s revenue increased by 26.0% from RMB566.9 million for the year ended 31 December 2013 to RMB714.1 million for the year ended 31 December 2014, mainly because of the sales volume increase due to increased orders from a new customer and the increase in market demand for passenger vehicles.
The following table sets forth the breakdown of CACG I’s revenue by business:
Year ended 31 December 2014 2013 RMB in RMB in millions millions
Sales of automotive products 698.5 562.9 Sales of materials and semi-products 15.6 3.9 Others – 0.1
Total 714.1 566.9
Cost of Sales
As CACG I recorded an increase in revenue, its cost of sales increased by 23.9% from RMB446.9 million for the year ended 31 December 2013 to RMB553.6 million for the year ended 31 December 2014.
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Gross Profit
Driven by the above factors, CACG I’s gross profit increased by 33.8% from RMB120.0 million for the year ended 31 December 2013 to RMB160.5 million for the year ended 31 December 2014.
Due to the significant increase in gross profit resulted from the increase in sales volumes, as well as the increased sales in products, such as high-power decelerating starter, with high profit margin and the decreased sales in products like direct-driven starter with low profit margin, CACG I’s gross profit margin increased from 21.2% for the year ended 31 December 2013 to 22.5% for the year ended 31 December 2014.
Other Income
CACG I’s other income decreased by 38.1% from RMB6.3 million for the year ended 31 December 2013 to RMB3.9 million for the year ended 31 December 2014.
Other Gains/(Losses), net
CACG I’s other gains and losses decreased by 106.9% from a gain of RMB54.7 million for the year ended 31 December 2013 to a loss of RMB3.8 million for the year ended 31 December 2014, primarily as a result of the increase in CACG I’s impairment of property, plant and equipment, as well as the fact that CACG I recorded a gain on disposal of associate with RMB57.5 million in 2013.
Selling and Distribution Costs
CACG I’s selling and distribution costs increased by 12.6% from RMB27.7 million for the year ended 31 December 2013 to RMB31.2 million for the year ended 31 December 2014, primarily as a result of an increase in transportation and storage costs following the increase in sales volume as well as an increase in provision of warranties.
Administrative Expenses
CACG I’s administrative expenses decreased by 6.9% from RMB18.8 million for the year ended 31 December 2013 to RMB17.5 million for the year ended 31 December 2014, primarily as a result of the decrease in other expenses.
Profit Before Income Tax
As a result of the above factors, CACG I’s profit before income tax decreased by 27.2% from RMB122.5 million for the year ended 31 December 2013 to RMB89.2 million for the year ended 31 December 2014.
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Income Tax Expense
CACG I’s income tax expense decreased by 4.3% from RMB23.0 million for the year ended 31 December 2013 to RMB22.0 million for the year ended 31 December 2014, primarily as a result of a decrease in CACG I’s taxable profit for the year. CACG I’s effective tax rate for the year ended 31 December 2014 increased to 24.7% from 18.8% for the year ended 31 December 2013.
Profit for the Year
As a result of the above factors, CACG I’s profit for the year decreased by 32.5% from RMB99.6 million for the year ended 31 December 2013 to RMB67.2 million for the year ended 31 December 2014.
Profit Attributable to Owners of CACG I
Based on the factors referred to above, profit attributable to owners of CACG I decreased by 34.7% from RMB47.5 million for 2013 to RMB31.0 million for 2014.
Net Current Position
The net current assets of CACG I increased by 7.1% from RMB178.9 million as of 31 December 2013 to RMB191.6 million as of 31 December 2014, primarily due to (i) an increase in inventories of RMB7.6 million, (ii) an increase in cash and cash equivalents of RMB99.9 million, which was partially offset by (i) a decrease in trade and other receivables of RMB43.9 million, (ii) a decrease in available-for-sale financial assets of RMB25.0 million and (iii) a decrease in pledged bank deposits of RMB15.6 million.
Cash Flows
Operating activities
Net cash flow from operating activities in 2015 was RMB77.2 million. Cash inflow primarily comprised profit before tax of RMB85.0 million, mainly adjusted for: (i) depreciation of items of property, plant and equipment of RMB9.8 million; (ii) write down of inventory of RMB1.0 million; (iii) decrease in inventories of RMB1.3 million; and (iv) increase in trade and other payables of RMB86.6 million. The cash inflow was partially offset by: (i) interest income on available-for-sale financial assets of RMB1.2 million; (ii) increase in trade and other receivables of RMB81.4 million; (iii) decrease in provisions of RMB5.0 million; and (iv) income tax paid of RMB20.8 million.
– I-167 – APPENDIX I INFORMATION ABOUT THE TARGET COMPANIES — 8. FINANCIAL INFORMATION
Net cash flow from operating activities in 2014 was RMB126.9 million. Cash inflow primarily comprised profit before tax of RMB89.2 million, mainly adjusted for: (i) depreciation of items of property, plant and equipment of RMB8.6 million; (ii) impairment of items of property, plant and equipment of RMB1.6 million; (iii) provision of impairment for prepayments, deposits and other receivables of RMB2.2 million; (iv) decrease in trade and other receivables of RMB41.0 million; and (v) increase in trade and other payables of RMB8.6 million. The cash inflow was partially offset by: (i) increase in inventories of RMB8.3 million and (ii) income tax paid of RMB17.2 million.
Net cash flow used in operating activities in 2013 was RMB19.9 million. Cash inflow primarily comprised profit before tax of RMB122.5 million, mainly adjusted for: (i) depreciation of items of property, plant and equipment of RMB7.7 million; (ii) write-down of inventory of RMB1.6 million; (iii) increase in trade and other payables of RMB7.7 million. The cash inflow was offset mainly by: (i) gain on disposal of an associate of RMB57.5 million; (ii) increase in inventories of RMB21.5 million; (iii) increase in trade and other receivables of RMB63.3 million; and (iv) income tax paid of RMB16.7 million.
Investing activities
Net cash used in investing activities in 2015 was RMB24.8 million, primarily comprising: (i) purchase of property, plant and equipment of RMB26.1 million, (ii) purchase of available-for-sale investment of RMB120.0 million, which was partially offset by (i) proceeds from disposal of available-for-sale financial assets of RMB120.0 million and (ii) investment income on available-for sale investment of RMB1.2 million.
Net cash generated from investing activities in 2014 was RMB30.0 million, primarily comprising: (i) proceeds from disposal of available-for-sale financial assets of RMB135.0 million, (ii) changes in pledged bank deposits of RMB15.6 million, which was partially offset by (i) purchase of property, plant and equipment of RMB11.8 million and (ii) purchase of available-for-sale investment of RMB110.0 million.
Net cash generated from investing activities in 2013 was RMB85.6 million, primarily comprising: (i) proceeds from disposal of an associate of RMB87.6 million and dividends received from an associate of RMB46.4 million, (ii) loan repayment from a fellow subsidiary of RMB10.0 million, which was partially offset by (i) purchase of property, plant and equipment of RMB19.6 million, (ii) purchase of available-for-sale investment of RMB25.0 million, and (iii) changes in pledged bank deposits of RMB15.6 million.
Financing activities
Net cash used in financing activities in 2015 was RMB69.5 million, primarily consisting of dividends paid to non-controlling interests of RMB35.9 million and dividends paid to company’s shareholders of RMB33.6 million.
– I-168 – APPENDIX I INFORMATION ABOUT THE TARGET COMPANIES — 8. FINANCIAL INFORMATION
Net cash used in financing activities in 2014 was RMB56.9 million, primarily consisting of dividends paid to non-controlling interests of RMB29.4 million and dividends paid to company’s shareholders of RMB27.5 million.
Net cash used in financing activities in 2013 was RMB123.4 million, primarily consisting of dividends paid to non-controlling interests of RMB63.7 million and dividends paid to company’s shareholders of RMB59.7 million.
Staff Costs and Remuneration Policy
As of 31 December 2013, 2014 and 2015, CACG I had 837, 808 and 758 employees, respectively. The company’s employee benefit expenses were RMB41.7 million, RMB50.9 million and RMB47.6 million for the years ended 31 December 2013, 2014 and 2015. The remuneration, promotion and salary increments of employees were assessed according to the individual’s performance, as well as professional and working experience, and in accordance with prevailing industry practices.
Significant Investments, Acquisitions and Disposals
On 7 June 2013, Hubei Super Electric Auto Motor Co., Ltd., a subsidiary of CACG I, entered into an equity transfer agreement according to which Hubei Super Electric Auto Motor Co., Ltd. agreed to sell to Remy Mauritius Holdings Ltd. 49% of the issued shares of Remy Electricals Hubei Company, Ltd. for a consideration of RMB50.0 million (“Remy Disposal”). Remy Disposal was completed in October 2013.
Save as disclosed above, CACG I did not conduct any significant investment, nor did it make any material acquisition or disposal of subsidiaries and associates throughout the year ended 31 December 2013, 2014 and 2015.
Charges on Assets
CACG I had no other charge on its assets as at 31 December 2013, 2014 and 2015.
Capital Structure
There was no change in the share capital of CACG I during the year.
Capital Expenditure
In 2013, 2014 and 2015, the cash payment for purchase of property, plant and equipment of CACG I was RMB19.6 million, RMB11.8 million and RMB26.1 million, respectively.
– I-169 – APPENDIX I INFORMATION ABOUT THE TARGET COMPANIES — 8. FINANCIAL INFORMATION
Capital Commitments
The following table below sets forth the capital commitments of CACG I as of the dates indicated:
31 December 31 December 31 December 2013 2014 2015 RMB in RMB in RMB in millions millions millions
Contracted, but not provided for property, plant and equipment 1.3 0.7 2.5
Contingent Liabilities
As of 31 December 2015, saved as disclosed, CACG I did not have any material purchase commitments, guarantees or material contingent liabilities.
Indebtedness
As at 31 December 2015, CACG I had no outstanding borrowings.
– I-170 – APPENDIX II FINANCIAL INFORMATION OF THE GROUP
The financial information of the Group: (a) for the year ended 31 December 2013 are disclosed on pages 70 to 148 of the annual report of the Company for the year ended 31 December 2013; (b) for the year ended 31 December 2014 are disclosed on pages 88 to 172 of the annual report of the Company for the year ended 31 December 2014; and (c) for the year ended 31 December 2015 are disclosed on pages 70 to 164 of the annual report of the Company for the year ended 31 December 2015.
All these reports have been published on the website of the Stock Exchange at www.hkexnews.hk.
MANAGEMENT DISCUSSION AND ANALYSIS OF HISTORICAL RESULTS OF THE GROUP
Set out below is the management discussion and analysis as extracted from the annual reports of the Group for the three years ended 31 December 2013, 2014 and 2015, respectively, and as modified as appropriate (for details please refer to the 2013, 2014 and 2015 annual reports of the Group):
Revenue
The Group’s revenue decreased by 26.3% from RMB6,124.5 million for the year ended 31 December 2014 to RMB4,510.9 million for the year ended 31 December 2015, mainly because demand in domestic coal market continued to diminish in 2015 and fixed asset investment in the coal mining and processing industry continued to fall, which resulted in a decrease in domestic market demand for the Group’s products and the corresponding decrease in the Group’s revenue from hydraulic roof supports.
The Group’s revenue decreased by 24.0% from RMB8,055.3 million for the year ended 31 December 2013 to RMB6,124.5 million for the year ended 31 December 2014, mainly due to demand in domestic coal market continued to diminish in 2014 which resulted in a decrease in domestic market demand for the Group’s products and the corresponding decrease in the Group’s revenue from hydraulic roof supports.
– II-1 – APPENDIX II FINANCIAL INFORMATION OF THE GROUP
The following table sets forth the breakdown of the Group’s revenue by product and business (in RMB millions):
2015 2014 2013 RMB millions RMB millions RMB millions
Sales of hydraulic roof supports 2,815.8 3,701.5 4,851.5 Revenue from steel and other materials trading 920.8 1,679.7 2,393.0 Sales of spare parts 601.9 540.2 612.8 Sales of other coal mining equipment 120.8 89.4 128.5 Other revenue 51.5 113.7 69.4
4,510.9 6,124.5 8,055.3
Cost of Sales
As the Group recorded a decrease in revenue, the Group’s cost of sales decreased by 27.9% from RMB5,070.5 million for the year ended 31 December 2014 to RMB3,653.8 million for the year ended 31 December 2015.
As the Group recorded a decrease in revenue, the Group’s cost of sales decreased by 18.7% from RMB6,233.1 million for the year ended 31 December 2013 to RMB5,070.5 million for the year ended 31 December 2014.
Gross Profit
The Group’s cost of sales decreased by 27.9% from RMB5,070.5 million for the year ended 31 December 2014 to RMB3,653.8 million for the year ended 31 December 2015. The Group’s gross profit decreased by 18.7% from RMB1,054.0 million for the year ended 31 December 2014 to RMB857.0 million for the year ended 31 December 2015. Due to the substantial drop in the purchase price of steel, the Group’s gross profit margin increased from 17.2% for the year ended 31 December 2014 to 19.0% for the year ended 31 December 2015.
The Group’s gross profit decreased by 42.2% from RMB1,822.2 million for the year ended 31 December 2013 to RMB1,054.0 million for the year ended 31 December 2014. Due to the increasingly intensive market competition, the Group’s gross profit margin decreased from 22.6% for the year ended 31 December 2013 to 17.2% for the year ended 31 December 2014.
Other Income
The Group’s other income increased by 13.2% from RMB106.7 million for the year ended 31 December 2014 to RMB120.7 million for the year ended 31 December 2015.
– II-2 – APPENDIX II FINANCIAL INFORMATION OF THE GROUP
The Group’s other income decreased by 0.6% from RMB107.4 million for the year ended 31 December 2013 to RMB106.7 million for the year ended 31 December 2014.
Other Gains and Losses
The Group’s other gains and losses decreased by 1.9% from RMB342.4 million for the year ended 31 December 2014 to RMB335.9 million for the year ended 31 December 2015, primarily as a result of the decrease in the Group’s allowance for doubtful debts.
The Group’s other gains and losses increased by 99.1% from RMB172.0 million for the year ended 31 December 2013 to RMB342.4 million for the year ended 31 December 2014, primarily due to an increase in the Group’s allowance for doubtful debts.
Selling and Distribution Expenses
The Group’s selling and distribution expenses decreased by 0.6% from RMB216.3 million for the year ended 31 December 2014 to RMB214.9 million for the year ended 31 December 2015, primarily as a result of a decrease in transportation and logistics expenses as the Group’s sales volumes decreased.
The Group’s selling and distribution expenses decreased by 16.1% from RMB257.9 million for the year ended 31 December 2013 to RMB216.3 million for the year ended 31 December 2014, primarily as a result of a decrease in transportation and logistics expenses as the Group’s sales volumes decreased.
Administrative Expenses
The Group’s administrative expenses increased by 8.8% from RMB279.5 million for the year ended 31 December 2014 to RMB304.2 million for the year ended 31 December 2015, primarily as a result of the increase in salary costs.
The Group’s administrative expenses decreased by 16.2% from RMB333.5 million for the year ended 31 December 2013 to RMB279.5 million for the year ended 31 December 2014, primarily as a result of a decrease in salary costs.
– II-3 – APPENDIX II FINANCIAL INFORMATION OF THE GROUP
Staff Costs and Remuneration Policy
As of 31 December 2013, 2014 and 2015, the Group had 5,653, 5,582 and 4,589 employees, respectively. The Group’s employee benefit expenses decreased by 0.8% from RMB412.1 million for the year ended 31 December 2014 to RMB408.6 million for the year ended 31 December 2015, primarily as a result of a decrease in the Group’s revenue and a decrease in the numbers of staff. The Group’s staff costs decreased by 9.6% from RMB455.6 million for the year ended 31 December 2013 to RMB412.1 million for the year ended 31 December 2014, primarily as a result of a decrease in the Group’s revenue and a decrease in the numbers of staff.
The staff remuneration of the Group comprises of basic salary and bonus payment, which is determined with reference to the operating results of the Group and results of performance assessment on the employees. The Group insisted the orientation towards efficiency and results as well as the focus on top-tier staff. It also strived to ensure scientific and reasonable allocation of income.
Finance Costs
The Group’s finance costs decreased by 9.2% from RMB2.4 million for the year ended 31 December 2014 to RMB2.2 million for the year ended 31 December 2015, primarily as a result of a decrease in interest expenses on the Group’s bank borrowings due to a decrease in the average balance of the Group’s bank borrowings.
The Group’s finance costs decreased by 37.2% from RMB3.8 million for the year ended 31 December 2013 to RMB2.4 million for the year ended 31 December 2014, primarily as a result of a decrease in interest expenses on the Group’s bank borrowings due to a decrease in the average balance of the Group’s bank borrowings.
Profit Before Tax
Being affected by the factors referred to above in aggregate, the Group’s profit before tax decreased by 86.9% from RMB232.6 million for the year ended 31 December 2014 to RMB30.4 million for the year ended 31 December 2015.
Being affected by the factors referred to above in aggregate, the Group’s profit before tax decreased by 76.8% from RMB1,003.7 million for the year ended 31 December 2013 to RMB232.6 million for the year ended 31 December 2014.
Income Tax Expense
The Group’s income tax expense decreased by 49.7% from RMB39.3 million for the year ended 31 December 2014 to RMB19.8 million for the year ended 31 December 2015, primarily as a result of a decrease in the Group’s taxable profit for the year. The Group’s effective tax rate for the year ended 31 December 2015 increased to 65.1% from 16.9% for the year ended 31 December 2014.
– II-4 – APPENDIX II FINANCIAL INFORMATION OF THE GROUP
The Group’s income tax expense decreased by 76.5% from RMB166.7 million for the year ended 31 December 2013 to RMB39.3 million for the year ended 31 December 2014, primarily as a result of a decrease in the Group’s taxable profit for the year. The Group’s effective tax rate for the year ended 31 December 2014 increased to 16.9% from 16.6% for the year ended 31 December 2013.
Profit for the Year
The Group’s profit and total comprehensive income decreased by 94.5% from RMB193.3 million for the year ended 31 December 2014 to RMB10.6 million for the year ended 31 December 2015.
The Group’s profit and total comprehensive income decreased by 76.9% from RMB837.0 million for the year ended 31 December 2013 to RMB193.3 million for the year ended 31 December 2014.
Profit Attributable to Owners of the Company
Profit attributable to owners of the Company decreased by 79.4% from RMB205.2 million for 2014 to RMB42.2 million for 2015.
Profit attributable to owners of the Company decreased by 76.3% from RMB866.7 million for 2013 to RMB205.2 million for 2014.
Net Current Position
The Company’s net current assets decreased from RMB6,465.3 million as of 31 December 2014 to RMB6,391.9 million as of 31 December 2015, primarily due to a decrease in trade and other receivables and a decrease in advances from customers. The Company’s net current assets decreased from RMB7,041.2 million as of 31 December 2013 to RMB6,465.3 million as of 31 December 2014, primarily due to a decrease in trade and other receivables and a decrease in advances from customers.
Cash flows
Operating Activities
Net cash from operating activities in 2015 was RMB318.4 Million. Cash inflow primarily comprised profit before taxation of RMB30.4 million, adjusted for: (i) loss of doubtful debts of RMB312.1 million, (ii) a decrease in inventory of RMB264.0 million; (iii) an increase in trade and other payables of RMB149.0 million. The cash inflow was offset by: (i) an increase in long-term receivables and finance lease receivables of RMB232.4 million; (ii) a decrease in advances from customers of RMB251.5 million.
– II-5 – APPENDIX II FINANCIAL INFORMATION OF THE GROUP
Net cash from operating activities in 2014 was RMB232.9 million, derived primarily by deducting from the profit before taxation, the following items: (i) loss of doubtful debts of RMB348.1 million, (ii) a decrease in trade and other payables of RMB169.1 million; (iii) an increase in trade and other receivables of RMB147.1 million.
Net cash used in operating activities in 2013 was RMB576.8 million, derived primarily by deducting from the profit before taxation of RMB1,003.7 million, the following items: (i) an increase in trade and other receivables of RMB762.3 million; and (ii) a decrease in trade and other payables of RMB542.9 million.
Investing Activities
Net cash used in investing activities in 2015 was RMB298.1 million, primarily comprising: (i) payment of RMB2,623.4 million from the purchase of short-term structured deposits with banks; (ii) receipt of proceeds of RMB2,065.4 million from the disposal of short-term structured deposits with banks; (iii) payment of RMB310.0 million due to bank deposits with a maturity of over three months; (iv) withdrawal of bank deposits with a maturity of over three months of RMB571.7 million; (v) payment of pledged bank deposits of RMB519.1 million, for the issuance of bank notes that The Group used to purchase raw materials; and (vi) withdrawal of pledged bank deposits of RMB487.3 million.
Net cash used in investing activities in 2014 was RMB166.8 million, primarily comprising: (i) payment of RMB1,260.0 million from the purchase of short-term structured deposits with banks; (ii) receipt of proceeds of RMB1,410.8 million from the disposal of short-term structured deposits with banks; (iii) payment of RMB396.7 million due to bank deposits with a maturity of over three months; (iv) withdrawal of bank deposits with a maturity of over three months of RMB460 million; and (v) payment of pledged bank deposits of RMB462.2 million, for the issuance of bank notes that The Group used to purchase raw materials; (vi) withdrawal of pledged bank deposits of RMB510.3 million; and (vii) expenses of RMB369.2 million from the purchase of bonds.
Net cash used in investing activities in 2013 was RMB465.9 million, primarily comprising: (i) payment of RMB2,435.8 million from the purchase of short-term structured deposits with banks; (ii) payment of RMB430 million due to bank deposits with a maturity of over three months; and (iii) payment of pledged bank deposits of RMB599.9 million, for the issuance of bank notes that The Group used to purchase raw materials, partially offset by: (i) receipt of proceeds of RMB1,793.0 million from the disposal of short-term structured deposits with banks; (ii) withdrawal of bank deposits with a maturity of over three months of RMB700 million; and (iii) withdrawal of pledged bank deposits of RMB747.9 million.
Financing Activities
Net cash used in financing activities in 2015 was RMB135.9 million, primarily consisting of (i) payment of dividends of RMB61.6 million; (ii) repayment of bank borrowings of RMB97.2 million.
– II-6 – APPENDIX II FINANCIAL INFORMATION OF THE GROUP
Net cash used in financing activities in 2014 was RMB289.1 million, primarily consisting of (i) payment of dividends of RMB267.5 million; (ii) repayment of bank borrowings of RMB39.2 million.
Net cash used in financing activities in 2013 was RMB466.5 million, primarily consisting of payment of dividends of RMB531.4 million, partially offset by bank borrowings of RMB97.6 million.
Significant Investments, Acquisition and Disposals
Save as disclosed in the annual reports of the Group, the Group did not conduct any significant investment, nor did it make any material acquisition or disposal of subsidiaries and associates throughout the year ended 31 December 2013, 2014 and 2015.
Charges on Group Assets
Save as disclosed in the annual reports of the Group, the Group had no other charge on its assets as at 31 December 2013, 2014 and 2015.
Capital Structure
There was no change in the Company’s share capital during the year.
Capital Expenditure
The Group incurred capital expenditures of RMB215.1 million, RMB217.1 million and RMB96.2 million for the year ended 31 December 2013, 2014 and 2015 respectively, for purchase of property, plant and equipment, intangible assets and lease prepayments.
Capital Commitments
As of 31 December 2015, the Group’s commitments consisted of capital commitments that have been authorized and contracted for in the amount of RMB31.3 million and capital commitments that have been authorized but not contracted for in the amount of RMB25.9 million, and operating lease commitments of RMB67.9 million.
As of 31 December 2014, the Group’s commitments consisted of capital commitments that have been authorized and contracted for in the amount of RMB56.1 million and capital commitments that have been authorized but not contracted for in the amount of RMB25.9 million, and operating lease commitments of RMB73.1 million.
– II-7 – APPENDIX II FINANCIAL INFORMATION OF THE GROUP
As of 31 December 2013, the Group’s commitments consisted of capital commitments that have been authorized and contracted for in the amount of RMB37.2 million and capital commitments that have been authorized but not contracted for in the amount of RMB25.9 million, and operating lease commitments of RMB78.4 million.
Contingent Liabilities
During the years ended 31 December 2013, 2014 and 2015, the Group has endorsed and derecognised certain bills receivable for the settlement of trade and other payables with full recthe Group’sse. In the opinion of the directors of the Company, the risk of the default in payment of the endorsed bills receivable is low because all endorsed bills receivable are issued and guaranteed by reputable PRC banks. The maximum exposure to the Group that may result from the default of these endorsed and derecognised bills receivable at the end of each reporting period is as follows:
2015 2014 2013 RMB million RMB million RMB million
Outstanding endorsed bills receivable with recthe Group’sse 461.2 765.4 1,782.5
Indebtedness
As at 31 December 2015, the Group had no outstanding borrowings. As at 31 December 2014, the Group’s outstanding borrowings, which wholly consist of short-term bank borrowings, amounted to RMB97.2 million, there are no material financial covenants relating to such outstanding borrowings. As at 31 December 2013, the Group’s outstanding bank borrowings, which wholly consist of short-term bank borrowings, amounted to RMB136.1 million, there are no material financial covenants relating to such outstanding bank borrowings.
– II-8 – APPENDIX III-1 ACCOUNTANT’S REPORT OF CACG I FOR THE THREE YEARS ENDED 31 DECEMBER 2015
The following is the text of a report received from the Company’s reporting accountant, PricewaterhouseCoopers, Certified Public Accountants, Hong Kong, for the purpose of incorporation in this circular.
23 May 2016
The Directors Zhengzhou Coal Mining Machinery Group Company Limited
Dear Sirs,
We report on the financial information of CACG Ltd. I. (“CACG I”) and its subsidiary (together, “CACG I Group”), which comprises the consolidated and company statements of financial position of CACG I as at 31 December 2013, 2014 and 2015, and the consolidated statements of profit or loss and other comprehensive income, the consolidated statements of changes in equity and the consolidated statements of cash flows of CACG I for each of the years ended 31 December 2013, 2014 and 2015 (the “Relevant Periods”) and a summary of significant accounting policies and other explanatory information. This financial information has been prepared by the directors of Zhengzhou Coal Mining Machinery Group Company Limited (the “Company”) and is set out in Sections I to III below for inclusion in Appendix III-1 to the circular of the Company dated 23 May 2016 (the “Circular”) in connection with the proposed acquisition of CACG I by the Company.
CACG I was incorporated in the Cayman Islands on 26 May 1994 as a company with limited liability.
As at the date of this report, CACG I has direct interests in only one subsidiary, Hubei Super-Elec Auto Electric Motor Co., Ltd. (“Hubei Super-Elec”) which is incorporated in the People’s Republic of China, as set out in Note 14(a) of Section II below.
No statutory audited financial statements have been prepared by CACG I as it is not required by the laws and regulations in its place of incorporation. The statutory financial statements of Hubei Super-Elec for the year ended 31 December 2013 were audited by Ernst & Young Hua Ming LLP, and the statutory financial statements of Hubei Super-Elec for each of the years ended 31 December 2014 and 2015 were audited by PricewaterhouseCoopers Zhong Tian LLP, Beijing Branch, pursuant to separate terms of engagement with Hubei Super-Elec respectively.
– III-1 – APPENDIX III-1 ACCOUNTANT’S REPORT OF CACG I FOR THE THREE YEARS ENDED 31 DECEMBER 2015
The directors of CACG I are responsible for the preparation of the consolidated financial statements of CACG I for the Relevant Periods that give a true and fair view in accordance with International Financial Reporting Standards (“IFRSs”) issued by the International Accounting Standards Board (the “Underlying Financial Statements”), and for such internal control as the directors determine is necessary to enable the preparation of Underlying Financial Statements that are free from material misstatement, whether due to fraud or error. PricewaterhouseCoopers Zhong Tian LLP have audited the Underlying Financial Statements in accordance with International Standards on Auditing (the “ISAs”) issued by the International Auditing and Assurance Standards Board (“IAASB”) pursuant to separate terms of engagement.
The financial information has been prepared based on the Underlying Financial Statements, with no adjustment made thereon.
Directors’ Responsibility for the Financial Information
The directors of the Company are responsible for the preparation of the financial information that gives a true and fair view in accordance with IFRSs and accounting policies adopted by the Company and its subsidiary (together, the “Group”) as set out in the annual report of the Company for the year ended 31 December 2015.
Reporting Accountant’s Responsibility
Our responsibility is to express an opinion on the financial information and to report our opinion to you. We carried out our procedures in accordance with Auditing Guideline 3.340 “Prospectuses and the Reporting Accountant” issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”).
Opinion
In our opinion, the financial information gives, for the purpose of this report, a true and fair view of the state of affairs of CACG I and of CACG I Group as at 31 December 2013, 2014 and 2015 and of CACG I Group’s results and cash flows for the Relevant Periods.
– III-2 – APPENDIX III-1 ACCOUNTANT’S REPORT OF CACG I FOR THE THREE YEARS ENDED 31 DECEMBER 2015
I FINANCIAL INFORMATION OF CACG I GROUP
A. The following is the financial information of CACG I Group prepared by the directors of the Company as at 31 December 2013, 2014 and 2015 and for each of the years ended 31 December 2013, 2014 and 2015 (the “Financial Information”):
Consolidated statements of profit or loss and other comprehensive income
Year ended December 31 2013 2014 2015 Note RMB’000 RMB’000 RMB’000
Revenue 6 566,920 714,051 669,889 Cost of sales 9 (446,913) (553,560) (521,213)
Gross profit 120,007 160,491 148,676 Selling and distribution costs 9 (27,687) (31,174) (25,609) Administrative expenses 9 (18,835) (17,485) (18,336) Research and development cost 9 (16,725) (22,617) (22,716) Other income 7 6,338 3,868 4,032 Other gains/(losses), net 8 54,729 (3,847) (1,036)
Profit from operations 117,827 89,236 85,011 Share of profits of an associate 4,720 – –
Profit before income tax 122,547 89,236 85,011 Income tax expense 11 (22,958) (22,011) (20,132)
Profit for the year 99,589 67,225 64,879
Profit attributable to: Owners of CACG I 47,542 30,958 29,491 Non-controlling interests 52,047 36,267 35,388
99,589 67,225 64,879
Profit for the year 99,589 67,225 64,879 Other comprehensive income: Item that may be reclassified to profit or loss Currency translation differences – (7) (115)
Total comprehensive income for the year 99,589 67,218 64,764
Attributable to: Owners of CACG I 47,542 30,951 29,376 Non-controlling interests 52,047 36,267 35,388
99,589 67,218 64,764
– III-3 – APPENDIX III-1 ACCOUNTANT’S REPORT OF CACG I FOR THE THREE YEARS ENDED 31 DECEMBER 2015
Consolidated statements of financial position
As at 31 December 2013 2014 2015 Note RMB’000 RMB’000 RMB’000
ASSETS
Non-current assets Property, plant and equipment 12 98,977 100,228 111,507 Prepaid lease payments 13 4,761 4,650 4,539 Deferred income tax assets 23 4,613 4,786 4,835
108,351 109,664 120,881
Current assets Inventories 15 71,220 78,847 76,513 Trade and other receivables 16 303,198 259,252 339,371 Income tax recoverable 884 – – Available-for-sale financial assets 17 25,000 – – Pledged bank deposits 18 15,600 – – Cash and cash equivalents 18 56,019 155,915 138,902
471,921 494,014 554,786
Total assets 580,272 603,678 675,667
EQUITY
Equity attributable to the owner of CACG I Share capital 419 419 419 Reserves 24 104,581 104,574 104,459 Retained earnings 24 67,961 71,379 123
172,961 176,372 105,001
Non-controlling interests 114,296 121,163 101,000
Total Equity 287,257 297,535 206,001
– III-4 – APPENDIX III-1 ACCOUNTANT’S REPORT OF CACG I FOR THE THREE YEARS ENDED 31 DECEMBER 2015
Consolidated statements of financial position (continued)
As at 31 December 2013 2014 2015 Note RMB’000 RMB’000 RMB’000
LIABILITIES
Non-current liabilities Deferred tax liabilities 23 – 3,736 –
– 3,736 –
Current liabilities Trade and other payables 19 231,026 239,645 460,524 Advances from customers 321 288 561 Loan from non-controlling interests 20 52,000 52,000 – Income tax payable – 376 3,452 Provisions 22 9,668 10,098 5,129
293,015 302,407 469,666
Total liabilities 293,015 306,143 469,666
Total equity and liabilities 580,272 603,678 675,667
– III-5 – APPENDIX III-1 ACCOUNTANT’S REPORT OF CACG I FOR THE THREE YEARS ENDED 31 DECEMBER 2015
Statements of financial position of CACG I
As at 31 December 2013 2014 2015 Note RMB’000 RMB’000 RMB’000
ASSETS
Non-current assets Investments in a subsidiary 14 37,108 37,243 93,450 Loans to a subsidiary 14 54,000 54,000 –
91,108 91,243 93,450
Current assets Dividends receivable 16 – – 67,122
– – 67,122
Total assets 91,108 91,243 160,572
EQUITY
Paid-in capital 419 419 419 Reserves 24 74,424 75,478 80,770 Retained earnings 16,265 11,610 12,261
Total equity 91,108 87,507 93,450
LIABILITIES
Non-current liabilities Deferred tax liabilities 23 – 3,736 –
– 3,736 –
Current liabilities Dividends payable 19 – – 67,122
– – 67,122
Total liabilities – 3,736 67,122
Total equity and liabilities 91,108 91,243 160,572
– III-6 – APPENDIX III-1 ACCOUNTANT’S REPORT OF CACG I FOR THE THREE YEARS ENDED 31 DECEMBER 2015
Consolidated statements of changes in equity
Attributable to the owners of CACG I Non- Paid-in Retained controlling Total capital Reserves earnings Total interests equity Note RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
At 1 January 2013 419 104,871 80,089 185,379 178,226 363,605
Comprehensive income Profit for the year – – 47,542 47,542 52,047 99,589
Total comprehensive income – – 47,542 47,542 52,047 99,589
Transactions with owners Dividends 21 – – (59,670) (59,670) (63,700) (123,370) Disposal of an associate – (290) – (290) (277) (567) Transfer from non-controlling interests to borrowings ––––(52,000) (52,000) Total transactions with owners – (290) (59,670) (59,960) (115,977) (175,937)
At 31 December 2013 419 104,581 67,961 172,961 114,296 287,257
At 1 January 2014 419 104,581 67,961 172,961 114,296 287,257
Comprehensive income Profit for the year – – 30,958 30,958 36,267 67,225 Other comprehensive income Currency translation differences – (7) – (7) – (7) Total other comprehensive income, net of tax – (7) – (7) – (7)
Total comprehensive income – (7) 30,958 30,951 36,267 67,218
Transactions with owners Dividends 21 – – (27,540) (27,540) (29,400) (56,940) Total transactions with owners – – (27,540) (27,540) (29,400) (56,940)
At 31 December 2014 419 104,574 71,379 176,372 121,163 297,535
– III-7 – APPENDIX III-1 ACCOUNTANT’S REPORT OF CACG I FOR THE THREE YEARS ENDED 31 DECEMBER 2015
Consolidated statements of changes in equity (continued)
Attributable to the owners of CACG I Non- Paid-in Retained controlling Total capital Reserves earnings Total interests equity Note RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
At 1 January 2015 419 104,574 71,379 176,372 121,163 297,535
Comprehensive income Profit for the year – – 29,491 29,491 35,388 64,879 Other comprehensive income Currency translation differences – (115) – (115) – (115) Total other comprehensive income, net of tax – (115) – (115) – (115)
Total comprehensive income – (115) 29,491 29,376 35,388 64,764
Transactions with owners Shareholder’s contribution ––––52,000 52,000 Dividends 21 – – (100,747) (100,747) (107,551) (208,298) Total transactions with owners – – (100,747) (100,747) (55,551) (156,298)
At 31 December 2015 419 104,459 123 105,001 101,000 206,001
– III-8 – APPENDIX III-1 ACCOUNTANT’S REPORT OF CACG I FOR THE THREE YEARS ENDED 31 DECEMBER 2015
Consolidated statements of cash flows
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Cash flows from operating activities
Profit before tax 122,547 89,236 85,011 Adjustments for: Share of profit of an associate (4,720) – – Interest income on available-for-sale financial assets – (892) (1,220) Interest income on loan to a fellow subsidiary (971) – – Loss/(gain) on disposal of property, plant and equipment 119 (10) 18 Gain on disposal of an associate (57,531) – – Exchange gain or loss 652 80 (110) Depreciation of property, plant and equipment 7,694 8,645 9,769 Impairment of property, plant and equipment – 1,634 340 Amortisation of prepaid lease payments 111 111 111 Provision of impairment for inventories 1,602 629 1,044 Provision of impairment for trade and other receivables 2,012 2,156 588
Operating cash flows before movement in working capital 71,515 101,589 95,551 (Increase)/decrease in inventories (21,473) (8,256) 1,290 (Increase)/decrease in trade and other receivables (63,349) 41,008 (81,369) Increase in trade and other payables 7,708 8,611 86,649 (Decrease)/increase in advance from customers (43) (31) 271 Decrease/(increase) in provisions (518) 430 (4,969)
Operating cash flows before movement in working capital (77,675) 41,762 1,872 Cash generated from operations (6,160) 143,351 97,423
Interest received 2,946 782 662 Income tax paid (16,663) (17,189) (20,841)
Net cash flows generated from/(used in) operating activities (19,877) 126,944 77,244
– III-9 – APPENDIX III-1 ACCOUNTANT’S REPORT OF CACG I FOR THE THREE YEARS ENDED 31 DECEMBER 2015
Consolidated statements of cash flows (continued)
Year ended 31 December 2013 2014 2015 Note RMB’000 RMB’000 RMB’000
Cash flows from investing activities
Purchase of property, plant and equipment (19,571) (11,772) (26,085) Proceeds from disposal of property, plant and equipment 837 252 17 Proceeds from disposal of an associate 87,557 – – Dividends received from an associate 46,403 – – Proceeds from disposal of available-for-sale financial assets – 135,000 120,000 Loan repayment from a fellow subsidiary 10,000 – – Interest income on loan to a fellow subsidiary 971 – – Purchase of available-for-sale financial assets (25,000) (110,000) (120,000) Changes in pledged bank deposits (15,600) 15,600 – Investment income on available-for-sale financial assets – 892 1,221
Net cash generated from/ (used in) investing activities 85,597 29,972 (24,847)
Cash flows from financing activities Dividends paid to non-controlling interests (63,700) (29,400) (35,896) Dividends paid to CACG I’s shareholders (59,670) (27,540) (33,625)
Net cash used in financing activities (123,370) (56,940) (69,521)
Net increase/(decrease) in cash and cash equivalents (57,650) 99,976 (17,124) Cash and cash equivalents, at beginning of year 113,669 56,019 155,915 Exchange gains on cash and cash equivalents – (80) 111
Cash and cash equivalents at end of year 18 56,019 155,915 138,902
– III-10 – APPENDIX III-1 ACCOUNTANT’S REPORT OF CACG I FOR THE THREE YEARS ENDED 31 DECEMBER 2015
II NOTES TO THE FINANCIAL INFORMATION
1 GENERAL INFORMATION
CACG Ltd. I (“CACG I”) was incorporated in the Cayman Islands on 26 May 1994 as a company with limited liability.
CACG I and its subsidiary (collectively referred to as “CACG I Group”) are principally engaged in manufacture of automotive component products such as starters and alternators and supplying products to the global automotive manufacturers. Majority of CACG I Group’s business is based in the PRC.
The Financial Information is presented in Renminbi (“RMB”), unless otherwise stated.
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
2.1 Basis of preparation
The Financial Information of CACG I have been prepared in accordance with all applicable International Financial Reporting Standards (“IFRS”). The Financial Information have been prepared under the historical cost convention as modified by the revaluation of available-for sale financial assets.
The preparation of Financial Information in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying CACG I Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 4.
2.1.2 Changes in accounting policy and disclosures
(a) New Hong Kong Companies Ordinance (Cap. 622)
The requirements of Part 9 “Accounts and Audit” of the new Hong Kong Companies Ordinance (Cap. 622) came into operation in 2015 and have been applied to presentation and disclosures of certain information in the Financial Information.
(b) New standards and interpretations not yet adopted
A number of new standards and amendments to standards and interpretations are effective for annual periods beginning after 1 January 2015, and have not been applied in preparing the Financial Information. None of these is expected to have a significant effect on the Financial Information of CACG I Group, except the following set out below:
• Amendment to IAS 27, ’Equity method in separate financial statements’. The amendment allows entities to use equity method to account for investments in subsidiaries, joint ventures and associates in their separate financial statements. The amendment is effective for annual periods beginning on or after 1 January 2016, with earlier application permitted.
• IFRS 15, ’Revenue from contracts with customers’ deals with revenue recognition and establishes principles for reporting useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. Revenue is recognised when a customer obtains control of a good or service and thus has the ability to direct the use and obtain the benefits from the good or service. The standard replaces IAS 18 “Revenue” and IAS 11 “Construction contracts” and related interpretations. IFRS 15 is effective for annual periods beginning on or after 1 January 2018 and earlier application is permitted. CACG I Group is assessing the impact of IFRS 15.
– III-11 – APPENDIX III-1 ACCOUNTANT’S REPORT OF CACG I FOR THE THREE YEARS ENDED 31 DECEMBER 2015
• IFRS 9, ‘Financial instruments’, addresses the classification, measurement and recognition of financial assets and financial liabilities. The complete version of IFRS 9 was issued in July 2014. It replaces the guidance in IAS 39 that relates to the classification and measurement of financial instruments. IFRS 9 retains but simplifies the mixed measurement model and establishes three primary measurement categories for financial assets: amortised cost, fair value through OCI and fair value through P&L. The basis of classification depends on the entity’s business model and the contractual cash flow characteristics of the financial asset. Investments in equity instruments are required to be measured at fair value through profit or loss with the irrevocable option at inception to present changes in fair value in OCI not recycling. There is now a new expected credit losses model that replaces the incurred loss impairment model used in IAS 39. For financial liabilities there were no changes to classification and measurement except for the recognition of changes in own credit risk in other comprehensive income, for liabilities designated at fair value through profit or loss. IFRS 9 relaxes the requirements for hedge effectiveness by replacing the bright line hedge effectiveness tests. It requires an economic relationship between the hedged item and hedging instrument and for the ‘hedged ratio’ to be the same as the one management actually use for risk management purpose.
• IFRS 16, ‘Leases’ addresses the definition of a lease, recognition and measurement of leases and establishes principles for reporting useful information to users of financial statements about the leasing activities of both lessees and lessors. A key change arising from IFRS 16 is that most operating leases will be accounted for on statement of financial position for lessees. The standard replaces IAS 17 ‘Leases’, and related interpretations. The standard is effective for annual periods beginning on or after 1 January 2019 and earlier application is permitted subject to the entity adopting IFRS 15 ‘Revenue from contracts with customers’ at the same time.
There are no other IFRSs or IFRIC interpretations that are not yet effective that would be expected to have a material impact on CACG I Group.
2.2 Subsidiaries
2.2.1 Consolidation
A subsidiary is an entity (including a structured entity) over which CACG I Group has control. CACG I Group controls an entity when CACG I Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are consolidated from the date on which control is transferred to CACG I Group. They are deconsolidated from the date that control ceases.
2.2.2 Separate financial statements
Investments in subsidiaries are accounted for at cost less impairment. Cost includes direct attributable costs of investment. The results of subsidiaries are accounted for by CACG I on the basis of dividend received and receivable.
Impairment testing of the investments in subsidiaries is required upon receiving a dividend from these investments if the dividend exceeds the total comprehensive income of the subsidiary in the period the dividend is declared or if the carrying amount of the investment in the separate financial statements exceeds the carrying amount in the consolidated financial statements of the investee’s net assets including goodwill.
– III-12 – APPENDIX III-1 ACCOUNTANT’S REPORT OF CACG I FOR THE THREE YEARS ENDED 31 DECEMBER 2015
2.3 Segment reporting
Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the executive directors that makes strategic decisions.
For management purposes, CACG I Group operates in one business unit and has one reportable operating segment during the years ended 31 December 2013, 2014 and 2015, which is manufacture and sale of automotive component products.
2.4 Foreign currency translation
(a) Functional and presentation currency
Items included in the financial statements of each of CACG I Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the ‘functional currency’). The functional currency of CACG I is US dollar whereas the functional currency of the subsidiary of CACG I is RMB. The consolidated financial statements are presented in RMB.
(b) Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or valuation where items are re-measured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the statement of profit or loss, except when deferred in other comprehensive income as qualifying cash flow hedges and qualifying net investment hedges.
Foreign exchange gains and losses are presented in the statement of profit or loss within “other gains, net”.
(c) Group companies
The results and financial position of all CACG I Group entities (none of which has the currency of a hyper-inflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows:
(i) assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet;
(ii) income and expenses for each statement of profit or loss are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the rate on the dates of the transactions); and
(iii) all resulting currency translation differences are recognised in other comprehensive income.
2.5 Property, plant and equipment
Property, plant and equipment is stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items.
Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to CACG I Group and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognised. All other repairs and maintenance are charged to the statement of profit or loss during the financial period in which they are incurred.
– III-13 – APPENDIX III-1 ACCOUNTANT’S REPORT OF CACG I FOR THE THREE YEARS ENDED 31 DECEMBER 2015
Depreciation is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives, as follows:
Estimated Estimated Category residual value useful life (%)
Buildings 10 20 years Plant, machinery and equipment 10 10 years Motor vehicles 10 5 years Office equipment and others 10 3 years
The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period.
An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount (Note 2.6).
Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognised within “Other gains, net” in the statement of profit or loss.
Construction in progress represents property, plant and equipment under construction or pending installation, and is stated at cost less impairment losses. Cost comprises direct costs of construction including borrowing costs attributable to the construction during the period of construction. No provision for depreciation is made on construction in progress until such time as the relevant assets are completed and ready for intended use.
2.6 Impairment of non-financial assets
Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date.
2.7 Financial assets
2.7.1 Classification
CACG I Group classifies its financial assets in the following categories: Loans and receivables and available-for-sale financial assets. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition.
(a) Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for the amounts that are settled or expected to be settled more than 12 months after the end of the reporting period. These are classified as non-current assets. CACG I Group’s Loans and receivables comprise trade receivables and other receivables (Note 16), pledged bank deposits (Note 18), and cash and cash equivalents (Note 18).
– III-14 – APPENDIX III-1 ACCOUNTANT’S REPORT OF CACG I FOR THE THREE YEARS ENDED 31 DECEMBER 2015
(b) Available-for-sale financial assets
Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless the investment matures or management intends to dispose of it within 12 months of the end of the reporting period.
2.7.2 Recognition and measurement
Regular way purchases and sales of financial assets are recognised on the trade-date – the date on which CACG I Group commits to purchase or sell the asset. Investments are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and CACG I Group has transferred substantially all risks and rewards of ownership. Available-for-sale financial assets are subsequently carried at fair value, except for the investments in equity instruments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured which are carried at cost. Receivables are subsequently carried at amortised cost using the effective interest method.
Interest earned whilst holding the available-for-sale financial assets is recognised in the statement of profit or loss as part of other income.
2.8 Offsetting financial instruments
Financial assets and liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis or realise the asset and settle the liability simultaneously. The legally enforceable right must not be contingent on future events and must be enforceable in the normal course of business and in the event of default, insolvency or bankruptcy of CACG I or the counterparty.
2.9 Impairment of financial assets
(a) Assets carried at amortised cost
CACG I Group assesses at the end of each reporting period whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.
Evidence of impairment may include indications that the debtors or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganisation, and where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.
For loans and receivables category, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate. The carrying amount of the asset is reduced and the amount of the loss is recognised in the consolidated statement of profit or loss.
If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor’s credit rating), the reversal of the previously recognised impairment loss is recognised in the consolidated statement of profit or loss.
– III-15 – APPENDIX III-1 ACCOUNTANT’S REPORT OF CACG I FOR THE THREE YEARS ENDED 31 DECEMBER 2015
(b) Available-for-sale financial assets
CACG I Group assesses at the end of each reporting period whether there is objective evidence that a financial asset or a group of financial assets is impaired.
If an available-for-sale asset is impaired, an amount comprising the difference between its cost (net of any principal payment and amortisation) and its current fair value, less any impairment loss previously recognised in the statement of profit or loss, is removed from other comprehensive income and recognised in the statement of profit or loss.
2.10 Inventories
Inventories are stated at the lower of cost and net realisable value. Cost is determined using the weighted average method. The cost of finished goods and work in progress comprises, raw materials, direct labour, other direct costs and related production overheads (based on normal operating capacity). It excludes borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses.
2.11 Trade and other receivables
Trade receivables are amounts due from customers for merchandise sold in the ordinary course of business. If collection of trade and other receivables is expected in one year or less (or in the normal operating cycle of the business if longer), they are classified as current assets. If not, they are presented as non-current assets.
Trade and other receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less allowance for impairment.
2.12 Cash and cash equivalents
In the consolidated statement of cash flows, cash and cash equivalents include cash in hand, deposits held at call with banks, and other short-term highly liquid investments with original maturities of three months or less.
2.13 Paid-in capital
Paid-in capital is classified as equity.
2.14 Trade payables
Trade payables are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Trade payables are classified as current liabilities if payment is due within one year or less (or in the normal operating cycle of the business if longer). If not, they are presented as non-current liabilities.
Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method.
2.15 Current and deferred income tax
The tax expense for the period comprises current and deferred tax. Tax is recognised in the statement of profit or loss, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case the tax is also recognised in other comprehensive income or directly in equity, respectively.
– III-16 – APPENDIX III-1 ACCOUNTANT’S REPORT OF CACG I FOR THE THREE YEARS ENDED 31 DECEMBER 2015
(a) Current income tax
The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the date of statement of financial position in the countries where CACG I’s subsidiaries and associates operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.
(b) Deferred income tax
Inside basis differences
Deferred income tax is recognised, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred tax liabilities are not recognised if they arise from the initial recognition of goodwill, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the date of statement of financial position and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.
Deferred income tax assets are recognised only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.
Outside basis differences
Deferred income tax liabilities are provided on taxable temporary differences arising from investments in subsidiaries, except for deferred income tax liability where the timing of the reversal of the temporary difference is controlled by CACG I Group and it is probable that the temporary difference will not reverse in the foreseeable future.
Deferred income tax assets are recognised on deductible temporary differences arising from investments in subsidiaries only to the extent that it is probable the temporary difference will reverse in the future and there is sufficient taxable profit available against which the temporary difference can be utilised.
(c) Offsetting
Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority on either the taxable entity or different taxable entities where there is an intention to settle the balances on a net basis.
2.16 Employee benefits
Defined contribution pension scheme
CACG I Group’s full-time employees in the PRC are covered by a government operated defined contribution pension scheme, and are entitled to a monthly pension from their retirement dates. The PRC government is responsible for the pension liability to these retired employees. CACG I Group is required to make annual contributions to the retirement scheme at certain percentages of employees’ basic salaries, which are charged as an expense when the employees have rendered services entitling them to the contributions and the contributions are due.
– III-17 – APPENDIX III-1 ACCOUNTANT’S REPORT OF CACG I FOR THE THREE YEARS ENDED 31 DECEMBER 2015
2.17 Provisions
Provisions are recognised when: CACG I Group has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. Provisions are not recognised for future operating losses.
Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small.
Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognised as interest expense.
Provisions for product warranties granted by CACG I Group on certain products are recognised based on sales volume and past experience of the level of repairs and returns, discounted to their present values as appropriate.
2.18 Revenue recognition
Revenue is measured at the fair value of the consideration received or receivable, and represents amounts receivable for goods supplied, stated net of discounts returns and value added taxes. CACG I Group recognises revenue when the amount of revenue can be reliably measured; when it is probable that future economic benefits will flow to the entity; and when specific criteria have been met for each of CACG I Group’s activities, as described below. CACG I Group bases its estimates of return on historical results, taking into consideration the type of customers, the type of transactions and the specifics of each arrangement.
Sales of automotive component products
CACG I Group sells automotive component products to domestic and overseas automotive manufacturers. The revenue is recognised when the related goods are delivered to the place of delivery pursuant to the sales contract and the customer confirms the acceptance of the goods or CACG I Group objective evidence that all criteria for acceptance have been satisfied.
2.19 Interest income
Interest income is recognised using the effective interest method. When a loan and receivable is impaired, CACG I Group reduces the carrying amount to its recoverable amount, being the estimated future cash flow discounted at the original effective interest rate of the instrument, and continues unwinding the discount as interest income. Interest income on impaired loans and receivables is recognised using the original effective interest rate.
2.20 Dividend income
Dividend income is recognised when the right to receive payment is established.
– III-18 – APPENDIX III-1 ACCOUNTANT’S REPORT OF CACG I FOR THE THREE YEARS ENDED 31 DECEMBER 2015
2.21 Leases
Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the statement of profit or loss on a straight-line basis over the period of the lease.
Prepaid lease payments
Interest in leasehold land that is accounted for as an operating lease is presented as “prepaid lease payments” in the statement of financial position and is amortised over the lease term on a straight-line basis.
2.22 Government grants
Grants from the government are recognised at their fair value where there is a reasonable assurance that the grant will be received and CACG I Group will comply with all attached conditions.
Government grants relating to costs are deferred and recognised in the statement of profit or loss over the period necessary to match them with the costs that they are intended to compensate.
Government grants relating to property, plant and equipment are included in non-current liabilities as deferred government grants and are credited to the statement of profit or loss on a straight-line basis over the expected lives of the related assets.
2.23 Dividend distribution
Dividend distribution to CACG I’s shareholders is recognised as a liability in CACG I Group’s and CACG I’s financial statements in the period in which the dividends are approved by CACG I’s shareholders or directors, where appropriate.
3 FINANCIAL RISK MANAGEMENT
3.1 Financial risk factors
CACG I Group’s activities expose it to a variety of financial risks: market risk (currency risk), credit risk and liquidity risk.
(a) Market risk
Foreign exchange risk
Foreign currency risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. CACG I Group’s exposure to the risk of changes in foreign exchange rates relates primarily to CACG I Group’s operating activities (when revenue or expense is denominated in a different currency from RMB).
CACG I Group’s businesses are mainly located in the PRC and are mainly transacted and settled in RMB. Certain sales, purchases and borrowings are settled in foreign currencies. The fluctuation of the exchange rates of foreign currencies against the RMB will affect CACG I Group’s results of operations.
As at 31 December 2013, 2014 and 2015, if RMB had strengthened/weakened by 10% against US dollar with all other variables held constant, profit before tax for the year would have been RMB17,000, RMB17,000 and RMB18,000 lower/higher, respectively, mainly as a result of foreign exchange losses/gains on translation of US dollar-denominated trade receivables.
– III-19 – APPENDIX III-1 ACCOUNTANT’S REPORT OF CACG I FOR THE THREE YEARS ENDED 31 DECEMBER 2015
(b) Credit risk
Credit risk is the risk that a counter party will not meet its obligations under a financial instrument or customer contract, leading to a financial loss. CACG I Group is exposed to credit risk from trade receivables, bills receivable, other receivables, pledged bank deposits and cash and cash equivalents.
Customer credit risk is managed by each operating company subject to CACG I Group’s established policy, procedures and control relating to customer credit risk management. CACG I Group’s policy is to perform credit verification for all customers who have transactions with CACG I Group. Further, credit limits, credit terms and sales methods are determined based on the credit history of customers. CACG I Group maintains long-term relationships with several large customers which management believes credit risk in relation with these customers is low. CACG I Group does not hold collateral as security.
All CACG I Group’s cash and cash equivalents and pledged bank deposits are held in major banks located in the PRC, which management believes are of high credit quality.
The carrying amounts of cash and cash equivalents, pledged bank deposits and trade and other receivables, represent CACG I Group’s maximum exposure to credit risk in relation to financial assets.
(c) Liquidity risk
CACG I Group’s objective is to maintain a balance between continuity of funding and flexibility through the use of bills.
The tables below analyses CACG I Group’s and CACG I’s non-derivative financial liabilities into relevant maturity groupings based on the remaining period at the date of statement of financial position to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows.
– III-20 – APPENDIX III-1 ACCOUNTANT’S REPORT OF CACG I FOR THE THREE YEARS ENDED 31 DECEMBER 2015
CACG I Group
Within one year RMB’000
As at 31 December 2013 Trade payables 192,315 Bills payable 13,220 Financial liabilities included in accruals and other payables 20,656 Loan from non-controlling interests 52,000
Total 278,191
As at 31 December 2014 Trade payables 213,734 Financial liabilities included in accruals and other payables 21,914 Loan from non-controlling interests 52,000
Total 287,648
As at 31 December 2015 Trade payables 287,178 Financial liabilities included in accruals and other payables 161,159
Total 448,337
CACG I
Within one year RMB’000
As at 31 December 2015 Dividends payable 67,122
3.2 Capital management
The primary objective of CACG I Group’s capital management is to ensure that it maintains healthy capital ratios in order to support its business and maximise shareholders’ value.
CACG I Group manages its capital structure and makes adjustments to it in light of changes in economic conditions. To maintain or adjust the capital structure, CACG I Group may adjust the dividend payment to shareholders, return capital to shareholders or issue new shares. No changes were made in the objectives, policies or processes for managing capital during the Relevant Periods.
CACG I Group monitors capital using a liability to asset ratio, which is total liabilities divided by the total assets.
CACG I Group’s strategy is to maintain the liability to asset ratio at a healthy capital level in order to support its business. The principal strategies adopted by CACG I Group include, without limitation, reviewing future cash flow requirement and the ability to meet debt repayment schedules when they fall due, maintaining a reasonable level of available banking facilities and adjusting investment plans and
– III-21 – APPENDIX III-1 ACCOUNTANT’S REPORT OF CACG I FOR THE THREE YEARS ENDED 31 DECEMBER 2015
financing plans, if necessary, to ensure that CACG I Group has a reasonable level of capital to support its business. The liability to asset ratios at the end of the reporting period were as follows:
As at 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Total liability 293,015 306,143 469,666 Total assets 580,272 603,678 675,667
Liability to asset ratio 50% 51% 70%
3.3 Fair value estimation
Financial instruments carried at fair value are analysed by level of the inputs to valuation techniques used to measure fair value. Such inputs are categorised into three levels within a fair value hierarchy as follows:
• Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1).
• Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (level 2).
• Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (level 3).
As at 31 December 2013, the available-for-sale financial assets are measured at fair value using significant observable inputs (level 2). Carrying amounts of other financial assets (including trade and other receivables, pledged bank deposits and cash and cash equivalents) and financial liabilities (including trade and other payables and loan from non-controlling interests) approximate their fair values.
As at 31 December 2014 and 2015, CACG I Group has no financial instruments carried at fair value. Carrying amounts of financial assets (including trade and other receivables, pledged bank deposits and cash and cash equivalents) and financial liabilities (including trade and other payables and loan from non-controlling interests) approximate their fair values.
4 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
CACG I Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are addressed below.
(a) Impairment of receivables
CACG I Group recognises provisions based on the judgement of recovery of accounts receivable. A bad debt provision is required to be recognised when there are indications that the receivable cannot be recovered. Recognition of bad debt provisions requires the use of judgement and estimates. If the revised estimates deviate from the current estimates, then any difference arising from changes of accounting estimates will affect the carrying value of debtors in the relevant accounting periods.
(b) Impairment of inventories
CACG I Group recognises provision based on the estimates of recovery of inventories. The estimates are made with reference to aged inventory analysis, projections of expected future saleability of goods and management experience and judgement. Impairment of inventories will be made when the carrying amounts of inventories are below their estimated net realisable values.
– III-22 – APPENDIX III-1 ACCOUNTANT’S REPORT OF CACG I FOR THE THREE YEARS ENDED 31 DECEMBER 2015
(c) Warranty provisions
A provision is recognised for expected warranty claims on products sold during the warranty guaranteed period. Assumptions used to calculate the provision for warranties are based on current sales levels and historical information for return and repairment. The estimation basis is reviewed on an ongoing basis and revised where appropriate.
5 SEGMENT INFORMATION
For management purposes, CACG I Group operates in one business unit and has one reportable operating segment, which is manufacture and sale of automotive component products.
(a) Geographical information
(i) Analysis of revenue
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
The PRC 557,733 709,683 666,966 Other countries 9,187 4,368 2,923 Total 566,920 714,051 669,889
The revenue information above is based on the locations of the customers.
(ii) Analysis of non-current assets
31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
The PRC 103,738 104,878 116,046
(b) Information about major customers
Revenues of RMB124,136,000, RMB185,281,000 and RMB193,566,000 for the year ended 31 December 2013, 2014 and 2015 respectively are derived from a single external customer from the PRC.
– III-23 – APPENDIX III-1 ACCOUNTANT’S REPORT OF CACG I FOR THE THREE YEARS ENDED 31 DECEMBER 2015
6 REVENUE
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Sales of automotive component products 562,930 698,516 653,130 Sales of materials 3,933 15,535 16,300 Others 57 – 459
Total 566,920 714,051 669,889
7 OTHER INCOME
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Interest income on bank deposits 2,946 781 663 Cash discount income 2,421 1,885 1,821 Interest income on loan to a fellow subsidiary 971 – – Investment income on available-for-sale financial assets – 892 1,220 Government grants – 310 328
6,338 3,868 4,032
8 OTHER GAINS/(LOSSES), NET
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Impairment of trade and other receivables (2,012) (2,156) (588) Impairment of property, plant and equipment – (1,634) (340) Net foreign exchange gains/(losses) (652) (80) 110 Gain on disposal of an associate (Note) 57,531 – – Loss on disposal of property, plant and equipment, net (119) 10 (18) Others (19) 13 (200)
Total 54,729 (3,847) (1,036)
Note: In 2013, the CACG I disposed its 49% equity investment in Remy Electricals Hubei Co., Ltd. to an third party for a cash consideration of RMB87,557,000 and a gain of RMB57,531,000 was recognised.
– III-24 – APPENDIX III-1 ACCOUNTANT’S REPORT OF CACG I FOR THE THREE YEARS ENDED 31 DECEMBER 2015
9 EXPENSE BY NATURE
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Changes in inventories of finished goods and work in progress (19,946) (9,673) 1,310 Raw materials and consumables used 415,082 495,433 464,173 Inventory write-down 1,602 629 1,044 Employee benefit expense (Note 10) 41,727 50,888 47,631 Water and electricity expenses 5,409 5,645 5,446 Maintenance and repair costs 4,020 2,971 1,829 Depreciation and amortisation 7,805 8,756 9,880 Sales tax and surcharges 2,329 3,902 2,828 Transportation expenses 9,323 10,750 10,480 Service fees 2,461 3,457 3,432 Product warranty costs 13,345 15,977 9,932 Entertainment expenses 1,515 1,301 2,237 Travel expense 2,016 2,493 3,240 Outsourced fabricating costs 8,576 12,776 10,962 Auditors’ remuneration – audit services 223 517 445 Others 14,673 19,014 13,005
Total 510,160 624,836 587,874
10 EMPLOYEE BENEFIT EXPENSE
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Salaries, allowances and other benefits 36,744 43,832 40,141 Pensions – defined contribution plans 4,983 7,056 7,490
Total 41,727 50,888 47,631
11 INCOME TAX EXPENSE
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Current tax: Current tax on profits for the year 17,676 18,448 23,917
Deferred tax: Origination and reversal of temporary differences 5,282 3,563 (3,785)
Total income tax expense 22,958 22,011 20,132
– III-25 – APPENDIX III-1 ACCOUNTANT’S REPORT OF CACG I FOR THE THREE YEARS ENDED 31 DECEMBER 2015
Pursuant to the relevant laws and regulations in the Cayman Islands, CACG I is exempted from income tax. Pursuant to Circular of the State Administration of Taxation on Issues Concerning Enterprise Income Tax Collection on High-tech Enterprises effective from 3 December 2008, Hubei Super Electric Motor Co., Ltd., the PRC subsidiary of CACG I, was entitled to a preferential tax rate of 15% for corporate income tax for the three years ended 31 December 2013, 2014 and 2015.
A reconciliation of the tax expense applicable to profit before tax at the applicable tax rate of the PRC subsidiary to the tax expense is as follows:
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Profit before tax 122,547 89,236 85,011
At PRC subsidiary’s applicable income tax rate of 15% 18,382 13,385 12,752 PRC withholding tax on dividends declared by PRC subsidiary 6,630 3,060 11,193 Recognition/(reversal) of deferred tax arising from unremitted earnings from the PRC subsidiary – 3,729 (3,850) Income not subject to tax (5,410) – – Non-deductible expenses for tax purposes 106 163 37 Effect of changes in applicable tax rate on opening deferred tax assets 3,958 – – Share of profits of an associate (708) – – Adjustments in respect of prior years – 1,674 –
22,958 22,011 20,132
12 PROPERTY, PLANT AND EQUIPMENT – CACG I GROUP
Machinery Office and Motor equipment Construction Buildings equipment vehicles and others in progress Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
At 1 January 2013 Cost 42,902 124,207 2,997 5,093 8,039 183,238 Accumulated depreciation (7,649) (79,615) (1,949) (4,298) – (93,511) Impairment provision – (1,672) – – – (1,672)
Net book amount 35,253 42,920 1,048 795 8,039 88,055
Year ended 31 December 2013 Opening net book amount 35,253 42,920 1,048 795 8,039 88,055 Additions – 14,957 – – 4,615 19,572 Transfers – 9,289 – – (9,289) – Disposals – (822) (134) – – (956) Depreciation charge (1,931) (5,359) (206) (198) – (7,694)
Closing net book amount 33,322 60,985 708 597 3,365 98,977
– III-26 – APPENDIX III-1 ACCOUNTANT’S REPORT OF CACG I FOR THE THREE YEARS ENDED 31 DECEMBER 2015
Machinery Office and Motor equipment Construction Buildings equipment vehicles and others in progress Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
At 31 December 2013 Cost 42,902 134,096 2,674 5,093 3,365 188,130 Accumulated depreciation (9,580) (73,111) (1,966) (4,496) – (89,153)
Net book amount 33,322 60,985 708 597 3,365 98,977
Year ended 31 December 2014 Opening net book amount 33,322 60,985 708 597 3,365 98,977 Additions –––411,768 11,772 Transfers 62 4,459 – – (4,521) – Disposals – (238) (4) – – (242) Depreciation charge (1,933) (6,507) (141) (64) – (8,645) Provision for impairment – (1,190) – (444) – (1,634)
Closing net book amount 31,451 57,509 563 93 10,612 100,228
At 31 December 2014 Cost 42,964 138,363 2,107 5,102 10,612 199,148 Accumulated depreciation (11,513) (79,664) (1,544) (4,565) – (97,286) Impairment provision – (1,190) – (444) – (1,634)
Net book amount 31,451 57,509 563 93 10,612 100,228
Year ended 31 December 2015 Opening net book amount 31,451 57,509 563 93 10,612 100,228 Additions ––––21,423 21,423 Transfers – 26,329 – – (26,329) – Disposals – – (35) – – (35) Depreciation charge (1,934) (7,702) (103) (30) – (9,769) Provision for impairment – (219) (121) – – (340)
Closing net book amount 29,517 75,917 304 63 5,706 111,507
At 31 December 2015 Cost 42,964 164,692 940 5,102 5,706 219,404 Accumulated depreciation (13,447) (87,366) (597) (4,595) – (106,005) Impairment provision – (1,409) (39) (444) – (1,892)
Net book amount 29,517 75,917 304 63 5,706 111,507
During the year ended 31 December 2013, the depreciation charges of CACG I Group were recorded in cost of sales and administrative expenses with amount of RMB5,367,000 and RMB2,327,000, respectively.
– III-27 – APPENDIX III-1 ACCOUNTANT’S REPORT OF CACG I FOR THE THREE YEARS ENDED 31 DECEMBER 2015
During the year ended 31 December 2014, the depreciation charges of CACG I Group were recorded in cost of sales and administrative expenses with amount of RMB6,031,000 and RMB2,614,000, respectively.
During the year ended 31 December 2015, the depreciation charges of CACG I Group were recorded in cost of sales and administrative expenses with amount of RMB7,199,000 and RMB2,570,000, respectively.
During the years ended 31 December 2013, 2014, and 2015, CACG I Group had no borrowing costs being capitalised.
13 PREPAID LEASE PAYMENTS – CACG I GROUP
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
At 1 January Cost 5,533 5,533 5,533 Accumulated amortisation (661) (772) (883)
Net book amount 4,872 4,761 4,650
Year ended 31 December Opening net book amount 4,872 4,761 4,650 Amortisation (111) (111) (111)
Closing net book amount 4,761 4,650 4,539
At 31 December Cost 5,533 5,533 5,533 Accumulated amortisation (772) (883) (994)
Net book amount 4,761 4,650 4,539
The leasehold land is situated in the PRC and is held under medium term leases.
14 INVESTMENT IN AND LOAN TO A SUBSIDIARY – CACG I
(a) Investments in a subsidiary
The following is the information of the subsidiary at 31 December 2013, 2014 and 2015:
Principal Attributable equity interest activities and of CACG I Group Place and date of place of Particulars of as at 31 December Name incorporation operation paid in capital 2013 2014 2015
Hubei Super-Elec Auto Hubei, the PRC/ Automotive RMB206,000,000 51% 51% 51% Electric Motor Co., Ltd. April, 1995 components (“Hubei Super-Elec”) manufacturing (湖北神電汽車電機有限公司) in the PRC
– III-28 – APPENDIX III-1 ACCOUNTANT’S REPORT OF CACG I FOR THE THREE YEARS ENDED 31 DECEMBER 2015
(b) Loan to a subsidiary
The loan to Hubei Super-Elec is unsecured, interest free and denominated in RMB. As at 31 December 2013, the loan was repayable on 24 December 2014. On 24 December 2014 CACG I extended the loan for one year to 24 December 2015. On 24 December 2015, pursuant to an agreement between the shareholders of Hubei Super-Elec, this loan was converted into the paid-in capital in Hubei Super-Elec by CACG I.
Set out below are the summarised financial information for the subsidiary that has material non-controlling interests. See Note 26 for transactions with non-controlling interests.
(c) Material non-controlling interests
Summarised financial information on the subsidiary with material non-controlling interests
Summarised statements of financial position
Hubei Super-Elec 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Assets 471,037 494,014 554,786 Liabilities 346,132 356,408 469,666
Total current net assets 124,905 137,606 85,120
Assets 108,351 109,664 120,881 Liabilities – – –
Total non-current net assets 108,351 109,664 120,881
Net assets 233,256 247,270 206,001
Summarised statement of profit or loss and other comprehensive income
Hubei Super-Elec Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Revenue 566,920 714,051 669,889 Profit/(loss) before income tax 122,547 89,236 85,011 Income tax expense (16,328) (15,222) (12,788) Profit/(loss) for the year 106,219 74,014 72,223
Total comprehensive income/(loss) 106,219 74,014 72,223
Total comprehensive income allocated to non-controlling Interests 52,047 36,267 35,388 Dividends paid to non-controlling Interests 63,700 29,400 107,551
– III-29 – APPENDIX III-1 ACCOUNTANT’S REPORT OF CACG I FOR THE THREE YEARS ENDED 31 DECEMBER 2015
Summarised cash flows
Hubei Super-Elec Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Net cash generated from/(used in) operating activities (28,847) 145,603 80,980 Net cash generated from/(used in) in investing activities 101,197 14,372 (24,847) Net cash generated from/(used in) in financing activities (130,000) (60,000) (73,256)
Net increase/(decrease) in cash and cash equivalents (57,650) 99,975 (17,123) Cash, cash equivalents at beginning of year 113,670 56,019 155,915 Exchange gain/(losses) on cash and cash equivalents – (80) 90
Cash and cash equivalents at end of year 56,019 155,915 138,882
15 INVENTORIES – CACG I GROUP
31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Raw materials 8,027 6,442 6,234 Work in progress 5,585 5,703 6,439 Finished goods 57,608 66,702 63,840
Total inventories at the lower of cost and net realisable value 71,220 78,847 76,513
During the year ended 31 December 2013, 2014, and 2015, provision of RMB1,602,000, RMB629,000 and RMB1,044,000, respectively, for impairment of inventory was recognised in cost of sales.
– III-30 – APPENDIX III-1 ACCOUNTANT’S REPORT OF CACG I FOR THE THREE YEARS ENDED 31 DECEMBER 2015
16 TRADE AND OTHER RECEIVABLES – CACG I GROUP
31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Trade receivables 180,961 169,567 183,850 Less: allowance for impairment (7,068) (8,845) (9,433)
Trade receivables – net 173,893 160,722 174,417 Bills receivable 125,959 96,008 160,959
299,852 256,730 335,376 Prepayments to suppliers 2,414 1,456 3,277 Deposits 150 150 150 Other receivables 932 1,445 1,097 Less: allowance for impairment (150) (529) (529)
3,346 2,522 3,995
303,198 259,252 339,371
CACG I Group’s trading terms with its customers are mainly on credit, except for new customers, where payment in advance is normally required. The credit period is generally three months, extending up to six months for major customers. Each customer has a maximum credit limit. CACG I Group seeks to maintain strict control over its outstanding receivables and has a credit control department to minimise credit risk. Overdue balances are reviewed regularly by senior management. In view of the aforementioned and the fact that CACG I Group’s trade receivables relate to a large number of diversified customers, there is no significant concentration of credit risk. CACG I Group does not hold any collateral or other credit enhancements over its trade receivable and bills receivable balances. Trade receivables and bills receivable are non-interest bearing.
As at 31 December 2013, 2014 and 2015, bank acceptance notes of RMB350,000, nil and RMB74,336,000 respectively, were endorsed to suppliers of CACG I Group but were not derecognised as these bank acceptance notes were issued by unlisted commercial banks.
An ageing analysis of the trade receivables based on the invoice date and net of provisions, is as follows:
31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Within 6 months 161,324 142,772 162,604 6 to 12 months 9,786 15,129 8,223 Over 1 year 2,783 2,821 3,590
173,893 160,722 174,417
– III-31 – APPENDIX III-1 ACCOUNTANT’S REPORT OF CACG I FOR THE THREE YEARS ENDED 31 DECEMBER 2015
An aged analysis of the bill receivables based on the invoice date and net of provisions is as follows:
31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Within 6 months 125,959 96,008 160,959
The movements in provision for impairment of trade receivables are as follows:
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
At 1 January 15,560 7,068 8,845 Impairment loss recognised 2,012 1,777 588 Amount written off as uncollectible (10,504) – –
At 31 December 7,068 8,845 9,433
As at 31 December 2013, 2014 and 2015, there are no significant trade receivables and bills receivable that are past due but are not impaired.
The individually impaired trade receivables partly relate to customers that were in financial difficulties or were in default in principal payments and only a portion or none of the receivables is expected to be recovered.
The carrying amounts of CACG I Group’s trade receivables and bills receivable are denominated in the following currencies:
31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
RMB 299,852 255,746 335,112 US dollar – 256 264 EURO – 728 –
299,852 256,730 335,376
The movements in provision for impairment of prepayments, deposits and other receivables are as follows:
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
At 1 January 150 150 529 Impairment loss recognised – 379 –
At 31 December 150 529 529
– III-32 – APPENDIX III-1 ACCOUNTANT’S REPORT OF CACG I FOR THE THREE YEARS ENDED 31 DECEMBER 2015
17 AVAILABLE-FOR-SALE FINANCIAL ASSETS – CACG I GROUP
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
At 1 January – 25,000 – Additions 25,000 110,000 120,000 Disposals – (135,000) (120,000)
At 31 December 25,000 – –
As at 31 December 2013, the available-for-sale financial asset was an investment in financial products issued by a bank, which was designated as an available-for-sale financial investment with no fixed coupon rate.
18 CASH AND CASH EQUIVALENTS AND PLEDGED DEPOSITS – CACG I GROUP
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Cash and bank balances 71,619 155,915 138,902 Less: pledged deposits for issuing bank acceptance bills (15,600) – –
Cash and cash equivalents 56,019 155,915 138,902
The carrying amounts of CACG I Group’s cash and cash equivalents are denominated in the following currencies:
31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
RMB 56,019 155,915 138,247 JPY – – 519 US dollar – – 136
56,019 155,915 138,902
– III-33 – APPENDIX III-1 ACCOUNTANT’S REPORT OF CACG I FOR THE THREE YEARS ENDED 31 DECEMBER 2015
19 TRADE AND OTHER PAYABLES
CACG I Group CACG I 31 December 31 December 2013 2014 2015 2013 2014 2015 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
Trade payables 192,315 213,734 287,178––– Bills payable 13,220–––––
205,535 213,734 287,178––– Accrued payroll 4,539 8,736 6,946––– Dividends payable – – 138,777 – – 67,122 Other payables 11,165 10,736 10,779––– Taxes payable 4,835 3,997 12,187––– Accrued liabilities 4,952 2,442 4,657–––
25,491 25,911 173,346 – – 67,122
231,026 239,645 460,524 – – 67,122
At 31 December 2013, 2014 and 2015, the ageing analysis of the trade payables based on invoice date were are follows:
CACG I Group 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Within 6 months 186,646 206,423 275,781 6 to 12 months 3,490 3,438 2,507 1 to 2 year 489 1,894 7,913 2 to 3 year 1,690 1,979 977 Over 3 year – – –
192,315 213,734 287,178
At 31 December 2013, 2014 and 2015, the ageing analysis of the bills payable and based on invoice date were are follows:
CACG I Group 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Within 6 months 13,220 – –
– III-34 – APPENDIX III-1 ACCOUNTANT’S REPORT OF CACG I FOR THE THREE YEARS ENDED 31 DECEMBER 2015
20 LOAN FROM NON-CONTROLLING INTERESTS – CACG I GROUP
Pursuant to an agreement entered into on 25 December 2013 between Hubei Super-Elec and its shareholders, CACG I and Jingzhou Super-Elec Industry Co., Ltd., the unregistered capital of RMB54,000,000 and RMB52,000,000 paid by CACG I and Jingzhou Super-Elec Industry Co., Ltd. (“Jingzhou Super-Elec”) in Hubei Super-Elec, which previously had no payment terms and non interest-bearing and were regarded as capital reserves, were designated as shareholder loans repayable on 24 December 2014 with no intersts. Accordingly, non-controlling interests of RMB52,000,000 were derecognised and a loan from non-controlling interests was recognised as at 31 December 2013. On 24 December 2014, Jingzhou Super-Elec extended the loan for one year to 24 December 2015. On 24 December 2015, pursuant to an agreement between Hubei Super-Elec, CACG I and Jingzhou Super-Elec, these loans were converted into the paid-in capital in Hubei Super-Elec respectively.
21 DIVIDENDS – CACG I GROUP
A dividend of RMB123,370,000, RMB56,940,000 and RMB73,256,000 was approved by the board of directors and paid in 2013, 2014 and 2015 respectively. A dividend of RMB135,042,000 in respect of the accumulated distributable profit was approved by the board of directors in 2015 and has been reflected in the dividend payable (net of withholding tax payable) as at 31 December 2015.
22 PROVISIONS – CACG I GROUP
The gross movement on provisions is as follows:
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
At 1 January 14,773 9,668 10,098 Additional provisions 13,345 15,977 9,932 Utilised during the year (18,450) (15,547) (14,901)
At 31 December 9,668 10,098 5,129
Portion classified as current liabilities 9,668 10,098 5,129
A provision is recognised for expected warranty claims on products sold during warranty period, based on past experience of the level of repairs and returns. Assumptions used to calculate the provision for warranties were based on current sales levels and current information available about returns based on the estimated warranty period for all products sold. The estimation basis is reviewed on an ongoing basis and revised where appropriate.
– III-35 – APPENDIX III-1 ACCOUNTANT’S REPORT OF CACG I FOR THE THREE YEARS ENDED 31 DECEMBER 2015
23 DEFERRED INCOME TAX
CACG I and CACG I Group
The analysis of deferred tax is as follows:
31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Deferred income tax assets: Deferred income tax assets to be recovered after more than 12 months – 245 296 Deferred income tax assets to be recovered within 12 months 4,613 4,541 4,539
Cash and cash equivalents 4,613 4,786 4,835
The gross movement on the deferred income tax accounts is as follows:
2013 2014 2015 RMB’000 RMB’000 RMB’000
At 1 January 9,895 4,613 4,786 Credited/(charged) to statement of profit or loss (5,282) 173 49
At 31 December 4,613 4,786 4,835
The movement in deferred income tax assets and liabilities without taking into consideration of the offsetting of balances within the same tax jurisdiction during the year is as follows:
Deferred income tax assets:
Accrued Impairment expenses Total RMB’000 RMB’000 RMB’000
At 1 January 2013 5,159 4,736 9,895 Credited/(charged) to statement of profit or loss (3,462) (1,820) (5,282)
At 31 December 2013 1,697 2,916 4,613
Credited/(charged) to statement of profit or loss 626 (452) 173
At 31 December 2014 2,323 2,464 4,786
Credited/(charged) to statement of profit or loss 262 (214) 49
At 31 December 2015 2,585 2,250 4,835
– III-36 – APPENDIX III-1 ACCOUNTANT’S REPORT OF CACG I FOR THE THREE YEARS ENDED 31 DECEMBER 2015
CACG I
The analysis of deferred tax is as follows:
31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Deferred income tax liabilities: Deferred income tax assets to be recovered within 12 months – 3,736 –
The gross movement on the deferred income tax accounts is as follows:
2013 2014 2015 RMB’000 RMB’000 RMB’000
At 1 January – – 3,736 Credited/(charged) to statement of profit or loss – 3,736 (3,736)
At 31 December – 3,736 –
The movement in deferred income tax assets and liabilities without taking into consideration of the offsetting of balances within the same tax jurisdiction during the year is as follows:
Deferred income tax liabilities:
Unremitted earnings from a PRC subsidiary RMB’000
At 1 January 2013 – Credited/(charged) to statement of profit or loss –
At 31 December 2013 –
Credited/(charged) to statement of profit or loss 3,736
At 31 December 2014 3,736
Credited/(charged) to statement of profit or loss (3,736)
At 31 December 2015 –
– III-37 – APPENDIX III-1 ACCOUNTANT’S REPORT OF CACG I FOR THE THREE YEARS ENDED 31 DECEMBER 2015
24 RESERVES
CACG I Group
Currency Capital translation reserves reserve Total RMB’000 RMB’000 RMB’000
At 1 January 2013 104,812 59 104,871 Disposal of an associate (290) – (290)
At 31 December 2013 104,522 59 104,581
Currency translation differences – (7) (7)
At 31 December 2014 104,522 52 104,574
Total comprehensive income for the year – (115) (115)
At 31 December 2015 104,522 (63) 104,459
CACG I
Currency Capital translation reserves reserve Total RMB’000 RMB’000 RMB’000
At 1 January 2013 104,522 (28,496) 76,026 Currency translation differences – (1,602) (1,602)
At 31 December 2013 104,522 (30,098) 74,424
Currency translation differences – 1,054 1,054
At 31 December 2014 104,522 (29,044) 75,478
Currency translation differences – 5,292 5,292
At 31 December 2015 104,522 (23,752) 80,770
– III-38 – APPENDIX III-1 ACCOUNTANT’S REPORT OF CACG I FOR THE THREE YEARS ENDED 31 DECEMBER 2015
25 COMMITMENTS
CACG I Group had the following capital commitments at the end of the reporting period:
31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Contracted, but not provided for: Property, plant and equipment 1,262 660 2,465
26 RELATED PARTY TRANSACTIONS
As at 31 December 2013, 2014 and 2015 CACG I Group is controlled by ASIMCO Technologies Limited, which owns 100% equity interests in CACG I. The ultimate parent company of CACG I Group is Bain Capital Asia Integral Investors, L.P. (incorporated in the Cayman Islands).
(a) The following transactions were carried out with related parties:
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Purchase of goods from Non-controlling interests 21,334 10,086 6,995
Interest income from A fellow subsidiary 971 – –
Service fees to Fellow subsidiaries 2,461 3,457 3,432
– III-39 – APPENDIX III-1 ACCOUNTANT’S REPORT OF CACG I FOR THE THREE YEARS ENDED 31 DECEMBER 2015
(b) Outstanding balances with related parties
31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Trade payables Non-controlling interests 3,134 4,735 3,513
Dividend payable The parent company of CACG I – – 67,122 Non-controlling interests – – 71,655
– – 138,777
Other payables A fellow subsidiary 10 549 2,124
Borrowings Non-controlling interests 52,000 52,000 –
27 FINANCIAL INSTRUMENTS BY CATEGORY
CACG I Group
Financial assets
Receivables RMB’000
As at 31 December 2013 Financial assets included in trade and other receivables 300,784 Pledged deposits 15,600 Cash and cash equivalents 56,019
Total 372,403
As at 31 December 2014 Financial assets included in trade and other receivables 257,796 Cash and cash equivalents 155,915
Total 413,711
As at 31 December 2015 Financial assets included in trade and other receivables 336,094 Cash and cash equivalents 138,902
Total 474,996
– III-40 – APPENDIX III-1 ACCOUNTANT’S REPORT OF CACG I FOR THE THREE YEARS ENDED 31 DECEMBER 2015
Available-for-sale financial asset RMB’000
As at 31 December 2013 Available-for-sale financial assets 25,000
As at 31 December 2014 Available-for-sale financial assets –
As at 31 December 2015 Available-for-sale financial assets –
Financial liabilities
Financial liabilities at amortised cost RMB’000
As at 31 December 2013 Financial liabilities included in trade and other payables 226,191 Loan from non-controlling interests 52,000
Total 278,191
As at 31 December 2014 Financial liabilities included in trade and other payables 235,648 Loan from non-controlling interests 52,000
Total 287,648
As at 31 December 2015 Financial liabilities included in trade and other payables 448,337
CACG I
Financial assets
Loans and receivables 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Dividends receivable – – 67,122
– III-41 – APPENDIX III-1 ACCOUNTANT’S REPORT OF CACG I FOR THE THREE YEARS ENDED 31 DECEMBER 2015
Loans to subsidiary 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Loans to a subsidiary 54,000 54,000 –
Financial liabilities
Financial liabilities at amortised cost 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Dividends payable – – 67,122
III SUBSEQUENT FINANCIAL STATEMENTS
No audited financial statements have been prepared by CACG I or its subsidiary in respect of any period subsequent to 31 December 2015 up to the date of this report. No dividend or distribution has been declared or made by CACG I or its subsidiary in respect of any period subsequent to 31 December 2015.
Yours faithfully,
PricewaterhouseCoopers Certified Public Accountants Hong Kong
– III-42 – APPENDIX III-2 ACCOUNTANT’S REPORT OF ASIMCO CAMSHAFT FOR THE THREE YEARS ENDED 31 DECEMBER 2015
The following is the text of a report received from the Company’s reporting accountant, PricewaterhouseCoopers, Certified Public Accountants, Hong Kong, for the purpose of incorporation in this circular.
23 May 2016
The Directors Zhengzhou Coal Mining Machinery Group Company Limited
Dear Sirs,
We report on the financial information of ASIMCO Camshaft (Yizheng) Co., Ltd. (“ASIMCO Camshaft”), which comprises the statements of financial position of ASIMCO Camshaft as at 31 December 2013, 2014 and 2015, and statements of profit or loss and other comprehensive income, statements of changes in equity and statements of cash flows of ASIMCO Camshaft for each of the years ended 31 December 2013, 2014 and 2015 (the “Relevant Periods”) and a summary of significant accounting policies and other explanatory information. This financial information has been prepared by the directors of Zhengzhou Coal Mining Machinery Group Company Limited (the “Company”) and is set out in Sections I to III below for inclusion in Appendix III-2 to the circular of the Company dated 23 May 2016 (the “Circular”) in connection with the proposed acquisition of ASIMCO Camshaft by the Company.
ASIMCO Camshaft was incorporated in the People’s Republic of China on 31 May 2004 as a company with limited liability.
The statutory financial statements of ASIMCO Camshaft for the year ended 31 December 2013 were audited by Ernst & Young Hua Ming LLP, and the statutory financial statements for each of the years ended 31 December 2014 and 2015 were audited by PricewaterhouseCoopers Zhong Tian LLP, Beijing Branch, pursuant to separate terms of engagement with ASIMCO Camshaft respectively.
The directors of ASIMCO Camshaft are responsible for the preparation of the financial statements of ASIMCO Camshaft for the Relevant Periods that give a true and fair view in accordance with International Financial Reporting Standards (“IFRSs”) issued by the International Accounting Standards Board (the “Underlying Financial Statements”), and for such internal control as the directors determine is necessary to enable the preparation of the Underlying Financial Statements that are free from material misstatement, whether due to fraud or error. PricewaterhouseCoopers Zhong Tian LLP
– III-43 – APPENDIX III-2 ACCOUNTANT’S REPORT OF ASIMCO CAMSHAFT FOR THE THREE YEARS ENDED 31 DECEMBER 2015 have audited the Underlying Financial Statements in accordance with International Standards on Auditing (the “ISAs”) issued by the International Auditing and Assurance Standards Board (“IAASB”) pursuant to separate terms of engagement.
The financial information has been prepared based on the Underlying Financial Statements with no adjustment made thereon.
Directors’ Responsibility for the Financial Information
The directors of the Company are responsible for the preparation of the financial information that gives a true and fair view in accordance with IFRSs and accounting policies adopted by the Company and its subsidiaries (together, the “Group”) as set out in the annual report of the Company for the year ended 31 December 2015.
Reporting Accountant’s Responsibility
Our responsibility is to express an opinion on the financial information and to report our opinion to you. We carried out our procedures in accordance with Auditing Guideline 3.340 “Prospectuses and the Reporting Accountant” issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”).
Opinion
In our opinion, the financial information gives, for the purpose of this report, a true and fair view of the state of affairs of ASIMCO Camshaft as at 31 December 2013, 2014 and 2015 and of ASIMCO Camshaft’s results and cash flows for the Relevant Periods.
– III-44 – APPENDIX III-2 ACCOUNTANT’S REPORT OF ASIMCO CAMSHAFT FOR THE THREE YEARS ENDED 31 DECEMBER 2015
I FINANCIAL INFORMATION OF ASIMCO CAMSHAFT
A. The following is the financial information of ASIMCO Camshaft prepared by the directors of the Company as at 31 December 2013, 2014 and 2015 and for each of the years ended 31 December 2013, 2014 and 2015 (the “Financial Information”):
Statements of profit or loss and other comprehensive income
Year ended December 31 2013 2014 2015 Note RMB’000 RMB’000 RMB’000
Revenue 6 85,990 103,029 103,762 Cost of sales 7 (65,460) (74,086) (70,599)
Gross profit 20,530 28,943 33,163 Selling and distribution costs 7 (2,513) (2,483) (2,696) Administrative expenses 7 (6,363) (8,020) (8,624) Research and development expenses 7 (951) (2,966) (6,036) Other income 165 120 112 Other gains/(losses), net (256) (184) 377
Profit from operations 10,612 15,410 16,296 Finance costs 9 (2,746) (3,173) (2,955)
Profit before income tax 7,866 12,237 13,341 Income tax expense 10 (1,330) 2,535 (62)
Profit for the year 6,536 14,772 13,279
Other comprehensive income for the year, net of tax –––
Total comprehensive income for the year 6,536 14,772 13,279
– III-45 – APPENDIX III-2 ACCOUNTANT’S REPORT OF ASIMCO CAMSHAFT FOR THE THREE YEARS ENDED 31 DECEMBER 2015
Statements of financial position
As at 31 December 2013 2014 2015 Note RMB’000 RMB’000 RMB’000
ASSETS
Non-current assets Property, plant and equipment 11 103,347 111,045 115,273 Intangible assets 31 20 10 Deferred income tax assets 18 – 2,883 6,604
103,378 113,948 121,887
Current assets Inventories 12 14,098 13,385 12,738 Trade and other receivables 13 30,371 31,522 38,861 Income tax recoverable – 1,701 – Pledged bank deposits 14 – – 2,500 Cash and cash equivalents 14 2,088 2,341 3,277
46,557 48,949 57,376
Total assets 149,935 162,897 179,263
EQUITY
Equity attributable to the owner of ASIMCO Camshaft Paid-in capital 118,043 118,043 118,043 Reserves 49,980 49,980 49,980 Retained earnings (91,232) (76,460) (63,181)
Total Equity 76,791 91,563 104,842
– III-46 – APPENDIX III-2 ACCOUNTANT’S REPORT OF ASIMCO CAMSHAFT FOR THE THREE YEARS ENDED 31 DECEMBER 2015
Statements of financial position (continued)
As at 31 December 2013 2014 2015 Note RMB’000 RMB’000 RMB’000
LIABILITIES
Non-current liabilities Loans from a fellow subsidiary 16 13,000 26,000 26,000 Loan from a shareholder 16 1,977 – –
14,977 26,000 26,000
Current liabilities Trade and other payables 15 14,619 19,216 23,646 Advances from customers 8 – – Borrowings 16 8,000 11,000 23,000 Loans from a fellow subsidiary 16 34,000 13,000 – Loan from a shareholder 16 – 1,977 – Income tax payable 1,272 – 1,637 Provisions 17 268 141 138
58,167 45,334 48,421
Total liabilities 73,144 71,334 74,421
Total equity and liabilities 149,935 162,897 179,263
– III-47 – APPENDIX III-2 ACCOUNTANT’S REPORT OF ASIMCO CAMSHAFT FOR THE THREE YEARS ENDED 31 DECEMBER 2015
Statements of changes in equity
Attributable to the owner of ASIMCO Camshaft Other Paid-in capital Retained capital reserves earnings Total RMB’000 RMB’000 RMB’000 RMB’000
At 1 January 2013 118,043 49,980 (97,768) 70,255
Comprehensive income Profit for the year – – 6,536 6,536
Total comprehensive income – – 6,536 6,536
At 31 December 2013 118,043 49,980 (91,232) 76,791
Comprehensive income Profit for the year – – 14,772 14,772
Total comprehensive income – – 14,772 14,772
At 31 December 2014 118,043 49,980 (76,460) 91,563
Comprehensive income Profit for the year – – 13,279 13,279
Total comprehensive income – – 13,279 13,279
At 31 December 2015 118,043 49,980 (63,181) 104,842
– III-48 – APPENDIX III-2 ACCOUNTANT’S REPORT OF ASIMCO CAMSHAFT FOR THE THREE YEARS ENDED 31 DECEMBER 2015
Statements of cash flows
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Cash flows from operating activities Profit before tax 7,866 12,237 13,341 Adjustments for: Finance costs 2,746 3,173 2,955 (Gain)/loss on disposal of items of property, plant and equipment (6) 259 4 Exchange (gain)/loss 203 47 (34) Depreciation of property, plant and equipment 11,250 13,553 15,233 Amortization of intangible assets 11 11 10 (Reversal)/provision of impairment for inventories (34) (74) 219 Provision/(reversal) of impairment for trade receivables 3 (17) 98
Operating cash flows before movement in working capital 22,039 29,189 31,826 (Increase)/decrease in inventories (3,550) 787 428 Increase in trade and other receivables (1,673) (1,141) (7,449) Increase in trade and other payables 2,035 3,272 5,457 (Decrease)/increase in advance from customers 8 (8) – Increase/(decrease) in provisions 3 (127) (3) Cash generated from operations 18,862 31,972 30,259 Interest received 7 7 12 Income tax paid 41 (1,620) (2,145)
Net cash generated from operating activities 18,910 30,359 28,126
Cash flows from investing activities Purchase of property, plant and equipment (17,215) (22,698) (18,558) Proceeds from disposal of property, plant and equipment 23 745 – Changes in pledged bank deposits – – (2,500)
Net cash used in investing activities (17,192) (21,953) (21,058)
– III-49 – APPENDIX III-2 ACCOUNTANT’S REPORT OF ASIMCO CAMSHAFT FOR THE THREE YEARS ENDED 31 DECEMBER 2015
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Cash flows from financing activities Proceeds from borrowings 8,000 14,500 28,000 Loans from a fellow subsidiary – 26,000 3,000 Repayment of borrowings – (11,500) (16,000) Repayment of loans to a fellow subsidiary (9,111) (34,000) (16,000) Repayment of loans from a shareholder – – (1,977) Interest paid (2,857) (3,106) (3,189)
Net cash generated /(used) in financing activities (3,968) (8,106) (6,166)
Net increase/(decrease) in cash and cash equivalents (2,250) 300 902 Cash and cash equivalents, at beginning of year 4,541 2,088 2,341 Exchange gains/(losses) on cash and cash equivalents (203) (47) 34
Cash and cash equivalents at end of year 2,088 2,341 3,277
– III-50 – APPENDIX III-2 ACCOUNTANT’S REPORT OF ASIMCO CAMSHAFT FOR THE THREE YEARS ENDED 31 DECEMBER 2015
II NOTES TO THE FINANCIAL INFORMATION
1 GENERAL INFORMATION
ASIMCO Camshaft (Yizheng) Co., Ltd. (the “Company”) was incorporated in Yizheng City, Jiangsu Province, the People’s Republic of China (“PRC”) on 31 May 2004 with limited liability.
ASIMCO Camshaft is principally engaged in manufacture and sale of automotive camshaft products. Majority of ASIMCO Camshaft’s business is based in the PRC.
The Financial Information is presented in Renminbi (‘RMB’), unless otherwise stated.
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
2.1 Basis of preparation
The Financial Information of ASIMCO Camshaft have been prepared in accordance with all applicable International Financial Reporting Standards (“IFRS”). The Financial Information have been prepared under the historical cost convention as modified by the revaluation of available-for sale financial assets.
The preparation of Financial Information in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying ASIMCO Camshaft’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in Note 4.
2.1.1 Changes in accounting policy and disclosures
(a) New Hong Kong Companies Ordinance (Cap. 622)
The requirements of Part 9 “Accounts and Audit” of the new Hong Kong Companies Ordinance (Cap. 622) came into operation in 2015 and have been applied to presentation and disclosures of certain information in the Financial Information.
(b) New standards and interpretations not yet adopted
A number of new standards and amendments to standards and interpretations are effective for annual periods beginning after 1 January 2015, and have not been applied in preparing the Financial Information. None of these is expected to have a significant effect on the Financial Information of ASIMCO Camshaft, except the following set out below:
• IFRS 15, ‘Revenue from contracts with customers’ deals with revenue recognition and establishes principles for reporting useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. Revenue is recognised when a customer obtains control of a good or service and thus has the ability to direct the use and obtain the benefits from the good or service. The standard replaces IAS 18 ‘Revenue’ and IAS 11 ‘Construction contracts’ and related interpretations. IFRS 15 is effective for annual periods beginning on or after 1 January 2018 and earlier application is permitted. ASIMCO Camshaft is assessing the impact of IFRS 15.
• IFRS 16, ‘Leases’ addresses the definition of a lease, recognition and measurement of leases and establishes principles for reporting useful information to users of financial statements about the leasing activities of both lessees and lessors. A key change arising from IFRS 16 is that most operating leases will be accounted for on statement of financial position for lessees. The standard replaces IAS 17 ‘Leases’, and related interpretations. The standard is effective for annual periods beginning
– III-51 – APPENDIX III-2 ACCOUNTANT’S REPORT OF ASIMCO CAMSHAFT FOR THE THREE YEARS ENDED 31 DECEMBER 2015
on or after 1 January 2019 and earlier application is permitted subject to the entity adopting IFRS 15 ‘Revenue from contracts with customers’ at the same time.
• IFRS 9, “Financial instruments”, addresses the classification, measurement and recognition of financial assets and financial liabilities. The complete version of IFRS 9 was issued in July 2014. It replaces the guidance in IAS 39 that relates to the classification and measurement of financial instruments. IFRS 9 retains but simplifies the mixed measurement model and establishes three primary measurement categories for financial assets: amortised cost, fair value through OCI and fair value through P&L. The basis of classification depends on the entity’s business model and the contractual cash flow characteristics of the financial asset. Investments in equity instruments are required to be measured at fair value through profit or loss with the irrevocable option at inception to present changes in fair value in OCI not recycling. There is now a new expected credit losses model that replaces the incurred loss impairment model used in IAS 39. For financial liabilities there were no changes to classification and measurement except for the recognition of changes in own credit risk in other comprehensive income, for liabilities designated at fair value through profit or loss. IFRS 9 relaxes the requirements for hedge effectiveness by replacing the bright line hedge effectiveness tests. It requires an economic relationship between the hedged item and hedging instrument and for the ‘hedged ratio’ to be the same as the one management actually use for risk management purpose.
There are no other IFRSs or IFRIC interpretations that are not yet effective that would be expected to have a material impact on ASIMCO Camshaft.
2.2 Segment reporting
Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the executive directors that makes strategic decisions.
For management purposes, ASIMCO Camshaft operates in one business unit and has one reportable operating segment during the years ended 31 December 2013, 2014 and 2015, which is manufacture and sale of automotive camshaft products.
2.3 Foreign currency translation
(a) Functional and presentation currency
The functional and presentation currency is RMB, which is the currency of primary economic environment in which ASIMCO Camshaft operates.
(b) Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or valuation where items are re-measured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the statement of profit or loss, except when deferred in other comprehensive income as qualifying cash flow hedges and qualifying net investment hedges.
Foreign exchange gains and losses are presented in the statement of profit or loss within “other gains, net”.
– III-52 – APPENDIX III-2 ACCOUNTANT’S REPORT OF ASIMCO CAMSHAFT FOR THE THREE YEARS ENDED 31 DECEMBER 2015
2.4 Property, plant and equipment
Property, plant and equipment is stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items.
Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to ASIMCO Camshaft and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognised. All other repairs and maintenance are charged to the statement of profit or loss during the financial period in which they are incurred.
Depreciation is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives, as follows:
Estimated Estimated Category residual value useful life (%)
Buildings 10 20 years Machinery and equipment 10 10 years Motor vehicles 10 5 years Office equipment and others 10 3 years
The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period.
An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount (Note 2.6).
Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognised within “Other gains, net” in the statement of profit or loss.
Construction in progress represents property, plant and equipment under construction or pending installation, and is stated at cost less impairment losses. Cost comprises direct costs of construction including borrowing costs attributable to the construction during the period of construction. No provision for depreciation is made on construction in progress until such time as the relevant assets are completed and ready for intended use.
2.5 Intangible assets
Computer software
Acquired computer software licenses are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortised over their estimated useful lives of 5 years.
2.6 Impairment of non-financial assets
Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date.
– III-53 – APPENDIX III-2 ACCOUNTANT’S REPORT OF ASIMCO CAMSHAFT FOR THE THREE YEARS ENDED 31 DECEMBER 2015
2.7 Financial assets
2.7.1 Classification
ASIMCO Camshaft classifies its financial assets in loans and receivables. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition.
Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for the amounts that are settled or expected to be settled more than 12 months after the end of the reporting period. These are classified as non-current assets. ASIMCO Camshaft’s loans and receivables comprise trade and other receivables (Note 13), pledged bank deposits (Note 14), and cash and cash equivalents (Note 14).
2.7.2 Recognition and measurement
Regular way purchases and sales of financial assets are recognised on the trade-date – the date on which ASIMCO Camshaft commits to purchase or sell the asset. Financial assets are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and ASIMCO Camshaft has transferred substantially all risks and rewards of ownership. Receivables are subsequently carried at amortised cost using the effective interest method.
2.8 Offsetting financial instruments
Financial assets and liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis or realise the asset and settle the liability simultaneously. The legally enforceable right must not be contingent on future events and must be enforceable in the normal course of business and in the event of default, insolvency or bankruptcy of ASIMCO Camshaft or the counterparty.
2.9 Impairment of financial assets
Assets carried at amortised cost
ASIMCO Camshaft assesses at the end of each reporting period whether there is objective evidence that a financial asset or Company of financial assets is impaired. A financial asset or a Company of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or Company of financial assets that can be reliably estimated.
Evidence of impairment may include indications that the debtors or a Company of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganisation, and where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.
For loans and receivables category, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate. The carrying amount of the asset is reduced and the amount of the loss is recognised in income statement. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. As a practical expedient, ASIMCO Camshaft may measure impairment on the basis of an instrument’s fair value using an observable market price.
– III-54 – APPENDIX III-2 ACCOUNTANT’S REPORT OF ASIMCO CAMSHAFT FOR THE THREE YEARS ENDED 31 DECEMBER 2015
If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor’s credit rating), the reversal of the previously recognised impairment loss is recognised in income statement.
2.10 Inventories
Inventories are stated at the lower of cost and net realisable value. Cost is determined using the weighted average cost method. The cost of finished goods and work in progress comprises, raw materials, direct labor, other direct costs and related production overheads (based on normal operating capacity). It excludes borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses.
2.11 Trade and other receivables
Trade receivables are amounts due from customers for merchandise sold in the ordinary course of business. If collection of trade and other receivables is expected in one year or less (or in the normal operating cycle of the business if longer), they are classified as current assets. If not, they are presented as non-current assets.
Trade and other receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less allowance for impairment.
2.12 Cash and cash equivalents
In statement of cash flows, cash and cash equivalents include cash in hand, deposits held at call with banks, and other short-term highly liquid investments with original maturities of three months or less.
2.13 Paid-in capital
Paid-in capital is classified as equity.
2.14 Trade payables
Trade payables are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Trade payables are classified as current liabilities if payment is due within one year or less (or in the normal operating cycle of the business if longer). If not, they are presented as non-current liabilities.
Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method.
2.15 Borrowings
Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently carried at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the statement of profit or loss over the period of the borrowings using the effective interest method.
Borrowings are classified as current liabilities unless ASIMCO Camshaft has an unconditional right to defer settlement of the liability for at least 12 months after the end of the reporting period.
– III-55 – APPENDIX III-2 ACCOUNTANT’S REPORT OF ASIMCO CAMSHAFT FOR THE THREE YEARS ENDED 31 DECEMBER 2015
2.16 Borrowing costs
General and specific borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale.
Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalisation.
All other borrowing costs are recognised in profit or loss in the period in which they are incurred.
2.17 Current and deferred income tax
The tax expense for the period comprises current and deferred tax. Tax is recognised in the income statement, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case the tax is also recognised in other comprehensive income or directly in equity, respectively.
(a) Current income tax
The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date of statement of financial position in the countries where ASIMCO Camshaft operates and generates taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.
(b) Deferred income tax
Deferred income tax is recognised, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in financial statements. However, deferred tax liabilities are not recognised if they arise from the initial recognition of goodwill, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the balance sheet date of statement of financial position and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.
Deferred income tax assets are recognised only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.
(c) Offsetting
Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority on either the taxable entity or different taxable entities where there is an intention to settle the balances on a net basis.
– III-56 – APPENDIX III-2 ACCOUNTANT’S REPORT OF ASIMCO CAMSHAFT FOR THE THREE YEARS ENDED 31 DECEMBER 2015
2.18 Employee benefits
Defined contribution pension scheme
ASIMCO Camshaft’s full-time employees are covered by a government operated defined contribution pension scheme, and are entitled to a monthly pension from their retirement dates. The PRC government is responsible for the pension liability to these retired employees. ASIMCO Camshaft is required to make annual contributions to the retirement scheme at certain percentages of employees’ basic salaries, which are charged as an expense when the employees have rendered services entitling them to the contributions and the contributions are due.
2.19 Provisions
Provisions are recognised when ASIMCO Camshaft has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. Provisions are not recognised for future operating losses.
Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small.
Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognised as interest expense.
Provisions for product warranties granted by ASIMCO Camshaft on certain products are recognised based on sales volume and past experience of the level of repairs and returns, discounted to their present values as appropriate.
2.20 Revenue recognition
Revenue is measured at the fair value of the consideration received or receivable, and represents amounts receivable for goods supplied, stated net of discounts returns and value added taxes. ASIMCO Camshaft recognises revenue when the amount of revenue can be reliably measured; when it is probable that future economic benefits will flow to the entity; and when specific criteria have been met for each of ASIMCO Camshaft activities, as described below. ASIMCO Camshaft bases its estimates of return on historical results, taking into consideration the type of customers, the type of transactions and the specifics of each arrangement.
Sales of automotive camshaft products
ASIMCO Camshaft sells camshaft products to domestic and overseas automotive manufacturers. The revenue is recognised when the related goods are delivered to the place of delivery pursuant to the sales contract and the customer confirms the acceptance of the goods or ASIMCO Camshaft has objective evidence that all criteria for the acceptance have been satisfied.
2.21 Interest income
Interest income is recognised using the effective interest method. When a loan and receivable is impaired, ASIMCO Camshaft reduces the carrying amount to its recoverable amount, being the estimated future cash flow discounted at the original effective interest rate of the instrument, and continues unwinding the discount as interest income. Interest income on impaired loans and receivables is recognised using the original effective interest rate.
– III-57 – APPENDIX III-2 ACCOUNTANT’S REPORT OF ASIMCO CAMSHAFT FOR THE THREE YEARS ENDED 31 DECEMBER 2015
2.22 Leases
Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the statement of profit or loss on a straight-line basis over the period of the lease.
2.23 Government grants
Grants from the government are recognised at their fair value where there is a reasonable assurance that the grant will be received and ASIMCO Camshaft will comply with all attached conditions.
Government grants relating to costs are deferred and recognised in the statement of profit or loss over the period necessary to match them with the costs that they are intended to compensate.
Government grants relating to property, plant and equipment are included in non-current liabilities as deferred government grants and are credited to the statement of profit or loss on a straight-line basis over the expected lives of the related assets.
3 FINANCIAL RISK MANAGEMENT
3.1 Financial risk factors
ASIMCO Camshaft’s activities expose it to a variety of financial risks: market risk (currency risk), credit risk and liquidity risk.
(a) Market risk
Foreign exchange risk
Foreign currency risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. ASIMCO Camshaft’s exposure to the risk of changes in foreign exchange rates relates primarily to ASIMCO Camshaft’s operating activities (when revenue or expense is denominated in a different currency from ASIMCO Camshaft’s functional currency).
ASIMCO Camshaft’s businesses are mainly located in the PRC and are mainly transacted and settled in RMB. Certain sales are settled in foreign currencies. The fluctuation of the exchange rates of foreign currencies against the RMB will affect ASIMCO Camshaft’s results of operations.
As at 31 December 2013, 2014 and 2015, if RMB had strengthened/weakened by 10% against US dollar with all other variables held constant, profit before tax for the year would have been RMB348,000, RMB303,000 and RMB678,000 lower/higher, respectively, mainly as a result of foreign exchange losses/gains on translation of US dollar-denominated trade receivables.
(b) Credit risk
Credit risk is the risk that a counter party will not meet its obligations under a financial instrument or customer contract, leading to a financial loss. ASIMCO Camshaft is exposed to credit risk from trade receivables, bills receivable and other receivables.
Customer credit risk is managed to ASIMCO Camshaft’s established policy, procedures and control relating to customer credit risk management. ASIMCO Camshaft’s policy is to perform credit verification for all customers who have transactions with ASIMCO Camshaft. Further, credit limits, credit terms and sales methods are determined based on the credit history of customers. ASIMCO Camshaft maintains long-term relationships with several large customers which management believes credit risk in relation with these customers is low. ASIMCO Camshaft does not hold collateral as security.
– III-58 – APPENDIX III-2 ACCOUNTANT’S REPORT OF ASIMCO CAMSHAFT FOR THE THREE YEARS ENDED 31 DECEMBER 2015
All ASIMCO Camshaft’s cash and cash equivalents are held in major banks located in the PRC, which management believes are of high credit quality.
The carrying amounts of cash and cash equivalents, pledged bank deposits and trade and other receivables, represent ASIMCO Camshaft’s maximum exposure to credit risk in relation to financial assets.
(c) Liquidity risk
ASIMCO Camshaft’s objective is to maintain a balance between continuity of funding and flexibility through the use of bills, bank loans and other interest-bearing loans.
The table below analyses ASIMCO Camshaft’s non-derivative financial liabilities into relevant maturity Company based on the remaining period at the date of statement of financial position to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows.
In the In the third to Within second fifth year, one year year inclusive Total RMB’000 RMB’000 RMB’000 RMB’000
As at 31 December 2013 Trade payables 7,696 – – 7,696 Financial liabilities included in other payables 6,769 – – 6,769 Borrowings 8,551 – – 8,551 Loans from a fellow subsidiary 36,360 13,650 – 50,010 Loan from a shareholder 59 2,036 – 2,095
Total 59,435 15,686 – 75,121
As at 31 December 2014 Trade payables 12,185 – – 12,185 Financial liabilities included in other payables 6,873 – – 6,873 Loans from a fellow subsidiary 14,950 1,300 26,424 42,674 Loan from a shareholder 2,036 – – 2,036 Borrowings 11,592 – – 11,592
Total 47,636 1,300 26,424 75,360
As at 31 December 2015 Trade payables 9,216 – – 9,216 Bills payable 2,500 – – 2,500 Financial liabilities included in other payables 11,697 – – 11,697 Loans from fellow a subsidiary 1,300 26,424 – 27,724 Borrowings 23,861 – – 23,861
Total 48,574 26,424 – 74,998
– III-59 – APPENDIX III-2 ACCOUNTANT’S REPORT OF ASIMCO CAMSHAFT FOR THE THREE YEARS ENDED 31 DECEMBER 2015
3.2 Capital management
The primary objective of ASIMCO Camshaft’s capital management is to ensure that it maintains healthy capital ratios in order to support its business and maximise shareholders’ value.
ASIMCO Camshaft manages its capital structure and makes adjustments to it in light of changes in economic conditions. To maintain or adjust the capital structure, ASIMCO Camshaft may adjust the dividend payment to shareholders, return capital to shareholders or issue new shares. No changes were made in the objectives, policies or processes for managing capital during the year ended.
ASIMCO Camshaft monitors capital using a liability to asset ratio, which is total liabilities divided by the total assets.
ASIMCO Camshaft’s strategy is to maintain the liability to asset ratio at a healthy capital level in order to support its business. The principal strategies adopted by ASIMCO Camshaft include, without limitation, reviewing future cash flow requirement and the ability to meet debt repayment schedules when they fall due, maintaining a reasonable level of available banking facilities and adjusting investment plans and financing plans, if necessary, to ensure that ASIMCO Camshaft has a reasonable level of capital to support its business. The liability to asset ratios at the end of the reporting period were as follows:
As at 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Total liabilities 73,144 71,334 74,421 Total assets 149,935 162,897 179,263
Liability to asset ratio 49% 44% 42%
3.3 Fair value estimation
Financial instruments carried at fair value are analysed by level of the inputs to valuation techniques used to measure fair value. Such inputs are categorised into three levels within a fair value hierarchy as follows:
• Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1).
• Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (level 2).
• Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (level 3).
As at 31 December 2013, 2014 and 2015, ASIMCO Camshaft has no financial instruments carried at fair value. Carrying amounts of financial assets (including trade and other receivables, pledged bank deposits and cash and cash equivalents) and financial liabilities (including trade and other payables, borrowings, loans from a fellow subsidiary and loan from a shareholder) approximate their fair values.
– III-60 – APPENDIX III-2 ACCOUNTANT’S REPORT OF ASIMCO CAMSHAFT FOR THE THREE YEARS ENDED 31 DECEMBER 2015
4 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
ASIMCO Camshaft makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are addressed below.
(a) Impairment of receivables
ASIMCO Camshaft recognises provisions based on the judgement of recovery of receivables. A bad debt provision is required to be recognised when there are indications that the receivable cannot be recovered. Recognition of bad debt provisions requires the use of judgement and estimates. If the revised estimates deviate from the current estimates, then any difference arising from changes of accounting estimates will affect the carrying value of debtors in the relevant accounting periods.
(b) Impairment of inventories
ASIMCO Camshaft recognises provision based on the estimates of recovery of inventories. The estimates are made with reference to aged inventory analysis, projections of expected future saleability of goods and management experience and judgement. Impairment of inventories will be made when the carrying amounts of inventories are below their estimated net realisable values.
(c) Warranty provisions
A provision is recognised for expected warranty claims on products sold during the warranty guaranteed period. Assumptions used to calculate the provision for warranties are based on current sales levels and historical information for return and repairment. The estimation basis is reviewed on an ongoing basis and revised where appropriate. For further details about the warranty provision, please refer to Note 17.
5 SEGMENT INFORMATION
For management purposes, ASIMCO Camshaft operates in one business unit and has one reportable operating segment, which is manufacturing and sale of automotive Camshaft products.
(a) Geographical information
(i) Analysis of revenue
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
The PRC 64,444 79,428 77,879 United Kingdom 8,585 9,402 8,767 United States – 558 8,081 Japan 1,940 5,871 3,460 France 8,652 2,743 1,306 Other countries 2,369 5,027 4,269
Total 85,990 103,029 103,762
The revenue information above is based on the locations of the customers.
– III-61 – APPENDIX III-2 ACCOUNTANT’S REPORT OF ASIMCO CAMSHAFT FOR THE THREE YEARS ENDED 31 DECEMBER 2015
(ii) Non-current assets, other than financial instruments and deferred income tax assets, by country:
31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
The PRC 103,378 111,065 115,283
(b) Information about major customers
Revenues of RMB16,994,000, RMB19,969,000 and RMB36,388,000 for the year ended 31 December 2013, 2014 and 2015, respectively were derived from a single external customer from the PRC.
6 REVENUE
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Sales of automotive camshaft products 85,151 102,221 103,478 Others 839 808 284
Total 85,990 103,029 103,762
7 EXPENSES BY NATURE
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Changes in inventories of finished goods and work in progress (2,470) (998) (527) Raw materials and consumables used 33,352 35,611 31,800 Employee benefit expenses (Note 8) 17,270 20,761 22,336 Water and electricity expenses 7,573 9,165 9,805 Maintenance and the repair costs 1,145 1,408 2,185 Depreciation and amortisation 11,261 13,564 15,243 Transportation expenses 2,649 3,276 1,548 Service fees (Note 20) 1,326 1,069 1,005 Sales tax and surcharges 617 703 961 Auditors’ remuneration – audit services 80 80 80 Others 2,484 2,916 3,519
Total 75,287 87,555 87,955
8 EMPLOYEE BENEFIT EXPENSE
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Salaries, allowances and other benefits 15,578 18,797 20,106 Pensions – defined contribution plans 1,692 1,964 2,230
Total 17,270 20,761 22,336
– III-62 – APPENDIX III-2 ACCOUNTANT’S REPORT OF ASIMCO CAMSHAFT FOR THE THREE YEARS ENDED 31 DECEMBER 2015
9 FINANCE COSTS
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Interest on bank loans 122 699 1,018 Interest on loans from a fellow subsidiary 2,624 2,474 1,937
2,746 3,173 2,955
10 INCOME TAX EXPENSE
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Current tax on profits for the year 1,330 348 3,783
Deferred tax: Origination and reversal of temporary differences – (2,883) (3,721)
Total income tax expense 1,330 (2,535) 62
Pursuant to the relevant laws and regulations in the PRC, the statutory enterprise income tax rate of 25% was applied to the subsidiaries of ASIMCO Camshaft for the years ended 31 December 2013, 2014 and 2015.
A reconciliation of the tax expense applicable to profit before tax at the applicable tax rate for ASIMCO Camshaft to the tax expense is as follows:
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Profit before tax 7,866 12,237 13,341
At ASIMCO Camshaft’s applicable income tax rate of 25% 1,967 3,060 3,335 Utilisation of previously unrecognised deductible temporary differences (747) (3,644) (364) Recognition of previously unrecognised temporary differences – (2,048) (2,925) Non-deductible expenses for tax purposes 110 97 93 Additional deduction for research and development expenditures – – (77)
1,330 (2,535) 62
– III-63 – APPENDIX III-2 ACCOUNTANT’S REPORT OF ASIMCO CAMSHAFT FOR THE THREE YEARS ENDED 31 DECEMBER 2015
11 PROPERTY, PLANT AND EQUIPMENT
Plant, machinery Office and Motor equipment Construction Buildings equipment vehicles and others in progress Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
At 1 January 2013 Cost 32,255 137,152 526 969 6,241 177,143 Accumulated depreciation (4,980) (32,974) (231) (827) – (39,012) Impairment provision – (41,930) – – – (41,930)
Net book amount 27,275 62,248 295 142 6,241 96,201
Year ended 31 December 2013 Opening net book amount 27,275 62,248 295 142 6,241 96,201 Additions 1,504 534 – – 16,935 18,973 Transfers – 18,018 118 206 (18,342) – Disposals – – (23) 6 – (17) Depreciation charge (1,988) (9,159) (65) (38) – (11,250) Provision for impairment – (560) – – – (560)
Closing net book amount 26,791 71,081 325 316 4,834 103,347
At 31 December 2013 Cost 33,759 154,279 477 1,171 4,834 194,520 Accumulated depreciation (6,968) (40,708) (152) (855) – (48,683) Impairment provision – (42,490) – – – (42,490)
Net book amount 26,791 71,081 325 316 4,834 103,347
Year ended 31 December 2014 Opening net book amount 26,791 71,081 325 316 4,834 103,347 Additions 3 654 – – 21,598 22,255 Transfers – 21,130 266 84 (21,480) – Disposals – (998) (5) (1) – (1,004) Depreciation charge (2,120) (11,247) (87) (99) – (13,553)
Closing net book amount 24,674 80,620 499 300 4,952 111,045
At 31 December 2014 Cost 33,207 161,678 691 1,242 4,952 201,770 Accumulated depreciation (8,533) (50,116) (192) (942) – (59,783) Impairment provision – (30,942) – – – (30,942)
Net book amount 24,674 80,620 499 300 4,952 111,045
– III-64 – APPENDIX III-2 ACCOUNTANT’S REPORT OF ASIMCO CAMSHAFT FOR THE THREE YEARS ENDED 31 DECEMBER 2015
Plant, machinery Office and Motor equipment Construction Buildings equipment vehicles and others in progress Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
At 1 January 2015 Cost 33,207 161,678 691 1,242 4,952 201,770 Accumulated depreciation (8,533) (50,116) (192) (942) – (59,783) Impairment provision – (30,942) – – – (30,942)
Net book amount 24,674 80,620 499 300 4,952 111,045
Year ended 31 December 2015 Opening net book amount 24,674 80,620 499 300 4,952 111,045 Additions – 1,038 – – 18,427 19,465 Transfers – 12,845 323 23 (13,191) – Disposals – (4) – – – (4) Depreciation charge (2,119) (12,895) (128) (91) – (15,233)
Closing net book amount 22,555 81,604 694 232 10,188 115,273
At 31 December 2015 Cost 32,521 174,600 1,014 1,265 10,188 219,588 Accumulated depreciation (9,966) (62,089) (320) (1,033) – (73,408) Impairment provision – (30,907) – – – (30,907)
Net book amount 22,555 81,604 694 232 10,188 115,273
During the year ended 31 December 2013, the depreciation charges of ASIMCO Camshaft were recorded in cost of sales, selling and distribution costs and administrative expenses with amount of RMB10,656,000, RMB2,000, and RMB592,000, respectively.
During the year ended 31 December 2014, the depreciation charges of ASIMCO Camshaft were recorded in cost of sales, selling and distribution costs and administrative expenses with amount of RMB12,857,000, RMB2,000, and RMB694,000, respectively.
During the year ended 31 December 2015, the depreciation charges of ASIMCO Camshaft were recorded in cost of sales, selling and distribution costs and administrative expenses with amount of RMB14,508,000, RMB1,000, and RMB724,000, respectively.
During the years ended 31 December 2013, 2014, and 2015, ASIMCO Camshaft has no borrowing costs being capitalised.
As at 31 December 2013, 2014 and 2015, ASIMCO Camshaft’s certain buildings and plant, machinery and equipment with a net carrying amount of approximately RMB13,219,000, RMB13,523,000, and RMB21,375,000 respectively were pledged to secure the short-term borrowings (Note 16).
– III-65 – APPENDIX III-2 ACCOUNTANT’S REPORT OF ASIMCO CAMSHAFT FOR THE THREE YEARS ENDED 31 DECEMBER 2015
12 INVENTORIES
31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Raw materials 4,562 2,866 3,041 Work in progress 1,688 2,681 1,825 Finished goods 7,848 7,838 7,872
14,098 13,385 12,738
During the year ended 31 December 2013, 2014, and 2015, reversal of provision of RMB34,000, RMB74,000 and provision of RMB219,000, respectively, for the impairment of inventories were recognised in cost of sales.
13 TRADE AND OTHER RECEIVABLES
31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Trade receivables 19,779 20,680 32,641 Less: allowance for impairment (28) (11) (109)
Trade receivables – net 19,751 20,669 32,532 Bills receivable 7,149 9,767 5,808
26,900 30,436 38,340 Prepayments to suppliers 2,995 1,042 484 Other receivables 476 44 37 Less: allowance for impairment – – –
3,471 1,086 521
30,371 31,522 38,861
ASIMCO Camshaft’s trading terms with its customers are mainly on credit, except for new customers, where payment in advance is normally required. The credit period is generally three months, extending up to six months for major customers. Each customer has a maximum credit limit. ASIMCO Camshaft seeks to maintain strict control over its outstanding receivables and has a credit control department to minimise credit risk. Overdue balances are reviewed regularly by senior management. In view of the aforementioned and the fact that ASIMCO Camshaft’s trade receivables relate to a large number of diversified customers, there is no significant concentration of credit risk. ASIMCO Camshaft does not hold any collateral or other credit enhancements over its trade receivable balances. Trade receivables are non-interest bearing.
As at 31 December 2013, 2014 and 2015, bank acceptance notes of RMB1,210,000, RMB7,780,000 and RMB1,960,000 respectively, were endorsed to suppliers of ASIMCO Camshaft but were not derecognised as these bank acceptance notes were issued by unlisted commercial banks.
– III-66 – APPENDIX III-2 ACCOUNTANT’S REPORT OF ASIMCO CAMSHAFT FOR THE THREE YEARS ENDED 31 DECEMBER 2015
An ageing analysis of the trade receivables based on the invoice date and net of provisions, is as follows:
31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Within 6 months 19,719 20,653 32,204 6 to 12 months 7 8 328 Over 1 year 25 8 –
19,751 20,669 32,532
An ageing analysis of the bills receivable based on the invoice date and net of provisions, is as follows:
31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Within 6 months 7,149 9,767 5,808
The movements in provision for impairment of trade receivables are as follows:
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
At 1 January 25 28 11 Impairment loss recognised/(reversed) 3 (17) 98
At 31 December 28 11 109
The individually impaired trade receivables partly relate to customers that were in financial difficulties or were in default in principal payments and only a portion or none of the receivables is expected to be recovered.
The carrying amounts of ASIMCO Camshaft’s trade receivables and bills receivable are denominated in the following currencies:
31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
RMB 22,959 26,456 30,103 US dollar 3,941 3,432 7,646 EURO – 548 591
26,900 30,436 38,340
– III-67 – APPENDIX III-2 ACCOUNTANT’S REPORT OF ASIMCO CAMSHAFT FOR THE THREE YEARS ENDED 31 DECEMBER 2015
14 CASH AND CASH EQUIVALENTS AND PLEDGED BANK DEPOSITS
31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Cash and bank balances 2,088 2,341 5,777 Less: pledged deposits for issuing bank acceptance notes – – (2,500)
Cash and cash equivalents 2,088 2,341 3,277
The carrying amounts of ASIMCO Camshaft’s cash and cash equivalents are denominated in the following currencies:
31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
RMB 2,088 2,341 3,242 US dollar – – 35
2,088 2,341 3,277
As at 31 December 2013, 2014 and 2015, pledged bank deposits are all denominated in RMB.
15 TRADE AND OTHER PAYABLES
31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Trade payables 7,696 12,185 9,216 Bill payables – – 2,500
7,696 12,185 11,716
Accrued payroll 2,395 2,463 2,572 Payables for purchase of property, plant and equipment 2,977 2,535 3,443 Taxes payable 154 158 233 Accrued liabilities 95 528 4,080 Interest payable 240 307 73 Other payables 1,062 1,040 1,529
6,923 7,031 11,930
Trade and other payables 14,619 19,216 23,646
– III-68 – APPENDIX III-2 ACCOUNTANT’S REPORT OF ASIMCO CAMSHAFT FOR THE THREE YEARS ENDED 31 DECEMBER 2015
At 31 December 2013, 2014 and 2015, the ageing analysis of the trade payables were as follows:
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Within 6 months 7,433 12,136 9,182 6 to 12 months 216 11 34 1 to 2 year 2 38 – 2 to 3 year 45 – –
7,696 12,185 9,216
At 31 December 2013, 2014 and 2015, the bills payable based on invoice date were as follows:
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Within 6 months – – 2,500
At 31 December 2013, 2014 and 2015, trade and other payables are all denominated in RMB.
16 BORROWINGS, LOANS FROM A FELLOW SUBSIDIARY AND LOAN FROM A SHAREHOLDER
Borrowings
31 December 2013 2014 2015 Interest rate RMB’000 Interest rate RMB’000 Interest rate RMB’000
Current Bank loans – secured 6.30% 8,000 6.16%, 6.60% 11,000 4.79%, 6.16% 23,000
At 31 December 2013, 2014 and 2015, ASIMCO Camshaft’s borrowings were repayable as follows:
31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Within one year 8,000 11,000 23,000
The above secured bank loans were secured by certain assets, and their carrying values are as follows:
31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Property, plant and equipment 13,219 13,523 21,375
The fair value of current borrowings approximate their carrying amount, as the impact of discounting is not significant.
– III-69 – APPENDIX III-2 ACCOUNTANT’S REPORT OF ASIMCO CAMSHAFT FOR THE THREE YEARS ENDED 31 DECEMBER 2015
Loans from a fellow subsidiary
31 December 2013 2014 2015 Interest rate RMB’000 Interest rate RMB’000 Interest rate RMB’000
Current Loans from a fellow 5.00% subsidiary – unsecured 6.30% 34,000 5.00% 13,000 –
Non-current Loans from a fellow subsidiary – unsecured 5.00% 13,000 5.00% 26,000 5.00% 26,000
47,000 39,000 26,000
At 31 December 2013, 2014 and 2015, ASIMCO Camshaft’s loans from fellow subsidiaries were repayable as follows:
31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Within one year 34,000 13,000 – One year to two years 13,000 26,000 26,000
47,000 39,000 26,000
The fair value of loans from fellow subsidiaries approximate their carrying amount, as the impact of discounting is not significant.
Loan from a shareholder
31 December 2013 2014 2015 Interest rate RMB’000 Interest rate RMB’000 Interest rate RMB’000
Current Loan from a shareholder – unsecured – 3.00% 1,977 –
Non-current Loan from a shareholder – unsecured 3.00% 1,977 – –
1,977 1,977 –
– III-70 – APPENDIX III-2 ACCOUNTANT’S REPORT OF ASIMCO CAMSHAFT FOR THE THREE YEARS ENDED 31 DECEMBER 2015
At 31 December 2013, 2014 and 2015, ASIMCO Camshaft’s loan from a shareholder was repayable as follows:
31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Within one year or on demand – 1,977 – One year to two years 1,977 – –
1,977 1,977 –
The fair value of loan from a shareholder approximates its carrying amount, as the impact of discounting is not significant.
At 31 December 2013, 2014 and 2015, borrowings, loans from a fellow subsidiary and loan from a shareholder are all denominated in RMB.
17 PROVISIONS
The gross movement on provisions is as follows:
31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
At 1 January 265 268 141 Additional provisions 437 121 227 Utilised during the year (434) (249) (229)
At 31 December 268 141 138
A provision is recognised for expected warranty claims on products sold during warranty period, based on past experience of the level of repairs and returns. Assumptions used to calculate the provision for warranties were based on current sales levels and current information available about returns based on the estimated warranty period for all products sold. The estimation basis is reviewed on an ongoing basis and revised where appropriate.
18 DEFERRED INCOME TAX
The analysis of deferred tax is as follows:
31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Deferred income tax assets: Deferred income tax assets to be recovered after more than 12 months – 2,048 3,935 Deferred income tax assets to be recovered within 12 months – 835 2,669
– 2,883 6,604
– III-71 – APPENDIX III-2 ACCOUNTANT’S REPORT OF ASIMCO CAMSHAFT FOR THE THREE YEARS ENDED 31 DECEMBER 2015
The gross movement on the deferred income tax accounts is as follows:
2013 2014 2015 RMB’000 RMB’000 RMB’000
At 1 January – – 2,883 Credited to statement of profit or loss – 2,883 3,721
At 31 December – 2,883 6,604
The movement in deferred income tax assets without taking into consideration of the offsetting of balances within the same tax jurisdiction during the year is as follows:
Deferred income tax assets:
Accrued Impairment expenses Total RMB’000 RMB’000 RMB’000
At 1 January 2013 ––– Credited to statement of profit or loss – – –
At 31 December 2013 –––
Credited to statement of profit or loss 2,100 783 2,883
At 31 December 2014 2,100 783 2,883
Credited to statement of profit or loss 2,484 1,237 3,721
At 31 December 2015 4,584 2,020 6,604
As at 31 December 2013, 2014 and 2015, deferred tax assets were not recognised in respect of the deductible temporary differences amounted to RMB47,007,000, RMB13,405,000 and nil.
19 COMMITMENTS
ASIMCO Camshaft had the following capital commitments at the end of the Relevant Periods:
31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Contracted, but not provided for: Property, plant and equipment 3,346 6,770 2,398
– III-72 – APPENDIX III-2 ACCOUNTANT’S REPORT OF ASIMCO CAMSHAFT FOR THE THREE YEARS ENDED 31 DECEMBER 2015
20 RELATED PARTY TRANSACTIONS
ASIMCO Camshaft is controlled by Axle ATL Cayman Limited, which owned 63% equity interest in ASIMCO Camshaft. The remaining 37% of ASIMCO Camshaft’s equity interests are held by Jiangsu Yizheng Piston Ring Factory. The ultimate parent company of ASIMCO Camshaft is Bain Capital Asia Integral Investors, L.P. (incorporated in the Cayman Islands).
The following transactions were carried out with related parties:
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
(a) Sales of goods to
– A fellow subsidiary 438 338 93
(b) Loans received from
– A fellow subsidiary – 26,000 3,000
(c) Loans repaid to
– A fellow subsidiary 9,111 34,000 16,000 – A shareholder – – 1,977
9,111 34,000 17,977
(d) Interest expenses to
– A fellow subsidiary 2,565 2,415 1,893 – A shareholder 59 59 44
2,624 2,474 1,937
(e) Purchase of raw material from
– A fellow subsidiary 267 446 361
(f) Service fees to
– A shareholder 673 30 28 – A fellow subsidiary 653 1,039 977
1,326 1,069 1,005
(g) Key management compensation 1,330 1,588 1,774
– III-73 – APPENDIX III-2 ACCOUNTANT’S REPORT OF ASIMCO CAMSHAFT FOR THE THREE YEARS ENDED 31 DECEMBER 2015
(h) Outstanding balances with related parties
31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Borrowings – A fellow subsidiary 47,000 39,000 26,000 – A shareholder 1,977 1,977 –
48,977 40,977 26,000
Interest payable – A shareholder 179 238 40 – A fellow subsidiary 46 48 –
225 286 40
21 FINANCIAL INSTRUMENTS BY CATEGORY
Financial assets
Loans and receivables RMB’000
As at 31 December 2013 Financial assets included in trade and other receivables 27,376 Cash and cash equivalents 2,088
Total 29,464
As at 31 December 2014 Financial assets included in trade and other receivables 30,480 Cash and cash equivalents 2,341
Total 32,821
As at 31 December 2015 Financial assets included in trade and other receivables 38,377 Pledged bank deposits 2,500 Cash and cash equivalents 3,277
Total 44,154
– III-74 – APPENDIX III-2 ACCOUNTANT’S REPORT OF ASIMCO CAMSHAFT FOR THE THREE YEARS ENDED 31 DECEMBER 2015
Financial liabilities
Financial liabilities at amortised cost RMB’000
As at 31 December 2013 Financial liabilities included in trade and other payables 14,465 Borrowings 8,000 Loans from a fellow subsidiary 47,000 Loan from a shareholder 1,977
Total 71,442
As at 31 December 2014 Financial liabilities included in trade and other payables 19,058 Borrowings 11,000 Loans from a fellow subsidiary 39,000 Loan from a shareholder 1,977
Total 71,035
As at 31 December 2015 Financial liabilities included in trade and other payables 23,413 Borrowings 23,000 Loans from a fellow subsidiary 26,000
Total 72,413
– III-75 – APPENDIX III-2 ACCOUNTANT’S REPORT OF ASIMCO CAMSHAFT FOR THE THREE YEARS ENDED 31 DECEMBER 2015
III SUBSEQUENT FINANCIAL STATEMENTS
No audited financial statements have been prepared by ASIMCO Camshaft in respect of any period subsequent to 31 December 2015 up to the date of this report. No dividend or distribution has been declared or made by ASIMCO Camshaft in respect of any period subsequent to 31 December 2015.
Yours faithfully,
PricewaterhouseCoopers Certified Public Accountants Hong Kong
– III-76 – APPENDIX III-3 ACCOUNTANT’S REPORT OF ASIMCO FOUNDRY FOR THE THREE YEARS ENDED 31 DECEMBER 2015
The following is the text of a report received from the Company’s reporting accountant, PricewaterhouseCoopers, Certified Public Accountants, Hong Kong, for the purpose of incorporation in this circular.
23 May 2016
The Directors Zhengzhou Coal Mining Machinery Group Company Limited
Dear Sirs,
We report on the financial information of ASIMCO Foundry (Yizheng) Co., Ltd. (“ASIMCO Foundry”), which comprises the statements of financial position of ASIMCO Foundry as at 31 December 2013, 2014 and 2015, and the statements of profit or loss and other comprehensive income, the statements of changes in equity and the statements of cash flows of ASIMCO Foundry for each of the years ended 31 December 2013, 2014 and 2015 (the “Relevant Periods”) and a summary of significant accounting policies and other explanatory information. This financial information has been prepared by the directors of Zhengzhou Coal Mining Machinery Group Company Limited (the “Company”) and is set out in Sections I to III below for inclusion in Appendix III-3 to the circular of the Company dated 23 May 2016 (the “Circular”) in connection with the proposed acquisition of ASIMCO Foundry by the Company.
ASIMCO Foundry was incorporated in the People’s Republic of China on 7 January 2004 as a company with limited liability.
The statutory financial statements of ASIMCO Foundry for the year ended 31 December 2013 were audited by Ernst & Young Hua Ming LLP, and the statutory financial statements for each of the years ended 31 December 2014 and 2015 were audited by PricewaterhouseCoopers Zhong Tian LLP, Beijing Branch, pursuant to separate terms of engagement with ASIMCO Foundry respectively.
– III-77 – APPENDIX III-3 ACCOUNTANT’S REPORT OF ASIMCO FOUNDRY FOR THE THREE YEARS ENDED 31 DECEMBER 2015
The directors of ASIMCO Foundry are responsible for the preparation of the financial statements of ASIMCO Foundry for the Relevant Periods that give a true and fair view in accordance with International Financial Reporting Standards (“IFRSs”) issued by the International Accounting Standards Board (the “Underlying Financial Statements”), and for such internal control as the directors determine is necessary to enable the preparation of the Underlying Financial Statements that are free from material misstatement, whether due to fraud or error. PricewaterhouseCoopers Zhong Tian LLP have audited the Underlying Financial Statements in accordance with International Standards on Auditing (the “ISAs”) issued by the International Auditing and Assurance Standards Board (“IAASB”) pursuant to separate terms of engagement.
The financial information has been prepared based on the Underlying Financial Statements with no adjustment made thereon.
Directors’ Responsibility for the Financial Information
The directors of the Company are responsible for the preparation of the financial information that gives a true and fair view in accordance with IFRSs and accounting policies adopted by the Company and its subsidiaries (together, the “Group”) as set out in the annual report of the Company for the year ended 31 December 2015.
Reporting Accountant’s Responsibility
Our responsibility is to express an opinion on the financial information and to report our opinion to you. We carried out our procedures in accordance with Auditing Guideline 3.340 “Prospectuses and the Reporting Accountant” issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”).
Opinion
In our opinion, the financial information gives, for the purpose of this report, a true and fair view of the state of affairs of ASIMCO Foundry as at 31 December 2013, 2014 and 2015 and of ASIMCO Foundry’s results and cash flows for the Relevant Periods.
– III-78 – APPENDIX III-3 ACCOUNTANT’S REPORT OF ASIMCO FOUNDRY FOR THE THREE YEARS ENDED 31 DECEMBER 2015
I FINANCIAL INFORMATION OF ASIMCO FOUNDRY
A. The following is the financial information of ASIMCO Foundry prepared by the directors of the Company as at 31 December 2013, 2014 and 2015 and for each of the years ended 31 December 2013, 2014 and 2015 (the “Financial Information”):
Statements of profit or loss and other comprehensive income
Year ended December 31 2013 2014 2015 Notes RMB’000 RMB’000 RMB’000
Revenue 6 123,722 104,673 84,720 Cost of sales (107,952) (95,876) (80,175)
Gross profit 15,770 8,797 4,545
Administrative expenses (5,534) (3,734) (4,269) Other income 5 4 4 Other gains, net 7 201 273 567
Profit before income tax 10,442 5,340 847 Income tax expense 10 (2,392) (1,399) (204)
Profit for the year 8,050 3,941 643
Other comprehensive income for the year, net of tax –––
Total comprehensive income for the year 8,050 3,941 643
– III-79 – APPENDIX III-3 ACCOUNTANT’S REPORT OF ASIMCO FOUNDRY FOR THE THREE YEARS ENDED 31 DECEMBER 2015
Statements of financial position
As at 31 December 2013 2014 2015 Notes RMB’000 RMB’000 RMB’000
ASSETS
Non-current assets Property, plant and equipment 11 77,991 67,698 57,603 Prepaid lease payments 12 5,559 5,420 5,281 Deferred income tax assets 17 764 700 806
84,314 73,818 63,690
Current assets Inventories 13 1,772 1,371 1,348 Trade and other receivables 14 44,470 54,912 62,545 Income tax recoverable – – 273 Cash and cash equivalents 15 1,183 766 1,022
47,425 57,049 65,188
Total assets 131,739 130,867 128,878
EQUITY
Equity attributable to the owner of ASIMCO Foundry Paid-in capital 49,687 49,687 49,687 Reserves – 591 682 Retained earnings 64,587 67,937 68,489
Total Equity 114,274 118,215 118,858
LIABILITIES
Current liabilities Trade and other payables 16 16,609 12,559 10,020 Income tax payable 856 93 –
17,465 12,652 10,020
Total liabilities 17,465 12,652 10,020
Total equity and liabilities 131,739 130,867 128,878
– III-80 – APPENDIX III-3 ACCOUNTANT’S REPORT OF ASIMCO FOUNDRY FOR THE THREE YEARS ENDED 31 DECEMBER 2015
Statements of changes in equity
Attributable to the owner of ASIMCO Foundry Paid-in Statutory Retained capital reserves earnings Total RMB’000 RMB’000 RMB’000 RMB’000
At 1 January 2013 49,687 – 56,537 106,224
Comprehensive income Profit for the year – – 8,050 8,050
Total comprehensive income – – 8,050 8,050
At 31 December 2013 49,687 – 64,587 114,274
Comprehensive income Profit for the year – – 3,941 3,941
Total comprehensive income – – 3,941 3,941
Transactions with owners Profit appropriations to statutory reserves – 591 (591) –
Total transactions with owners – 591 (591) –
At 31 December 2014 49,687 591 67,937 118,215
Comprehensive income Profit for the year – – 643 643
Total comprehensive income – – 643 643
Transactions with owners Profit appropriations to statutory reserves – 91 (91) –
Total transactions with owners – 91 (91) –
At 31 December 2015 49,687 682 68,489 118,858
– III-81 – APPENDIX III-3 ACCOUNTANT’S REPORT OF ASIMCO FOUNDRY FOR THE THREE YEARS ENDED 31 DECEMBER 2015
Statements of cash flows
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Cash flows from operating activities
Profit before tax 10,442 5,340 847 Adjustments for: Loss on disposal of items of property, plant and equipment 3 6 – Depreciation of property, plant and equipment 10,315 10,381 10,325 Amortisation of prepaid lease payments 139 139 139
Operating cash flows before movement in working capital 20,899 15,866 11,311 Decrease in inventories 1,690 401 23 Increase in trade and other receivables (19,343) (10,446) (7,637) Increase/(decrease) in trade and other payables 914 (4,050) (2,404)
Cash generated from operations 4,160 1,771 1,293 Interest received 5 4 4 Income tax paid (1,664) (2,098) (677)
Net cash generated from/(used in) operating activities 2,501 (323) 620
Cash flows from investing activities Purchase of property, plant and equipment (2,151) (95) (364) Proceeds from disposal of property, plant and equipment – 1 –
Net cash used in investing activities (2,151) (94) (364)
Net increase/(decrease) in cash and cash equivalents 350 (417) 256 Cash and cash equivalents, at beginning of year 833 1,183 766
Cash and cash equivalents at end of year 1,183 766 1,022
– III-82 – APPENDIX III-3 ACCOUNTANT’S REPORT OF ASIMCO FOUNDRY FOR THE THREE YEARS ENDED 31 DECEMBER 2015
II NOTES TO THE FINANCIAL INFORMATION
1 GENERAL INFORMATION
ASIMCO Foundry (Yizheng) Co., Ltd. (“ASIMCO Foundry”) was incorporated in Yizheng City, Jiangsu Province, the People’s Republic of China (“PRC”) on 7 January 2004 with Limited Liability.
ASIMCO Foundry is principally engaged in manufacturing automotive foundry products, and sale of the products to a fellow subsidiary. Majority of ASIMCO Foundry’s business is based in the PRC.
The Financial Information is presented in Renminbi (“RMB”), unless otherwise stated.
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
2.1 Basis of preparation
The Financial Information of ASIMCO Foundry have been prepared in accordance with all applicable International Financial Reporting Standards (“IFRS”). The Financial Information have been prepared under the historical cost convention.
The preparation of Financial Information in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying ASIMCO Foundry’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in Note 4.
2.1.1 Changes in accounting policy and disclosures
(a) New Hong Kong Companies Ordinance (Cap. 622)
The requirements of Part 9 “Accounts and Audit” of the new Hong Kong Companies Ordinance (Cap. 622) came into operation in 2015, as a result, there are changes to presentation and disclosures of certain information in the financial statements.
(b) New standards and interpretations not yet adopted
A number of new standards and amendments to standards and interpretations are effective for annual periods beginning after 1January 2015, and have not been applied in preparing the Financial Information. None of these is expected to have a significant effect on the Financial Information of ASIMCO Foundry, except the following set out below:
• IFRS 15, ‘Revenue from contracts with customers’ deals with revenue recognition and establishes principles for reporting useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. Revenue is recognised when a customer obtains control of a good or service and thus has the ability to direct the use and obtain the benefits from the good or service. The standard replaces IAS 18 ‘Revenue’ and IAS 11 ‘Construction contracts’ and related interpretations. IFRS 15 is effective for annual periods beginning on or after 1 January 2018 and earlier application is permitted. ASIMCO Foundry is assessing the impact of IFRS 15.
• IFRS 9, “Financial instruments”, addresses the classification, measurement and recognition of financial assets and financial liabilities. The complete version of IFRS 9 was issued in July 2014. It replaces the guidance in IAS 39 that relates to the classification and measurement of financial instruments. IFRS 9 retains but simplifies the mixed measurement model and establishes three primary measurement categories for financial assets: amortised cost, fair value through
– III-83 – APPENDIX III-3 ACCOUNTANT’S REPORT OF ASIMCO FOUNDRY FOR THE THREE YEARS ENDED 31 DECEMBER 2015
OCI and fair value through P&L. The basis of classification depends on the entity’s business model and the contractual cash flow characteristics of the financial asset. Investments in equity instruments are required to be measured at fair value through profit or loss with the irrevocable option at inception to present changes in fair value in OCI not recycling. There is now a new expected credit losses model that replaces the incurred loss impairment model used in IAS 39. For financial liabilities there were no changes to classification and measurement except for the recognition of changes in own credit risk in other comprehensive income, for liabilities designated at fair value through profit or loss. IFRS 9 relaxes the requirements for hedge effectiveness by replacing the bright line hedge effectiveness tests. It requires an economic relationship between the hedged item and hedging instrument and for the ‘hedged ratio’ to be the same as the one management actually use for risk management purpose.
• IFRS 16, ‘Leases’ addresses the definition of a lease, recognition and measurement of leases and establishes principles for reporting useful information to users of financial statements about the leasing activities of both lessees and lessors. A key change arising from IFRS 16 is that most operating leases will be accounted for on statement of financial position for lessees. The standard replaces IAS 17 ‘Leases’, and related interpretations. The standard is effective for annual periods beginning on or after 1 January 2019 and earlier application is permitted subject to the entity adopting IFRS 15 ‘Revenue from contracts with customers’ at the same time.
There are no other IFRSs or IFRIC interpretations that are not yet effective that would be expected to have a material impact on ASIMCO Foundry.
2.2 Segment reporting
Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the executive directors that makes strategic decisions.
For management purposes, ASIMCO Foundry operates in one business unit and has one reportable operating segment, during the years ended 31 December 2013, 2014 and 2015 focusing on manufacturing and sale of automotive foundry products.
2.3 Foreign currency translation
(a) Functional and presentation currency
The functional and presentation currency is RMB, which is the currency of primary economic environment in which ASIMCO Foundry operates.
(b) Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or valuation where items are re-measured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the statement of profit or loss, except when deferred in other comprehensive income as qualifying cash flow hedges and qualifying net investment hedges.
Foreign exchange gains and losses are presented in the statement of profit or loss within “other gains, net”.
2.4 Property, plant and equipment
Property, plant and equipment is stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items.
– III-84 – APPENDIX III-3 ACCOUNTANT’S REPORT OF ASIMCO FOUNDRY FOR THE THREE YEARS ENDED 31 DECEMBER 2015
Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to ASIMCO Foundry and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognised. All other repairs and maintenance are charged to the statement of profit or loss during the financial period in which they are incurred.
Depreciation is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives, as follows:
Estimated Estimated Category residual value useful life (%)
Buildings 10 20 years Machinery and equipment 10 10 years Motor vehicles 10 5 years Office equipment and others 10 3 years
The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period.
An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount (Note 2.5).
Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognised within “Other gains, net” in the statement of profit or loss.
Construction in progress represents property, plant and equipment under construction or pending installation, and is stated at cost less impairment losses. Cost comprises direct costs of construction including borrowing costs attributable to the construction during the period of construction. No provision for depreciation is made on construction in progress until such time as the relevant assets are completed and ready for intended use.
2.5 Impairment of non-financial assets
Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are companied at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date.
2.6 Financial assets
2.6.1 Classification
ASIMCO Foundry classifies its financial assets in Loans and receivables. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition.
Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for the amounts that are settled or expected to be settled more than 12 months after the end of the reporting period. These are classified as non-current assets. ASIMCO Foundry’s Loans and receivables comprise trade receivables (Note 14), bills receivable (Note 14), deposits and other receivables (Note 14), and cash and cash equivalents (Note 15).
– III-85 – APPENDIX III-3 ACCOUNTANT’S REPORT OF ASIMCO FOUNDRY FOR THE THREE YEARS ENDED 31 DECEMBER 2015
2.6.2 Recognition and measurement
Regular way purchases and sales of financial assets are recognised on the trade-date – the date on which ASIMCO Foundry commits to purchase or sell the asset. Financial assets are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and ASIMCO Foundry has transferred substantially all risks and rewards of ownership. Receivables are subsequently carried at amortised cost using the effective interest method.
2.7 Offsetting financial instruments
Financial assets and liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis or realise the asset and settle the liability simultaneously. The legally enforceable right must not be contingent on future events and must be enforceable in the normal course of business and in the event of default, insolvency or bankruptcy of ASIMCO Foundry or the counterparty.
2.8 Impairment of financial assets
Assets carried at amortised cost
ASIMCO Foundry assesses at the end of each reporting period whether there is objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.
Evidence of impairment may include indications that the debtors or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganisation, and where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.
For receivables category, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate. The carrying amount of the asset is reduced and the amount of the loss is recognised in the statement of profit or loss.
If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor’s credit rating), the reversal of the previously recognised impairment loss is recognised in the statement of profit or loss.
2.9 Inventories
Inventories are stated at the lower of cost and net realisable value. Cost is determined using the weighted average cost method. The cost of finished goods and work in progress comprises, raw materials, direct labour, other direct costs and related production overheads (based on normal operating capacity). It excludes borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses.
2.10 Trade and other receivables
Trade receivables are amounts due from customers for merchandise sold in the ordinary course of business. If collection of trade and other receivables is expected in one year or less (or in the normal operating cycle of the business if longer), they are classified as current assets. If not, they are presented as non-current assets.
– III-86 – APPENDIX III-3 ACCOUNTANT’S REPORT OF ASIMCO FOUNDRY FOR THE THREE YEARS ENDED 31 DECEMBER 2015
Trade and other receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less allowance for impairment.
2.11 Cash and cash equivalents
In the statement of cash flows, cash and cash equivalents include cash in hand, deposits held at call with banks, and other short-term highly liquid investments with original maturities of three months or less.
2.12 Paid-in capital
Paid-in capital is classified as equity.
2.13 Trade payables
Trade payables are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Trade payables are classified as current liabilities if payment is due within one year or less (or in the normal operating cycle of the business if longer). If not, they are presented as non-current liabilities.
Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method.
2.14 Current and deferred income tax
The tax expense for the year comprises current and deferred tax. Tax is recognised in the statement of profit or loss, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case the tax is also recognised in other comprehensive income or directly in equity, respectively.
(a) Current income tax
The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the date of statement of financial position in the countries where ASIMCO Foundry’s subsidiaries and associates operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.
(b) Deferred income tax
Deferred income tax is recognised, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. However, deferred tax liabilities are not recognised if they arise from the initial recognition of goodwill, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the date of statement of financial position and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.
Deferred income tax assets are recognised only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.
(c) Offsetting
Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority on either the taxable entity or different taxable entities where there is an intention to settle the balances on a net basis.
– III-87 – APPENDIX III-3 ACCOUNTANT’S REPORT OF ASIMCO FOUNDRY FOR THE THREE YEARS ENDED 31 DECEMBER 2015
2.15 Employee benefits
Defined contribution pension scheme
ASIMCO Foundry’s full-time employees are covered by a government operated defined contribution pension scheme, and are entitled to a monthly pension from their retirement dates. The PRC government is responsible for the pension liability to these retired employees. ASIMCO Foundry is required to make annual contributions to the retirement scheme at certain percentages of employees’ basic salaries, which are charged as an expense when the employees have rendered services entitling them to the contributions and the contributions are due.
Termination benefits
Termination benefits are payable when employment is terminated by ASIMCO Foundry before the normal retirement date, or whenever an employee accepts voluntary redundancy in exchange for these benefits. ASIMCO Foundry recognises termination benefits at the earlier of the following dates: (i) when ASIMCO Foundry can no longer withdraw the offer of those benefits; and (ii) when ASIMCO Foundry recognises costs for a restructuring that is within the scope of IAS 37 and involves the payment of termination benefits. In the case of an offer made to encourage voluntary redundancy, the termination benefits are measured based on the number of employees expected to accept the offer. Benefits falling due more than 12 months after the end of the reporting period are discounted to their present value.
2.16 Revenue recognition
Revenue is measured at the fair value of the consideration received or receivable, and represents amounts receivable for goods supplied, stated net of discounts returns and value added taxes. ASIMCO Foundry recognises revenue when the amount of revenue can be reliably measured; when it is probable that future economic benefits will flow to the entity; and when specific criteria have been met for each of ASIMCO Foundry’s activities, as described below. ASIMCO Foundry bases its estimates of return on historical results, taking into consideration the type of customers, the type of transactions and the specifics of each arrangement.
Sales of automotive foundry products
ASIMCO Foundry sells automotive foundry products to domestic and overseas automotive manufacturers. The revenue is recognised when the related goods are delivered to the place of delivery pursuant to the sales contract and the customer confirms the acceptance of the goods or ASIMCO Foundry has objective evidence that all criteria for the acceptance have been satisfied.
2.17 Interest income
Interest income is recognised using the effective interest method. When a loan and receivable is impaired, ASIMCO Foundry reduces the carrying amount to its recoverable amount, being the estimated future cash flow discounted at the original effective interest rate of the instrument, and continues unwinding the discount as interest income. Interest income on impaired loans and receivables is recognised using the original effective interest rate.
2.18 Leases
Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the statement of profit or loss on a straight-line basis over the period of the lease.
Prepaid lease payments
Interest in leasehold land that is accounted for as an operating lease is presented as “prepaid lease payments” in the statement of financial position and is amortised over the lease term on a straight-line basis.
– III-88 – APPENDIX III-3 ACCOUNTANT’S REPORT OF ASIMCO FOUNDRY FOR THE THREE YEARS ENDED 31 DECEMBER 2015
3 FINANCIAL RISK MANAGEMENT
3.1 Financial risk factors
ASIMCO Foundry’s activities expose it to a variety of financial risks: credit risk and liquidity risk.
(a) Credit risk
Credit risk is the risk that a counter party will not meet its obligations under a financial instrument or customer contract, leading to a financial loss. ASIMCO Foundry is exposed to credit risk from trade and other receivables, cash and cash equivalents.
Customer credit risk is managed subject to ASIMCO Foundry’s established policy, procedures and control relating to customer credit risk management. ASIMCO Foundry’s policy is to perform credit verification for all customers who have transactions with ASIMCO Foundry. Further, credit limits, credit terms and sales methods are determined based on the credit history of customers. ASIMCO Foundry maintains long-term relationships with several large customers which management believes credit risk in relation with these customers is low. ASIMCO Foundry does not hold collateral as security.
All ASIMCO Foundry’s cash and cash equivalents are held in major banks located in the PRC, which management believes are of high credit quality.
The carrying amounts of cash and cash equivalents, pledged deposits, trade and other receivables, bills receivable and loans to fellow subsidiaries, represent ASIMCO Foundry’s maximum exposure to credit risk in relation to financial assets.
(b) Liquidity risk
ASIMCO Foundry’s objective is to maintain a balance between continuity of funding and flexibility through the use of bills, bank loans and other interest-bearing loans.
The table below analyses ASIMCO Foundry’s non-derivative financial liabilities into relevant maturity groupings based on the remaining period at the date of statement of financial position to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows.
Within one year RMB’000
As at 31 December 2013 Trade payables 9,473 Financial liabilities included in accruals, advances and other payables 6,196
Total 15,669
– III-89 – APPENDIX III-3 ACCOUNTANT’S REPORT OF ASIMCO FOUNDRY FOR THE THREE YEARS ENDED 31 DECEMBER 2015
Within one year RMB’000
As at 31 December 2014 Trade payables 6,411 Financial liabilities included in accruals, advances and other payables 5,405
Total 11,816
As at 31 December 2015 Trade payables 4,174 Financial liabilities included in accruals, advances and other payables 4,913
Total 9,087
3.2 Capital management
The primary objective of ASIMCO Foundry’s capital management is to ensure that it maintains healthy capital ratios in order to support its business and maximise shareholders’ value.
ASIMCO Foundry manages its capital structure and makes adjustments to it in light of changes in economic conditions. To maintain or adjust the capital structure, ASIMCO Foundry may adjust the dividend payment to shareholders, return capital to shareholders or issue new shares. No changes were made in the objectives, policies or processes for managing capital during the Relevant Periods.
ASIMCO Foundry monitors capital using a liability to asset ratio, which is total liabilities divided by the total assets.
ASIMCO Foundry’s strategy is to maintain the liability to asset ratio at a healthy capital level in order to support its business. The principal strategies adopted by ASIMCO Foundry include, without limitation, reviewing future cash flow requirement and the ability to meet debt repayment schedules when they fall due, if necessary, to ensure that ASIMCO Foundry has a reasonable level of capital to support its business. The liability to asset ratios at the end of the Relevant Periods were as follows:
As at 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Total liabilities 17,465 12,652 10,020 Total assets 131,739 130,867 128,878
Liability to asset ratio 13% 10% 8%
– III-90 – APPENDIX III-3 ACCOUNTANT’S REPORT OF ASIMCO FOUNDRY FOR THE THREE YEARS ENDED 31 DECEMBER 2015
3.3 Fair value estimation
Financial instruments carried at fair value are analysed by level of the inputs to valuation techniques used to measure fair value. Such inputs are categorised into three levels within a fair value hierarchy as follows:
• Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1).
• Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (level 2).
• Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (level 3).
As at 31 December 2013, 2014 and 2015, ASIMCO Foundry has no financial instruments carried at fair value. Carrying amounts of financial assets (including trade and other receivables, pledged bank deposits, cash and cash equivalents and loans to fellow subsidiaries) and financial liabilities (including trade and other payables and borrowings) approximate their fair values.
4 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
ASIMCO Foundry makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are addressed below.
(a) Impairment of receivables
ASIMCO Foundry recognises provisions based on the judgement of recovery of receivables. A bad debt provision is required to be recognised when there are indications that the receivable cannot be recovered. Recognition of bad debt provisions requires the use of judgement and estimates. If the revised estimates deviate from the current estimates, then any difference arising from changes of accounting estimates will affect the carrying value of debtors in the relevant accounting periods.
(b) Impairment of inventories
ASIMCO Foundry recognises provision based on the estimates of recovery of inventories. The estimates are made with reference to aged inventory analysis, projections of expected future saleability of goods and management experience and judgement. Impairment of inventories will be made when the carrying amounts of inventories are below their estimated net realisable values.
5 SEGMENT INFORMATION
For management purposes, ASIMCO Foundry operates in one business unit and has one reportable operating segment, focusing on manufacturing and sale of automotive foundry products.
(a) Geographical information
(i) Analysis of revenue
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
The PRC 123,722 104,673 84,720
– III-91 – APPENDIX III-3 ACCOUNTANT’S REPORT OF ASIMCO FOUNDRY FOR THE THREE YEARS ENDED 31 DECEMBER 2015
The revenue information above is based on the locations of the customers.
(ii) Non-current assets, other than financial instruments and deferred income tax assets, by country:
31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
The PRC 83,550 73,118 62,884
6 REVENUE
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Sales of automotive foundry products 123,032 104,499 84,671 Others 690 174 49
Total 123,722 104,673 84,720
7 OTHER GAINS, NET
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Loss on disposal of property, plant and equipment, net (3) (6) – Others 204 279 567
Total 201 273 567
8 EXPENSES BY NATURE
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Changes in inventories of finished goods and work in progress 1,334 94 189 Raw materials and consumables used 49,984 43,688 34,797 Employee benefit expense (Note 9) 27,447 26,967 23,050 Water and electricity expense 18,160 15,338 13,075 Maintenance and repair cost 2,976 916 689 Depreciation and amortisation 10,454 10,520 10,464 Sales tax and surcharges 1,127 925 772 Auditors’ remuneration – audit services 150 169 138 Others 1,854 993 1,270
Total 113,486 99,610 84,444
– III-92 – APPENDIX III-3 ACCOUNTANT’S REPORT OF ASIMCO FOUNDRY FOR THE THREE YEARS ENDED 31 DECEMBER 2015
9 EMPLOYEE BENEFIT EXPENSE
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Salaries, allowances and other benefits 22,725 23,326 20,343 Pensions – defined contribution plans 3,027 3,641 2,707 Termination benefits 1,695 – –
Total 27,447 26,967 23,050
10 INCOME TAX EXPENSE
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Current tax: Current tax on profits for the year 2,390 1,335 310
Deferred tax: Origination and reversal of temporary differences 2 64 (106)
Total income tax expense 2,392 1,399 204
Pursuant to the relevant laws and regulations in the PRC, the statutory enterprise income tax rate of 25% was applied to ASIMCO Foundry for the years ended 31 December 2013, 2014 and 2015.
A reconciliation of the tax expense applicable to profit before tax at the applicable tax rate for ASIMCO Foundry to the tax expense is as follows:
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Profit before tax 10,442 5,340 847
At ASIMCO Foundry’s statutory income tax rate of 25% 2,611 1,335 212 Utilisation of previously unrecognised temporary differences (44) – (16) Adjustment in respect of prior year (188) – – Non-deductible expenses for tax purposes 13 64 8
2,392 1,399 204
– III-93 – APPENDIX III-3 ACCOUNTANT’S REPORT OF ASIMCO FOUNDRY FOR THE THREE YEARS ENDED 31 DECEMBER 2015
11 PROPERTY, PLANT AND EQUIPMENT
Machinery Office and Motor equipment Construction Buildings equipment vehicles and others in progress Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
At 1 January 2013 Cost 45,997 90,042 414 510 1,582 138,545 Accumulated depreciation (10,838) (39,804) (325) (434) – (51,401)
Net book amount 35,159 50,238 89 76 1,582 87,144
Year ended 31 December 2013 Opening net book amount 35,159 50,238 89 76 1,582 87,144 Additions ––––1,165 1,165 Transfers – 688 – 327 (1,015) – Disposals – – – (3) – (3) Depreciation charge (2,070) (8,217) (17) (11) – (10,315)
Closing net book amount 33,089 42,709 72 389 1,732 77,991
At 31 December 2013 Cost 45,997 90,730 413 808 1,732 139,680 Accumulated depreciation (12,908) (48,021) (341) (419) – (61,689)
Net book amount 33,089 42,709 72 389 1,732 77,991
Year ended 31 December 2014 Opening net book amount 33,089 42,709 72 389 1,732 77,991 Additions ––––9595 Transfers – 275 106 69 (450) – Disposals – (2) – (5) – (7) Depreciation charge (2,070) (8,272) (13) (26) – (10,381)
Closing net book amount 31,019 34,710 165 427 1,377 67,698
At 31 December 2014 Cost 45,997 91,003 519 825 1,377 139,721 Accumulated depreciation (14,978) (56,293) (354) (398) – (72,023)
Net book amount 31,019 34,710 165 427 1,377 67,698
– III-94 – APPENDIX III-3 ACCOUNTANT’S REPORT OF ASIMCO FOUNDRY FOR THE THREE YEARS ENDED 31 DECEMBER 2015
Machinery Office and Motor equipment Construction Buildings equipment vehicles and others in progress Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
Year ended 31 December 2015 Opening net book amount 31,019 34,710 165 427 1,377 67,698 Additions ––––230230 Transfers – 429 30 169 (628) – Reclassification – 281 – (281) – – Depreciation charge (2,070) (8,192) (11) (52) – (10,325)
Closing net book amount 28,949 27,228 184 263 979 57,603
At 31 December 2015 Cost 45,997 91,712 549 713 979 139,950 Accumulated depreciation (17,048) (64,484) (365) (450) – (82,347)
Net book amount 28,949 27,228 184 263 979 57,603
During the year ended 31 December 2013, the depreciation charges were recorded in cost of sales and administrative expenses with amount of RMB10,190,000 and RMB125,000, respectively.
During the year ended 31 December 2014, the depreciation charges were recorded in cost of sales and administrative expenses with amount of RMB10,257,000, and RMB124,000, respectively.
During the year ended 31 December 2015, the depreciation charges were recorded in cost of sales and administrative expenses with amount of RMB10,201,000 and RMB124,000, respectively.
During the years ended 31 December 2013, 2014 and 2015, ASIMCO Foundry has no borrowing costs capitalised.
– III-95 – APPENDIX III-3 ACCOUNTANT’S REPORT OF ASIMCO FOUNDRY FOR THE THREE YEARS ENDED 31 DECEMBER 2015
12 PREPAID LEASE PAYMENTS
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
At 1 January Cost 6,948 6,948 6,948 Accumulated amortisation (1,250) (1,389) (1,528)
Net book amount 5,698 5,559 5,420
Year ended 31 December Opening net book amount 5,698 5,559 5,420 Amortisation (139) (139) (139)
Closing net book amount 5,559 5,420 5,281
At 31 December Cost 6,948 6,948 6,948 Accumulated amortisation (1,389) (1,528) (1,667)
Net book amount 5,559 5,420 5,281
The leasehold land is situated in the PRC and is held under medium term leases.
13 INVENTORIES
31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Raw materials 1,092 596 762 Work in progress 570 380 466 Finished goods 110 395 120
Total inventories at the lower of cost and net realisable value 1,772 1,371 1,348
– III-96 – APPENDIX III-3 ACCOUNTANT’S REPORT OF ASIMCO FOUNDRY FOR THE THREE YEARS ENDED 31 DECEMBER 2015
14 TRADE AND OTHER RECEIVABLES
31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Trade receivables 37,920 50,335 58,169 Less: allowance for impairment – – –
Trade receivables – net 37,920 50,335 58,169 Bills receivable 3,766 2,170 2,180
41,686 52,505 60,349
Prepayments to suppliers 2,782 2,407 2,137 Other receivables 2 – 59 Less: allowance for impairment – – –
2,785 2,407 2,196
44,470 54,912 62,545
ASIMCO Foundry’s trading terms with its customers are mainly on credit, except for new customers, where payment in advance is normally required. The credit period is generally three months, extending up to six months for major customers. Each customer has a maximum credit limit. ASIMCO Foundry seeks to maintain strict control over its outstanding receivables and has a credit control department to minimise credit risk. Overdue balances are reviewed regularly by senior management. ASIMCO Foundry does not hold any collateral or other credit enhancements over its trade receivable balances. Trade receivables are non-interest-bearing.
As at 31 December 2013, 2014 and 2015, bank acceptance notes of RMB3,766,000, RMB2,170,000 and RMB1,110,000 respectively, were endorsed to banks or suppliers of ASIMCO Foundry but were not derecognised as these bank acceptance notes were issued by unlisted commercial banks.
An ageing analysis of the trade receivables based on the invoice date and net of provisions, is as follows:
31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Within 6 months 37,920 50,335 40,997 6 to 12 months – – 17,172
37,920 50,335 58,169
An ageing analysis of the bills receivables based on the invoice date and net of provisions, is as follows:
31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Within 6 months 3,766 2,170 2,180
– III-97 – APPENDIX III-3 ACCOUNTANT’S REPORT OF ASIMCO FOUNDRY FOR THE THREE YEARS ENDED 31 DECEMBER 2015
As at 31 December 2013, 2014 and 2015, there are no significant trade receivables and bills receivable that are past due but are not imparied.
The carrying amounts of ASIMCO Foundry’s trade and other receivables are all denominated in RMB.
15 CASH AND CASH EQUIVALENTS
The carrying amounts of ASIMCO Foundry’s cash and cash equivalents are denominated in the following currencies:
31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
RMB 1,182 765 1,021 EURO 1 1 1
1,183 766 1,022
16 TRADE AND OTHER PAYABLES
31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Trade payables 9,473 6,411 4,174 Other payables 3,204 2,614 1,851 Accrued payroll 2,992 2,791 3,062 Taxes payable 940 743 933
16,609 12,559 10,020
At 31 December 2013, 2014 and 2015, the ageing analysis of the trade payables and bills payable based on invoice date were are follows:
31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Within 6 months 9,473 6,411 4,174
17 DEFERRED INCOME TAX
The analysis of deferred tax is as follows:
31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Deferred income tax assets:
Deferred income tax assets to be recovered within 12 months 764 700 806
– III-98 – APPENDIX III-3 ACCOUNTANT’S REPORT OF ASIMCO FOUNDRY FOR THE THREE YEARS ENDED 31 DECEMBER 2015
The gross movement on the deferred income tax accounts is as follows:
2013 2014 2015 RMB’000 RMB’000 RMB’000
At 1 January 766 764 700 Credited/(charged) to statement of profit or loss (2) (64) 106
At 31 December 764 700 806
The movement in deferred income tax assets without taking into consideration of the offsetting of balances within the same tax jurisdiction during the year is as follows:
Deferred income tax assets:
Accrued expenses RMB’000
At 1 January 2013 766 Credited/(charged) to statement of profit or loss (2)
At 31 December 2013 764
Credited/(charged) to statement of profit or loss (64)
At 31 December 2014 700
Credited/(charged) to statement of profit or loss 106
At 31 December 2015 806
18 RELATED PARTY TRANSACTIONS
ASIMCO Foundry is controlled by Axle ATL Cayman Limited, which owns 70% of ASIMCO Foundry’s equity interests. The remaining 30% of ASIMCO Foundry’s equity interests are held by Jiangsu Yizheng Piston Ring Factory. The ultimate parent company of ASIMCO Foundry is Bain Capital Asia Integral Investors, L.P. (incorporated in the Cayman Islands).
– III-99 – APPENDIX III-3 ACCOUNTANT’S REPORT OF ASIMCO FOUNDRY FOR THE THREE YEARS ENDED 31 DECEMBER 2015
The following transactions were carried out with related parties:
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
(a) Sales of goods
– Fellow subsidiaries 123,032 104,660 84,686
(b) Purchase of goods
– A fellow subsidiary 14,720 15,046 11,576
(c) Outstanding balances with related parties
31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Trade receivables – A fellow subsidiary 37,920 50,335 58,169
Other payables – A shareholder – – 69
19 FINANCIAL INSTRUMENTS BY CATEGORY
Financial assets
Receivables RMB’000
As at 31 December 2013 Financial assets included in trade and other receivables 41,689 Cash and cash equivalents 1,183
Total 42,871
As at 31 December 2014 Financial assets included in trade and other receivables 52,505 Cash and cash equivalents 766
Total 53,271
As at 31 December 2015 Financial assets included in trade and other receivables 60,408 Cash and cash equivalents 1,022
Total 61,430
– III-100 – APPENDIX III-3 ACCOUNTANT’S REPORT OF ASIMCO FOUNDRY FOR THE THREE YEARS ENDED 31 DECEMBER 2015
Financial liabilities
Financial liabilities at amortised cost RMB’000
As at 31 December 2013 Financial liabilities included in trade and other payables 15,669
As at 31 December 2014 Financial liabilities included in trade and other payables 11,816
As at 31 December 2015 Financial liabilities included in trade and other payables 9,087
III SUBSEQUENT FINANCIAL STATEMENTS
No audited financial statements have been prepared by ASIMCO Foundry in respect of any period subsequent to 31 December 2015 up to the date of this report. No dividend or distribution has been declared or made by ASIMCO Foundry in respect of any period subsequent to 31 December 2015.
Yours faithfully,
PricewaterhouseCoopers Certified Public Accountants Hong Kong
– III-101 – APPENDIX III-4 ACCOUNTANT’S REPORT OF ASIMCO NVH FOR THE THREE YEARS ENDED 31 DECEMBER 2015
The following is the text of a report received from the Company’s reporting accountant, PricewaterhouseCoopers, Certified Public Accountants, Hong Kong, for the purpose of incorporation in this circular.
23 May 2016
The Directors Zhengzhou Coal Mining Machinery Group Company Limited
Dear Sirs,
We report on the financial information of ASIMCO NVH Technologies Co., Ltd. (Anhui) (“ASIMCO NVH”) and its subsidiaries (together, “ASIMCO NVH Group”), which comprises the consolidated and company statements of financial position of ASIMCO NVH as at 31 December 2013, 2014 and 2015, and the consolidated statements of profit or loss and other comprehensive income, the consolidated statements of changes in equity and the consolidated statements of cash flows of ASIMCO NVH for each of the years ended 31 December 2013, 2014 and 2015 (the “Relevant Periods”) and a summary of significant accounting policies and other explanatory information. This financial information has been prepared by the directors of Zhengzhou Coal Mining Machinery Group Company Limited (the “Company”) and is set out in Sections I to III below for inclusion in Appendix III-4 to the circular of the Company dated 23 May 2016 (the “Circular”) in connection with the proposed acquisition of ASIMCO NVH by the Company.
ASIMCO NVH was incorporated in the People’s Republic of China on 1 August 1994 as a company with limited liability.
As at the date of this report, ASIMCO NVH has direct interests in the subsidiaries as set out in Note 15 of Section II below.
The statutory consolidated financial statements of ASIMCO NVH for the year ended 31 December 2013 were audited by Ernst & Young Hua Ming LLP, and the statutory consolidated financial statements for each of the years ended 31 December 2014 and 2015 were audited by PricewaterhouseCoopers Zhong Tian LLP, Beijing Branch, pursuant to separate terms of engagement with the ASIMCO NVH respectively.
– III-102 – APPENDIX III-4 ACCOUNTANT’S REPORT OF ASIMCO NVH FOR THE THREE YEARS ENDED 31 DECEMBER 2015
The directors of ASIMCO NVH are responsible for the preparation of the consolidated financial statements of ASIMCO NVH for the Relevant Periods that give a true and fair view in accordance with International Financial Reporting Standards (“IFRSs”) issued by the International Accounting Standards Board (the “Underlying Financial Statements”), and for such internal control as the directors determine is necessary to enable the preparation of the Underlying Financial Statements that are free from material misstatement, whether due to fraud or error. PricewaterhouseCoopers Zhong Tian LLP have audited the Underlying Financial Statements in accordance with International Standards on Auditing (the “ISAs”) issued by the International Auditing and Assurance Standards Board (“IAASB”) pursuant to separate terms of engagement.
The financial information has been prepared based on the Underlying Financial Statements with no adjustment made thereon.
Directors’ Responsibility for the Financial Information
The directors of the Company are responsible for the preparation of the financial information that gives a true and fair view in accordance with IFRSs and accounting policies adopted by the Company and its subsidiaries (together, the “Group”) as set out in the annual report of the Company for the year ended 31 December 2015.
Reporting Accountant’s Responsibility
Our responsibility is to express an opinion on the financial information and to report our opinion to you. We carried out our procedures in accordance with Auditing Guideline 3.340 “Prospectuses and the Reporting Accountant” issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”).
Opinion
In our opinion, the financial information gives, for the purpose of this report, a true and fair view of the state of affairs of ASIMCO NVH and of ASIMCO NVH Group as at 31 December 2013, 2014 and 2015 and of ASIMCO NVH Group’s results and cash flows for the Relevant Periods.
– III-103 – APPENDIX III-4 ACCOUNTANT’S REPORT OF ASIMCO NVH FOR THE THREE YEARS ENDED 31 DECEMBER 2015
I FINANCIAL INFORMATION OF ASIMCO NVH GROUP
A. The following is the financial information of ASIMCO NVH Group prepared by the directors of the Company as at 31 December 2013, 2014 and 2015 and for each of the years ended 31 December 2013, 2014 and 2015 (the “Financial Information”):
Consolidated statements of profit or loss and other comprehensive income
Year ended December 31 2013 2014 2015 Note RMB’000 RMB’000 RMB’000
Revenue 6 506,456 596,373 667,107 Cost of sales 9 (377,636) (434,559) (496,235)
Gross profit 128,820 161,814 170,872
Selling and distribution costs 9 (34,076) (36,148) (40,999) Administrative expenses 9 (28,717) (36,025) (33,305) Research and development expenses 9 (28,756) (36,057) (36,676) Other income 7 4,174 5,203 5,257 Other losses, net 8 (2,675) (4,125) (1,813)
Profit from operations 38,770 54,662 63,336
Finance costs 11 (6,090) (5,149) (5,235)
Profit before income tax 32,680 49,513 58,101 Income tax expense 12 (6,097) (6,807) (7,778)
Profit for the year 26,583 42,706 50,323
Profit attributable to: Owners of ASIMCO NVH 26,583 42,706 50,323
26,583 42,706 50,323
Profit for the year 26,583 42,706 50,323 Other comprehensive income for the year, net of tax ––– Total comprehensive income for the year 26,583 42,706 50,323
Attributable to: Owners of ASIMCO NVH 26,583 42,706 50,323
– III-104 – APPENDIX III-4 ACCOUNTANT’S REPORT OF ASIMCO NVH FOR THE THREE YEARS ENDED 31 DECEMBER 2015
Consolidated statements of financial position
As at 31 December 2013 2014 2015 Note RMB’000 RMB’000 RMB’000
ASSETS
Non-current assets Property, plant and equipment 13 108,091 122,241 161,685 Prepaid lease payments 14 2,250 7,157 12,364 Intangible assets 40 12 98 Available-for-sale financial assets 500 – – Deferred income tax assets 24 16,593 17,834 18,070
127,474 147,244 192,217
Current assets Inventories 16 58,905 76,451 103,883 Trade and other receivables 17 287,470 326,435 348,545 Loans to fellow subsidiaries 18 20,000 33,000 33,000 Pledged bank deposits 19 1,062 3,088 1 Cash and cash equivalents 19 43,047 23,529 12,555
410,484 462,503 497,984
Total assets 537,958 609,747 690,201
EQUITY
Equity attributable to the owner of ASIMCO NVH Paid-in capital 25 209,200 209,200 209,200 Reserves 26 6,020 9,570 14,288 Retained earnings 26 19,293 58,449 16,054
Total Equity 234,513 277,219 239,542
LIABILITIES
Current liabilities Trade and other payables 20 193,051 246,073 360,509 Advances from customers 506 468 571 Borrowings 21 97,086 77,904 83,388 Income tax payable 11,158 5,914 2,733 Provisions 22 1,644 2,169 3,458
303,445 332,528 450,659
Total liabilities 303,445 332,528 450,659
Total equity and liabilities 537,958 609,747 690,201
– III-105 – APPENDIX III-4 ACCOUNTANT’S REPORT OF ASIMCO NVH FOR THE THREE YEARS ENDED 31 DECEMBER 2015
Statements of financial position of ASIMCO NVH
As at 31 December 2013 2014 2015 Note RMB’000 RMB’000 RMB’000
ASSETS
Non-current assets Property, plant and equipment 13 96,595 108,077 121,594 Investment property 4,311 3,427 2,945 Prepaid lease prepayments 14 1,864 1,685 1,506 Intangible assets 40 12 – Available-for-sale financial assets 500 – – Deferred income tax assets 24 13,686 14,906 14,894 Investments in subsidiaries 15 20,010 30,010 53,010
137,006 158,117 193,949
Current assets Inventories 16 55,326 69,594 95,037 Trade and other receivables 17 285,800 326,229 355,143 Loans to fellow subsidiaries 18 20,000 33,000 33,000 Pledged deposits 19 1,062 3,088 1 Cash and cash equivalents 19 31,907 18,830 12,073
394,095 450,741 495,254
Total assets 531,101 608,858 689,203
EQUITY
Paid-in capital 25 209,200 209,200 209,200 Reserves 26 7,319 10,869 15,587 Retained earnings 26 13,797 45,737 199
Total equity 230,316 265,806 224,986
LIABILITIES
Current liabilities Trade and other payables 20 192,641 257,898 375,346 Advance from customer 506 468 571 Borrowings 21 97,086 77,904 83,388 Income tax payable 9,059 4,905 2,276 Provisions 22 1,493 1,877 2,636
300,785 343,052 464,217
Total liabilities 300,785 343,052 464,217
Total equity and liabilities 531,101 608,858 689,203
– III-106 – APPENDIX III-4 ACCOUNTANT’S REPORT OF ASIMCO NVH FOR THE THREE YEARS ENDED 31 DECEMBER 2015
Consolidated statements of changes in equity
Attributable to the owners of ASIMCO NVH Non- Paid-in Retained controlling Total capital Reserves earnings Total interests equity RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
At 1 January 2013 160,000 4,430 (4,558) 159,872 – 159,872
Comprehensive income Profit for the year – – 26,583 26,583 – 26,583
Total comprehensive income – – 26,583 26,583 – 26,583
Transactions with owners Profit appropriations to statutory reserves – 1,653 (1,653) – – Dividends – – (1,079) (1,079) – (1,079) Contributions by the owners of ASIMCO NVH 49,200 (63) – 49,137 – 49,137 Total transactions with owners 49,200 1,590 (2,732) 48,058 – 48,058
At 31 December 2013 209,200 6,020 19,293 234,513 – 234,513
At 1 January 2014 209,200 6,020 19,293 234,513 – 234,513
Comprehensive income Profit for the year – – 42,706 42,706 – 42,706
Total comprehensive income – – 42,706 42,706 – 42,706
Transactions with owners Profit appropriations to statutory reserves – 3,550 (3,550) – – – Total transactions with owners – 3,550 (3,550) – – –
At 31 December 2014 209,200 9,570 58,449 277,219 – 277,219
– III-107 – APPENDIX III-4 ACCOUNTANT’S REPORT OF ASIMCO NVH FOR THE THREE YEARS ENDED 31 DECEMBER 2015
Consolidated statements of changes in equity (continued)
Attributable to the owners of ASIMCO NVH Non- Paid-in Retained controlling Total capital Reserves earnings Total interests equity RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
At 1 January 2015 209,200 9,570 58,449 277,219 – 277,219
Comprehensive income Profit for the year – – 50,323 50,323 – 50,323
Total comprehensive income – – 50,323 50,323 – 50,323
Transactions with owners Profit appropriations to statutory reserves – 4,718 (4,718) – – – Dividends – – (88,000) (88,000) – (88,000) Total transactions with owners – 4,718 (92,718) (88,000) – (88,000)
At 31 December 2015 209,200 14,288 16,054 239,542 – 239,542
– III-108 – APPENDIX III-4 ACCOUNTANT’S REPORT OF ASIMCO NVH FOR THE THREE YEARS ENDED 31 DECEMBER 2015
Consolidated statements of cash flows
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Cash flows from operating activities
Profit before tax 32,680 49,513 58,101 Adjustments for: Finance costs 6,090 5,149 5,235 Interest income on loans to fellow subsidiaries (268) (1,497) (1,755) Exchange gain/(loss) 1,967 501 (1,812)
Loss/(gain) on disposal of property, plant and equipment (71) 418 (34) Depreciation of property, plant and equipment 11,251 13,093 14,225 Impairment of property, plant and equipment 268 2,644 1,485 Amortisation of prepaid lease payments 217 217 431 Amortisation of other intangible assets 27 27 13 Provision of impairment for inventories 258 964 1,124 Provision of impairment for trade and other receivables 358 403 1,083
Operating cash flows before movement in working capital 52,777 71,432 78,096
Increase in inventories (13,684) (18,510) (28,556) Increase in trade and other receivables (38,100) (39,368) (23,193) Increase in trade and other payables 30,657 49,160 18,683 Increase/(decrease) in advances from customers (120) 38 (103) Decrease in provisions 518 525 1,289
Cash flows from operating activities Cash generated from operations 32,048 63,277 46,216 Interest received 51 68 88 Income tax paid (7,646) (13,292) (11,195)
Net cash flows from operating activities 24,453 50,053 35,109
– III-109 – APPENDIX III-4 ACCOUNTANT’S REPORT OF ASIMCO NVH FOR THE THREE YEARS ENDED 31 DECEMBER 2015
Consolidated statements of cash flows (continued)
Year ended 31 December 2013 2014 2015 Note RMB’000 RMB’000 RMB’000
Cash flows from investing activities
Purchase of property, plant and equipment (23,095) (31,572) (50,104) Purchase of prepaid lease payments, and intangible assets – – (5,738)
Proceeds from disposal of property, plant and equipment 408 467 2,885 Loans repayments from fellow subsidiaries 10,000 20,000 – Proceeds from disposal of available-for-sale financial assets – 500 – Loans to fellow subsidiaries (30,400) (33,000) – Interest income on loans to fellow subsidiaries 244 1,476 1,744 Changes in pledged bank deposits 373 (2,026) 3,087
Net cash used in investing activities (42,470) (44,155) (48,126)
Cash flows from financing activities
Contributions by the owners of ASIMCO NVH 49,137 – – Proceeds from borrowings 184,291 121,774 107,899 Repayment of borrowings (188,503) (140,957) (102,415) Interest paid (5,610) (5,732) (5,253)
Net cash generated/(used) in financing activities 39,315 (24,915) 231
Net increase/(decrease) in cash and cash equivalents 21,298 (19,017) (12,786) Cash and cash equivalents, at beginning of year 23,716 43,047 23,529 Exchange gains on cash and cash equivalents (1,967) (501) 1,812
Cash and cash equivalents at end of year 19 43,047 23,529 12,555
– III-110 – APPENDIX III-4 ACCOUNTANT’S REPORT OF ASIMCO NVH FOR THE THREE YEARS ENDED 31 DECEMBER 2015
II NOTES TO THE FINANCIAL INFORMATION
1 GENERAL INFORMATION
ASIMCO NVH Technologies Co., Ltd. (Anhui) (“ASIMCO NVH”) was incorporated in Ningguo City, Anhui Province, the PRC on 1 August 1994 with limited liability.
ASIMCO NVH and its subsidiaries (collectively referred to as “ASIMCO NVH Group”) are principally engaged in manufacturing and sale of automotive noise variation and harshness (“NVH”) products. The majority of ASIMCO NVH Group’s business is based in the PRC.
The Financial Information is presented in Renminbi (“RMB”), unless otherwise stated.
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
2.1 Basis of preparation
The Financial Information of ASIMCO NVH have been prepared in accordance with all applicable International Financial Reporting Standards (“IFRS”). The Financial Information have been prepared under the historical cost convention as modified by the revaluation of available for sale financial assets.
The preparation of Financial Information in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying ASIMCO NVH Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 4.
2.1.1 Changes in accounting policy and disclosures
(a) New Hong Kong Companies Ordinance (Cap. 622)
The requirements of Part 9 “Accounts and Audit” of the new Hong Kong Companies Ordinance (Cap. 622) came into operation in 2015 and have been applied to presentation and disclosures of certain information in the Financial Information.
(b) New standards and interpretations not yet adopted
A number of new standards and amendments to standards and interpretations are effective for annual periods beginning after 1 January 2015, and have not been applied in preparing the Financial Information. None of these is expected to have a significant effect on the Financial Information of ASIMCO NVH Group, except the following set out below:
• Amendment to IAS 27, ’Equity method in separate financial statements’. The amendment allows entities to use equity method to account for investments in subsidiaries, joint ventures and associates in their separate financial statements. The amendment is effective for annual periods beginning on or after 1 January 2016, with earlier application permitted.
• IFRS 15, ’Revenue from contracts with customers’ deals with revenue recognition and establishes principles for reporting useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. Revenue is recognised when a customer obtains control of a good or service and thus has the ability to direct the use and obtain the benefits from the good or service. The standard replaces IAS 18 “Revenue” and IAS 11 “Construction contracts” and related interpretations. IFRS 15 is effective for annual periods beginning on or after 1 January 2018 and earlier application is permitted. ASIMCO NVH Group is assessing the impact of IFRS 15.
– III-111 – APPENDIX III-4 ACCOUNTANT’S REPORT OF ASIMCO NVH FOR THE THREE YEARS ENDED 31 DECEMBER 2015
• IFRS 9, ’Financial instruments’, addresses the classification, measurement and recognition of financial assets and financial liabilities. The complete version of IFRS 9 was issued in July 2014. It replaces the guidance in IAS 39 that relates to the classification and measurement of financial instruments. IFRS 9 retains but simplifies the mixed measurement model and establishes three primary measurement categories for financial assets: amortised cost, fair value through OCI and fair value through P&L. The basis of classification depends on the entity’s business model and the contractual cash flow characteristics of the financial asset. Investments in equity instruments are required to be measured at fair value through profit or loss with the irrevocable option at inception to present changes in fair value in OCI not recycling. There is now a new expected credit losses model that replaces the incurred loss impairment model used in IAS 39. For financial liabilities there were no changes to classification and measurement except for the recognition of changes in own credit risk in other comprehensive income, for liabilities designated at fair value through profit or loss. IFRS 9 relaxes the requirements for hedge effectiveness by replacing the bright line hedge effectiveness tests. It requires an economic relationship between the hedged item and hedging instrument and for the ‘hedged ratio’ to be the same as the one management actually use for risk management purpose.
• IFRS 16, ’Leases’ addresses the definition of a lease, recognition and measurement of leases and establishes principles for reporting useful information to users of financial statements about the leasing activities of both lessees and lessors. A key change arising from IFRS 16 is that most operating leases will be accounted for on statement of financial position for lessees. The standard replaces IAS 17 “Leases”, and related interpretations. The standard is effective for annual periods beginning on or after 1 January 2019 and earlier application is permitted subject to the entity adopting IFRS 15 “Revenue from contracts with customers” at the same time.
There are no other IFRSs or IFRIC interpretations that are not yet effective that would be expected to have a material impact on ASIMCO NVH Group.
2.2 Subsidiaries
2.2.1 Consolidation
A subsidiary is an entity (including a structured entity) over which ASIMCO NVH Group has control. ASIMCO NVH Group controls an entity when ASIMCO NVH Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are consolidated from the date on which control is transferred to ASIMCO NVH Group. They are deconsolidated from the date that control ceases.
2.2.2 Separate financial statements
Investments in subsidiaries are accounted for at cost less impairment. Cost includes direct attributable costs of investment. The results of subsidiaries are accounted for by ASIMCO NVH on the basis of dividend received and receivable.
Impairment testing of the investments in subsidiaries is required upon receiving a dividend from these investments if the dividend exceeds the total comprehensive income of the subsidiary in the period the dividend is declared or if the carrying amount of the investment in the separate financial statements exceeds the carrying amount in the consolidated financial statements of the investee’s net assets including goodwill.
– III-112 – APPENDIX III-4 ACCOUNTANT’S REPORT OF ASIMCO NVH FOR THE THREE YEARS ENDED 31 DECEMBER 2015
2.3 Segment reporting
Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the executive directors that makes strategic decisions.
For management purposes, ASIMCO NVH Group operates in one business unit and has one reportable operating segment during the years ended 31 December 2013, 2014 and 2015, which is manufacturing and sale of automotive NVH products.
2.4 Foreign currency translation
(a) Functional and presentation currency
Items included in the financial statements of each of ASIMCO NVH Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the “functional currency”). The consolidated financial statements are presented in RMB, which is ASIMCO NVH’s functional and ASIMCO NVH Group’s presentation currency.
(b) Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or valuation where items are re-measured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the statement of profit or loss, except when deferred in other comprehensive income as qualifying cash flow hedges and qualifying net investment hedges.
Foreign exchange gains and losses are presented in the statement of profit or loss within “other gains, net”.
2.5 Property, plant and equipment
Property, plant and equipment is stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items.
Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to ASIMCO NVH Group and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognised. All other repairs and maintenance are charged to the statement of profit or loss during the financial period in which they are incurred.
Depreciation is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives, as follows:
Estimated Estimated Category residual value useful life (%)
Buildings 10 20 years Machinery and equipment 10 10 years Motor vehicles 10 5 years Office equipment and others 10 3 years
The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period.
– III-113 – APPENDIX III-4 ACCOUNTANT’S REPORT OF ASIMCO NVH FOR THE THREE YEARS ENDED 31 DECEMBER 2015
An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount (Note 2.8).
Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognised within “Other gains, net” in the statement of profit or loss.
Construction in progress represents property, plant and equipment under construction or pending installation, and is stated at cost less impairment losses. Cost comprises direct costs of construction including borrowing costs attributable to the construction during the period of construction. No provision for depreciation is made on construction in progress until such time as the relevant assets are completed and ready for intended use.
2.6 Investment property
Investment properties include those portions of buildings that are held for long-term rental yields or for capital appreciation.
Investment properties are initially measured at cost, including any directly attributable expenditure. Subsequent to initial recognition, investment properties are stated at cost less subsequent accumulated depreciation and any accumulated impairment losses.
Depreciation of the investment properties is calculated using the straight-line method to allocate its cost less its residual value over its estimated useful life. The estimated useful life of these investment properties is estimated to be 20 years.
2.7 Intangible assets
Computer software
Acquired computer software licenses are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortised over their estimated useful lives of 2 to 5 years.
2.8 Impairment of non-financial assets
Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date.
2.9 Financial assets
2.9.1 Classification
ASIMCO NVH Group classifies its financial assets in the following categories: loans and receivables and available for sale. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition. As at 31 December 2013, 2014 and 2015, ASIMCO NVH Group only has loans and receivables category.
Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for the amounts that are settled or expected to be settled more than 12 months after the end of the reporting period. These are classified as non-current assets. ASIMCO NVH Group’s loans and receivables comprise trade receivables (Note 17), bill receivables (Note 17), deposits and other receivables (Note 17), loans to fellow subsidiaries (Note 18), pledged bank deposits (Note 19) and cash and cash equivalents (Note 19).
– III-114 – APPENDIX III-4 ACCOUNTANT’S REPORT OF ASIMCO NVH FOR THE THREE YEARS ENDED 31 DECEMBER 2015
Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for the amounts that are settled or expected to be settled more than 12 months after the end of the reporting period. These are classified as non-current assets. ASIMCO NVH Group’s loans and receivables comprise trade receivables (Note 17), bill receivables (Note 17), deposits and other receivables (Note 17), loans to fellow subsidiaries (Note 18), pledged bank deposits (Note 19) and cash and cash equivalents (Note 19).
2.9.2 Recognition and measurement
Regular way purchases and sales of financial assets are recognised on the trade-date – the date on which ASIMCO NVH Group commits to purchase or sell the asset. Investments are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or loss are initially recognised at fair value, and transaction costs are expensed in the statement of profit or loss. Financial assets are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and ASIMCO NVH Group has transferred substantially all risks and rewards of ownership. Available-for-sale financial assets are subsequently carried at fair value, except for the investments in equity instruments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured which are carried at cost. Loans and receivables are subsequently carried at amortised cost using the effective interest method.
Interest earned whilst holding the available-for-sale financial assets is recognised in the statement of profit or loss as part of other income.
2.10 Offsetting financial instruments
Financial assets and liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis or realise the asset and settle the liability simultaneously. The legally enforceable right must not be contingent on future events and must be enforceable in the normal course of business and in the event of default, insolvency or bankruptcy of ASIMCO NVH or the counterparty.
2.11 Impairment of financial assets
(a) Assets carried at amortised cost
ASIMCO NVH Group assesses at the end of each reporting period whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.
Evidence of impairment may include indications that the debtors or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganisation, and where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.
– III-115 – APPENDIX III-4 ACCOUNTANT’S REPORT OF ASIMCO NVH FOR THE THREE YEARS ENDED 31 DECEMBER 2015
For loans and receivables category, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate. The carrying amount of the asset is reduced and the amount of the loss is recognised in the consolidated statement of profit or loss. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. As a practical expedient, ASIMCO NVH Group may measure impairment on the basis of an instrument’s fair value using an observable market price.
If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor’s credit rating), the reversal of the previously recognised impairment loss is recognised in the consolidated statement of profit or loss.
(b) Available-for-sale financial assets
ASIMCO NVH Group assesses at the end of each reporting period whether there is objective evidence that a financial asset or a group of financial assets is impaired.
If an available-for-sale asset is impaired, an amount comprising the difference between its cost (net of any principal payment and amortisation) and its current fair value, less any impairment loss previously recognised in the statement of profit or loss, is removed from other comprehensive income and recognised in the statement of profit or loss.
2.12 Inventories
Inventories are stated at the lower of cost and net realisable value. Cost is determined using the weighted average cost method. The cost of finished goods and work in progress comprises, raw materials, direct labour, other direct costs and related production overheads (based on normal operating capacity). It excludes borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses.
2.13 Trade and other receivables
Trade receivables are amounts due from customers for merchandise sold in the ordinary course of business. If collection of trade and other receivables is expected in one year or less (or in the normal operating cycle of the business if longer), they are classified as current assets. If not, they are presented as non-current assets.
Trade and other receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less allowance for impairment.
2.14 Cash and cash equivalents
In the consolidated statement of cash flows, cash and cash equivalents include cash in hand, deposits held at call with banks, and other short-term highly liquid investments with original maturities of three months or less.
2.15 Paid-in capital
Paid-in capital is classified as equity.
2.16 Trade payables
Trade payables are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Trade payables are classified as current liabilities if payment is due within one year or less (or in the normal operating cycle of the business if longer). If not, they are presented as non-current liabilities.
Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method.
– III-116 – APPENDIX III-4 ACCOUNTANT’S REPORT OF ASIMCO NVH FOR THE THREE YEARS ENDED 31 DECEMBER 2015
2.17 Borrowings
Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently carried at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the statement of profit or loss over the period of the borrowings using the effective interest method.
Borrowings are classified as current liabilities unless ASIMCO NVH Group has an unconditional right to defer settlement of the liability for at least 12 months after the end of the reporting period.
2.18 Borrowing costs
General and specific borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale.
Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalisation.
All other borrowing costs are recognised in profit or loss in the period in which they are incurred.
2.19 Current and deferred income tax
The tax expense for the period comprises current and deferred tax. Tax is recognised in the statement of profit or loss, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case the tax is also recognised in other comprehensive income or directly in equity, respectively.
(a) Current income tax
The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the date of statement of financial position in the countries where ASIMCO NVH’s subsidiaries and associates operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.
(b) Deferred income tax
Inside basis differences
Deferred income tax is recognised, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred tax liabilities are not recognised if they arise from the initial recognition of goodwill, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the date of statement of financial position and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.
Deferred income tax assets are recognised only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.
– III-117 – APPENDIX III-4 ACCOUNTANT’S REPORT OF ASIMCO NVH FOR THE THREE YEARS ENDED 31 DECEMBER 2015
Outside basis differences
Deferred income tax liabilities are provided on taxable temporary differences arising from investments in subsidiaries, except for deferred income tax liability where the timing of the reversal of the temporary difference is controlled by ASIMCO NVH Group and it is probable that the temporary difference will not reverse in the foreseeable future.
Deferred income tax assets are recognised on deductible temporary differences arising from investments in subsidiaries only to the extent that it is probable the temporary difference will reverse in the future and there is sufficient taxable profit available against which the temporary difference can be utilised.
(c) Offsetting
Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority on either the taxable entity or different taxable entities where there is an intention to settle the balances on a net basis.
2.20 Employee benefits
Defined contribution pension scheme
ASIMCO NVH Group’s full-time employees are covered by a government operated defined contribution pension scheme, and are entitled to a monthly pension from their retirement dates. The PRC government is responsible for the pension liability to these retired employees. ASIMCO NVH Group is required to make annual contributions to the retirement scheme at certain percentages of employees’ basic salaries, which are charged as an expense when the employees have rendered services entitling them to the contributions and the contributions are due.
2.21 Provisions
Provisions are recognised when ASIMCO NVH Group has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. Provisions are not recognised for future operating losses.
Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small.
Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognised as interest expense.
Provisions for product warranties granted by ASIMCO NVH Group on certain products are recognised based on sales volume and past experience of the level of repairs and returns, discounted to their present values as appropriate.
– III-118 – APPENDIX III-4 ACCOUNTANT’S REPORT OF ASIMCO NVH FOR THE THREE YEARS ENDED 31 DECEMBER 2015
2.22 Revenue recognition
Revenue is measured at the fair value of the consideration received or receivable, and represents amounts receivable for goods supplied, stated net of discounts returns and value added taxes. ASIMCO NVH Group recognises revenue when the amount of revenue can be reliably measured; when it is probable that future economic benefits will flow to the entity; and when specific criteria have been met for each of ASIMCO NVH Group’s activities, as described below. ASIMCO NVH Group bases its estimates of return on historical results, taking into consideration the type of customers, the type of transactions and the specifics of each arrangement.
Sales of automotive NVH products
ASIMCO NVH Group sells NVH products to domestic and overseas automotive manufacturers. The revenue is recognised when the related goods are delivered to the place of delivery pursuant to the sales contract and the customer confirms the acceptance of the goods or ASIMCO NVH Group has objective evidence that all criteria for the acceptance have been satisfied.
2.23 Interest income
Interest income is recognised using the effective interest method. When a loan and receivable is impaired, ASIMCO NVH Group reduces the carrying amount to its recoverable amount, being the estimated future cash flow discounted at the original effective interest rate of the instrument, and continues unwinding the discount as interest income. Interest income on impaired loans and receivables is recognised using the original effective interest rate.
2.24 Dividend income
Dividend income is recognised when the right to receive payment is established.
2.25 Leases
Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the statement of profit or loss on a straight-line basis over the period of the lease.
Prepaid lease payments
Interest in leasehold land that is accounted for as an operating lease is presented as “prepaid lease payments” in the statement of financial position and is amortised over the lease term on a straight-line basis.
2.26 Government grants
Grants from the government are recognised at their fair value where there is a reasonable assurance that the grant will be received and ASIMCO NVH Group will comply with all attached conditions.
Government grants relating to costs are deferred and recognised in the statement of profit or loss over the period necessary to match them with the costs that they are intended to compensate.
Government grants relating to property, plant and equipment are included in non-current liabilities as deferred government grants and are credited to the statement of profit or loss on a straight-line basis over the expected lives of the related assets.
2.27 Dividend distribution
Dividend distribution to ASIMCO NVH’s shareholders is recognised as a liability in ASIMCO NVH Group’s and ASIMCO NVH’s financial statements in the period in which the dividends are approved by ASIMCO NVH’s shareholders or directors, where appropriate.
– III-119 – APPENDIX III-4 ACCOUNTANT’S REPORT OF ASIMCO NVH FOR THE THREE YEARS ENDED 31 DECEMBER 2015
3 FINANCIAL RISK MANAGEMENT
3.1 Financial risk factors
ASIMCO NVH Group’s activities expose it to a variety of financial risks: market risk (currency risk), credit risk and liquidity risk.
(a) Market risk
Foreign exchange risk
Foreign currency risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. ASIMCO NVH Group’s exposure to the risk of changes in foreign exchange rates relates primarily to ASIMCO NVH Group’s operating activities (when revenue or expense is denominated in a different currency from ASIMCO NVH’s functional currency).
ASIMCO NVH Group’s businesses are mainly located in the PRC and are mainly transacted and settled in RMB. Certain sales, purchases and borrowings are settled in foreign currencies. The fluctuation of the exchange rates of foreign currencies against the RMB will affect ASIMCO NVH Group’s results of operations.
As at 31 December 2013, 2014 and 2015, if RMB had strengthened/weakened by 10% against US dollar with all other variables held constant, profit before tax for the year would have been RMB2,313,000, RMB2,820,000 and RMB3,005,000 lower/higher, respectively, mainly as a result of foreign exchange losses/gains on translation of US dollar-denominated trade receivables.
(b) Credit risk
Credit risk is the risk that a counter party will not meet its obligations under a financial instrument or customer contract, leading to a financial loss. ASIMCO NVH Group is exposed to credit risk from trade receivables, bills receivable, other receivables, loans to fellow subsidiaries, pledged bank deposits and cash and cash equivalents.
Customer credit risk is managed by each operating company subject to ASIMCO NVH Group’s established policy, procedures and control relating to customer credit risk management. ASIMCO NVH Group’s policy is to perform credit verification for all customers who have transactions with ASIMCO NVH Group. Further, credit limits, credit terms and sales methods are determined based on the credit history of customers. ASIMCO NVH Group maintains long-term relationships with several large customers which management believes credit risk in relation with these customers is low. ASIMCO NVH Group does not hold collateral as security.
Loans to fellow subsidiaries are arranged by the parent company of ASIMCO NVH. Based on the overall financial position of the parent company, management believes the credit risk in relation with the loans to fellow subsidiaries is low.
All ASIMCO NVH Group’s cash and cash equivalents are held in major banks located in the PRC, which management believes are of high credit quality.
The carrying amounts of cash and cash equivalents, pledged deposits, trade and other receivables, bills receivable and loans to fellow subsidiaries, represent ASIMCO NVH Group’s maximum exposure to credit risk in relation to financial assets.
– III-120 – APPENDIX III-4 ACCOUNTANT’S REPORT OF ASIMCO NVH FOR THE THREE YEARS ENDED 31 DECEMBER 2015
(c) Liquidity risk
ASIMCO NVH Group’s objective is to maintain a balance between continuity of funding and flexibility through the use of bills, bank loans and other interest-bearing loans.
The table below analyses ASIMCO NVH Group’s and ASIMCO NVH’s non-derivative financial liabilities into relevant maturity groupings based on the remaining period at the date of statement of financial position to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows.
ASIMCO NVH Group
Within one year RMB’000
As at 31 December 2013 Trade payables 91,842 Financial liabilities included in trade and other payables 99,490 Borrowings 99,447
Total 290,779
As at 31 December 2014 Trade payables 121,224 Bills payable 5,679 Financial liabilities included in trade and other payables 117,191 Borrowings 79,795
Total 323,889
As at 31 December 2015 Trade payables 144,300 Financial liabilities included in trade and other payables 207,918 Borrowings 85,028
Total 437,246
– III-121 – APPENDIX III-4 ACCOUNTANT’S REPORT OF ASIMCO NVH FOR THE THREE YEARS ENDED 31 DECEMBER 2015
ASIMCO NVH
Within one year RMB’000
As at 31 December 2013 Trade payables 104,089 Financial liabilities included in trade and other payables 87,172 Borrowings 99,447
Total 290,708
As at 31 December 2014 Trade payables 146,499 Bills payable 5,679 Financial liabilities included in trade and other payables 103,731 Borrowings 79,795
Total 335,704
As at 31 December 2015 Trade payables 172,725 Financial liabilities included in trade and other payables 194,805 Borrowings 85,028
Total 452,558
3.2 Capital management
The primary objective of ASIMCO NVH Group’s capital management is to ensure that it maintains healthy capital ratios in order to support its business and maximise shareholders’ value.
ASIMCO NVH Group manages its capital structure and makes adjustments to it in light of changes in economic conditions. To maintain or adjust the capital structure, ASIMCO NVH Group may adjust the dividend payment to shareholders, return capital to shareholders or issue new shares. No changes were made in the objectives, policies or processes for managing capital during the Relevant Periods.
ASIMCO NVH Group monitors capital using a liability to asset ratio, which is total liabilities divided by the total assets.
ASIMCO NVH Group’s strategy is to maintain the liability to asset ratio at a healthy capital level in order to support its business. The principal strategies adopted by ASIMCO NVH Group include, without limitation, reviewing future cash flow requirement and the ability to meet debt repayment schedules when they fall due, maintaining a reasonable level of available banking facilities and adjusting investment plans and financing plans, if necessary, to ensure that ASIMCO NVH Group has a reasonable level of capital to support its business. The liability to asset ratios at the end of the reporting period were as follows:
As at 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Total liabilities 303,445 332,528 450,659 Total assets 537,958 609,747 690,201
Liability to asset ratio 56% 55% 65%
– III-122 – APPENDIX III-4 ACCOUNTANT’S REPORT OF ASIMCO NVH FOR THE THREE YEARS ENDED 31 DECEMBER 2015
3.3 Fair value estimation
Financial instruments carried at fair value are analysed by level of the inputs to valuation techniques used to measure fair value. Such inputs are categorised into three levels within a fair value hierarchy as follows:
• Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1).
• Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (level 2).
• Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (level 3).
As at 31 December 2013, 2014 and 2015, ASIMCO NVH Group has no financial instruments carried at fair value. Carrying amounts of financial assets (including trade and other receivables, pledged bank deposits, cash and cash equivalents and loans to fellow subsidiaries) and financial liabilities (including trade and other payables and borrowings) approximate their fair values.
4 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
ASIMCO NVH Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are addressed below.
(a) Impairment of receivables
ASIMCO NVH Group recognises provisions based on the judgement of recovery of receivables. A bad debt provision is required to be recognised when there are indications that the receivable cannot be recovered. Recognition of bad debt provisions requires the use of judgement and estimates. If the revised estimates deviate from the current estimates, then any difference arising from changes of accounting estimates will affect the carrying value of debtors in the relevant accounting periods.
(b) Impairment of inventories
ASIMCO NVH Group recognises provision based on the estimates of recovery of inventories. The estimates are made with reference to aged inventory analysis, projections of expected future saleability of goods and management experience and judgement. Impairment of inventories will be made when the carrying amounts of inventories are below their estimated net realisable values.
(c) Warranty provisions
A provision is recognised for expected warranty claims on products sold during the warranty guaranteed period. Assumptions used to calculate the provision for warranties are based on current sales levels and historical information for return and repairment. The estimation basis is reviewed on an ongoing basis and revised where appropriate. For further details about the warranty provision, please refer to Note 22.
– III-123 – APPENDIX III-4 ACCOUNTANT’S REPORT OF ASIMCO NVH FOR THE THREE YEARS ENDED 31 DECEMBER 2015
5 SEGMENT INFORMATION
For management purposes, ASIMCO NVH Group operates in one business unit and has one reportable operating segment, which is manufacturing and sale of automotive NVH products.
(a) Geographical information
(i) Analysis of revenue
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
The PRC 370,683 438,662 495,281 United States of America 73,252 65,108 59,489 Europe 22,194 26,253 36,394 Japan 6,616 6,474 7,208 Other countries 33,711 59,876 68,735
Total 506,456 596,373 667,107
The revenue information above is based on the locations of the customers.
(ii) Non-current assets, other than financial instruments and deferred income tax assets, by country:
31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
The PRC 110,381 129,410 174,147
(b) Information about major customers
Revenues of RMB34,200,000, RMB41,022,000 and RMB37,123,000 for the years ended 31 December 2013, 2014 and 2015 are derived from a single external customer from the PRC.
6 REVENUE
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Sales of automotive products 489,542 576,568 641,618 Sales of materials and semi-products 13,706 15,419 19,659 Others 3,208 4,386 5,830
Total 506,456 596,373 667,107
– III-124 – APPENDIX III-4 ACCOUNTANT’S REPORT OF ASIMCO NVH FOR THE THREE YEARS ENDED 31 DECEMBER 2015
7 OTHER INCOME
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Government grants 3,855 3,638 3,414 Interest income on loans to fellow subsidiaries 268 1,497 1,755 Interest income on bank deposits 51 68 88
4,174 5,203 5,257
8 OTHER LOSSES, NET
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Impairment of trade and other receivables (358) (402) (1,083) Impairment of property, plant and equipment (268) (2,644) (1,485) Net foreign exchange (losses)/gains (1,987) (501) 1,812 Gain/(loss) on disposal of property, plant and equipment, net 71 (418) 34 Others (133) (160) (1,091)
Total (2,675) (4,125) (1,813)
9 EXPENSES BY NATURE
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Changes in inventories of finished goods and work in progress (13,301) (7,183) (26,555) Raw materials and consumables used 261,695 298,474 371,092 Inventory write-down 258 964 1,124 Employee benefit expense (Note 10) 121,948 129,561 131,123 Water and electricity expenses 18,282 18,570 19,461 Maintenance and repair costs 13,602 19,171 15,802 Depreciation and amortisation 11,495 13,337 14,669 Transportation expenses 13,515 18,370 24,665 Service fees (Note 28) 4,764 5,695 6,441 Entertainment expenses 5,563 4,449 5,359 Sales tax and surcharges 2,894 4,126 4,497 Travel expense 3,071 3,267 3,966 Auditors’ remuneration – audit services 494 514 799 Product warranty costs 3,842 3,973 3,880 Others 21,063 29,501 30,892
Total 469,185 542,789 607,215
– III-125 – APPENDIX III-4 ACCOUNTANT’S REPORT OF ASIMCO NVH FOR THE THREE YEARS ENDED 31 DECEMBER 2015
10 EMPLOYEE BENEFIT EXPENSE
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Salaries, allowances and other benefits 105,564 117,033 117,234 Pensions – defined contribution plans 16,384 12,528 13,889
Total 121,948 129,561 131,123
11 FINANCE COSTS
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Interest on bank borrowings 6,090 5,149 5,235
12 INCOME TAX EXPENSES
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Current tax: Current tax on profits for the year 11,211 8,048 8,014
Deferred tax: Origination and reversal of temporary differences (5,114) (1,241) (236)
Total income tax expenses 6,097 6,807 7,778
Pursuant to Circular of the State Administration of Taxation on Issues Concerning Enterprise Income Tax Collection on High-tech Enterprises effective from 3 December 2008, ASIMCO NVH was entitled to a preferential tax rate of 15% for corporate income tax for the three years ended 31 December 2013, 2014 and 2015.
Pursuant to the relevant laws and regulations in the PRC, the statutory enterprise income tax rate of 25% was applied to the subsidiaries of ASIMCO NVH for the year ended 31 December 2013, 2014 and 2015.
– III-126 – APPENDIX III-4 ACCOUNTANT’S REPORT OF ASIMCO NVH FOR THE THREE YEARS ENDED 31 DECEMBER 2015
A reconciliation of the tax expense applicable to profit before tax at the applicable tax rate for ASIMCO NVH to the tax expense is as follows:
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Profit before tax 32,680 49,513 58,101
At ASIMCO NVH’s preferential income tax rate of 15% 4,902 7,427 8,715 Effect of different tax rate applicable to the subsidiaries of ASIMCO NVH subsidiaries 401 577 419 Additional deduction of research and development expenses – (1,367) (1,876) Non-deductible expenses for tax purposes 794 170 520
6,097 6,807 7,778
– III-127 – APPENDIX III-4 ACCOUNTANT’S REPORT OF ASIMCO NVH FOR THE THREE YEARS ENDED 31 DECEMBER 2015
13 PROPERTY, PLANT AND EQUIPMENT
ASIMCO NVH Group
Machinery Office and Motor equipment Construction Buildings equipment vehicles and others in progress Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
At 1 January 2013 Cost 88,909 172,487 2,589 5,299 14,342 283,626 Accumulated depreciation (58,943) (114,730) (1,586) (3,892) – (179,151) Impairment provision (86) (7,457) – (22) (58) (7,623)
Net book amount 29,880 50,300 1,003 1,385 14,284 96,852
Year ended 31 December 2013 Opening net book amount 29,880 50,300 1,003 1,385 14,284 96,852 Additions 118 597 559 85 21,736 23,095 Transfers 3,092 27,385 156 423 (31,056) – Disposals – (270) (63) (4) – (337) Depreciation charge (3,959) (6,190) (263) (839) – (11,251) Provision for impairment – (268) – – – (268)
Closing net book amount 29,131 71,554 1,392 1,050 4,964 108,091
At 31 December 2013 Cost 92,119 195,991 2,677 5,768 5,022 301,577 Accumulated depreciation (62,902) (117,037) (1,285) (4,696) – (185,920) Impairment provision (86) (7,400) – (22) (58) (7,566)
Net book amount 29,131 71,554 1,392 1,050 4,964 108,091
Year ended 31 December 2014 Opening net book amount 29,131 71,554 1,392 1,050 4,964 108,091 Additions 434 1,644 292 37 28,367 30,774 Transfers – 21,278 1,005 392 (22,675) – Disposals (5) (508) (311) (63) – (887) Depreciation charge (3,536) (8,522) (410) (625) – (13,093) Provision for impairment (262) (2,278) (60) (44) – (2,644)
Closing net book amount 25,762 83,168 1,908 747 10,656 122,241
At 31 December 2014 Cost 91,856 187,792 2,889 5,711 10,714 298,962 Accumulated depreciation (66,001) (97,173) (981) (4,914) – (169,069) Impairment provision (93) (7,451) – (50) (58) (7,652)
Net book amount 25,762 83,168 1,908 747 10,656 122,241
– III-128 – APPENDIX III-4 ACCOUNTANT’S REPORT OF ASIMCO NVH FOR THE THREE YEARS ENDED 31 DECEMBER 2015
ASIMCO NVH Group
Machinery Office and Motor equipment Construction Buildings equipment vehicles and others in progress Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 At 1 January 2015 Cost 91,856 187,792 2,889 5,711 10,714 298,962 Accumulated depreciation (66,001) (97,173) (981) (4,914) – (169,069) Impairment provision (93) (7,451) – (50) (58) (7,652)
Net book amount 25,762 83,168 1,908 747 10,656 122,241
Year ended 31 December 2015 Opening net book amount 25,762 83,168 1,908 747 10,656 122,241 Additions 14 3,732 486 14 53,759 58,005 Transfers – 30,997 113 374 (31,484) – Disposals (33) (2,672) (134) (12) – (2,851) Reclassification (3) (27) (26) 56 – – Depreciation charge (2,159) (11,236) (475) (355) – (14,225) Provision for impairment – (1,195) (14) (31) (245) (1,485)
Closing net book amount 23,581 102,767 1,858 793 32,686 161,685
At 31 December 2015 Cost 91,508 209,958 2,873 6,382 32,989 343,710 Accumulated depreciation (67,865) (101,575) (1,001) (5,520) – (175,961) Impairment provision (62) (5,616) (14) (69) (303) (6,064)
Net book amount 23,581 102,767 1,858 793 32,686 161,685
During the year ended 31 December 2013, the depreciation charges of ASIMCO NVH Group were recorded in cost of sales, selling and distribution costs and administrative expenses with amount of RMB9,683,000, RMB106,000, and RMB1,462,000, respectively.
During the year ended 31 December 2014, the depreciation charges of ASIMCO NVH Group were recorded in cost of sales, selling and distribution costs and administrative expenses with amount of RMB10,007,000, RMB92,000, and RMB2,994,000, respectively.
During the year ended 31 December 2015, the depreciation charges of ASIMCO NVH Group were recorded in cost of sales, selling and distribution costs and administrative expenses with amount of RMB11,131,000, RMB74,000, and RMB3,020,000, respectively.
During the year ended 31 December 2013, 2014, and 2015, ASIMCO NVH Group had no borrowing costs being capitalised.
As at 31 December 2013, 2014 and 2015, ASIMCO NVH Group’s certain buildings and plant, machinery and equipment with a net carrying amount of RMB14,018,000, RMB11,973,000, and RMB19,001,000 respectively were pledged to secure the short-term borrowings of ASIMCO NVH Group (Note 21).
– III-129 – APPENDIX III-4 ACCOUNTANT’S REPORT OF ASIMCO NVH FOR THE THREE YEARS ENDED 31 DECEMBER 2015
ASIMCO NVH
Machinery Office and Motor equipment Construction Buildings equipment vehicles and others in progress Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
At 1 January 2013 Cost 69,759 165,548 2,589 5,183 14,130 257,209 Accumulated depreciation (44,590) (112,575) (1,586) (3,850) – (162,601) Impairment provision (72) (7,228) – (22) (58) (7,380)
Net book amount 25,097 45,745 1,003 1,311 14,072 87,228
Year ended 31 December 2013 Opening net book amount 25,097 45,745 1,003 1,311 14,072 87,228 Additions 118 42 559 35 18,803 19,557 Transfers 3,092 24,603 156 423 (28,274) – Disposals – (199) (63) (4) – (266) Depreciation charge (3,100) (5,471) (263) (822) – (9,656) Provision for impairment – (268) – – – (268)
Closing net book amount 25,207 64,452 1,392 943 4,601 96,595
At 31 December 2013 Cost 72,969 185,917 2,677 5,602 4,659 271,824 Accumulated depreciation (47,690) (114,293) (1,285) (4,637) – (167,905) Impairment provision (72) (7,172) – (22) (58) (7,324)
Net book amount 25,207 64,452 1,392 943 4,601 96,595
Year ended 31 December 2014 Opening net book amount 25,207 64,452 1,392 943 4,601 96,595 Additions 395 – 292 – 25,555 26,242 Transfers – 20,044 1,006 392 (21,442) – Disposals (5) (506) (311) (63) – (885) Depreciation charge (2,690) (7,310) (411) (993) – (11,404) Provision for impairment (262) (2,149) (60) – – (2,471)
Closing net book amount 22,645 74,531 1,908 279 8,714 108,077
At 31 December 2014 Cost 71,628 178,579 2,889 3,338 8,772 265,206 Accumulated depreciation (48,885) (96,626) (981) (3,034) – (149,526) Impairment provision (98) (7,422) – (25) (58) (7,603)
Net book amount 22,645 74,531 1,908 279 8,714 108,077
– III-130 – APPENDIX III-4 ACCOUNTANT’S REPORT OF ASIMCO NVH FOR THE THREE YEARS ENDED 31 DECEMBER 2015
ASIMCO NVH
Machinery Office and Motor equipment Construction Buildings equipment vehicles and others in progress Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
At 1 January 2015 Cost 71,628 178,579 2,889 3,338 8,772 265,206 Accumulated depreciation (48,885) (96,626) (981) (3,034) – (149,526) Impairment provision (98) (7,422) – (25) (58) (7,603)
Net book amount 22,645 74,531 1,908 279 8,714 108,077
Year ended 31 December 2015 Opening net book amount 22,645 74,531 1,908 279 8,714 108,077 Additions – 2,620 486 7 24,890 28,003 Transfers – 29,247 113 374 (29,734) – Disposals (33) (50) (134) (4) – (221) Reclassification (3) (27) (26) 56 – Depreciation charge (1,698) (10,280) (475) (327) – (12,780) Provision for impairment – (1,195) (14) (31) (245) (1,485)
Closing net book amount 20,911 94,846 1,858 354 3,625 121,594
At 31 December 2015 Cost 71,266 201,125 2,873 4,019 3,928 283,211 Accumulated depreciation (50,288) (100,692) (1,001) (3,621) – (155,602) Impairment provision (67) (5,587) (14) (44) (303) (6,015)
Net book amount 20,911 94,846 1,858 354 3,625 121,594
During the year ended 31 December 2013, the depreciation charges of ASIMCO NVH were recorded in cost of sales, selling and distribution costs and administrative expenses with amount of RMB8,089,000, RMB106,000, and RMB1,461,000, respectively.
During the year ended 31 December 2014, the depreciation charges of ASIMCO NVH were recorded in cost of sales, selling and distribution costs and administrative expenses with amount of RMB9,132,000, RMB92,000, and RMB2,180,000, respectively.
During the year ended 31 December 2015, the depreciation charges of ASIMCO NVH were recorded in cost of sales, selling and distribution costs and administrative expenses with amount of RMB9,669,000, RMB94,000, and RMB3,017,000, respectively.
During the year ended 31 December 2013, 2014, and 2015, ASIMCO NVH had no borrowing costs being capitalised.
As at 31 December 2013, 2014 and 2015, ASIMCO NVH’s certain buildings and plant, machinery and equipment with a net carrying amount of approximately RMB14,018,000, RMB11,973,000, and RMB19,001,000 respectively were pledged to secure the short-term borrowings of ASIMCO NVH (Note 21).
– III-131 – APPENDIX III-4 ACCOUNTANT’S REPORT OF ASIMCO NVH FOR THE THREE YEARS ENDED 31 DECEMBER 2015
14 PREPAID LEASE PAYMENTS
ASIMCO NVH Group ASIMCO NVH Year ended 31 December Year ended 31 December 2013 2014 2015 2013 2014 2015 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
At 1 January Cost 6,314 6,314 11,438 5,228 5,228 5,228 Accumulated amortisation (3,847) (4,064) (4,281) (3,185) (3,364) (3,543)
Net book amount 2,467 2,250 7,157 2,043 1,864 1,685
Year ended 31 December Opening net book amount 2,467 2,250 7,157 2,043 1,864 1,685 Additions – 5,124 5,638––– Amortisation (217) (217) (431) (179) (179) (179)
Closing net book amount 2,250 7,157 12,364 1,864 1,685 1,506
At 31 December Cost 6,314 11,438 17,076 5,228 5,228 5,228 Accumulated amortisation (4,064) (4,281) (4,712) (3,364) (3,543) (3,722)
Net book amount 2,250 7,157 12,364 1,864 1,685 1,506
The leasehold land is situated in the PRC and is held under medium term leases.
As at 31 December 2013, 2014, and 2015, prepaid lease payments with carrying amount of RMB1,639,000, RMB2,034,000 and RMB12,364,000 respectively were pledged to secure the short-term borrowings of ASIMCO NVH Group (Note 21).
15 INVESTMENTS IN SUBSIDIARIES – ASIMCO NVH
The following is a list of the principal subsidiaries at 31 December 2015:
Principal Attributable equity interests activities and of ASIMCO NVH Group Place and date of place of Particulars of as at 31 December Name incorporation operation paid-in capital 2013 2014 2015
Anhui ASIMCO Hermetic Seal Anhui, the PRC/ Automotive RMB33,000,000 N/A 100% 100% Technology Co., Ltd. 9 September 2014 components (安徽亞新科密封技術有限公司) manufacture in the PRC
Ningguo ASIMCO Hardware Anhui, the PRC/ Automotive RMB20,000,000 100% 100% 100% Co., Ltd. (寧國市亞新科五金製品 7 August 2008 components 有限公司) manufacture in the PRC
– III-132 – APPENDIX III-4 ACCOUNTANT’S REPORT OF ASIMCO NVH FOR THE THREE YEARS ENDED 31 DECEMBER 2015
16 INVENTORIES
ASIMCO NVH Group ASIMCO NVH Year ended 31 December Year ended 31 December 2013 2014 2015 2013 2014 2015 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
Raw materials 6,859 15,784 16,788 11,578 14,118 13,639 Work in progress 14,545 6,649 8,717 6,047 4,545 6,672 Finished goods 37,501 54,018 78,378 37,701 50,931 74,726
Total inventories at the lower of cost and net realisable value 58,905 76,451 103,883 55,326 69,594 95,037
During the years ended 31 December 2013, 2014, and 2015, provision of RMB258,000, RMB964,000 and RMB1,124,000 respectively, for obsolete inventory impairment were recognised in cost of sales.
17 TRADE AND OTHER RECEIVABLES
ASIMCO NVH Group ASIMCO NVH 31 December 31 December 2013 2014 2015 2013 2014 2015 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
Trade receivables 176,105 215,290 227,669 176,105 215,290 227,669 Less: allowance for impairment (2,477) (2,631) (883) (2,477) (2,631) (883)
Trade receivables – net 173,628 212,659 226,786 173,628 212,659 226,786 Bills receivable 106,798 109,151 115,876 106,798 109,151 115,876
280,426 321,810 342,662 280,426 321,810 342,662 Prepayments to suppliers 3,304 1,178 1,822 1,740 770 1,336 Other receivables 3,741 3,687 5,431 3,634 3,880 12,505 Less: allowance for impairment (1) (240) (1,370) – (231) (1,360)
7,044 4,625 5,883 5,374 4,419 12,481
287,470 326,435 348,545 285,800 326,229 355,143
ASIMCO NVH Group’s trading terms with its customers are mainly on credit, except for new customers, where payment in advance is normally required. The credit period is generally three months, extending up to six months for major customers. Each customer has a maximum credit limit. ASIMCO NVH Group seeks to maintain strict control over its outstanding receivables and has a credit control department to minimise credit risk. Overdue balances are reviewed regularly by senior management. In view of the aforementioned and the fact that ASIMCO NVH Group’s trade receivables relate to a large number of diversified customers, there is no significant concentration of credit risk. ASIMCO NVH Group does not hold any collateral or other credit enhancements over its trade receivable and bills receivable balances. Trade receivables and bills receivable are non-interest bearing.
As at 31 December 2013, 2014 and 2015, trade receivables of RMB36,977,000, RMB9,064,000 and RMB7,221,000, respectively, were pledged to secure the short-term borrowings of ASIMCO NVH Group (Note 21).
– III-133 – APPENDIX III-4 ACCOUNTANT’S REPORT OF ASIMCO NVH FOR THE THREE YEARS ENDED 31 DECEMBER 2015
As at 31 December 2013, 2014 and 2015 bank acceptance notes of RMB29,710,000, RMB8,335,000 and RMB27,870,000, respectively, were pledged for bank borrowings of ASIMCO NVH Group (Note 21).
As at 31 December 2013, 2014 and 2015, bank acceptance notes of RMB13,266,000, RMB25,366,000, and RMB25,380,000 respectively, were endorsed to banks or suppliers of ASIMCO NVH Group but were not derecognised as these bank acceptance notes were issued by unlisted commercial banks.
An ageing analysis of the trade receivables based on the invoice date and net of provisions, is as follows:
ASIMCO NVH Group ASIMCO NVH 31 December 31 December 2013 2014 2015 2013 2014 2015 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
Within 6 months 172,767 210,982 225,508 172,767 210,982 225,508 6 to 12 months 113 1,658 1,172 113 1,658 1,172 Over 1 year 748 19 106 748 19 106
173,628 212,659 226,786 173,628 212,659 226,786
An ageing analysis of the bills receivables based on the invoice date and net of provisions, is as follows:
ASIMCO NVH Group ASIMCO NVH 31 December 31 December 2013 2014 2015 2013 2014 2015 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
Within 6 months 106,798 109,151 115,876 106,798 109,151 115,876
The movements in provision for impairment of trade receivables are as follows:
ASIMCO NVH Group ASIMCO NVH Year ended 31 December Year ended 31 December 2013 2014 2015 2013 2014 2015 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
At 1 January 2,235 2,477 2,631 2,235 2,477 2,631 Impairment loss recognised 358 163 (47) 358 163 (47) Amount written off as uncollectible (116) (9) (1,701) (116) (9) (1,701)
At 31 December 2,477 2,631 883 2,477 2,631 883
As at 31 December 2013, 2014 and 2015, there are no significant trade receivables and bills receivable that are past due but are not impaired.
The individually impaired trade receivables mainly relate to customers that were in financial difficulties or were in default in principal payments and only a portion or none of the receivables is expected to be recovered.
– III-134 – APPENDIX III-4 ACCOUNTANT’S REPORT OF ASIMCO NVH FOR THE THREE YEARS ENDED 31 DECEMBER 2015
The carrying amounts of ASIMCO NVH Group’s trade receivables and bills receivable are denominated in the following currencies:
ASIMCO NVH Group ASIMCO NVH 31 December 31 December 2013 2014 2015 2013 2014 2015 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
RMB 255,902 288,676 310,847 255,902 288,708 310,847 US dollar 22,162 28,073 24,706 22,162 28,073 24,706 EURO 2,362 5,061 7,109 2,362 5,029 7,109
280,426 321,810 342,662 280,426 321,810 342,662
The movements in provision for impairment of prepayments, deposits and other receivables are as follows:
ASIMCO NVH Group ASIMCO NVH Year ended 31 December Year ended 31 December 2013 2014 2015 2013 2014 2015 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
At 1 January 4 1 240 3 – 231 Impairment loss recognised – 239 1,130 – 231 1,129 Amount written off as uncollectible (3) – – (3) – –
At 31 December 1 240 1,370 – 231 1,360
– III-135 – APPENDIX III-4 ACCOUNTANT’S REPORT OF ASIMCO NVH FOR THE THREE YEARS ENDED 31 DECEMBER 2015
18 LOANS TO FELLOW SUBSIDIARIES
ASIMCO NVH Group and ASIMCO NVH
As at 31 December 2013, 2014 and 2015, a commercial bank was entrusted by ASIMCO NVH to extend the entrusted loans to its fellow subsidiaries for one more year. All entrusted loans to fellow subsidiaries are all denominated in RMB. Details are as below:
Amount of loan Due date Interest rate RMB’000
As at 31 December 2013
Entrusted loan to: ASIMCO (China) Limited 7,000 1 September 2014 4.00% ASIMCO (China) Limited 3,000 1 September 2014 4.00% ASIMCO (China) Limited 5,000 1 September 2014 4.00% ASIMCO (Tianjin) Auto Components Co., Ltd. 5,000 1 September 2014 5.00%
20,000
As at 31 December 2014
Entrusted loan to: ASIMCO (China) Limited 3,000 1 September 2015 4.00% ASIMCO (China) Limited 5,000 1 September 2015 4.00% ASIMCO (China) Limited 7,000 1 September 2015 4.00% ASIMCO (China) Limited 8,000 1 September 2015 6.20% ASIMCO (Tianjin) Auto Components Co., Ltd. 5,000 1 September 2015 5.00% ASIMCO (Tianjin) Auto Components Co., Ltd. 5,000 1 September 2015 6.20%
33,000
As at 31 December 2015
Entrusted loan to: ASIMCO (China) Limited 3,000 1 September 2016 5.50% ASIMCO (China) Limited 5,000 1 September 2016 5.50% ASIMCO (China) Limited 7,000 1 September 2016 5.50% ASIMCO (China) Limited 8,000 1 September 2016 6.20% ASIMCO (Tianjin) Auto Components Co., Ltd. 5,000 1 September 2016 5.00% ASIMCO (Tianjin) Auto Components Co., Ltd. 5,000 1 September 2016 6.20%
33,000
Entrusted loans to fellow subsidiaries are all denominated in RMB.
– III-136 – APPENDIX III-4 ACCOUNTANT’S REPORT OF ASIMCO NVH FOR THE THREE YEARS ENDED 31 DECEMBER 2015
19 CASH AND CASH EQUIVALENTS AND PLEDGED DEPOSITS
ASIMCO NVH Group ASIMCO NVH Year ended 31 December Year ended 31 December 2013 2014 2015 2013 2014 2015 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
Cash and bank balances 44,109 26,617 12,556 32,969 21,918 12,074 Less: pledged deposits for issuing letters of credit (1,062) (3,088) (1) (1,062) (3,088) (1)
Cash and cash equivalents 43,047 23,529 12,555 31,907 18,830 12,073
The carrying amounts of ASIMCO NVH Group’s cash and cash equivalents are denominated in the following currencies:
ASIMCO NVH Group ASIMCO NVH 31 December 31 December 2013 2014 2015 2013 2014 2015 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
RMB 42,798 23,378 8,590 31,658 18,679 8,108 US dollar 210 127 3,965 210 127 3,965 EURO 39 24 – 39 24 –
43,047 23,529 12,555 31,907 18,830 12,073
20 TRADE AND OTHER PAYABLES
ASIMCO NVH Group ASIMCO NVH 31 December 31 December 2013 2014 2015 2013 2014 2015 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
Trade payables 91,842 121,224 144,300 104,089 146,499 172,725 Bill payables – 5,679 – – 5,679 –
91,842 126,903 144,300 104,089 152,178 172,725
Accrued payroll 62,468 69,687 73,392 55,122 60,878 66,239 Dividend payable 1,079 1,079 82,220 1,079 1,079 82,220 Other payables 35,003 46,068 51,967 30,031 41,417 46,007 Taxes payable 1,719 1,979 8,291 1,380 1,989 7,816 Interest payable 940 357 339 940 357 339
101,209 119,170 216,209 88,552 105,720 202,621
193,051 246,073 360,509 192,641 257,898 375,346
– III-137 – APPENDIX III-4 ACCOUNTANT’S REPORT OF ASIMCO NVH FOR THE THREE YEARS ENDED 31 DECEMBER 2015
At 31 December 2013, 2014 and 2015, the ageing analysis of the trade payables based on invoice date were are follows:
ASIMCO NVH Group ASIMCO NVH 31 December 31 December 2013 2014 2015 2013 2014 2015 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
Within 6 months 86,156 113,719 136,261 99,395 139,746 165,483 6 to 12 months 2,114 2,491 1,347 1,523 2,298 1,266 1 to 2 year 1,113 1,811 1,774 712 1,653 1,608 2 to 3 year 128 748 1,723 128 508 1,575 Over 3 year 2,331 2,455 3,195 2,331 2,294 2,793
91,842 121,224 144,300 104,089 146,499 172,725
An ageing analysis of the bills payables based on the invoice date and net of provisions, is as follows:
ASIMCO NVH Group ASIMCO NVH 31 December 31 December 2013 2014 2015 2013 2014 2015 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
Within 6 months – 5,679 – – 5,679 –
21 BORROWINGS
ASIMCO NVH Group and ASIMCO NVH
31 December 2013 2014 2015 Interest rate RMB’000 Interest rate RMB’000 Interest rate RMB’000
Current Short-term bank loans – secured 4.92% 97,086 5.09% 77,904 4.01% 83,388
The above secured bank loans were secured by certain assets, and their carrying values are as follows:
31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Property, plant and equipment 14,018 11,973 19,001 Trade receivables 36,977 9,064 7,221 Bills receivable 29,710 8,335 27,870 Prepaid lease payments 1,639 2,034 12,364
82,344 31,406 66,456
The fair value of the borrowings approximates their carrying amount, as the impact of discounting is not significant.
– III-138 – APPENDIX III-4 ACCOUNTANT’S REPORT OF ASIMCO NVH FOR THE THREE YEARS ENDED 31 DECEMBER 2015
The carrying amounts of ASIMCO NVH Group’s borrowings are denominated in the following currencies:
31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
RMB 78,000 62,301 69,751 US dollar 19,086 15,603 13,637
97,086 77,904 83,388
22 PROVISIONS
The gross movement on provisions is as follows:
ASIMCO NVH Group ASIMCO NVH Year ended 31 December Year ended 31 December 2013 2014 2015 2013 2014 2015 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
At 1 January 1,126 1,644 2,169 1,035 1,493 1,877 Additional provisions 3,842 3,973 3,880 3,635 3,198 3,305 Utilised during the year (3,324) (3,448) (2,591) (3,177) (2,814) (2,546)
At 31 December 1,644 2,169 3,458 1,493 1,877 2,636
A provision is recognised for expected warranty claims on products sold during warranty period, based on past experience of the level of repairs and returns. Assumptions used to calculate the provision for warranties were based on current sales levels and current information available about returns based on the estimated warranty period for all products sold. The estimation basis is reviewed on an ongoing basis and revised where appropriate.
23 DIVIDENDS
A dividend of RMB1,079,000 was approved in 2013. No dividend was declared in 2014. A dividend of RMB81,140,000 in respect of the accumulated distributable profit was approved by the board of directors in 2015 and has been reflected in the dividend payable (net of withholding tax payable).
– III-139 – APPENDIX III-4 ACCOUNTANT’S REPORT OF ASIMCO NVH FOR THE THREE YEARS ENDED 31 DECEMBER 2015
24 DEFERRED INCOME TAX
The analysis of deferred tax is as follows:
ASIMCO NVH Group ASIMCO NVH 31 December 31 December 2013 2014 2015 2013 2014 2015 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
Deferred income tax assets: Deferred income tax assets to be recovered after more than 12 months 1,126 1,142 913 1,099 1,143 905 Deferred income tax assets to be recovered within 12 months 15,467 16,692 17,157 12,587 13,763 13,989
Cash and cash equivalents 16,593 17,834 18,070 13,686 14,906 14,894
The gross movement on the deferred income tax accounts is as follows:
ASIMCO NVH Group ASIMCO NVH 2013 2014 2015 2013 2014 2015 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
At 1 January 11,479 16,593 17,834 9,334 13,686 14,906 Credited/(charged) to statement of profit or loss 5,114 1,241 236 4,352 1,220 (12)
At 31 December 16,593 17,834 18,070 13,686 14,906 14,894
The movement in deferred income tax assets and liabilities without taking into consideration of the offsetting of balances within the same tax jurisdiction during the year is as follows:
Deferred income tax assets:
ASIMCO NVH Group ASIMCO NVH Accrued Accrued Impairment expenses Total Impairment expenses Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
At 1 January 2013 2,322 9,157 11,479 2,186 7,148 9,334 Credited/(charged) to statement of profit or loss (30) 5,144 5,114 (13) 4,365 4,352
At 31 December 2013 2,292 14,301 16,593 2,173 11,513 13,686
Credited/(charged) to statement of profit or loss (342) 1,583 1,241 (269) 1,489 1,220
At 31 December 2014 1,950 15,884 17,834 1,904 13,002 14,906
Credited/(charged) to statement of profit or loss (305) 541 236 (331) 319 (12)
At 31 December 2015 1,645 16,475 18,070 1,573 13,321 14,894
– III-140 – APPENDIX III-4 ACCOUNTANT’S REPORT OF ASIMCO NVH FOR THE THREE YEARS ENDED 31 DECEMBER 2015
25 PAID-IN CAPITAL
ASIMCO NVH Group and ASIMCO NVH
Paid-in capital RMB’000
As at 1 January 2013 160,000 Paid-in capital 49,200
As at 31 December 2013, 2014 and 2015 209,200
26 RESERVES AND RETAINED EARNINGS
ASIMCO NVH Group
The amounts of ASIMCO NVH Group’s reserves which are comprised of other capital reserves, and retained earnings, and the movements therein for the years ended 31 December 2013, 2014 and 2015 are presented in the consolidated statement of changes in equity on pages 7 to 9 of the financial statements.
ASIMCO NVH
Capital Statutory Retained reserves reserves earnings Total RMB’000 RMB’000 RMB’000 RMB’000
At 1 January 2013 3,892 1,837 (7,379) (1,650) Total comprehensive income for the year – – 23,908 23,908 Contribution from the owners of ASIMCO NVH (63) – – (63) Appropriations – 1,653 (1,653) – Dividends – – (1,079) (1,079)
At 31 December 2013 3,829 3,490 13,797 21,116
Total comprehensive income for the year – – 35,490 35,490 Appropriations – 3,550 (3,550) –
At 31 December 2014 3,829 7,040 45,737 56,606
Total comprehensive income for the year – – 47,180 47,180 Appropriations – 4,718 (4,718) – Dividends – – (88,000) (88,000)
At 31 December 2015 3,829 11,758 199 15,786
During the year ended 31 December 2013, 2014 and 2015, PRC statutory reserve of RMB1,653,000, RMB3,550,000 and RMB4,718,000 was appropriated from the profit for the year, respectively, pursuant to the resolution of board of directors.
– III-141 – APPENDIX III-4 ACCOUNTANT’S REPORT OF ASIMCO NVH FOR THE THREE YEARS ENDED 31 DECEMBER 2015
27 COMMITMENTS
ASIMCO NVH Group had the following capital commitments at the end of the reporting period:
31 31 31 December December December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Contracted, but not provided for: Property, plant and equipment 4,664 12,207 25,221
28 RELATED PARTY TRANSACTIONS
As at 31 December 2013, ASIMCO Investments II Ltd., ASIMCO Investments X Ltd. and ASIMCO (China) Limited, all of which are controlled by Bain Capital Asia Integral Investors, L.P., respectively owned 45.89%, 30.59% and 23.52% equity interests in ASIMCO NVH. As at 31 December 2014 and 2015, ASIMCO NVH is controlled by ASIMCO Technologies Hong Kong Limited, which owns 76.48% equity interests in ASIMCO NVH. The remaining 23.52% equity interests in ASIMCO NVH are held by ASIMCO (China) Limited. As at 31 December 2013, 2014 and 2015, the ultimate parent of ASIMCO NVH Group is Bain Capital Asia Integral Investors, L.P. (incorporated in the Cayman Islands).
The following transactions were carried out with related parties:
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
(a) Sales of goods to
Fellow subsidiaries 87,123 81,050 78,395
(b) Loans provided to
Fellow subsidiaries 30,400 33,000 –
(c) Loans repaid from
Fellow subsidiaries 10,000 20,000 –
(d) Interest income from
Fellow subsidiaries 244 1,498 1,755
(e) Service fees to
ASIMCO (China) Limited 4,764 5,695 6,441
(f) Disposal of available-for-sale financial assets to
A fellow subsidiary – 500 –
(g) Key management compensation 2,268 2,685 2,988
– III-142 – APPENDIX III-4 ACCOUNTANT’S REPORT OF ASIMCO NVH FOR THE THREE YEARS ENDED 31 DECEMBER 2015
(h) Outstanding balances with related parties
31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Trade receivables
– Fellow subsidiary 20,135 24,816 23,001
Interest receivables
– Fellow subsidiaries – 47 59
Trade payables – Fellow subsidiary – 1,365 1,219
Dividend payable
– Shareholders of ASIMCO NVH 1,079 1,079 82,220
Other payables
– Fellow subsidiary – 3,542 4,987
Loans receivable
– Fellow subsidiaries 20,000 33,000 33,000
29 FINANCIAL INSTRUMENTS BY CATEGORY
Financial assets
Loans and receivables ASIMCO NVH Group ASIMCO NVH 31 December 31 December 2013 2014 2015 2013 2014 2015 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
Financial assets included in trade and other receivables 284,166 325,257 346,723 284,060 325,459 353,807 Loans to fellow subsidiaries 20,000 33,000 33,000 20,000 33,000 33,000 Pledged deposits 1,062 3,088 1 1,062 3,088 1 Cash and cash equivalents 43,047 23,529 12,555 31,907 18,830 12,073
348,275 384,874 392,279 337,029 380,377 398,881
– III-143 – APPENDIX III-4 ACCOUNTANT’S REPORT OF ASIMCO NVH FOR THE THREE YEARS ENDED 31 DECEMBER 2015
Financial liabilities
Financial liabilities at amortised cost ASIMCO NVH Group ASIMCO NVH 31 December 31 December 2013 2014 2015 2013 2014 2015 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
Financial liabilities included in trade and other payables 191,332 244,094 352,218 191,261 255,909 367,530 Borrowings 97,086 77,904 83,388 97,086 77,904 83,388
288,418 321,998 435,606 288,347 333,813 450,918
III SUBSEQUENT FINANCIAL STATEMENTS
No audited financial statements have been prepared by the ASIMCO NVH or any of its subsidiaries in respect of any period subsequent to 31 December 2015 up to the date of this report. No dividend or distribution has been declared or made by the ASIMCO NVH or any of its subsidiaries in respect of any period subsequent to 31 December 2015.
Yours faithfully, PricewaterhouseCoopers Certified Public Accountants Hong Kong
– III-144 – APPENDIX III-5 ACCOUNTANT’S REPORT OF ASIMCO SHANXI FOR THE THREE YEARS ENDED 31 DECEMBER 2015
The following is the text of a report received from the Company’s reporting accountant, PricewaterhouseCoopers, Certified Public Accountants, Hong Kong, for the purpose of incorporation in this circular.
23 May 2016
The Directors Zhengzhou Coal Mining Machinery Group Company Limited
Dear Sirs,
We report on the financial information of ASIMCO International Casting (Shanxi) Co., Ltd. (“ASIMCO Shanxi”), which comprises the statements of financial position of ASIMCO Shanxi as at 31 December 2013, 2014 and 2015, and the statements of profit or loss and other comprehensive income, the statements of changes in equity and the statements of cash flows of ASIMCO Shanxi for each of the years ended 31 December 2013, 2014 and 2015 (the “Relevant Periods”) and a summary of significant accounting policies and other explanatory information. This financial information has been prepared by the directors of Zhengzhou Coal Mining Machinery Group Company Limited (the “Company”) and is set out in Sections I to III below for inclusion in Appendix III-5 to the circular of the Company dated 23 May 2016 (the “Circular”) in connection with the proposed acquisition of ASIMCO Shanxi by the Company.
ASIMCO Shanxi was incorporated in the People’s Republic of China on 4 September 1997 as a company with limited liability.
The statutory financial statements of ASIMCO Shanxi for the year ended 31 December 2013 were audited by Ernst & Young Hua Ming LLP, and the statutory financial statements for each of the years ended 31 December 2014 and 2015 were audited by PricewaterhouseCoopers Zhong Tian LLP, Beijing Branch, pursuant to separate terms of engagement with ASIMCO Shanxi respectively.
The directors of ASIMCO Shanxi are responsible for the preparation of the financial statements of ASIMCO Shanxi for the Relevant Periods that give a true and fair view in accordance with International Financial Reporting Standards (“IFRSs”) issued by the International Accounting Standards Board (the “Underlying Financial Statements”), and for such internal control as the directors determine is necessary to enable the preparation of the Underlying Financial Statements that are free from material misstatement, whether due to fraud or error. PricewaterhouseCoopers Zhong Tian LLP have audited the
– III-145 – APPENDIX III-5 ACCOUNTANT’S REPORT OF ASIMCO SHANXI FOR THE THREE YEARS ENDED 31 DECEMBER 2015
Underlying Financial Statements in accordance with International Standards on Auditing (the “ISAs”) issued by the International Auditing and Assurance Standards Board (“IAASB”) pursuant to separate terms of engagement.
The financial information has been prepared based on the Underlying Financial Statements with no adjustment made thereon.
Directors’ Responsibility for the Financial Information
The directors of the Company are responsible for the preparation of the financial information that gives a true and fair view in accordance with IFRSs and accounting policies adopted by the Company and its subsidiaries (together, the “Group”) as set out in the annual report of the Company for the year ended 31 December 2015.
Reporting Accountant’s Responsibility
Our responsibility is to express an opinion on the financial information and to report our opinion to you. We carried out our procedures in accordance with Auditing Guideline 3.340 “Prospectuses and the Reporting Accountant” issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”).
Opinion
In our opinion, the financial information gives, for the purpose of this report, a true and fair view of the state of affairs of ASIMCO Shanxi as at 31 December 2013, 2014 and 2015 and of ASIMCO Shanxi’s results and cash flows for the Relevant Periods.
– III-146 – APPENDIX III-5 ACCOUNTANT’S REPORT OF ASIMCO SHANXI FOR THE THREE YEARS ENDED 31 DECEMBER 2015
I FINANCIAL INFORMATION OF ASIMCO SHANXI
A. The following is the financial information of ASIMCO Shanxi prepared by the directors of the Company as at 31 December 2013, 2014 and 2015 and for each of the years ended 31 December 2013, 2014 and 2015 (the “Financial Information”):
Statements of profit or loss and other comprehensive income
Year ended December 31 2013 2014 2015 Note RMB’000 RMB’000 RMB’000
Revenue 6 448,681 565,376 548,124 Cost of sales 9 (357,608) (435,186) (405,146)
Gross profit 91,073 130,190 142,978
Selling and distribution costs 9 (23,104) (33,792) (38,562) Administrative expenses 9 (20,947) (24,195) (23,170) Research and development expenses 9 (10,992) (19,523) (20,212) Other income 7 1,033 1,298 1,109 Other losses, net 8 (407) (1,863) (4,616)
Profit from operations 36,656 52,115 57,527 Finance costs 11 (8,005) (9,048) (6,482)
Profit before income tax 28,651 43,067 51,045 Income tax expense 12 (6,370) (6,847) (6,852)
Profit for the year 22,281 36,220 44,193
Other comprehensive income for the year, net of tax –––
Total comprehensive income for the year 22,281 36,220 44,193
– III-147 – APPENDIX III-5 ACCOUNTANT’S REPORT OF ASIMCO SHANXI FOR THE THREE YEARS ENDED 31 DECEMBER 2015
Statements of financial position
As at 31 December 2013 2014 2015 Note RMB’000 RMB’000 RMB’000
ASSETS
Non-current assets Property, plant and equipment 13 346,131 323,873 302,834 Prepaid lease payments 14 8,778 8,517 8,256 Intangible assets – 37 29 Deferred income tax assets 22 7,792 6,487 8,065
362,701 338,914 319,184
Current assets Inventories 15 55,787 49,543 49,292 Trade and other receivables 16 122,542 161,814 155,507 Loan to a fellow subsidiary 17 – – 28,000 Income tax recoverable 1,236 – – Cash and cash equivalents 18 70,069 44,843 46,134
249,634 256,200 278,933
Total assets 612,335 595,114 598,117
EQUITY
Equity attributable to the owner of ASIMCO Shanxi Paid-in capital 23 420,362 420,362 420,362 Reserves 24 116,812 116,812 116,812 Retained earnings 24 (166,359) (130,139) (85,946)
Total Equity 370,815 407,035 451,228
LIABILITIES
Non-Current liabilities Borrowings 20 117,170 24,212 –
Current liabilities Trade and other payables 19 82,958 86,009 120,930 Advances from customers – 1,498 – Borrowings 20 27,326 62,408 – Income tax payable – 480 5,263 Provisions 21 14,066 13,472 20,696
124,350 163,867 146,889
Total liabilities 241,520 188,079 146,889
Total equity and liabilities 612,335 595,114 598,117
– III-148 – APPENDIX III-5 ACCOUNTANT’S REPORT OF ASIMCO SHANXI FOR THE THREE YEARS ENDED 31 DECEMBER 2015
Statements of changes in equity
Attributable to the owner of ASIMCO Shanxi Other Paid-in capital Retained capital reserve earnings Total RMB’000 RMB’000 RMB’000 RMB’000
At 1 January 2013 420,362 116,812 (188,640) 348,534
Comprehensive income Profit for the year – – 22,281 22,281
Total comprehensive income – – 22,281 22,281
At 31 December 2013 420,362 116,812 (166,359) 370,815
Comprehensive income Profit for the year – – 36,220 36,220
Total comprehensive income – – 36,220 36,220
At 31 December 2014 420,362 116,812 (130,139) 407,035
Comprehensive income Profit for the year – – 44,193 44,193
Total comprehensive income – – 44,193 44,193
At 31 December 2015 420,362 116,812 (85,946) 451,228
– III-149 – APPENDIX III-5 ACCOUNTANT’S REPORT OF ASIMCO SHANXI FOR THE THREE YEARS ENDED 31 DECEMBER 2015
Statements of cash flows
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Cash flows from operating activities Profit before tax 28,651 43,067 51,045 Adjustments for: Finance costs 8,005 9,048 6,482 Exchange gains or losses (2,100) 980 1,197 Gain/(loss) on disposal of items of property, plant and equipment 3,134 850 (30) Depreciation of property, plant and equipment 30,927 36,400 33,412 Amortisation of prepaid lease payments 261 261 261 Amortisation of intangible assets – 2 8 Provision/(reversal) of impairment for inventories 322 (11) 250 (Reversal of)/provision of impairment for trade receivables (665) (77) 453 Provision of impairment for prepayments, deposits and other receivables 106 117 (4)
Operating cash flows before movement in working capital 68,641 90,637 93,074
(Increase)/decrease in inventories (1,374) 6,255 1 (Increase)/decrease in trade and other receivables (22,410) (40,224) 5,515 Increase in trade and other payables 38,163 6,706 32,426 Increase/(decrease) in advance from customers – 1,498 (1,498) Increase/(decrease) in provisions (2,851) (594) 7,224
Cash generated from operations 80,169 64,278 136,742
Interest received 735 912 343 Income tax paid (266) (5,062) (3,647)
Net cash flows from operating activities 80,638 60,128 133,438
– III-150 – APPENDIX III-5 ACCOUNTANT’S REPORT OF ASIMCO SHANXI FOR THE THREE YEARS ENDED 31 DECEMBER 2015
Statements of cash flows (continued)
Year ended 31 December 2013 2014 2015 Note RMB’000 RMB’000 RMB’000
Cash flows from investing activities Purchase of property, plant and equipment (52,037) (18,537) (8,942) Purchase of prepaid lease payments, and intangible assets – (39) – Proceeds from disposal of property, plant and equipment 211 588 93 Loans to fellow subsidiaries – – (28,000)
Net cash used in investing activities (51,826) (17,988) (36,849)
Cash flows from financing activities Proceeds from borrowings 10,000 – – Repayment of borrowings (28,971) (57,876) (86,620) Interest paid (8,058) (8,511) (7,481)
Net cash used in financing activities (27,029) (66,387) (94,101)
Net increase/(decrease) in cash and cash equivalents 1,783 (24,247) 2,488 Cash and cash equivalents, at beginning of year 67,948 70,069 44,843 Exchange gains/(losses) on cash and cash equivalents 338 (979) (1,197)
Cash and cash equivalents at end of year 18 70,069 44,843 46,134
– III-151 – APPENDIX III-5 ACCOUNTANT’S REPORT OF ASIMCO SHANXI FOR THE THREE YEARS ENDED 31 DECEMBER 2015
II NOTES TO THE FINANCIAL INFORMATION
1 GENERAL INFORMATION
ASIMCO International Casting (Shanxi) Co., Ltd. (the “Company”) was incorporated in Yuncheng City, Shanxi Province, the People’s Republic of China (“PRC”) on 4 September 1997 with limited liability.
ASIMCO Shanxi is principally engaged in manufacturing and sales of automotive component products such as cylinder block, cylinder head and other gray and iron castings applying to diesel engines. Majority of ASIMCO Shanxi’s business is based in the PRC.
The Financial Information is presented in Renminbi (“RMB”), unless otherwise stated.
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
2.1 Basis of preparation
The Financial Information of ASIMCO Shanxi have been prepared in accordance with all applicable International Financial Reporting Standards (“IFRS”). The Financial Information have been prepared under the historical cost convention.
The preparation of Financial Information in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying ASIMCO Shanxi’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in Note 4.
2.1.1 Changes in accounting policy and disclosures
(a) New Hong Kong Companies Ordinance (Cap. 622)
The requirements of Part 9 ‘Accounts and Audit‘ of the new Hong Kong Companies Ordinance (Cap. 622) came into operation in 2015 and have been applied to presentation and disclosures of certain information in the Financial Information.
(b) New standards and interpretations not yet adopted
A number of new standards and amendments to standards and interpretations are effective for annual periods beginning after 1 January 2015, and have not been applied in preparing the Financial Information. None of these is expected to have a significant effect on the Financial Information of ASIMCO Shanxi, except the following set out below:
• IFRS 15, ’Revenue from contracts with customers’ deals with revenue recognition and establishes principles for reporting useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. Revenue is recognised when a customer obtains control of a good or service and thus has the ability to direct the use and obtain the benefits from the good or service. The standard replaces IAS 18 “Revenue” and IAS 11 “Construction contracts” and related interpretations. IFRS 15 is effective for annual periods beginning on or after 1 January 2018 and earlier application is permitted. ASIMCO Shanxi is assessing the impact of IFRS 15.
• IFRS 9, ‘Financial instruments‘, addresses the classification, measurement and recognition of financial assets and financial liabilities. The complete version of IFRS 9 was issued in July 2014. It replaces the guidance in IAS 39 that relates to the classification and measurement of financial instruments. IFRS 9 retains but simplifies the mixed measurement model and establishes three primary
– III-152 – APPENDIX III-5 ACCOUNTANT’S REPORT OF ASIMCO SHANXI FOR THE THREE YEARS ENDED 31 DECEMBER 2015
measurement categories for financial assets: amortised cost, fair value through OCI and fair value through P&L. The basis of classification depends on the entity’s business model and the contractual cash flow characteristics of the financial asset. Investments in equity instruments are required to be measured at fair value through profit or loss with the irrevocable option at inception to present changes in fair value in OCI not recycling. There is now a new expected credit losses model that replaces the incurred loss impairment model used in IAS 39. For financial liabilities there were no changes to classification and measurement except for the recognition of changes in own credit risk in other comprehensive income, for liabilities designated at fair value through profit or loss. IFRS 9 relaxes the requirements for hedge effectiveness by replacing the bright line hedge effectiveness tests. It requires an economic relationship between the hedged item and hedging instrument and for the ‘hedged ratio’ to be the same as the one management actually use for risk management purpose.
• IFRS 16, ‘Leases‘ addresses the definition of a lease, recognition and measurement of leases and establishes principles for reporting useful information to users of financial statements about the leasing activities of both lessees and lessors. A key change arising from IFRS 16 is that most operating leases will be accounted for on statement of financial position for lessees. The standard replaces IAS 17 “Leases”, and related interpretations. The standard is effective for annual periods beginning on or after 1 January 2019 and earlier application is permitted subject to the entity adopting IFRS 15 “Revenue from contracts with customers” at the same time.
There are no other IFRSs or IFRIC interpretations that are not yet effective that would be expected to have a material impact on ASIMCO Shanxi.
2.2 Segment reporting
Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the executive directors that makes strategic decisions.
For management purposes, ASIMCO Shanxi operates in one business unit and has one reportable operating segment during the years ended 31 December 2013, 2014 and 2015, which is manufacturing and sale of automotive component products.
2.3 Foreign currency translation
(a) Functional and presentation currency
The functional and presentation currency is RMB, which is the currency of primary economic environment in which ASIMCO Shanxi operates.
(b) Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or valuation where items are re-measured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the statement of profit or loss, except when deferred in other comprehensive income as qualifying cash flow hedges and qualifying net investment hedges.
Foreign exchange gains and losses are presented in the statement of profit or loss within “other gains, net”.
– III-153 – APPENDIX III-5 ACCOUNTANT’S REPORT OF ASIMCO SHANXI FOR THE THREE YEARS ENDED 31 DECEMBER 2015
2.4 Property, plant and equipment
Property, plant and equipment is stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items.
Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to ASIMCO Shanxi and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognised. All other repairs and maintenance are charged to the statement of profit or loss during the financial period in which they are incurred.
Depreciation is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives, as follows:
Estimated Estimated Category residual value useful life (%)
Buildings 10 20 years Machinery and equipment 10 10 years Motor vehicles 10 5 years Office equipment and others 10 3 years
The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period.
An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount (Note 2.6).
Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognised within “Other losses, net” in the statement of profit or loss.
Construction in progress represents property, plant and equipment under construction or pending installation, and is stated at cost less impairment losses. Cost comprises direct costs of construction including borrowing costs attributable to the construction during the period of construction. No provision for depreciation is made on construction in progress until such time as the relevant assets are completed and ready for intended use.
2.5 Intangible assets
Patents
Patents are stated at cost less any impairment losses and are amortised on the straight-line basis over their estimated useful lives.
2.6 Impairment of non-financial assets
Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date.
– III-154 – APPENDIX III-5 ACCOUNTANT’S REPORT OF ASIMCO SHANXI FOR THE THREE YEARS ENDED 31 DECEMBER 2015
2.7 Financial assets
2.7.1 Classification
ASIMCO Shanxi classifies its financial assets in loans and receivables. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition.
Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for the amounts that are settled or expected to be settled more than 12 months after the end of the reporting period. These are classified as non-current assets. ASIMCO Shanxi’s loans and receivables comprise trade and other receivables (Note 16), loan to a fellow subsidiary (Note 17) and cash and cash equivalents (Note 18).
2.7.2 Recognition and measurement
Regular way purchases and sales of financial assets are recognised on the trade-date – the date on which ASIMCO Shanxi commits to purchase or sell the asset. Investments are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or loss are initially recognised at fair value, and transaction costs are expensed in the statement of profit or loss. Financial assets are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and ASIMCO Shanxi has transferred substantially all risks and rewards of ownership. Loans and receivables are subsequently carried at amortised cost using the effective interest method.
2.8 Offsetting financial instruments
Financial assets and liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis or realise the asset and settle the liability simultaneously. The legally enforceable right must not be contingent on future events and must be enforceable in the normal course of business and in the event of default, insolvency or bankruptcy of ASIMCO Shanxi or the counterparty.
2.9 Impairment of financial assets
Assets carried at amortised cost
ASIMCO Shanxi assesses at the end of each reporting period whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.
Evidence of impairment may include indications that the debtors or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganisation, and where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.
For loans and receivables category, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate. The carrying amount of the asset is reduced and the amount of the loss is recognised in the statement of profit or loss. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the
– III-155 – APPENDIX III-5 ACCOUNTANT’S REPORT OF ASIMCO SHANXI FOR THE THREE YEARS ENDED 31 DECEMBER 2015
current effective interest rate determined under the contract. As a practical expedient, ASIMCO Shanxi may measure impairment on the basis of an instrument’s fair value using an observable market price.
If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor’s credit rating), the reversal of the previously recognised impairment loss is recognised in the statement of profit or loss.
2.10 Inventories
Inventories are stated at the lower of cost and net realisable value. Cost is determined using the weighted average cost method. The cost of finished goods and work in progress comprises, raw materials, direct labor, other direct costs and related production overheads (based on normal operating capacity). It excludes borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses.
2.11 Trade and other receivables
Trade receivables are amounts due from customers for merchandise sold in the ordinary course of business. If collection of trade and other receivables is expected in one year or less (or in the normal operating cycle of the business if longer), they are classified as current assets. If not, they are presented as non-current assets.
Trade and other receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less allowance for impairment.
2.12 Cash and cash equivalents
In the statement of cash flows, cash and cash equivalents include cash in hand, deposits held at call with banks, and other short-term highly liquid investments with original maturities of three months or less.
2.13 Paid-in capital
Paid-in capital is classified as equity.
2.14 Trade payables
Trade payables are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Trade payables are classified as current liabilities if payment is due within one year or less (or in the normal operating cycle of the business if longer). If not, they are presented as non-current liabilities.
Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method.
2.15 Borrowings
Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently carried at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the statement of profit or loss over the period of the borrowings using the effective interest method.
Borrowings are classified as current liabilities unless ASIMCO Shanxi has an unconditional right to defer settlement of the liability for at least 12 months after the end of the reporting period.
– III-156 – APPENDIX III-5 ACCOUNTANT’S REPORT OF ASIMCO SHANXI FOR THE THREE YEARS ENDED 31 DECEMBER 2015
2.16 Borrowing costs
General and specific borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale.
Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalisation.
All other borrowing costs are recognised in profit or loss in the period in which they are incurred.
2.17 Current and deferred income tax
The tax expense for the period comprises current and deferred tax. Tax is recognised in the statement of profit or loss, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case the tax is also recognised in other comprehensive income or directly in equity, respectively.
(a) Current income tax
The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the date of statement of financial position in the countries where ASIMCO Shanxi operates and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.
(b) Deferred income tax
Deferred income tax is recognised, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. However, deferred tax liabilities are not recognised if they arise from the initial recognition of goodwill, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the date of statement of financial position and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.
Deferred income tax assets are recognised only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.
(c) Offsetting
Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority on either the taxable entity or different taxable entities where there is an intention to settle the balances on a net basis.
– III-157 – APPENDIX III-5 ACCOUNTANT’S REPORT OF ASIMCO SHANXI FOR THE THREE YEARS ENDED 31 DECEMBER 2015
2.18 Employee benefits
Defined contribution pension scheme
ASIMCO Shanxi’s full-time employees are covered by a government operated defined contribution pension scheme, and are entitled to a monthly pension from their retirement dates. The PRC government is responsible for the pension liability to these retired employees. ASIMCO Shanxi is required to make annual contributions to the retirement scheme at certain percentages of employees’ basic salaries, which are charged as an expense when the employees have rendered services entitling them to the contributions and the contributions are due.
Termination benefits
Termination benefits are payable when employment is terminated by ASIMCO Shanxi before the normal retirement date, or whenever an employee accepts voluntary redundancy in exchange for these benefits. ASIMCO Shanxi recognises termination benefits at the earlier of the following dates: (i) when ASIMCO Shanxi can no longer withdraw the offer of those benefits; and (ii) when ASIMCO Shanxi recognises costs for a restructuring that is within the scope of IAS 37 and involves the payment of termination benefits. In the case of an offer made to encourage voluntary redundancy, the termination benefits are measured based on the number of employees expected to accept the offer. Benefits falling due more than 12 months after the end of the reporting period are discounted to their present value.
2.19 Provisions
Provisions are recognised when ASIMCO Shanxi has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. Provisions are not recognised for future operating losses.
Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small.
Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognised as interest expense.
Provisions for product warranties granted by ASIMCO Shanxi on certain products are recognised based on sales volume and past experience of the level of repairs and returns, discounted to their present values as appropriate.
2.20 Revenue recognition
Revenue is measured at the fair value of the consideration received or receivable, and represents amounts receivable for goods supplied, stated net of discounts returns and value added taxes. ASIMCO Shanxi recognises revenue when the amount of revenue can be reliably measured; when it is probable that future economic benefits will flow to the entity; and when specific criteria have been met for each of ASIMCO Shanxi’s activities, as described below. ASIMCO Shanxi bases its estimates of return on historical results, taking into consideration the type of customers, the type of transactions and the specifics of each arrangement.
Sales of automotive component products
ASIMCO Shanxi sells automotive component products to domestic and overseas automotive manufacturers. The revenue is recognised when the related goods are delivered to the place of delivery pursuant to the sales contract and the customer confirms the acceptance of the goods or ASIMCO Shanxi has objective evidence that all criteria for the acceptance have been satisfied.
– III-158 – APPENDIX III-5 ACCOUNTANT’S REPORT OF ASIMCO SHANXI FOR THE THREE YEARS ENDED 31 DECEMBER 2015
2.21 Interest income
Interest income is recognised using the effective interest method. When a loan and receivable is impaired, ASIMCO Shanxi reduces the carrying amount to its recoverable amount, being the estimated future cash flow discounted at the original effective interest rate of the instrument, and continues unwinding the discount as interest income. Interest income on impaired loans and receivables is recognised using the original effective interest rate.
2.22 Leases
Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the statement of profit or loss on a straight-line basis over the period of the lease.
Prepaid lease payments
Interest in leasehold land that is accounted for as an operating lease is presented as “prepaid lease payments” in the statement of financial position and is amortised over the lease term on a straight-line basis.
2.23 Government grants
Grants from the government are recognised at their fair value where there is a reasonable assurance that the grant will be received and ASIMCO Shanxi will comply with all attached conditions.
Government grants relating to costs are deferred and recognised in the statement of profit or loss over the period necessary to match them with the costs that they are intended to compensate.
Government grants relating to property, plant and equipment are included in non-current liabilities as deferred government grants and are credited to the statement of profit or loss on a straight- line basis over the expected lives of the related assets.
3 FINANCIAL RISK MANAGEMENT
3.1 Financial risk factors
ASIMCO Shanxi’s activities expose it to a variety of financial risks: market risk (including currency risk and fair value interest rate risk), credit risk and liquidity risk.
(a) Market risk
(i) Foreign exchange risk
Foreign currency risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. ASIMCO Shanxi’s exposure to the risk of changes in foreign exchange rates relates primarily to ASIMCO Shanxi’s operating activities (when revenue or expense is denominated in a different currency from ASIMCO Shanxi’s functional currency).
ASIMCO Shanxi’s businesses are mainly located in the PRC and are mainly transacted and settled in RMB. Certain sales and borrowings are settled in foreign currencies like US dollar. The fluctuation of the exchange rates of foreign currencies against the RMB will affect ASIMCO Shanxi’s results of operations.
– III-159 – APPENDIX III-5 ACCOUNTANT’S REPORT OF ASIMCO SHANXI FOR THE THREE YEARS ENDED 31 DECEMBER 2015
As at 31 December 2013, 2014 and 2015, if RMB had strengthened/ weakened by 10% against US dollar with all other variables held constant, profit before tax for the year would have been RMB12,759,000, RMB6,156,000 and RMB889,000 higher/lower, respectively, mainly as a result of foreign exchange gains/losses on translation of US dollar-denominated trade receivables, cash and cash equivalents and borrowings.
(ii) Fair value interest rate risk
ASIMCO Shanxi’s interest rate risk arises from long-term borrowings at fixed interest rates, which expose ASIMCO Shanxi to fair value interest rate risk.
(b) Credit risk
Credit risk is the risk that a counter party will not meet its obligations under a financial instrument or customer contract, leading to a financial loss. ASIMCO Shanxi is exposed to credit risk from trade receivables, bills receivable, other receivables, loan to a fellow subsidiary and cash and cash equivalents.
Customer credit risk is managed subject to ASIMCO Shanxi’s established policy, procedures and control relating to customer credit risk management. ASIMCO Shanxi’s policy is to perform credit verification for all customers who have transactions with ASIMCO Shanxi. Further, credit limits, credit terms and sales methods are determined based on the credit history of customers. ASIMCO Shanxi maintains long-term relationships with several large customers which management believes credit risk in relation with these customers is low. ASIMCO Shanxi does not hold collateral as security.
Loan to a fellow subsidiary is arranged by the parent company of ASIMCO Shanxi. Based on the overall financial position of the parent company, management believes credit risk in relation with the loan to a fellow subsidiary is low.
All ASIMCO Shanxi’s cash and cash equivalents are held in major banks located in the PRC, which management believes are of high credit quality.
The carrying amounts of cash and cash equivalents, trade and other receivables, and loan to a fellow subsidiary, represent ASIMCO Shanxi’s maximum exposure to credit risk in relation to financial assets.
(c) Liquidity risk
ASIMCO Shanxi’s objective is to maintain a balance between continuity of funding and flexibility through the use of bills and bank loans.
The table below analyses ASIMCO Shanxi’s non-derivative financial liabilities into relevant maturity groupings based on the remaining period at the date of statement of financial position to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows.
Within one In the year second year Total RMB’000 RMB’000 RMB’000
As at 31 December 2013 Financial liabilities included in trade and other payables 82,824 – 83,824 Borrowings 35,549 127,791 163,340
Total 118,373 127,791 247,164
– III-160 – APPENDIX III-5 ACCOUNTANT’S REPORT OF ASIMCO SHANXI FOR THE THREE YEARS ENDED 31 DECEMBER 2015
Within one In the year second year Total RMB’000 RMB’000 RMB’000
As at 31 December 2014 Financial liabilities included in trade and other payables 83,110 – 83,110 Borrowings 67,455 25,683 93,138
Total 150,565 25,683 176,248
Within one In the year second year Total RMB’000 RMB’000 RMB’000
As at 31 December 2015 Financial liabilities included in trade and other payables 116,477 – 116,477
3.2 Capital management
The primary objective of ASIMCO Shanxi’s capital management is to ensure that it maintains healthy capital ratios in order to support its business and maximise shareholders’ value.
ASIMCO Shanxi manages its capital structure and makes adjustments to it in light of changes in economic conditions. To maintain or adjust the capital structure, ASIMCO Shanxi may adjust the dividend payment to shareholders, return capital to shareholders or issue new shares. No changes were made in the objectives, policies or processes for managing capital during the Related Periods.
ASIMCO Shanxi monitors capital using a liability to asset ratio, which is total liabilities divided by the total assets.
ASIMCO Shanxi’s strategy is to maintain the liability to asset at a healthy capital level in order to support its business. The principal strategies adopted by ASIMCO Shanxi include, without limitation, reviewing future cash flow requirement and the ability to meet debt repayment schedules when they fall due, maintaining a reasonable level of available banking facilities and adjusting investment plans and financing plans, if necessary, to ensure that ASIMCO Shanxi has a reasonable level of capital to support its business. The liability to asset ratios at the end of the reporting period were as follows:
As at 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Total liabilities 241,520 188,079 146,889 Total assets 612,335 595,114 598,117
Liability to asset ratio 39% 32% 25%
– III-161 – APPENDIX III-5 ACCOUNTANT’S REPORT OF ASIMCO SHANXI FOR THE THREE YEARS ENDED 31 DECEMBER 2015
3.3 Fair value estimation
Financial instruments carried at fair value are analysed by level of the inputs to valuation techniques used to measure fair value. Such inputs are categorised into three levels within a fair value hierarchy as follows:
• Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1).
• Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (level 2).
• Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (level 3).
As at 31 December 2013, 2014 and 2015, ASIMCO Shanxi has no financial instruments carried at fair value. Carrying amounts of financial assets (including trade and other receivables, loan to a fellow subsidiary, and cash and cash equivalents) and financial liabilities (including trade and other payables and borrowings) approximate their fair values.
4 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
ASIMCO Shanxi makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are addressed below.
(a) Impairment of receivables
ASIMCO Shanxi recognises provisions based on the judgement of recovery of receivables. A bad debt provision is required to be recognised when there are indications that the receivable cannot be recovered. Recognition of bad debt provisions requires the use of judgement and estimates. If the revised estimates deviate from the current estimates, then any difference arising from changes of accounting estimates will affect the carrying value of debtors in the relevant accounting periods.
(b) Impairment of inventories
ASIMCO Shanxi recognises provision based on the estimates of recovery of inventories. The estimates are made with reference to aged inventory analysis, projections of expected future saleability of goods and management experience and judgement. Impairment of inventories will be made when the carrying amounts of inventories are below their estimated net realisable values.
(c) Warranty provisions
A provision is recognised for expected warranty claims on products sold during the warranty guaranteed period. Assumptions used to calculate the provision for warranties are based on current sales levels and historical information for return and repairment. The estimation basis is reviewed on an ongoing basis and revised where appropriate. For further details about the warranty provision, please refer to Note 21.
– III-162 – APPENDIX III-5 ACCOUNTANT’S REPORT OF ASIMCO SHANXI FOR THE THREE YEARS ENDED 31 DECEMBER 2015
5 SEGMENT INFORMATION
For management purposes, ASIMCO Shanxi operates in one business unit, which is manufacturing and sale of automotive component products.
(a) Geographical information
(i) Analysis of revenue
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
The PRC 358,945 442,400 452,402 United States of America 35,577 45,624 28,283 Japan 13,417 14,690 10,792 Germany 3,155 44,726 56,040 Other countries 37,587 17,936 607
Total 448,681 565,376 548,124
The revenue information above is based on the locations of the customers.
(ii) Non-current assets, other than financial instrument and deferred income tax assets, by country:
31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
The PRC 354,909 332,427 311,119
(b) Information about major customers
Revenues of RMB35,881,000, RMB52,660,000 and RMB187,805,000 for the years ended 31 December 2013, 2014 and 2015, respectively, are derived from a single external customer from the PRC.
6 REVENUE
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Sales of automotive component products 439,831 562,675 542,876 Others 8,850 2,701 5,248
Total 448,681 565,376 548,124
– III-163 – APPENDIX III-5 ACCOUNTANT’S REPORT OF ASIMCO SHANXI FOR THE THREE YEARS ENDED 31 DECEMBER 2015
7 OTHER INCOME
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Interest income on bank deposits 538 912 344 Interest income on loan to a fellow subsidiary 198 – – Cash discount income 259 386 706 Government grants 38 – 59
1,033 1,298 1,109
8 OTHER LOSSES, NET
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Reversal/(impairment) of trade and other receivables 559 (40) (449) Net foreign exchange gains/(losses) 2,100 (980) (1,197) (Losses)/gains on disposal of property, plant and equipment, net (3,134) (850) 30 Fines – – (3,000) Others 68 7 –
Total (407) (1,863) (4,616)
9 EXPENSES BY NATURE
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Changes in inventories of finished goods and work in progress (4,417) 221 305 Raw materials and consumables used 223,576 276,048 252,208 Inventory write-down/(reversal) 322 (11) 250 Employee benefit expense (Note 10) 49,849 72,185 67,374 Water and electricity expenses 58,528 62,327 60,539 Maintenance and repair costs 9,519 13,179 11,727 Depreciation and amortisation 31,188 36,663 33,681 Transportation expenses 12,515 17,205 14,897 Rental expenses 153 286 185 Product warranty provisions 11,254 14,840 20,770 Service fees (Note 24) 6,225 7,007 6,806 Travel expenses 907 819 891 Sales tax and surcharges 12 1,121 2,811 Auditors’ remuneration – audit services 133 556 578 Others 12,887 10,250 14,068
Total 412,651 512,696 487,090
– III-164 – APPENDIX III-5 ACCOUNTANT’S REPORT OF ASIMCO SHANXI FOR THE THREE YEARS ENDED 31 DECEMBER 2015
10 EMPLOYEE BENEFIT EXPENSE
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Salaries, allowances and other benefits 44,703 66,090 58,940 Pensions – defined contribution plans 5,146 6,095 6,434 Termination benefits – – 2,000
Total 49,849 72,185 67,374
11 FINANCE COSTS
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Interest on bank borrowings 8,005 9,048 6,482
12 INCOME TAX EXPENSES
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000 Current tax: Current tax on profits for the year 3,445 5,542 8,430
Deferred tax: Origination and reversal of temporary differences 2,925 1,305 (1,578)
Total income tax expenses 6,370 6,847 6,852
Pursuant to the relevant laws and regulations in the PRC, the statutory enterprise income tax rate of 25% was applied to ASIMCO Shanxi for the year ended 31 December 2013.
ASIMCO Shanxi was determined by the government to be a High and New Tech Enterprise in 2014. Pursuant to Circular of the State Administration of Taxation on Issues Concerning Enterprise Income Tax Collection on High-tech Enterprises effective from 3 December 2008, ASIMCO Shanxi was entitled to a preferential tax rate of 15% for corporate income tax for the years since 2014.
– III-165 – APPENDIX III-5 ACCOUNTANT’S REPORT OF ASIMCO SHANXI FOR THE THREE YEARS ENDED 31 DECEMBER 2015
A reconciliation of the tax expense applicable to profit before tax at the applicable tax rate for the country in which ASIMCO Shanxi and the majority of its subsidiaries are domiciled to the tax expense is as follows:
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Profit before tax 28,651 43,067 51,045
At ASIMCO Shanxi’s applicable income tax rate of 15% for 2014 and 2015 and 25% for 2013 7,163 6,460 7,657 Additional deduction for purchase of environmental protection equipment and research and development expenditures (496) (568) (1,516) Non-deductible expenses for tax purposes 131 46 56 Effect of changes in applicable tax rate on opening deferred tax assets – 2,669 – Adjustments in respect of prior year (428) (1,760) 655
6,370 6,847 6,852
13 PROPERTY, PLANT AND EQUIPMENT
Machinery Office and Motor equipment Construction Buildings equipment vehicles and others in progress Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
At 1 January 2013 Cost 70,882 253,583 6,626 2,701 222,585 556,377 Accumulated depreciation (34,282) (192,050) (5,378) (2,119) – (233,829) Impairment provision – (5) – – – (5)
Net book amount 36,600 61,528 1,248 582 222,585 322,543
Year ended 31 December 2013 Opening net book amount 36,600 61,528 1,248 582 222,585 322,543 Additions 200 157 934 878 55,691 57,860 Transfers 30,728 247,273 – – (278,001) – Disposals (2,797) (538) (9) (1) – (3,345) Depreciation charge (4,811) (25,295) (420) (401) – (30,927)
Closing net book amount 59,920 283,125 1,753 1,058 275 346,131
At 31 December 2013 Cost 96,177 498,722 7,471 3,571 275 606,216 Accumulated depreciation (36,257) (215,592) (5,718) (2,513) – (260,080) Impairment provision – (5) – – – (5)
Net book amount 59,920 283,125 1,753 1,058 275 346,131
– III-166 – APPENDIX III-5 ACCOUNTANT’S REPORT OF ASIMCO SHANXI FOR THE THREE YEARS ENDED 31 DECEMBER 2015
Machinery Office and Motor equipment Construction Buildings equipment vehicles and others in progress Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
Year ended 31 December 2014 Opening net book amount 59,920 283,125 1,753 1,058 275 346,131 Additions – 781 348 706 13,745 15,580 Transfers 2,891 3,682 – – (6,573) – Disposals – (1,401) (37) – – (1,438) Depreciation charge (4,807) (30,562) (540) (491) – (36,400)
Closing net book amount 58,004 255,625 1,524 1,273 7,447 323,873
At 31 December 2014 Cost 98,844 490,222 7,449 4,277 7,447 608,239 Accumulated depreciation (40,840) (234,592) (5,925) (3,004) – (284,361) Impairment provision – (5) – – – (5)
Net book amount 58,004 255,625 1,524 1,273 7,447 323,873
At 1 January 2015 Cost 98,844 490,222 7,449 4,277 7,447 608,239 Accumulated depreciation (40,840) (234,592) (5,925) (3,004) – (284,361) Impairment provision – (5) – – – (5)
Net book amount 58,004 255,625 1,524 1,273 7,447 323,873
Year ended 31 December 2015 Opening net book amount 58,004 255,625 1,524 1,273 7,447 323,873 Additions 350 8,889 1,078 266 1,853 12,436 Transfers 1,604 7,058 – – (8,662) – Disposals (22) (26) (15) – – (63) Depreciation charge (4,599) (27,774) (599) (440) – (33,412)
Closing net book amount 55,337 243,772 1,988 1,099 638 302,834
At 31 December 2015 Cost 100,726 503,048 8,311 4,543 638 617,266 Accumulated depreciation (45,389) (259,271) (6,323) (3,444) – (314,427) Impairment provision – (5) – – – (5)
Net book amount 55,337 243,772 1,988 1,099 638 302,834
During the year ended 31 December 2013, the depreciation charges of ASIMCO Shanxi were recorded in cost of sales, selling and distribution costs and administrative expenses with amount of RMB29,515,000, RMB68,000, and RMB1,344,000, respectively.
During the year ended 31 December 2014, the depreciation charges of ASIMCO Shanxi were recorded in cost of sales, selling and distribution costs and administrative expenses with amount of RMB34,939,000, RMB61,000, and RMB1,400,000, respectively.
– III-167 – APPENDIX III-5 ACCOUNTANT’S REPORT OF ASIMCO SHANXI FOR THE THREE YEARS ENDED 31 DECEMBER 2015
During the year ended 31 December 2015, the depreciation charges of ASIMCO Shanxi were recorded in cost of sales, selling and distribution costs and administrative expenses with amount of RMB32,133,000, RMB49,000, and RMB1,230,000, respectively.
During the years ended 31 December 2013, 2014, and 2015, ASIMCO Shanxi has no borrowing costs being capitalised.
As at 31 December 2013 and 2014 certain buildings and machinery and equipment of ASIMCO Shanxi with carrying amount of approximately RMB307,313,000 and RMB255,571,000, respectively were pledged to secure the long-term borrowings of ASIMCO Shanxi (Note 20).
As at 31 December 2015, the bank borrowing secured by the pledge of buildings and machinery and equipment with carrying amount of approximately RMB224,932,000 has been repaid in advance of maturity and the security on the related pledged assets was released subsequent to 31 December 2015.
14 PREPAID LEASE PAYMENTS
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
At 1 January Cost 13,036 13,036 13,036 Accumulated amortisation (3,997) (4,258) (4,519)
Net book amount 9,039 8,778 8,517
Year ended 31 December Opening net book amount 9,039 8,778 8,517 Amortisation (261) (261) (261)
Closing net book amount 8,778 8,517 8,256
At 31 December Cost 13,036 13,036 13,036 Accumulated amortisation (4,258) (4,519) (4,780)
Net book amount 8,778 8,517 8,256
The leasehold land is situated in the PRC and is held under medium term leases.
As at 31 December 2013 and 2014, prepaid lease payments with carrying amount of RMB8,778,000, and RMB8,517,000 respectively were pledged to secure the long-term borrowings of ASIMCO Shanxi (Note 20).
As at 31 December 2015, the bank borrowing secured by the prepaid lease payments with carrying amount of approximately RMB8,256,000 has been repaid in advance of maturity and the security on the related pledged assets was released subsequent to 31 December 2015.
– III-168 – APPENDIX III-5 ACCOUNTANT’S REPORT OF ASIMCO SHANXI FOR THE THREE YEARS ENDED 31 DECEMBER 2015
15 INVENTORIES
31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Raw materials 16,860 10,846 10,649 Work in progress 6,204 9,004 7,401 Finished goods 32,723 29,693 31,242
Total inventories at the lower of cost and net realisable value 55,787 49,543 49,292
During the year ended 31 December 2013, 2014, and 2015, provision of RMB322,000, reversal of RMB11,000 and provision of RMB250,000, respectively, for the impairment of inventories were recognised in cost of sales.
16 TRADE AND OTHER RECEIVABLES
31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Trade receivables 96,488 135,979 135,045 Less: allowance for impairment (102) (5) (401)
Trade receivables – net 96,386 135,974 134,644 Bills receivable 10,004 18,066 11,292 106,390 154,040 145,936 Prepayments to suppliers 4,170 4,121 3,763 Other receivables 11,430 1,786 6,044 Prepaid expense 675 2,107 – Less: allowance for impairment (123) (240) (236)
16,152 7,774 9,571
122,542 161,814 155,507
As at 31 December 2013, 2014 and 2015, bank acceptance notes of RMB8,004,000, RMB7,793,000, and RMB7,272,000, respectively, were endorsed to suppliers of ASIMCO Shanxi but were not derecognised as these bank acceptance notes were issued by unlisted commercial banks.
As at 31 December 2013 and 2014, ASIMCO Shanxi’s trade receivables with carrying amount of approximately of RMB48,146,000 and RMB27,739,000 respectively, were pledged to secure the long-term borrowings of ASIMCO Shanxi (Note 20).
ASIMCO Shanxi’s trading terms with its customers are mainly on credit, except for new customers, where payment in advance is normally required. The credit period is generally three months, extending up to six months for major customers. Each customer has a maximum credit limit. ASIMCO Shanxi seeks to maintain strict control over its outstanding receivables and has a credit control department to minimise credit risk. Overdue balances are reviewed regularly by senior management. In view of the aforementioned and the fact that ASIMCO Shanxi’s trade receivables relate to a large number of diversified customers, there is no significant concentration of credit risk. ASIMCO Shanxi does not hold any collateral or other credit enhancements over its trade receivable balances. Trade receivables are non-interest bearing.
– III-169 – APPENDIX III-5 ACCOUNTANT’S REPORT OF ASIMCO SHANXI FOR THE THREE YEARS ENDED 31 DECEMBER 2015
An aging analysis of the trade receivables, based on the invoice date and net of provisions, is as follows:
31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Within 6 months 96,080 135,960 133,442 6 to 12 months 306 14 1,202
96,386 135,974 134,644
An aging analysis of the bills receivable, based on the invoice date and net of provisions, is as follows:
31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Within 6 months 10,004 18,066 11,292
The movements in provision for impairment of trade receivables are as follows:
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
At 1 January 767 102 5 Impairment loss recognised (665) (40) 453 Amount written off as uncollectible – (57) (57)
At 31 December 102 5 401
As at 31 December 2013, 2014 and 2015, there are no significant trade receivables and bills receivable that are past due but are not impaired.
The individually impaired trade receivables mainly relate to customers that were in financial difficulties or were in default in principal payments and only a portion or none of the receivables is expected to be recovered.
The carrying amounts of ASIMCO Shanxi’s trade receivables and bills receivable are denominated in the following currencies:
31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
RMB 91,637 133,227 138,188 US dollar 11,605 16,371 6,539 EURO 3,148 4,442 1,209
106,390 154,040 145,936
– III-170 – APPENDIX III-5 ACCOUNTANT’S REPORT OF ASIMCO SHANXI FOR THE THREE YEARS ENDED 31 DECEMBER 2015
The movements in provision for impairment of prepayments, deposits and other receivables are as follows:
31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
At 1 January 17 123 240 Impairment loss recognised/(reversal) 106 117 (4)
At 31 December 123 240 236
17 LOAN TO A FELLOW SUBSIDIARY
Amount of loan Due date Interest rate RMB’000
As at 31 December 2015 Entrusted loan to: ASIMCO (China) Limited 28,000 1 April 2016 5.00%
As at 31 December 2015, the loan to a fellow subsidiary is denominated in RMB.
18 CASH AND CASH EQUIVALENTS
The carrying amounts of ASIMCO Shanxi’s cash and cash equivalents are denominated in the following currencies:
31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
RMB 58,435 36,149 43,774 US dollar 11,634 8,694 2,354 EURO – – 6
70,069 44,843 46,134
– III-171 – APPENDIX III-5 ACCOUNTANT’S REPORT OF ASIMCO SHANXI FOR THE THREE YEARS ENDED 31 DECEMBER 2015
19 TRADE AND OTHER PAYABLES
An aged analysis of the trade payables as at the end of the reporting period, based on the invoice date, is as follows:
31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Trade payables 47,036 41,275 60,122 Accrued payroll 5,466 13,988 19,753 Other payables 29,860 26,848 36,602 Taxes payable 134 2,899 4,453 Interest payable 462 999 –
82,958 86,009 120,930
As at 31 December 2013, 2014 and 2015, the ageing analysis of the trade payables based on invoice date were are follows:
31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Within 6 months 46,232 40,569 59,211 6 to 12 months 3 3 168 1 to 2 year 801 703 40 2 to 3 year – – 703
47,036 41,275 60,122
As at 31 December 2013, 2014 and 2015, trade and other payables are all denominated in RMB.
20 BORROWINGS
31 December 2013 2014 2015 Interest rate RMB’000 Interest rate RMB’000 Interest rate RMB’000
Long term bank borrowings – secured 5.63% 144,496 5.63% 86,620 – –
Less: current portion 5.63% (27,326) 5.63% (62,408) – –
Non-current portion 117,170 24,212 –
– III-172 – APPENDIX III-5 ACCOUNTANT’S REPORT OF ASIMCO SHANXI FOR THE THREE YEARS ENDED 31 DECEMBER 2015
As at 31 December 2013, 2014 and 2015, ASIMCO Shanxi’s borrowings were repayable as follows:
31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Bank borrowings repayable: Within one year 27,326 62,408 – In the second year 82,390 24,212 – In the third to fifth years, inclusive 34,780 – –
144,496 86,620 –
The above secured bank borrowings were secured by certain assets, and their carrying values are as follows:
31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Trade receivables 48,146 27,739 – Property, plant and equipment 307,313 255,571 – Prepaid land lease payments 8,778 8,517 –
364,237 291,827 –
As at 31 December 2015, bank borrowings secured by the pledge of buildings and machinery and equipment have been repaid in advance of maturity whereas the related pledged assets were still in process of releasing. Up to the date of this report, the above mentioned assets have been released from pledge (Note 13, Note 14).
As at 31 December 2013 and 2014, borrowings approximate their fair value and are all denominated in US dollar.
21 PROVISIONS
The gross movement on provisions is as follows:
31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
At 1 January 16,917 14,066 13,472 Additional provisions 11,254 14,840 20,770 Utilised during the year (14,105) (15,434) (13,546)
At 31 December 14,066 13,472 20,696
A provision is recognised for expected warranty claims on products sold during warranty period, based on past experience of the level of repairs and returns. Assumptions used to calculate the provision for warranties were based on current sales levels and current information available about returns based on the estimated warranty period for all products sold. The estimation basis is reviewed on an ongoing basis and revised where appropriate.
– III-173 – APPENDIX III-5 ACCOUNTANT’S REPORT OF ASIMCO SHANXI FOR THE THREE YEARS ENDED 31 DECEMBER 2015
22 DEFERRED INCOME TAX
The analysis of deferred tax is as follows:
31 31 31 December December December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Deferred income tax assets: Deferred income tax assets to be recovered after more than 12 months 1 1 1,351 Deferred income tax assets to be recovered within 12 months 7,791 6,486 6,714
7,792 6,487 8,065
The gross movement on the deferred income tax accounts is as follows:
2013 2014 2015 RMB’000 RMB’000 RMB’000
At 1 January 10,717 7,792 6,487 Credited/(charged) to statement of profit or loss (2,925) (1,305) 1,578
At 31 December 7,792 6,487 8,065
The movement in deferred income tax assets without taking into consideration of the offsetting of balances within the same tax jurisdiction during the year is as follows:
Deferred income tax assets:
Accrued Impairment expenses Total RMB’000 RMB’000 RMB’000
At 1 January 2013 1,455 9,262 10,717 Credited/(charged) to statement of profit or loss (538) (2,387) (2,925)
At 31 December 2013 917 6,875 7,792
Credited/(charged) to statement of profit or loss (366) (939) (1,305)
At 31 December 2014 551 5,936 6,487
Credited/(charged) to statement of profit or loss 96 1,482 1,578
At 31 December 2015 647 7,418 8,065
– III-174 – APPENDIX III-5 ACCOUNTANT’S REPORT OF ASIMCO SHANXI FOR THE THREE YEARS ENDED 31 DECEMBER 2015
23 COMMITMENTS
ASIMCO Shanxi had the following capital commitments at the end of the Relevant Periods:
31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Contracted, but not provided for: Property, plant and equipment 21,976 – 55
24 RELATED PARTY TRANSACTIONS
As at 31 December 2013, 2014 and 2015, ASIMCO Shanxi is respectively controlled by CACG Ltd. VII, ASIMCO Technologies Hong Kong Limited and ASIMCO (China) Limited, which owned 100.00% equity interests in ASIMCO Shanxi. The ultimate parent company of ASIMCO Shanxi as at 31 December 2013, 2014 and 2015 is Bain Capital Asia Integral Investors, L.P. (incorporated in the Cayman Islands).
(a) The following transactions were carried out with related parties:
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
(i) Sales of goods to A fellow subsidiary 8,815 20,293 17,296
(ii) Loans provided to A fellow subsidiary 10,000 – – ASIMCO (China) Limited – – 28,000
10,000 – 28,000
(iii) Loans repaid from A fellow subsidiary 10,000 – –
(iv) Interest income from A fellow subsidiary 198 – –
(v) Service fees to ASIMCO (China) Limited 6,225 7,007 6,806
(vi) Key management compensation 1,295 1,477 1,973
– III-175 – APPENDIX III-5 ACCOUNTANT’S REPORT OF ASIMCO SHANXI FOR THE THREE YEARS ENDED 31 DECEMBER 2015
(b) Outstanding balances with related parties
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Trade receivables – A fellow subsidiary 4,350 8,480 3,915
Other payables – A fellow subsidiary – 1,136 498
Loan to fellow subsidiaries – A fellow subsidiary – – 28,000
25 FINANCIAL INSTRUMENTS BY CATEGORY
Financial assets
Loans and receivables 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Trade receivables 96,386 135,974 134,644 Financial assets included in other receivables 11,982 3,893 6,044 Loan to a fellow subsidiary – – 28,000 Cash and cash equivalents 70,069 44,843 46,134
178,437 184,710 214,822
Financial liabilities
Financial liabilities at amortised cost 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Trade payables 47,036 41,275 60,122 Financial liabilities included in accruals and other payables 35,788 41,835 56,355 Borrowings 144,496 86,620 –
227,320 169,730 116,477
– III-176 – APPENDIX III-5 ACCOUNTANT’S REPORT OF ASIMCO SHANXI FOR THE THREE YEARS ENDED 31 DECEMBER 2015
III SUBSEQUENT FINANCIAL STATEMENTS
No audited financial statements have been prepared by ASIMCO Shanxi in respect of any period subsequent to 31 December 2015 up to the date of this report. No dividend or distribution has been declared or made by ASIMCO Shanxi in respect of any period subsequent to 31 December 2015.
Yours faithfully,
PricewaterhouseCoopers Certified Public Accountants Hong Kong
– III-177 – APPENDIX III-6 ACCOUNTANT’S REPORT OF ASIMCO SHUANGHUAN FOR THE THREE YEARS ENDED 31 DECEMBER 2015
The following is the text of a report received from the Company’s reporting accountant, PricewaterhouseCoopers, Certified Public Accountants, Hong Kong, for the purpose of incorporation in this circular.
23 May 2016
The Directors Zhengzhou Coal Mining Machinery Group Company Limited
Dear Sirs,
We report on the financial information of ASIMCO Shuanghuan Piston Ring (Yizheng) Co., Ltd. (“ASIMCO Shuanghuan”) and its subsidiaries (together, “ASIMCO Shuanghuan Group”), which comprises the consolidated and company statements of financial position of ASIMCO Shuanghuan as at 31 December 2013, 2014 and 2015, and the consolidated statements of profit or loss and other comprehensive income, the consolidated statements of changes in equity and the consolidated statements of cash flows of ASIMCO Shuanghuan for each of the years ended 31 December 2013, 2014 and 2015 (the “Relevant Periods”) and a summary of significant accounting policies and other explanatory information. This financial information has been prepared by the directors of Zhengzhou Coal Mining Machinery Group Company Limited (the “Company”) and is set out in Sections I to III below for inclusion in Appendix III-6 to the circular of the Company dated 23 May 2016 (the “Circular”) in connection with the proposed acquisition of ASIMCO Shuanghuan by the Company.
ASIMCO Shuanghuan was incorporated in the People’s Republic of China on 17 August 1995 as a company with limited liability.
As at the date of this report, ASIMCO Shuanghuan has direct interests in the subsidiaries as set out in Note 16(a) of Section II below.
The statutory consolidated financial statements of ASIMCO Shuanghuan for the year ended 31 December 2013 were audited by Ernst & Young Hua Ming LLP, and the statutory consolidated financial statements of ASIMCO Shuanghuan for each of the years ended 31 December 2014 and 2015 were audited by PricewaterhouseCoopers Zhong Tian LLP, Beijing Branch, pursuant to separate terms of engagement with ASIMCO Shuanghuan respectively.
– III-178 – APPENDIX III-6 ACCOUNTANT’S REPORT OF ASIMCO SHUANGHUAN FOR THE THREE YEARS ENDED 31 DECEMBER 2015
The directors of ASIMCO Shuanghuan are responsible for the preparation of the consolidated financial statements of ASIMCO Shuanghuan for the Relevant Periods that give a true and fair view in accordance with International Financial Reporting Standards (“IFRSs”) issued by the International Accounting Standards Board (the “Underlying Financial Statements”), and for such internal control as the directors determine is necessary to enable the preparation of the Underlying Financial Statements that are free from material misstatement, whether due to fraud or error. PricewaterhouseCoopers Zhong Tian LLP have audited the Underlying Financial Statements in accordance with International Standards on Auditing (the “ISAs”) issued by the International Auditing and Assurance Standards Board (“IAASB”) pursuant to separate terms of engagement.
The financial information has been prepared based on the Underlying Financial Statements with no adjustment made thereon.
Directors’ Responsibility for the Financial Information
The directors of the Company are responsible for the preparation of the financial information that gives a true and fair view in accordance with IFRSs and accounting policies adopted by the Company and its subsidiaries (together, the “Group”) as set out in the annual report of the Company for the year ended 31 December 2015.
Reporting Accountant’s Responsibility
Our responsibility is to express an opinion on the financial information and to report our opinion to you. We carried out our procedures in accordance with Auditing Guideline 3.340 “Prospectuses and the Reporting Accountant” issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”).
Opinion
In our opinion, the financial information gives, for the purpose of this report, a true and fair view of the state of affairs of ASIMCO Shuanghuan and of ASIMCO Shuanghuan Group as at 31 December 2013, 2014 and 2015 and of ASIMCO Shuanghuan Group’s results and cash flows for the Relevant Periods.
– III-179 – APPENDIX III-6 ACCOUNTANT’S REPORT OF ASIMCO SHUANGHUAN FOR THE THREE YEARS ENDED 31 DECEMBER 2015
I FINANCIAL INFORMATION OF ASIMCO SHUANGHUAN GROUP
A. The following is the financial information of ASIMCO Shuanghuan Group prepared by the directors of the Company as at 31 December 2013, 2014 and 2015 and for each of the years ended 31 December 2013, 2014 and 2015 (the “Financial Information”):
Consolidated statements of profit or loss and other comprehensive income
Year ended December 31 2013 2014 2015 Note RMB’000 RMB’000 RMB’000
Revenue 6 542,970 520,296 477,554 Cost of sales 9 (383,258) (368,887) (338,204)
Gross profit 159,712 151,409 139,350
Selling and distribution costs 9 (42,058) (28,048) (30,228) Administrative expenses 9 (34,784) (37,154) (32,185) Research and development expenses 9 (16,806) (15,302) (13,290) Other income 7 10,259 7,508 6,607 Other gains/(losses), net 8 1,442 (2,133) 2,443
Profit from operations 77,765 76,280 72,697
Finance costs 11 (1,687) (1,116) – Share of loss of a joint venture 17 – (2,465) (2,170)
Profit before income tax 76,078 72,699 70,527 Income tax expense 12 (10,864) (11,113) (10,571)
Profit for the year 65,214 61,586 59,956
Profit attributable to: Owners of ASIMCO Shuanghuan 66,017 62,396 59,554 Non-controlling interests (803) (810) 402
65,214 61,586 59,956
Total comprehensive income for the year 65,214 61,586 59,956
Attributable to: Owners of ASIMCO Shuanghuan 66,017 62,396 59,554 Non-controlling interests (803) (810) 402
65,214 61,586 59,956
– III-180 – APPENDIX III-6 ACCOUNTANT’S REPORT OF ASIMCO SHUANGHUAN FOR THE THREE YEARS ENDED 31 DECEMBER 2015
Consolidated statements of financial position
As at 31 December 2013 2014 2015 Note RMB’000 RMB’000 RMB’000
ASSETS
Non-current assets Property, plant and equipment 13 220,527 214,311 204,582 Prepaid lease payments 14 13,561 13,122 12,684 Intangible assets 15 6,255 6,055 5,875 Available-for-sale financial assets 1,041 1,041 1,041 Investment in a joint venture 17 27,495 25,030 22,860 Loans to a joint venture 17 – 17,227 19,226 Loans to fellow subsidiaries 18 13,000 26,000 26,000 Deferred income tax assets 26 10,497 5,301 4,049
292,376 308,087 296,317
Current assets Inventories 19 76,811 69,806 63,931 Trade and other receivables 20 202,965 214,237 189,181 Loans to a joint venture 17 – – 7,980 Loans to fellow subsidiaries 18 50,700 23,000 30,000 Income tax recoverable – 1,813 892 Pledged bank deposits 21 – 3,000 8,400 Term deposits with initial terms over three months 21 50,000 – 38,000 Cash and cash equivalents 21 62,043 60,215 95,520
442,519 372,071 433,904
Total assets 734,895 680,158 730,221
EQUITY
Equity attributable to the owner of ASIMCO Shuanghuan Paid-in capital 180,000 180,000 180,000 Reserves 27 127,816 137,653 146,846 Retained earnings 185,586 158,145 32,180
493,402 475,798 359,026 Non-controlling interests 2,601 1,791 2,193
Total Equity 496,003 477,589 361,219
– III-181 – APPENDIX III-6 ACCOUNTANT’S REPORT OF ASIMCO SHUANGHUAN FOR THE THREE YEARS ENDED 31 DECEMBER 2015
Consolidated statements of financial position (continued)
As at 31 December 2013 2014 2015 Note RMB’000 RMB’000 RMB’000
LIABILITIES
Non-current liabilities
Other non-current liabilities 2,520 2,160 1,800
Current liabilities Trade and other payables 22 172,340 173,258 342,764 Advances from customers 15,837 17,189 14,719 Loans from a shareholder 23 30,000 – – Income tax payable 3,433 – – Provisions 24 14,762 9,962 9,719
236,372 200,409 367,202
Total liabilities 238,892 202,569 369,002
Total equity and liabilities 734,895 680,158 730,221
– III-182 – APPENDIX III-6 ACCOUNTANT’S REPORT OF ASIMCO SHUANGHUAN FOR THE THREE YEARS ENDED 31 DECEMBER 2015
Statements of financial position of ASIMCO Shuanghuan
As at 31 December 2013 2014 2015 Note RMB’000 RMB’000 RMB’000
ASSETS
Non-current assets Property, plant and equipment 13 205,504 197,465 182,255 Prepaid lease payments 14 13,561 13,122 12,684 Intangible assets 15 6,255 6,055 5,855 Investments in subsidiaries 16 13,523 13,523 13,523 Investment in a joint venture 17 27,495 25,030 22,860 Available-for-sale financial assets 1,041 1,041 1,041 Loans to a subsidiary 16 4,000 6,650 – Loans to a joint venture 17 – 17,227 19,226 Loans to fellow subsidiaries 18 13,000 26,000 26,000 Deferred income tax assets 26 10,497 5,301 4,049
294,876 311,414 287,493
Current assets Inventories 19 74,388 67,331 60,826 Trade and other receivables 20 197,460 203,129 173,528 Income tax recoverable – 1,813 892 Loans to a subsidiary 16 – 4,000 20,000 Loans to a joint venture 17 – – 7,980 Loans to fellow subsidiaries 18 50,700 23,000 30,000 Pledged bank deposits 21 – 3,000 8,400 Term deposits with initial terms over three months 21 50,000 – 38,000 Cash and cash equivalents 21 59,850 58,121 91,009
432,398 360,394 430,635
Total assets 727,274 671,808 718,128
– III-183 – APPENDIX III-6 ACCOUNTANT’S REPORT OF ASIMCO SHUANGHUAN FOR THE THREE YEARS ENDED 31 DECEMBER 2015
Statements of financial position of ASIMCO Shuanghuan (continued)
2013 2014 2015 Note RMB’000 RMB’000 RMB’000
EQUITY
Paid-in capital 180,000 180,000 180,000 Reserves 27 127,805 137,642 146,835 Retained earnings 186,610 162,351 38,612
Total equity 494,415 479,993 365,447
LIABILITIES
Non-current liabilities
Other non-current liabilities 2,520 2,160 1,800
Current liabilities Trade and other payables 22 166,339 162,504 327,773 Advances from customers 15,837 17,189 14,719 Loans from a shareholder 23 30,000 – – Income tax payable 3,401 – – Provisions 24 14,762 9,962 8,389
230,339 189,655 350,881
Total liabilities 232,859 191,815 352,681
Total equity and liabilities 727,274 671,808 718,128
– III-184 – APPENDIX III-6 ACCOUNTANT’S REPORT OF ASIMCO SHUANGHUAN FOR THE THREE YEARS ENDED 31 DECEMBER 2015
Consolidated statements of changes in equity
Attributable to the owners of ASIMCO Shuanghuan Non- Paid-in Retained controlling Total capital Reserves earnings Total interests equity RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
At 1 January 2013 180,000 117,751 129,634 427,385 – 427,385
Comprehensive income Profit for the year – – 66,017 66,017 (803) 65,214
Total comprehensive income – – 66,017 66,017 (803) 65,214
Transactions with owners Profit appropriations to statutory reserves – 10,065 (10,065) – – – Acquisition of a subsidiary ––––3,404 3,404
Total transactions with owners – 10,065 (10,065) – 3,404 3,404
At 31 December 2013 180,000 127,816 185,586 493,402 2,601 496,003
At 1 January 2014 180,000 127,816 185,586 493,402 2,601 496,003
Comprehensive income Profit for the year – – 62,396 62,396 (810) 61,586
Total comprehensive income – – 62,396 62,396 (810) 61,586
Transactions with owners Profit appropriations to statutory reserves – 9,837 (9,837) – – – Dividends – – (80,000) (80,000) – (80,000)
Total transactions with owners – 9,837 (89,837) (80,000) – (80,000)
At 31 December 2014 180,000 137,653 158,145 475,798 1,791 477,589
– III-185 – APPENDIX III-6 ACCOUNTANT’S REPORT OF ASIMCO SHUANGHUAN FOR THE THREE YEARS ENDED 31 DECEMBER 2015
Consolidated statements of changes in equity (continued)
Attributable to the owners of ASIMCO Shuanghuan Non- Paid-in Retained controlling Total capital Reserves earnings Total interests equity RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
At 1 January 2015 180,000 137,653 158,145 475,798 1,791 477,589
Comprehensive income Profit for the year – – 59,554 59,554 402 59,956
Total comprehensive income – – 59,554 59,554 402 59,956
Transactions with owners Profit appropriations to statutory reserves – 9,193 (9,193) – – – Dividends – – (176,326) (176,326) – (176,326)
Total transactions with owners – 9,193 (185,519) (176,326) – (176,326)
At 31 December 2015 180,000 146,846 32,180 359,026 2,193 361,219
– III-186 – APPENDIX III-6 ACCOUNTANT’S REPORT OF ASIMCO SHUANGHUAN FOR THE THREE YEARS ENDED 31 DECEMBER 2015
Consolidated statements of cash flows
2013 2014 2015 RMB’000 RMB’000 RMB’000
Cash flows from operating activities
Profit before tax 76,078 72,699 70,527 Adjustments for: Finance costs 1,687 1,116 – Share of loss of a joint venture – 2,465 2,170 Interest income on loans to fellow subsidiaries and a joint venture (5,214) (3,562) (2,993) Dividend income on available-for-sale financial assets (8) – (59) Loss on disposal of items of property, plant and equipment 240 843 261 Gain on acquisition of a subsidiary (2,091) – – Exchange gain or loss 134 736 (926) Depreciation of property, plant and equipment 27,165 28,686 29,653 Amortisation of prepaid land lease payments 438 439 438 Amortisation of intangible assets 200 200 208 Provision/(reversal) of impairment for inventories 121 (60) 660 (Reversal)/provision of impairment for trade receivables (503) 619 432 Realisation of government grants (360) (360) (360)
Operating cash flows before movement in working capital 97,887 103,821 100,011
Decrease in inventories 2,215 7,065 5,215 (Increase)/decrease in trade and other receivables (31,257) (14,148) 15,024 Increase/(decrease) in advances from customers 256 (1,352) 2,470 Increase/(decrease) in trade and other payables 40,719 4,370 (9,508) Increase/(decrease) in provisions 3,098 (4,800) (243)
Cash generated from operations Cash generated from operations 112,918 94,956 112,969
Interest received 735 1,873 1,369 Income tax paid (8,557) (11,163) (8,398)
Net cash generated from operating activities 105,096 85,666 105,940
– III-187 – APPENDIX III-6 ACCOUNTANT’S REPORT OF ASIMCO SHUANGHUAN FOR THE THREE YEARS ENDED 31 DECEMBER 2015
Consolidated statements of cash flows (continued)
2013 2014 2015 Note RMB’000 RMB’000 RMB’000
Cash flows from investing activities
Purchase of property, plant and equipment (26,136) (23,335) (14,200)
Proceeds from sale of property, plant and equipment 350 21 – Investment in a joint venture (27,495) – – Loan repayments from fellow subsidiaries 37,650 40,700 18,000 Loans to fellow subsidiaries and a joint venture (6,700) (43,210) (35,000) Term deposits with initial terms over three months (50,000) 50,000 (38,000) Changes in pledged bank deposits 29 – (3,000) (5,400) Acquisition of a subsidiary (11,071) – – Interest income on loans to fellow subsidiaries and a joint venture 5,324 3,435 2,980 Dividend income on available-for-sale financial assets 8 – 59
Net cash (used)/generated in investing activities (78,070) 24,611 (71,561)
Cash flows from financing activities
Repayments of loans from shareholders (33,132) (30,000) – Interest paid (1,674) (2,324) – Dividends (57,736) (79,045) –
Net cash used in financing activities (92,542) (111,369) –
Net (decrease)/increase in cash and cash equivalents (65,516) (1,092) 34,379 Cash and cash equivalents, at beginning of the year 127,693 62,043 60,215 Exchange gains on cash and cash equivalents (134) (736) 926
Cash and cash equivalents at end of year 21 62,043 60,215 95,520
– III-188 – APPENDIX III-6 ACCOUNTANT’S REPORT OF ASIMCO SHUANGHUAN FOR THE THREE YEARS ENDED 31 DECEMBER 2015
II NOTES TO THE FINANCIAL INFORMATION
1 GENERAL INFORMATION
ASIMCO Shuanghuan Piston Ring (Yizheng) Co., Ltd. (“ASIMCO Shuanghuan”) was established in Jiangsu province of the People’s Republic of China (“PRC”) as an equity joint-venture on 17 August 1995 with limited liability.
ASIMCO Shuanghuan and its subsidiaries (collectively referred to as the “ASIMCO Shuanghuan Group”) are principally engaged in design, development, production and processing of piston rings and internal combustion engine parts, and provide related technical and after-sales service. Majority of ASIMCO Shuanghuan Group’s business is based in the PRC.
The Financial Information is presented in Renminbi (“RMB”), unless otherwise stated.
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
2.1 Basis of preparation
The Financial Information of ASIMCO Shuanghuan have been prepared in accordance with all applicable International Financial Reporting Standards (“IFRS”). The Financial Information have been prepared under the historical cost convention as modified by the revaluation of available-for sale financial assets.
The preparation of Financial Information in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying ASIMCO Shuanghuan Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 4.
2.1.1 Changes in accounting policy and disclosures
(a) New Hong Kong Companies Ordinance (Cap. 622)
The requirements of Part 9 “Accounts and Audit” of the new Hong Kong Companies Ordinance (Cap. 622) came into operation in 2015 and have been applied to presentation and disclosures of certain information in the consolidated financial statements.
(b) New standards and interpretations not yet adopted
A number of new standards and amendments to standards and interpretations are effective for annual periods beginning after 1January 2015, and have not been applied in preparing the Financial Information. None of these is expected to have a significant effect on the Financial Information of ASIMCO Shuanghuan Group, except the following set out below:
• Amendment to IAS 27, ‘Equity method in separate financial statements‘. The amendment allows entities to use equity method to account for investments in subsidiaries, joint ventures and associates in their separate financial statements. The amendment is effective for annual periods beginning on or after 1 January 2016, with earlier application permitted.
• IFRS 15, ‘Revenue from contracts with customers‘ deals with revenue recognition and establishes principles for reporting useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. Revenue is recognised when a customer obtains control of a good or service and thus has the ability to direct the use and obtain the benefits from the good or service. The standard replaces IAS 18 “Revenue” and IAS 11 “Construction contracts” and related
– III-189 – APPENDIX III-6 ACCOUNTANT’S REPORT OF ASIMCO SHUANGHUAN FOR THE THREE YEARS ENDED 31 DECEMBER 2015
interpretations. IFRS 15 is effective for annual periods beginning on or after 1 January 2018 and earlier application is permitted. ASIMCO Shuanghuan Group is assessing the impact of IFRS 15.
• IFRS 9, ‘Financial instruments‘, addresses the classification, measurement and recognition of financial assets and financial liabilities. The complete version of IFRS 9 was issued in July 2014. It replaces the guidance in IAS 39 that relates to the classification and measurement of financial instruments. IFRS 9 retains but simplifies the mixed measurement model and establishes three primary measurement categories for financial assets: amortised cost, fair value through OCI and fair value through P&L. The basis of classification depends on the entity’s business model and the contractual cash flow characteristics of the financial asset. Investments in equity instruments are required to be measured at fair value through profit or loss with the irrevocable option at inception to present changes in fair value in OCI not recycling. There is now a new expected credit losses model that replaces the incurred loss impairment model used in IAS 39. For financial liabilities there were no changes to classification and measurement except for the recognition of changes in own credit risk in other comprehensive income, for liabilities designated at fair value through profit or loss. IFRS 9 relaxes the requirements for hedge effectiveness by replacing the bright line hedge effectiveness tests. It requires an economic relationship between the hedged item and hedging instrument and for the ‘hedged ratio’ to be the same as the one management actually use for risk management purpose.
• IFRS 16, ‘Leases‘ addresses the definition of a lease, recognition and measurement of leases and establishes principles for reporting useful information to users of financial statements about the leasing activities of both lessees and lessors. A key change arising from IFRS 16 is that most operating leases will be accounted for on statement of financial position for lessees. The standard replaces IAS 17 “Leases”, and related interpretations. The standard is effective for annual periods beginning on or after 1 January 2019 and earlier application is permitted subject to the entity adopting IFRS 15 ‘Revenue from contracts with customers’ at the same time.
There are no other IFRSs or IFRIC interpretations that are not yet effective that would be expected to have a material impact on ASIMCO Shuanghuan Group.
2.2 Subsidiaries
2.2.1 Consolidation
A subsidiary is an entity (including a structured entity) over which ASIMCO Shuanghuan Group has control. ASIMCO Shuanghuan Group controls an entity when ASIMCO Shuanghuan Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are consolidated from the date on which control is transferred to ASIMCO Shuanghuan Group. They are deconsolidated from the date that control ceases.
(a) Business combinations
ASIMCO Shuanghuan Group applies the acquisition method to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred to the former owners of the acquiree and the equity interests issued by ASIMCO Shuanghuan Group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date.
– III-190 – APPENDIX III-6 ACCOUNTANT’S REPORT OF ASIMCO SHUANGHUAN FOR THE THREE YEARS ENDED 31 DECEMBER 2015
ASIMCO Shuanghuan Group recognises any non-controlling interest in the acquiree on an acquisition-by-acquisition basis. Non-controlling interests in the acquiree that are present ownership interests and entitle their holders to a proportionate share of the entity’s net assets in the event of liquidation are measured at either fair value or the present ownership interests’ proportionate share in the recognised amounts of the acquiree’s identifiable net assets. All other components of non-controlling interests are measured at their acquisition date fair value, unless another measurement basis is required by IFRS.
Acquisition-related costs are expensed as incurred.
If the business combination is achieved in stages, the acquisition date carrying value of the acquirer’s previously held equity interest in the acquiree is re-measured to fair value at the acquisition date; any gains or losses arising from such re-measurement are recognised in profit or loss.
Any contingent consideration to be transferred by ASIMCO Shuanghuan Group is recognised at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration that is deemed to be an asset or liability is recognised in accordance with IAS/HKAS 39 either in profit or loss or as a change to other comprehensive income. Contingent consideration that is classified as equity is not remeasured, and its subsequent settlement is accounted for within equity.
The excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the identifiable net assets acquired is recorded as goodwill. If the total of consideration transferred, non-controlling interest recognised and previously held interest measured is less than the fair value of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognised directly in the statement of profit or loss.
Intra-group transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated. When necessary, amounts reported by subsidiaries have been adjusted to conform with ASIMCO Shuanghuan Group’s accounting policies.
2.2.2 Separate financial statements
Investments in subsidiaries are accounted for at cost less impairment. Cost includes direct attributable costs of investment. The results of subsidiaries are accounted for by ASIMCO Shuanghuan on the basis of dividend received and receivable.
Impairment testing of the investments in subsidiaries is required upon receiving a dividend from these investments if the dividend exceeds the total comprehensive income of the subsidiary in the period the dividend is declared or if the carrying amount of the investment in the separate financial statements exceeds the carrying amount in the consolidated financial statements of the investee’s net assets including goodwill.
2.3 Joint arrangements
ASIMCO Shuanghuan Group has applied IFRS 11 to all joint arrangements. Under IFRS 11 investments in joint arrangements are classified as either joint operations or joint ventures depending on the contractual rights and obligations each investor. ASIMCO Shuanghuan Group has assessed the nature of its joint arrangements and determined them to be joint ventures. Joint ventures are accounted for using the equity method.
Under the equity method of accounting, interests in joint ventures are initially recognised at cost and adjusted thereafter to recognise ASIMCO Shuanghuan Group’s share of the post-acquisition profits or losses and movements in other comprehensive income. ASIMCO Shuanghuan Group’s investments in joint ventures include goodwill identified on acquisition. Upon the acquisition of the ownership interest
– III-191 – APPENDIX III-6 ACCOUNTANT’S REPORT OF ASIMCO SHUANGHUAN FOR THE THREE YEARS ENDED 31 DECEMBER 2015
in a joint venture, any difference between the cost of the joint venture and ASIMCO Shuanghuan Group’s share of the net fair value of the joint venture’s identifiable assets and liabilities is accounted for as goodwill. When ASIMCO Shuanghuan Group’s share of losses in a joint venture equals or exceeds its interests in the joint ventures (which includes any long-term interests that, in substance, form part of ASIMCO Shuanghuan Group’s net investment in the joint ventures), ASIMCO Shuanghuan Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the joint ventures.
2.4 Segment reporting
Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the executive directors that makes strategic decisions.
For management purposes, ASIMCO Shuanghuan Group operates in one business unit and has one reportable operating segment during the years ended 31 December 2013, 2014 and 2015, which is manufacturing and sale of automotive products.
2.5 Foreign currency translation
(a) Functional and presentation currency
Items included in the financial statements of each of ASIMCO Shuanghuan Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the “functional currency”). The consolidated financial statements are presented in RMB, which is ASIMCO Shuanghuan’s functional and ASIMCO Shuanghuan Group’s presentation currency.
(b) Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or valuation where items are re-measured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the statement of profit or loss, except when deferred in other comprehensive income as qualifying cash flow hedges and qualifying net investment hedges.
Foreign exchange gains and losses are presented in the statement of profit or loss within “other gains/(losses), net”.
2.6 Property, plant and equipment
Property, plant and equipment is stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items.
Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to ASIMCO Shuanghuan Group and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognised. All other repairs and maintenance are charged to the statement of profit or loss during the financial period in which they are incurred.
Depreciation is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives, as follows:
Estimated Estimated Category residual value useful life (%)
Buildings 10 20 years Plant, machinery and equipment 10 10 years Motor vehicles 10 5 years Office equipment and others 10 3 years
– III-192 – APPENDIX III-6 ACCOUNTANT’S REPORT OF ASIMCO SHUANGHUAN FOR THE THREE YEARS ENDED 31 DECEMBER 2015
The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period.
An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount (Note 2.8).
Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognised within “Other gains/(losses), net” in the statement of profit or loss.
Construction in progress represents property, plant and equipment under construction or pending installation, and is stated at cost less impairment losses. Cost comprises direct costs of construction including borrowing costs attributable to the construction during the period of construction. No provision for depreciation is made on construction in progress until such time as the relevant assets are completed and ready for intended use.
2.7 Intangible assets
(a) Trademark
Trademark is stated at cost less any impairment losses and is amortised on the straight-line basis over their estimated useful lives of 50 years.
(b) Computer software
Acquired computer software is stated at costs incurred to acquire and bring to use the specific software. These costs are amortised over their estimated useful lives of 3 years.
2.8 Impairment of non-financial assets
Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date.
2.9 Financial assets
2.9.1 Classification
ASIMCO Shuanghuan Group classifies its financial assets in the following categories: loans and receivables and available-for-sale. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition.
(a) Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for the amounts that are settled or expected to be settled more than 12 months after the end of the reporting period. These are classified as non-current assets. ASIMCO Shuanghuan Group’s loans and receivables comprise trade receivables (Note 20), bills receivable (Note 20), deposits and other receivables (Note 20), loans to fellow subsidiaries (Note 18), loans to a joint venture (Note 17), pledged bank deposits (Note 21), term deposits with initial terms over three months (Note 21) and cash and cash equivalents (Note 21).
– III-193 – APPENDIX III-6 ACCOUNTANT’S REPORT OF ASIMCO SHUANGHUAN FOR THE THREE YEARS ENDED 31 DECEMBER 2015
(b) Available-for-sale financial assets
Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless the investment matures or management intends to dispose of it within 12 months of the end of the reporting period.
2.9.2 Recognition and measurement
Regular way purchases and sales of financial assets are recognised on the trade-date – the date on which ASIMCO Shuanghuan Group commits to purchase or sell the asset. Investments are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or loss are initially recognised at fair value, and transaction costs are expensed in the statement of profit or loss. Financial assets are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and ASIMCO Shuanghuan Group has transferred substantially all risks and rewards of ownership. Available-for-sale financial assets are subsequently carried at fair value, except for the investments in equity instruments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured which are carried at cost. Loans and receivables are subsequently carried at amortised cost using the effective interest method.
Interest earned whilst holding the available-for-sale financial assets is recognised in the statement of profit or loss as part of other income.
2.10 Offsetting financial instruments
Financial assets and liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis or realise the asset and settle the liability simultaneously. The legally enforceable right must not be contingent on future events and must be enforceable in the normal course of business and in the event of default, insolvency or bankruptcy of ASIMCO Shuanghuan or the counterparty.
2.11 Impairment of financial assets
(a) Assets carried at amortised cost
ASIMCO Shuanghuan Group assesses at the end of each reporting period whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.
Evidence of impairment may include indications that the debtors or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganisation, and where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.
For loans and receivables category, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate. The carrying amount of the asset is reduced and the amount of the loss is recognised in the consolidated statement of profit or loss. If a loan or held-to-maturity investment has a variable interest rate, the discount rate for measuring any impairment loss is the current
– III-194 – APPENDIX III-6 ACCOUNTANT’S REPORT OF ASIMCO SHUANGHUAN FOR THE THREE YEARS ENDED 31 DECEMBER 2015
effective interest rate determined under the contract. As a practical expedient, ASIMCO Shuanghuan Group may measure impairment on the basis of an instrument’s fair value using an observable market price.
If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor’s credit rating), the reversal of the previously recognised impairment loss is recognised in the consolidated statement of profit or loss.
(b) Available-for-sale financial assets
ASIMCO Shuanghuan Group assesses at the end of each reporting period whether there is objective evidence that a financial asset or a group of financial assets is impaired.
If an available-for-sale asset is impaired, an amount comprising the difference between its cost (net of any principal payment and amortisation) and its current fair value, less any impairment loss previously recognised in the statement of profit or loss, is removed from other comprehensive income and recognised in the statement of profit or loss.
2.12 Inventories
Inventories are stated at the lower of cost and net realisable value. Cost is determined using the weighted average cost method. The cost of finished goods and work in progress comprises, raw materials, direct labour, other direct costs and related production overheads (based on normal operating capacity). It excludes borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses.
2.13 Trade and other receivables
Trade receivables are amounts due from customers for merchandise sold in the ordinary course of business. If collection of trade and other receivables is expected in one year or less (or in the normal operating cycle of the business if longer), they are classified as current assets. If not, they are presented as non-current assets.
Trade and other receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less allowance for impairment.
2.14 Cash and cash equivalents
In the consolidated statement of cash flows, cash and cash equivalents include cash in hand, deposits held at call with banks, and other short-term highly liquid investments with original maturities of three months or less.
2.15 Paid-in capital
Paid-in capital is classified as equity.
2.16 Trade payables
Trade payables are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Trade payables are classified as current liabilities if payment is due within one year or less (or in the normal operating cycle of the business if longer). If not, they are presented as non-current liabilities.
Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method.
– III-195 – APPENDIX III-6 ACCOUNTANT’S REPORT OF ASIMCO SHUANGHUAN FOR THE THREE YEARS ENDED 31 DECEMBER 2015
2.17 Borrowings
Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently carried at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the statement of profit or loss over the period of the borrowings using the effective interest method.
Borrowings are classified as current liabilities unless ASIMCO Shuanghuan Group has an unconditional right to defer settlement of the liability for at least 12 months after the end of the reporting period.
2.18 Borrowing costs
General and specific borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale.
Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalisation.
All other borrowing costs are recognised in profit or loss in the period in which they are incurred.
2.19 Current and deferred income tax
The tax expense for the period comprises current and deferred tax. Tax is recognised in the statement of profit or loss, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case the tax is also recognised in other comprehensive income or directly in equity, respectively.
(a) Current income tax
The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the date of statement of financial position in the countries where ASIMCO Shuanghuan’s subsidiaries and associates operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.
(b) Deferred income tax
Inside basis differences
Deferred income tax is recognised, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred tax liabilities are not recognised if they arise from the initial recognition of goodwill, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the date of statement of financial position and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.
Deferred income tax assets are recognised only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.
– III-196 – APPENDIX III-6 ACCOUNTANT’S REPORT OF ASIMCO SHUANGHUAN FOR THE THREE YEARS ENDED 31 DECEMBER 2015
Outside basis differences
Deferred income tax liabilities are provided on taxable temporary differences arising from investments in subsidiaries and joint arrangements, except for deferred income tax liability where the timing of the reversal of the temporary difference is controlled by ASIMCO Shuanghuan Group and it is probable that the temporary difference will not reverse in the foreseeable future.
Deferred income tax assets are recognised on deductible temporary differences arising from investments in subsidiaries and joint arrangements only to the extent that it is probable the temporary difference will reverse in the future and there is sufficient taxable profit available against which the temporary difference can be utilised.
(c) Offsetting
Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority on either the taxable entity or different taxable entities where there is an intention to settle the balances on a net basis.
2.20 Employee benefits
Defined contribution pension scheme
ASIMCO Shuanghuan Group’s full-time employees are covered by a government operated defined contribution pension scheme, and are entitled to a monthly pension from their retirement dates. The PRC government is responsible for the pension liability to these retired employees. ASIMCO Shuanghuan Group is required to make annual contributions to the retirement scheme at certain percentages of employees’ basic salaries, which are charged as an expense when the employees have rendered services entitling them to the contributions and the contributions are due.
2.21 Provisions
Provisions are recognised when ASIMCO Shuanghuan Group has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. Provisions are not recognised for future operating losses.
Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small.
Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognised as interest expense.
Provisions for product warranties granted by ASIMCO Shuanghuan Group on certain products are recognised based on sales volume and past experience of the level of repairs and returns, discounted to their present values as appropriate.
– III-197 – APPENDIX III-6 ACCOUNTANT’S REPORT OF ASIMCO SHUANGHUAN FOR THE THREE YEARS ENDED 31 DECEMBER 2015
2.22 Revenue recognition
Revenue is measured at the fair value of the consideration received or receivable, and represents amounts receivable for goods supplied, stated net of discounts returns and value added taxes. ASIMCO Shuanghuan Group recognises revenue when the amount of revenue can be reliably measured; when it is probable that future economic benefits will flow to the entity; and when specific criteria have been met for each of ASIMCO Shuanghuan Group’s activities, as described below. ASIMCO Shuanghuan Group bases its estimates of return on historical results, taking into consideration the type of customers, the type of transactions and the specifics of each arrangement.
Sales of automotive products
ASIMCO Shuanghuan Group sells piston rings and internal combustion engine parts to domestic and overseas automotive manufacturers. The revenue is recognised when the related goods are delivered to the place of delivery pursuant to the sales contract and the sales contract the customer confirms the acceptance of the goods or ASIMCO Shuanghuan has objective evidence that all criteria for acceptance have been satisfied.
2.23 Interest income
Interest income is recognised using the effective interest method. When a loan and receivable is impaired, ASIMCO Shuanghuan Group reduces the carrying amount to its recoverable amount, being the estimated future cash flow discounted at the original effective interest rate of the instrument, and continues unwinding the discount as interest income. Interest income on impaired loans and receivables is recognised using the original effective interest rate.
2.24 Dividend income
Dividend income is recognised when the right to receive payment is established.
2.25 Leases
Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the statement of profit or loss on a straight-line basis over the period of the lease.
Prepaid lease payments
Interest in leasehold land that is accounted for as an operating lease is presented as “prepaid lease payments” in the statement of financial position and is amortised over the lease term on a straight-line basis.
2.26 Government grants
Grants from the government are recognised at their fair value where there is a reasonable assurance that the grant will be received and ASIMCO Shuanghuan Group will comply with all attached conditions.
Government grants relating to costs are deferred and recognised in the statement of profit or loss over the period necessary to match them with the costs that they are intended to compensate.
Government grants relating to property, plant and equipment are included in non-current liabilities as deferred government grants and are credited to the statement of profit or loss on a straight- line basis over the expected lives of the related assets.
– III-198 – APPENDIX III-6 ACCOUNTANT’S REPORT OF ASIMCO SHUANGHUAN FOR THE THREE YEARS ENDED 31 DECEMBER 2015
2.27 Dividend distribution
Dividend distribution to ASIMCO Shuanghuan’s shareholders is recognised as a liability in ASIMCO Shuanghuan Group’s and ASIMCO Shuanghuan’s financial statements in the period in which the dividends are approved by ASIMCO Shuanghuan’s shareholders or directors, where appropriate.
3 FINANCIAL RISK MANAGEMENT
3.1 Financial risk factors
ASIMCO Shuanghuan Group’s activities expose it to a variety of financial risks: market risk (currency risk), credit risk and liquidity risk.
(a) Market risk
Foreign exchange risk
Foreign currency risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. ASIMCO Shuanghuan Group’s exposure to the risk of changes in foreign exchange rates relates primarily to ASIMCO Shuanghuan Group’s operating activities (when revenue or expense is denominated in a different currency from ASIMCO Shuanghuan’s functional currency).
ASIMCO Shuanghuan Group’s businesses are mainly located in the PRC and are mainly transacted and settled in RMB. Certain sales, purchases and borrowings are settled in foreign currencies. The fluctuation of the exchange rates of foreign currencies against the RMB will affect ASIMCO Shuanghuan Group’s results of operations.
As at 31 December 2013, 2014 and 2015, if RMB had strengthened/ weakened by 10% against US dollar with all other variables held constant, profit before tax for the year would have been RMB26,000, RMB14,000 and RMB121,000 lower/higher, respectively, mainly as a result of foreign exchange losses/gains on translation of US dollar-denominated trade receivables.
(b) Credit risk
Credit risk is the risk that a counter party will not meet its obligations under a financial instrument or customer contract, leading to a financial loss. ASIMCO Shuanghuan Group is exposed to credit risk from its trade receivables, bills receivable and other receivables, loans to fellow subsidiaries, pledged bank deposits, term deposits with initial terms over three months and cash and cash equivalents.
Customer credit risk is managed by each operating company subject to ASIMCO Shuanghuan Group’s established policy, procedures and control relating to customer credit risk management. ASIMCO Shuanghuan Group’s policy is to perform credit verification for all customers who have transactions with ASIMCO Shuanghuan Group. Further, credit limits, credit terms and sales methods are determined based on the credit history of customers. ASIMCO Shuanghuan Group maintains long-term relationships with several large customers which management believes credit risk in relation with these customers is low. ASIMCO Shuanghuan Group does not hold collateral as security.
Loans to fellow subsidiaries are arranged by the parent company of ASIMCO Shuanghuan. Based on the overall financial position of the parent company, management believes the credit risk in relation with the loans to fellow subsidiaries is low. Loans to a joint venture are a part of the initial shareholders’ investments in the joint venture in form of loans, of which the credit risk is low.
– III-199 – APPENDIX III-6 ACCOUNTANT’S REPORT OF ASIMCO SHUANGHUAN FOR THE THREE YEARS ENDED 31 DECEMBER 2015
All ASIMCO Shuanghuan Group’s cash and cash equivalents are held in major banks located in the PRC, which management believes are of high credit quality.
The carrying amounts of cash and cash equivalents, term deposits with initial terms over three months, pledged bank deposits, trade and other receivables, bills receivable and loans to fellow subsidiaries, represent ASIMCO Shuanghuan Group’s maximum exposure to credit risk in relation to financial assets.
(c) Liquidity risk
ASIMCO Shuanghuan Group’s objective is to maintain a balance between continuity of funding and flexibility through the use of bills, bank loans and other interest-bearing loans.
The table below analyses ASIMCO Shuanghuan Group’s and ASIMCO Shuanghuan’s non-derivative financial liabilities into relevant maturity groupings based on the remaining period at the date of statement of financial position to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows.
ASIMCO Shuanghuan Group
Within one year RMB’000
As at 31 December 2013 Trade payables 98,659 Financial liabilities included in other payables 61,962 Loans from a shareholder 31,674
Total 192,295
As at 31 December 2014 Trade payables 102,728 Bills payable 3,000 Financial liabilities included in other payables 55,877
Total 161,605
As at 31 December 2015 Trade payables 95,628 Bills payable 8,400 Financial liabilities included in other payables 217,098
Total 321,126
– III-200 – APPENDIX III-6 ACCOUNTANT’S REPORT OF ASIMCO SHUANGHUAN FOR THE THREE YEARS ENDED 31 DECEMBER 2015
ASIMCO Shuanghuan
Within one year RMB’000
As at 31 December 2013 Trade payables 95,046 Financial liabilities included in other payables 59,735 Loans from a shareholder 31,674
Total 186,455
As at 31 December 2014 Trade payables 94,081 Bills payable 3,000 Financial liabilities included in other payables 53,596
Total 150,677
As at 31 December 2015 Trade payables 84,182 Bills payable 8,400 Financial liabilities included in other payables 213,569
Total 306,151
3.2 Capital management
The primary objective of ASIMCO Shuanghuan Group’s capital management is to ensure that it maintains healthy capital ratios in order to support its business and maximise shareholders’ value.
ASIMCO Shuanghuan Group manages its capital structure and makes adjustments to it in light of changes in economic conditions. To maintain or adjust the capital structure, ASIMCO Shuanghuan Group may adjust the dividend payment to shareholders, return capital to shareholders or issue new shares. No changes were made in the objectives, policies or processes for managing capital during the Relevant Periods.
ASIMCO Shuanghuan Group monitors capital using a liability to asset ratio, which is total liabilities divided by the total assets.
ASIMCO Shuanghuan Group’s strategy is to maintain the liability to asset ratio at a healthy capital level in order to support its business. The principal strategies adopted by ASIMCO Shuanghuan Group include, without limitation, reviewing future cash flow requirement and the ability to meet debt repayment schedules when they fall due, maintaining a reasonable level of available banking facilities and adjusting investment plans and financing plans, if necessary, to ensure that ASIMCO Shuanghuan Group has a reasonable level of capital to support its business. The liability to asset ratios at the end of the reporting period were as follows:
As at 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Total liability 238,892 202,569 369,002 Total assets 734,895 680,158 730,221
Liability to asset ratio 33% 30% 51%
– III-201 – APPENDIX III-6 ACCOUNTANT’S REPORT OF ASIMCO SHUANGHUAN FOR THE THREE YEARS ENDED 31 DECEMBER 2015
3.3 Fair value estimation
Financial instruments carried at fair value are analysed by level of the inputs to valuation techniques used to measure fair value. Such inputs are categorised into three levels within a fair value hierarchy as follows:
• Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1).
• Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (level 2).
• Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (level 3).
As at 31 December 2013, 2014 and 2015, ASIMCO Shuanghuan Group has no financial instruments carried at fair value. Carrying amounts of financial assets (including trade and other receivables, term deposits with initial terms over three months, pledged bank deposits, cash and cash equivalents and loans to a joint venture and fellow subsidiaries) and financial liabilities (including trade and other payables and loans from a shareholder) approximate their fair values.
4 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
ASIMCO Shuanghuan Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are addressed below.
(a) Impairment of receivables
ASIMCO Shuanghuan Group recognises provisions based on the judgement of recovery of accounts receivable. A bad debt provision is required to be recognised when there are indications that the receivable cannot be recovered. Recognition of bad debt provisions requires the use of judgement and estimates. If the revised estimates deviate from the current estimates, then any difference arising from changes of accounting estimates will affect the carrying value of debtors in the relevant accounting periods.
(b) Impairment of inventories
ASIMCO Shuanghuan Group recognises provision based on the estimates of recovery of inventories. The estimates are made with reference to aged inventory analysis, projections of expected future saleability of goods and management experience and judgement. Impairment of inventories will be made when the carrying amounts of inventories are below their estimated net realisable values.
(c) Warranty provisions
A provision is recognised for expected warranty claims on products sold during the warranty guaranteed period. Assumptions used to calculate the provision for warranties are based on current sales levels and historical information for return and repairmen. The estimation basis is reviewed on an ongoing basis and revised where appropriate. For further details about the warranty provision, please refer to Note 24.
– III-202 – APPENDIX III-6 ACCOUNTANT’S REPORT OF ASIMCO SHUANGHUAN FOR THE THREE YEARS ENDED 31 DECEMBER 2015
5 SEGMENT INFORMATION
For management purposes, ASIMCO Shuanghuan Group operates in one business unit and has one reportable operating segment, which is manufacture and sale of automotive piston ring and internal combustion engine parts.
(a) Geographical information
(i) Analysis of revenue
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
The PRC 463,633 441,588 395,485 Bengal 12,852 17,851 22,907 Japan 12,982 12,503 13,354 Turkey 7,675 11,210 9,469 Russia 12,715 8,526 10,112 Other countries 33,113 28,618 26,227
Total 542,970 520,296 477,554
The revenue information above is based on the locations of the customers.
(ii) Analysis of non-current assets
31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
The PRC 240,343 233,488 223,141
(b) Information about major customers
Revenues of RMB48,009,000, RMB36,225,000 and RMB25,463,000 for the years ended 31 December 2013, 2014 and 2015, respectively, were derived from a single external customer from the PRC.
6 REVENUE
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Sales of piston rings and internal combustion engine parts 526,146 502,229 464,134 Sales of materials and others 16,824 18,067 13,420
Total 542,970 520,296 477,554
– III-203 – APPENDIX III-6 ACCOUNTANT’S REPORT OF ASIMCO SHUANGHUAN FOR THE THREE YEARS ENDED 31 DECEMBER 2015
7 OTHER INCOME
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Interest income on loans to fellow subsidiaries 5,214 3,379 2,620 Interest income on loans to a joint venture – 183 373 Interest income on bank deposits 2,367 1,450 1,476 Government grants 2,670 2,496 2,079 Dividend income 8 – 59
10,259 7,508 6,607
8 OTHER GAINS/(LOSSES), NET
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Gains on acquisition of a subsidiary (Note 29) 2,091 – – Reversal of/(provision for) impairment of trade and other receivables 503 (619) (432) Net foreign exchange (losses)/gains (1,131) (758) 2,622 Loss on disposal of property, plant and equipment, net (240) (843) (261) Others 219 87 514
Total 1,442 (2,133) 2,443
– III-204 – APPENDIX III-6 ACCOUNTANT’S REPORT OF ASIMCO SHUANGHUAN FOR THE THREE YEARS ENDED 31 DECEMBER 2015
9 EXPENSES BY NATURE
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Changes in inventories of finished goods and work in progress 208 5,158 6,374 Raw materials and consumables used 256,111 252,246 212,852 Provision/(reversal) of impairment for inventories 121 (60) 660 Employee benefit expenses (Note 10) 103,569 97,128 95,102 Water and electricity expenses 25,989 20,754 20,421 Maintenance and repair costs 3,978 3,846 2,841 Depreciation and amortisation 27,803 29,325 30,299 Transportation expenses 5,844 5,208 5,041 Service fees (Note 30) 8,411 10,107 9,652 Entertainment expenses 3,361 3,437 3,709 Sales tax and surcharges 4,339 4,591 4,319 Travel expenses 3,579 4,260 4,142 Auditors’ remuneration - audit services 450 406 431 Product warranty costs 17,686 5,330 9,429 Others 15,457 7,655 8,635
Total 476,906 449,391 413,907
10 EMPLOYEE BENEFIT EXPENSE
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Salaries, allowances and other benefits 92,431 86,695 84,853 Pensions – defined contribution plans 11,138 10,433 10,249
Total 103,569 97,128 95,102
11 FINANCE COSTS
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Interest on loans from a shareholder 1,687 1,116 –
– III-205 – APPENDIX III-6 ACCOUNTANT’S REPORT OF ASIMCO SHUANGHUAN FOR THE THREE YEARS ENDED 31 DECEMBER 2015
12 INCOME TAX EXPENSE
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Current tax: Current tax on profits for the year 12,365 5,917 9,319
Deferred tax: Origination and reversal of temporary differences (1,501) 5,196 1,252
Total Income tax expense 10,864 11,113 10,571
Pursuant to Circular of the State Administration of Taxation on Issues Concerning Enterprise Income Tax Collection on High-tech Enterprises effective from 30 September 2011, ASIMCO Shuanghuan was entitled to a preferential tax rate of 15% for corporate income tax for the years ended 31 December 2013, 2014 and 2015.
Pursuant to the relevant laws and regulations in the PRC, different tax rates were applicable to the two subsidiaries of ASIMCO Shuanghuan. The statutory enterprise income tax rate of 25% was applied to ASM Alloy Materials (Yizheng) Co., Ltd. whereas a tax rate of 10% for small enterprises was to Yangzhou Yingwei Auto Components Co., Ltd. for the three years ended 31 December 2013, 2014 and 2015 respectively.
A reconciliation of the tax expense applicable to profit before tax at the applicable tax rate for ASIMCO Shuanghuan to the tax expense is as follows:
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Profit before tax 76,078 72,699 70,527
At ASIMCO Shuanghuan’s preferential income tax rate of 15% 11,412 10,905 10,579 Effect of different tax rate applicable for the subsidiaries of ASIMCO Shuanghuan (387) 7 (211) Additional tax deduction on research and development expenditures (1,260) (1,148) (1,013) Non-deductible expenses for tax purposes 201 1,186 713 Unrecognised tax losses 898 163 503
10,864 11,113 10,571
– III-206 – APPENDIX III-6 ACCOUNTANT’S REPORT OF ASIMCO SHUANGHUAN FOR THE THREE YEARS ENDED 31 DECEMBER 2015
13 PROPERTY, PLANT AND EQUIPMENT
ASIMCO Shuanghuan Group
Machinery Office and Motor equipment Construction Buildings equipment vehicles and others in progress Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
At 1 January 2013 Cost 79,098 374,292 1,965 9,917 12,719 477,991 Accumulated depreciation (42,485) (221,830) (1,709) (8,344) – (274,368)
Net book amount 36,613 152,462 256 1,573 12,719 203,623
Year ended 31 December 2013 Opening net book amount 36,613 152,462 256 1,573 12,719 203,623 Additions 835 1,486 – 70 26,114 28,505 Transfers 1,145 27,424 – 2,132 (30,701) – Disposals – (543) (20) (27) – (590) Acquisition of a subsidiary 1,806 13,565 – 783 – 16,154 Depreciation charge (4,505) (22,080) (19) (561) – (27,165)
Closing net book amount 35,894 172,314 217 3,970 8,132 220,527
At 31 December 2013 Cost 82,882 390,205 1,770 12,681 8,132 495,670 Accumulated depreciation (46,988) (217,891) (1,553) (8,711) – (275,143)
Net book amount 35,894 172,314 217 3,970 8,132 220,527
Year ended 31 December 2014 Opening net book amount 35,894 172,314 217 3,970 8,132 220,527 Additions 1,490 8,487 – 456 12,901 23,334 Transfers 460 11,956 442 339 (13,197) – Disposals (62) (793) – (9) – (864) Depreciation charge (4,155) (23,474) (78) (979) – (28,686)
Closing net book amount 33,627 168,490 581 3,777 7,836 214,311
At 31 December 2014 Cost 83,590 393,500 2,211 12,984 7,836 500,121 Accumulated depreciation (49,963) (225,010) (1,630) (9,207) – (285,810)
Net book amount 33,627 168,490 581 3,777 7,836 214,311
– III-207 – APPENDIX III-6 ACCOUNTANT’S REPORT OF ASIMCO SHUANGHUAN FOR THE THREE YEARS ENDED 31 DECEMBER 2015
ASIMCO Shuanghuan Group
Machinery Office and Motor equipment Construction Buildings equipment vehicles and others in progress Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
At 1 January 2015 Cost 83,590 393,500 2,211 12,984 7,836 500,121 Accumulated depreciation (49,963) (225,010) (1,630) (9,207) – (285,810)
Net book amount 33,627 168,490 581 3,777 7,836 214,311
Year ended 31 December 2015 Opening net book amount 33,627 168,490 581 3,777 7,836 214,311 Additions 517 7,491 489 29 11,659 20,185 Transfers – 13,443 – 690 (14,133) – Disposals (227) (32) – (2) – (261) Depreciation charge (4,339) (24,050) (143) (1,121) – (29,653)
Closing net book amount 29,578 165,342 927 3,373 5,362 204,582
At 31 December 2015 Cost 81,629 409,799 2,700 13,680 5,362 513,170 Accumulated depreciation (52,051) (244,457) (1,773) (10,307) – (308,588)
Net book amount 29,578 165,342 927 3,373 5,362 204,582
During the year ended 31 December 2013, the depreciation charges of ASIMCO Shuanghuan were recorded in cost of sales, selling and distribution costs and administrative expenses with amount of RMB22,618,000, RMB41,000, and RMB4,506,000, respectively.
During the year ended 31 December 2014, the depreciation charges of ASIMCO Shuanghuan were recorded in cost of sales, selling and distribution costs and administrative expenses with amount of RMB22,022,000, RMB49,000 and RMB6,615,000, respectively.
During the year ended 31 December 2015, the depreciation charges of ASIMCO Shuanghuan were recorded in cost of sales, selling and distribution costs and administrative expenses with amount of RMB22,368,000, RMB83,000, and RMB7,202,000, respectively.
During the years ended 31 December 2013, 2014, and 2015, ASIMCO Shuanghuan Group had no borrowing costs being capitalised.
– III-208 – APPENDIX III-6 ACCOUNTANT’S REPORT OF ASIMCO SHUANGHUAN FOR THE THREE YEARS ENDED 31 DECEMBER 2015
ASIMCO Shuanghuan
Machinery Office and Motor equipment Construction Buildings equipment vehicles and others in progress Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
At 1 January 2013 Cost 79,098 374,292 1,965 9,917 12,719 477,991 Accumulated depreciation (42,485) (221,830) (1,709) (8,344) – (274,368)
Net book amount 36,613 152,462 256 1,573 12,719 203,623
Year ended 31 December 2013 Opening net book amount 36,613 152,462 256 1,573 12,719 203,623 Additions 110 1,423 – 19 26,114 27,666 Transfers 1,145 27,424 – 2,132 (30,701) – Disposals – (543) (20) (27) – (590) Depreciation charge (3,755) (20,878) (19) (543) – (25,195)
Closing net book amount 34,113 159,888 217 3,154 8,132 205,504
At 31 December 2013 Cost 80,353 371,944 1,770 11,787 8,132 473,986 Accumulated depreciation (46,240) (212,056) (1,553) (8,633) – (268,482)
Net book amount 34,113 159,888 217 3,154 8,132 205,504
Year ended 31 December 2014 Opening net book amount 34,113 159,888 217 3,154 8,132 205,504 Additions 1,453 4,879 – 395 12,900 19,627 Transfers 460 11,976 442 318 (13,196) – Disposals (62) (793) – (9) – (864) Depreciation charge (4,079) (21,768) (78) (877) – (26,802)
Closing net book amount 31,885 154,182 581 2,981 7,836 197,465
At 31 December 2014 Cost 81,774 371,631 2,211 12,028 7,836 475,480 Accumulated depreciation (49,889) (217,449) (1,630) (9,047) – (278,015)
Net book amount 31,885 154,182 581 2,981 7,836 197,465
– III-209 – APPENDIX III-6 ACCOUNTANT’S REPORT OF ASIMCO SHUANGHUAN FOR THE THREE YEARS ENDED 31 DECEMBER 2015
ASIMCO Shuanghuan
Machinery Office and Motor equipment Construction Buildings equipment vehicles and others in progress Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
At 1 January 2015 Cost 81,774 371,631 2,211 12,028 7,836 475,480 Accumulated depreciation (49,889) (217,449) (1,630) (9,047) – (278,015)
Net book amount 31,885 154,182 581 2,981 7,836 197,465
Year ended 31 December 2015 Opening net book amount 31,885 154,182 581 2,981 7,836 197,465 Additions 517 4,353 490 – 7,019 12,379 Transfers – 8,803 – 690 (9,493) – Disposals (227) (32) – (2) – (261) Depreciation charge (4,269) (21,862) (143) (1,054) – (27,328)
Closing net book amount 27,906 145,444 928 2,615 5,362 182,255
At 31 December 2015 Cost 79,889 381,512 2,700 12,695 5,362 482,158 Accumulated depreciation (51,983) (236,068) (1,772) (10,080) – (299,903)
Net book amount 27,906 145,444 928 2,615 5,362 182,255
During the year ended 31 December 2013, the depreciation charges of ASIMCO Shuanghuan were recorded in cost of sales, selling and distribution costs and administrative expenses with amount of RMB21,398,000, RMB41,000, and RMB3,756,000, respectively.
During the year ended 31 December 2014, the depreciation charges of ASIMCO Shuanghuan were recorded in cost of sales, selling and distribution costs and administrative expenses with amount of RMB20,282,000, RMB49,000, and RMB6,471,000, respectively.
During the year ended 31 December 2015, the depreciation charges of ASIMCO Shuanghuan were recorded in cost of sales, selling and distribution costs and administrative expenses with amount of RMB22,006,000, RMB83,000, and RMB5,239,000, respectively.
During the years ended 31 December 2013, 2014, and 2015, ASIMCO Shuanghuan had no borrowing costs being capitalised.
– III-210 – APPENDIX III-6 ACCOUNTANT’S REPORT OF ASIMCO SHUANGHUAN FOR THE THREE YEARS ENDED 31 DECEMBER 2015
14 PREPAID LEASE PAYMENTS
ASIMCO Shuanghuan Group ASIMCO Shuanghuan Year ended 31 December Year ended 31 December 2013 2014 2015 2013 2014 2015 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
At 1 January Cost 22,158 22,158 22,158 22,158 22,158 22,158 Accumulated amortisation (8,159) (8,597) (9,036) (8,159) (8,597) (9,036)
Net book amount 13,999 13,561 13,122 13,999 13,561 13,122
Year ended 31 December Opening net book amount 13,999 13,561 13,122 13,999 13,561 13,122 Amortisation (438) (439) (438) (438) (439) (438)
Closing net book amount 13,561 13,122 12,684 13,561 13,122 12,684
At 31 December Cost 22,158 22,158 22,158 22,158 22,158 22,158 Accumulated amortisation (8,597) (9,036) (9,474) (8,597) (9,036) (9,474)
Net book amount 13,561 13,122 12,684 13,561 13,122 12,684
As at 31 December 2013, 2014 and 2015, the leasehold land is situated in the PRC.
– III-211 – APPENDIX III-6 ACCOUNTANT’S REPORT OF ASIMCO SHUANGHUAN FOR THE THREE YEARS ENDED 31 DECEMBER 2015
15 INTANGIBLE ASSETS
ASIMCO Shuanghuan Group ASIMCO Shuanghuan Computer Trademark software Total Trademark Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
At 1 January 2013 Cost 10,000 – 10,000 10,000 10,000 Accumulated amortisation (3,545) – (3,545) (3,545) (3,545)
Net book amount 6,455 – 6,455 6,455 6,455
Year ended 31 December 2013 Opening net book amount 6,455 – 6,455 6,455 6,455 Amortisation charge (200) – (200) (200) (200)
Closing net book amount 6,255 – 6,255 6,255 6,255
At 31 December 2013 Cost 10,000 – 10,000 10,000 10,000 Accumulated amortisation (3,745) – (3,745) (3,745) (3,745)
Net book amount 6,255 – 6,255 6,255 6,255
Year ended 31 December 2014 Opening net book amount 6,255 – 6,255 6,255 6,255 Amortisation charge (200) – (200) (200) (200)
Closing net book amount 6,055 – 6,055 6,055 6,055
At 31 December 2014 Cost 10,000 – 10,000 10,000 10,000 Accumulated amortisation (3,945) – (3,945) (3,945) (3,945)
Net book amount 6,055 – 6,055 6,055 6,055
Year ended 31 December 2015 Opening net book amount 6,055 – 6,055 6,055 6,055 Additions – 28 28 – – Amortisation charge (200) (8) (208) (200) (200)
Closing net book amount 5,855 20 5,875 5,855 5,855
At 31 December 2015 Cost 10,000 28 10,028 10,000 10,000 Accumulated amortisation (4,145) (8) (4,153) (4,145) (4,145)
Net book amount 5,855 20 5,875 5,855 5,855
For the years ended 31 December 2013, 2014, and 2015, amortisation of RMB200,000, RMB200,000 and RMB208,000 respectively is included in administrative expenses.
– III-212 – APPENDIX III-6 ACCOUNTANT’S REPORT OF ASIMCO SHUANGHUAN FOR THE THREE YEARS ENDED 31 DECEMBER 2015
16 INVESTMENTS IN AND LOANS TO SUBSIDIARIES – ASIMCO SHUANGHUAN
(a) Investments in subsidiaries
The following is a list of the principal subsidiaries of ASIMCO Shuanghuan:
Attributable equity interest Principal activities of ASIMCO Shuanghuan Place and date and place of Particulars of Group as at 31 December Name of incorporation operation paid-in capital 2013 2014 2015
Yangzhou Yingwei Auto Jiangsu, the PRC/ Trading of RMB2,000,000 100% 100% 100% Components Co., Ltd. 20 February 2013 automotive (“Yang Zhou Yingwei”) components in the (揚州映煒汽車零部件 PRC 有限公司)
ASM Alloy Materials Jiangsu, the PRC/ Manufacturing of US$5,913,000 80% 80% 80% (Yizheng) Co., Ltd. (“ASM”) 23 January 2007 automotive (愛斯姆合金材料（儀征） components in the 有限公司) PRC
As at 31 December 2013, 2014 and 2015, non-controlling interests were not material.
(b) Loans to a subsidiary
Interest rate Amount of loan Due date per annum RMB’000
As at 31 December 2013 Non-Current: Loans to: ASM 4,000 26 April 2015 3.50%
As at 31 December 2014 Current: Loans to: ASM 4,000 26 April 2015 3.50%
Non-Current: Loans to: ASM 6,650 27 April 2016 3.50%
As at 31 December 2015 Current: Loans to: ASM 14,000 27 April 2016 3.50% ASM 3,000 24 June 2016 3.50% ASM 3,000 24 November 2016 3.50%
20,000
– III-213 – APPENDIX III-6 ACCOUNTANT’S REPORT OF ASIMCO SHUANGHUAN FOR THE THREE YEARS ENDED 31 DECEMBER 2015
17 INVESTMENT IN A JOINT VENTURE AND LOANS TO A JOINT VENTURE
ASIMCO Shuanghuan Group and ASIMCO Shuanghuan
(a) Investments in a joint venture
2013 2014 2015 RMB’000 RMB’000 RMB’000
At 1 January – 27,495 25,030 Addition 27,495 – – Share of losses – (2,465) (2,170)
At 31 December 27,495 25,030 22,860
The joint venture listed below has share capital consisting solely of ordinary shares, which is held directly by ASIMCO Shuanghuan Group.
Place of %of Registered registration ownership Principal Measurement Name share capital and business interest activities method
NPR ASIMCO Powdered US$8,800,000 The PRC 50 Automotive Equity Metals Manufacturing components (Yizheng) Co., Ltd. (儀征日 manufacturing 環亞新科粉末冶金製造有限 公司)(“NPR ASIMCO”)
Summarised statements of financial position
NPR ASIMCO As at 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Current assets 12,337 21,805 31,723 Non-current assets 50,714 67,005 73,648
63,051 88,810 105,371
Current liabilities (459) (4,715) (4,201) Non-current liabilities (7,962) (34,395) (55,450)
(8,421) (39,110) (59,651)
Net assets 54,630 49,700 45,720
– III-214 – APPENDIX III-6 ACCOUNTANT’S REPORT OF ASIMCO SHUANGHUAN FOR THE THREE YEARS ENDED 31 DECEMBER 2015
Summarised statements of profit of loss and statement of comprehensive income
NPR ASIMCO Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Revenue – 21,833 31,044 Loss before income tax – (4,930) (4,340) Income tax expense – – – Loss for the year – (4,930) (4,340)
Total comprehensive loss – (4,930) (4,340)
Reconciliation of summarised financial information
Reconciliation of the summarised financial information presented to the carrying amount of its interest in the joint venture.
NPR ASIMCO 2013 2014 2015 RMB’000 RMB’000 RMB’000
Net assets at 1 January 54,630 54,630 50,060 Loss for the year – (4,930) (4,340)
Closing net assets 54,630 49,700 45,720 Interest in the joint venture @ 50% 27,315 24,850 22,860 Adjustment 180 180 –
Carrying value of investment in a joint venture at 31 December 27,495 25,030 22,860
– III-215 – APPENDIX III-6 ACCOUNTANT’S REPORT OF ASIMCO SHUANGHUAN FOR THE THREE YEARS ENDED 31 DECEMBER 2015
(b) Loans to a joint venture
Amount of Interest rate loan Due date per annum RMB’000
As at 31 December 2014 Non-Current: Loans to NPR ASIMCO 7,980 31 December 2016 1.38% NPR ASIMCO 9,247 30 June 2017 1.85%
17,227
As at 31 December 2015 Current: Loans to NPR ASIMCO 7,980 31 December 2016 1.38%
Non-Current: Loans to: NPR ASIMCO 9,226 30 June 2017 1.85% NPR ASIMCO 10,000 30 June 2018 1.64%
19,226
– III-216 – APPENDIX III-6 ACCOUNTANT’S REPORT OF ASIMCO SHUANGHUAN FOR THE THREE YEARS ENDED 31 DECEMBER 2015
18 LOANS TO FELLOW SUBSIDIARIES
ASIMCO Shuanghuan Group and ASIMCO Shuanghuan
Amount of Interest rate loan Due date per annum RMB’000
As at 31 December 2013 Current: Entrusted loan to: ASIMCO Camshaft (Yizheng) Co., Ltd. 2,000 30 November 2014 5.40% ASIMCO Camshaft (Yizheng) Co., Ltd. 7,000 8 March 2014 5.00% ASIMCO Camshaft (Yizheng) Co., Ltd. 7,000 17 April 2014 5.00% ASIMCO Casting (Beijing) Co., Ltd. 10,000 15 December 2014 8.00% ASIMCO (China) Limited 6,700 30 June 2014 5.60%
50,700
Non-Current: Entrusted loan to: ASIMCO Camshaft (Yizheng) Co., Ltd. 3,000 9 March 2015 5.00% ASIMCO Camshaft (Yizheng) Co., Ltd. 3,000 30 July 2015 5.00% ASIMCO Camshaft (Yizheng) Co., Ltd. 7,000 30 December 2015 5.00%
13,000
As at 31 December 2014 Current: Entrusted loan to: ASIMCO Casting (Beijing) Co., Ltd. 10,000 15 December 2015 8.00% ASIMCO Camshaft (Yizheng) Co., Ltd. 7,000 30 December 2015 5.00% ASIMCO Camshaft (Yizheng) Co., Ltd. 3,000 30 July 2015 5.00% ASIMCO Camshaft (Yizheng) Co., Ltd. 3,000 19 March 2015 5.00%
23,000
Non-Current: Entrusted loan to: ASIMCO Camshaft (Yizheng) Co., Ltd. 20,000 31 March 2017 5.00% ASIMCO Camshaft (Yizheng) Co., Ltd. 6,000 31 July 2017 5.00%
26,000
– III-217 – APPENDIX III-6 ACCOUNTANT’S REPORT OF ASIMCO SHUANGHUAN FOR THE THREE YEARS ENDED 31 DECEMBER 2015
Amount of Interest rate loan Due date per annum RMB’000
As at 31 December 2015 Current: Entrusted loan to: ASIMCO (China) Limited 20,000 1 April 2016 5.00% ASIMCO (Tianjin) Auto Components Co., Ltd. 5,000 7 June 2016 8.00% ASIMCO (Tianjin) Auto Components Co., Ltd. 5,000 10 June 2016 8.00%
30,000
Non-Current: Entrusted loan to: ASIMCO Camshaft (Yizheng) Co., Ltd. 20,000 31 March 2017 5.00% ASIMCO Camshaft (Yizheng) Co., Ltd. 6,000 31 July 2017 5.00%
26,000
Loans to fellow subsidiaries are all denominated in RMB.
19 INVENTORIES
ASIMCO Shuanghuan Group ASIMCO Shuanghuan Year ended 31 December Year ended 31 December 2013 2014 2015 2013 2014 2015 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
Raw materials 9,280 6,554 7,902 8,453 6,220 7,285 Work in progress 12,900 13,875 11,242 12,412 12,634 10,131 Finished goods 54,631 49,377 44,787 53,523 48,477 43,410
76,811 69,806 63,931 74,388 67,331 60,826
During the year ended 31 December 2013, 2014, and 2015, provision/(reversal of provision) of RMB121,000, RMB(60,000) and RMB660,000, respectively, for the impairment of inventories were recognised in cost of sales of ASIMCO Shuanghuan Group.
– III-218 – APPENDIX III-6 ACCOUNTANT’S REPORT OF ASIMCO SHUANGHUAN FOR THE THREE YEARS ENDED 31 DECEMBER 2015
20 TRADE AND OTHER RECEIVABLES
ASIMCO Shuanghuan Group ASIMCO Shuanghuan 31 December 31 December 2013 2014 2015 2013 2014 2015 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
Trade receivables 100,054 98,345 103,116 95,665 90,301 92,765 Less: allowance for impairment (572) (1,191) (1,593) (483) (1,008) (1,410)
Trade receivables – net 99,482 97,154 101,523 95,182 89,293 91,355 Bills receivable 93,541 106,399 81,172 93,215 104,739 76,901
193,023 203,553 182,695 188,397 194,032 168,256 Prepayments to suppliers 6,449 6,994 3,734 6,262 6,994 3,734 Deposits at customers 2,838 3,287 1,202 2,297 1,973 924 Other receivable 504 121 593 504 130 614 Prepaid expenses 151 282 957–––
9,942 10,684 6,486 9,063 9,097 5,272
202,965 214,237 189,181 197,460 203,129 173,528
ASIMCO Shuanghuan Group’s trading terms with its customers are mainly on credit, except for new customers, where payment in advance is normally required. The credit period is generally three months, extending up to six months for major customers. Each customer has a maximum credit limit. ASIMCO Shuanghuan Group seeks to maintain strict control over its outstanding receivables and has a credit control department to minimise credit risk. Overdue balances are reviewed regularly by senior management. In view of the aforementioned and the fact that ASIMCO Shuanghuan Group’s trade receivables relate to a large number of diversified customers, there is no significant concentration of credit risk. ASIMCO Shuanghuan Group does not hold any collateral or other credit enhancements over its trade receivable and bills receivable balances. Trade receivables and bills receivable are non-interest-bearing.
As at 31 December 2013, 2014 and 2015, bank acceptance notes of RMB21,252,000, RMB13,612,000 and RMB7,398,000 respectively, were endorsed to banks or suppliers of ASIMCO Shuanghuan Group but were not derecognised, as these bank acceptance notes were issued by unlisted commercial bank.
An ageing analysis of the trade receivables based on the invoice date and net of provisions, is as follows:
ASIMCO Shuanghuan Group ASIMCO Shuanghuan 31 December 31 December 2013 2014 2015 2013 2014 2015 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
Within 6 months 97,720 94,349 97,536 93,541 86,596 87,368 6 to 12 months 1,421 2,626 3,901 1,358 2,626 3,901 Over 1 year 341 179 86 283 71 86
99,482 97,154 101,523 95,182 89,293 91,355
– III-219 – APPENDIX III-6 ACCOUNTANT’S REPORT OF ASIMCO SHUANGHUAN FOR THE THREE YEARS ENDED 31 DECEMBER 2015
An ageing analysis of bills receivable based on the invoice date and net of provisions, is as follows:
ASIMCO Shuanghuan Group ASIMCO Shuanghuan 31 December 31 December 2013 2014 2015 2013 2014 2015 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
Within 6 months 93,541 106,399 81,172 93,215 104,739 76,901
The movements in provision for impairment of trade receivables are as follows:
ASIMCO Shuanghuan Group ASIMCO Shuanghuan Year ended 31 December Year ended 31 December 2013 2014 2015 2013 2014 2015 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
At 1 January 604 572 1,191 604 483 1,008 Impairment loss recognised (503) 619 432 3 525 432 Acquisition of a subsidiary 645––––– Amount written off as uncollectible (174) – (30) (124) – (30)
572 1,191 1,593 483 1,008 1,410
As at 31 December 2013, 2014 and 2015, there are no significant trade receivables and bills receivable that are past due but are not impaired.
The individually impaired trade receivables mainly relate to customers that were in financial difficulties or were in default in principal payments and only a portion or none of the receivables is expected to be recovered.
The carrying amounts of ASIMCO Shuanghuan Group’s trade receivables and bills receivable are denominated in the following currencies:
ASIMCO Shuanghuan Group ASIMCO Shuanghuan 31 December 31 December 2013 2014 2015 2013 2014 2015 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
RMB 178,625 189,493 162,926 173,999 179,972 151,590 US dollar 12,385 12,094 17,100 12,385 12,094 13,997 Other currency 2,013 1,966 2,669 2,013 1,966 2,669
193,023 203,553 182,695 188,397 194,032 168,256
– III-220 – APPENDIX III-6 ACCOUNTANT’S REPORT OF ASIMCO SHUANGHUAN FOR THE THREE YEARS ENDED 31 DECEMBER 2015
21 CASH AND CASH EQUIVALENTS, TERM DEPOSITS WITH INITIAL TERMS OVER THREE MONTHS AND PLEDGED BANK DEPOSITS
ASIMCO Shuanghuan Group ASIMCO Shuanghuan Year ended 31 December Year ended 31 December 2013 2014 2015 2013 2014 2015 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
Cash and bank balances 112,043 63,215 141,920 109,850 61,121 137,409 Less: Term deposits with initial terms over three months (50,000) – (38,000) (50,000) – (38,000) pledged bank deposits – (3,000) (8,400) – (3,000) (8,400)
Cash and cash equivalents 62,043 60,215 95,520 59,850 58,121 91,009
As at 31 December 2013, the interest rates on term deposits with initial terms over three months ranged from 3.05% to 3.30% per annum. As at 31 December 2015, the interest rates on term deposits with initial terms over three months ranged from 2.02% to 2.52%.
The carrying amounts of ASIMCO Shuanghuan Group’s cash and cash equivalents are denominated in the following currencies:
ASIMCO Shuanghuan Group ASIMCO Shuanghuan 31 December 31 December 2013 2014 2015 2013 2014 2015 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
RMB 55,030 56,258 85,285 52,837 54,164 81,819 US dollar 1,704 961 8,043 1,704 961 6,998 EURO 5,309 1,450 2,192 5,309 1,450 2,192 JPY – 1,546 – – 1,546 –
62,043 60,215 95,520 59,850 58,121 91,009
As at 31 December 2013, 2014 and 2015, pledged bank deposits and term deposits with initial terms over three months are all denominated in RMB.
– III-221 – APPENDIX III-6 ACCOUNTANT’S REPORT OF ASIMCO SHUANGHUAN FOR THE THREE YEARS ENDED 31 DECEMBER 2015
22 TRADE AND OTHER PAYABLES
ASIMCO Shuanghuan Group ASIMCO Shuanghuan 31 December 31 December 2013 2014 2015 2013 2014 2015 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
Trade payables 98,659 102,728 95,628 95,046 94,081 84,182 Bill payables – 3,000 8,400 – 3,000 8,400
98,659 105,728 104,028 95,046 97,081 92,582
Accrued payroll 23,750 18,812 19,422 22,772 17,762 17,834 Dividend payable – – 166,813 – – 166,813 Other payables 38,197 37,065 30,863 36,963 35,834 28,922 Taxes payable 11,719 11,653 21,638 11,558 11,827 21,622 Interest payable 15–––––
73,681 67,530 238,736 71,293 65,423 235,191
Trade and other payables 172,340 173,258 342,764 166,339 162,504 327,773
At 31 December 2013, 2014 and 2015, the ageing analysis of trade payables based on invoice date were are follows:
ASIMCO Shuanghuan Group ASIMCO Shuanghuan 31 December 31 December 2013 2014 2015 2013 2014 2015 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
Within 6 months 97,857 101,407 94,536 94,958 93,906 84,018 6 to 12 months 802 1,321 192 88 175 164 1 to 2 year – – 900–––
98,659 102,728 95,628 95,046 94,081 84,182
At 31 December 2013, 2014 and 2015, the ageing analysis of bills payable based on invoice date were as follows:
ASIMCO Shuanghuan Group ASIMCO Shuanghuan 31 December 31 December 2013 2014 2015 2013 2014 2015 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
Within 6 months – 3,000 8,400 – 3,000 8,400
23 LOANS FROM A SHAREHOLDER
As at 31 December 2013, loans from a shareholder bore an interest of 5.58% per annum and repayable on 15 April 2014 and 27 December 2014 respectively by two installments, each of which is RMB15,000,000. These loans were repaid in 2014 upon their due date.
– III-222 – APPENDIX III-6 ACCOUNTANT’S REPORT OF ASIMCO SHUANGHUAN FOR THE THREE YEARS ENDED 31 DECEMBER 2015
24 PROVISIONS
The gross movement on provisions is as follows:
ASIMCO Shuanghuan Group ASIMCO Shuanghuan Year ended 31 December Year ended 31 December 2013 2014 2015 2013 2014 2015 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
At 1 January 11,664 14,762 9,962 11,664 14,762 9,962 Additional provisions 17,686 5,330 9,429 17,686 5,330 7,879 Utilised during the year (14,588) (10,130) (9,672) (14,588) (10,130) (9,452)
At 31 December 14,762 9,962 9,719 14,762 9,962 8,389
A provision is recognised for expected warranty claims on products sold during warranty period, based on past experience of the level of repairs and returns. Assumptions used to calculate the provision for warranties were based on current sales levels and current information available about returns based on the estimated warranty period for all products sold. The estimation basis is reviewed on an ongoing basis and revised where appropriate.
25 DIVIDENDS
A dividend of RMB59,410,000 in respect of profits for the years before 2012 was paid in 2013. A dividend of RMB74,960,000 in respect of profit for 2012 and 2013 was approved by the board of directors and paid in 2014. A dividend of RMB166,813,000, in respect of the accumulated distributable profit was approved by the board of directors in 2015, and have been reflected in the dividend payable (net of withholding tax payable) as at 31 December 2015.
26 DEFERRED INCOME TAX
ASIMCO Shuanghuan Group and ASIMCO Shuanghuan
The analysis of deferred tax is as follows:
31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Deferred income tax assets: Deferred income tax assets to be recovered within 12 months 10,497 5,301 4,049
The gross movement on the deferred income tax accounts is as follows:
2013 2014 2015 RMB’000 RMB’000 RMB’000
At 1 January 8,996 10,497 5,301 Charged/(credited) to statement of profit or loss 1,501 (5,196) (1,252)
At 31 December 10,497 5,301 4,049
– III-223 – APPENDIX III-6 ACCOUNTANT’S REPORT OF ASIMCO SHUANGHUAN FOR THE THREE YEARS ENDED 31 DECEMBER 2015
The movement in deferred income tax assets and liabilities without taking into consideration of the offsetting of balances within the same tax jurisdiction during the year is as follows:
Deferred income tax assets:
Accrued Impairment expenses Total RMB’000 RMB’000 RMB’000
At 1 January 2013 1,027 7,969 8,996 Credited/(charged) to statement of profit or loss (53) 1,554 1,501
At 31 December 2013 974 9,523 10,497
Credited/(charged) to statement of profit or loss 163 (5,359) (5,196)
At 31 December 2014 1,137 4,164 5,301
Credited/(charged) to statement of profit or loss 148 (1,400) (1,252)
At 31 December 2015 1,285 2,764 4,049
ASIMCO Shuanghuan Group
As at 31 December 2013, 2014 and 2015, unrecognised deferred income tax assets in respect of the deductible temporary differences and deductible losses are as follows:
2013 2014 2015 RMB’000 RMB’000 RMB’000
Deductible temporary differences 1,910 653 1,967 Deductible losses 28,532 27,520 26,944
Total 30,442 28,173 28,911
Deferred income tax
As at 31 December 2013, 2014 and 2015, tax losses that has not been recognised as deferred income tax assets will expire in the following years:
ASIMCO Shuanghuan Group 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
2014 5,064 – – 2015 2,587 2,587 – 2016 6,815 6,815 6,815 2017 6,815 6,815 6,815 2018 7,250 7,250 7,250 2019 – 4,052 4,052 2020 – – 2,012
28,531 27,519 26,944
– III-224 – APPENDIX III-6 ACCOUNTANT’S REPORT OF ASIMCO SHUANGHUAN FOR THE THREE YEARS ENDED 31 DECEMBER 2015
27 RESERVES
ASIMCO Shuanghuan Group
The amounts of ASIMCO Shuanghuan Group’s reserves which are comprised of capital reserves, and statutory reserve, and the movements therein for the years ended 31 December 2013, 2014 and 2015 are presented in the consolidated statement of changes in equity on pages 7 to 9 of the financial statements.
ASIMCO Shuanghuan
Capital Statutory reserve reserve Total RMB’000 RMB’000 RMB’000
At 1 January 2013 100 117,651 117,751 Profit appropriations to statutory reserves – 10,054 10,054
At 31 December 2013 100 127,705 127,805
Profit appropriations to statutory reserves – 9,837 9,837
At 31 December 2014 100 137,542 137,642
Profit appropriations to statutory reserves – 9,193 9,193
At 31 December 2015 100 146,735 146,835
During the year ended 31 December 2013, 2014 and 2015, PRC statutory reserve of RMB10,054,000, RMB9,837,000 and RMB9,193,000 were appropriated from the profit for the year, respectively pursuant to the resolution of board of directors.
28 COMMITMENTS
ASIMCO Shuanghuan Group had the following capital commitments at the end of the reporting period:
ASIMCO Shuanghuan Group
31 31 31 December December December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Contracted, but not provided for: Property, plant and equipment 3,023 – 1,769
29 BUSINESS COMBINATION
On 22 February 2013, ASIMCO Shuanghuan entered into a share transfer agreement with an independent third party company to acquire an 80% equity interest in ASM. ASM is engaged in the manufacture and sale of automotive components. The consideration for the acquisition was RMB11,523,000 at the acquisition date of 10 May, 2013, the entire of which was paid in cash.
– III-225 – APPENDIX III-6 ACCOUNTANT’S REPORT OF ASIMCO SHUANGHUAN FOR THE THREE YEARS ENDED 31 DECEMBER 2015
The fair values of the identifiable assets and liabilities of ASM as at the date of acquisition were as follows:
Fair value recognised on acquisition RMB’000
ASSETS Property, plant and equipment 16,194 Inventories 1,346 Trade and other receivables 2,256 Cash and cash equivalents 452
Total assets 20,248
Liabilities Trade and other payables 3,215 Income tax payable 15 Total liabilities 3,230
Total identifiable net assets at fair value 17,018 Non-controlling interests (3,404) 13,614
Gain on bargain purchase recognised in other gains/(losses), net in the consolidated statement of profit or loss and other comprehensive income 2,091
Consideration paid in cash 11,523
An analysis of the cash flows in respect of the acquisition of a subsidiary is as follows:
RMB’000
Cash consideration 11,523 Cash and bank balances acquired (452)
Net outflow of cash and cash equivalents included in cash flows from investing activities 11,071
The fair values of the trade and other receivables as at the date of acquisition amounted to RMB2,256,000. The gross contractual amounts of trade receivables and other receivables are RMB2,901,000, of which trade receivables of RMB645,000 are expected to be uncollectible.
Since the date of acquisition, ASM contributed RMB7,781,000 to ASIMCO Shuanghuan Group’s turnover and resulted in a loss of RMB4,014,000 to the consolidated profit for the year ended 31 December 2013.
Had the combination taken place at the beginning of 2013, the revenue of ASIMCO Shuanghuan Group and the profit of ASIMCO Shuanghuan Group for the year would have been RMB550,751,000 and RMB69,228,000 respectively.
30 RELATED PARTY TRANSACTIONS
ASIMCO Shuanghuan Group is controlled by Axle ATL Cayman Limited, which owned 63% equity interests in ASIMCO Shuanghuan. The remaining 37% equity interests of ASIMCO Shuanghuan are held by Jiangsu Yizheng Piston Ring Factory. The ultimate parent company of ASIMCO Shuanghuan Group is Bain Capital Asia Integral Investors, L.P. (incorporated in the Cayman Islands).
– III-226 – APPENDIX III-6 ACCOUNTANT’S REPORT OF ASIMCO SHUANGHUAN FOR THE THREE YEARS ENDED 31 DECEMBER 2015
(a) ASIMCO Shuanghuan Group had transactions with the related parties below:
Year ended 31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Sales of goods to
– Fellow subsidiaries 15,893 16,289 14,662
Sales of materials to
– Fellow subsidiaries 14,545 14,717 11,493
Purchase of goods from
– A fellow subsidiary 123,031 104,499 84,671
Service fees to
– A fellow subsidiary 7,661 7,051 6,596 – A shareholder of ASIMCO Shuanghuan 750 3,056 3,056
8,411 10,107 9,652
Loans provided to
– Fellow subsidiaries 6,700 26,000 35,000 – A joint venture – 17,210 10,000
6,700 43,210 45,000
Loans repaid from
– Fellow subsidiaries 37,650 40,700 28,000
Interest income from
– Fellow subsidiaries 5,214 3,379 2,620 – A joint venture – 183 373
5,214 3,562 2,993
Interest expense to
– A shareholder of ASIMCO Shuanghuan 1,687 1,116 –
Key management compensation 2,703 2,950 3,152
– III-227 – APPENDIX III-6 ACCOUNTANT’S REPORT OF ASIMCO SHUANGHUAN FOR THE THREE YEARS ENDED 31 DECEMBER 2015
(b) Outstanding balances with related parties
31 December 2013 2014 2015 RMB’000 RMB’000 RMB’000
Trade receivables
– Fellow subsidiaries 3,547 728 3,336
Interest receivables
– Fellow subsidiaries 163 15 134 – A joint venture 341 34 34
504 49 168
Trade payables
– Fellow subsidiaries 37,920 50,998 58,169
Dividends payable
– Shareholders of ASIMCO Shuanghuan – – 166,813
Other payables
– A shareholder of ASIMCO Shuanghuan 1,056 – 606 – A fellow subsidiary 739 689 958
1,795 689 1,564
Loans to fellow subsidiaries 63,700 49,000 56,000
Loans to a joint venture – 17,227 27,206
Loans from a shareholder of ASIMCO Shuanghuan 30,000 – –
– III-228 – APPENDIX III-6 ACCOUNTANT’S REPORT OF ASIMCO SHUANGHUAN FOR THE THREE YEARS ENDED 31 DECEMBER 2015
31 FINANCIAL INSTRUMENTS BY CATEGORY
ASIMCO Shuanghuan Group
Financial assets
Available- for-sale Loans and financial receivables assets Total RMB’000 RMB’000 RMB’000
As at 31 December 2013 Financial assets included in trade and other receivables 196,365 – 196,365 Loans to fellow subsidiaries 63,700 – 63,700 Available-for-sale financial assets – 1,041 1,041 Term deposits with initial terms over three months 50,000 – 50,000 Cash and cash equivalents 62,043 – 62,043
Total 372,108 1,041 373,149
As at 31 December 2014 Financial assets included in trade and other receivables 206,961 – 206,961 Loans to a joint venture 17,227 – 17,227 Loans to fellow subsidiaries 49,000 – 49,000 Available-for-sale financial assets – 1,041 1,041 Pledged bank deposits 3,000 – 3,000 Cash and cash equivalents 60,215 – 60,215
Total 336,403 1,041 337,444
As at 31 December 2015 Financial assets included in trade and other receivables 184,490 – 184,490 Loans to a joint venture 27,206 – 27,206 Loans to fellow subsidiaries 56,000 – 56,000 Available-for-sale financial assets – 1,041 1,041 Pledged bank deposits 8,400 – 8,400 Term deposits with initial terms over three months 38,000 – 38,000 Cash and cash equivalents 95,520 – 95,520
Total 409,616 1,041 410,657
– III-229 – APPENDIX III-6 ACCOUNTANT’S REPORT OF ASIMCO SHUANGHUAN FOR THE THREE YEARS ENDED 31 DECEMBER 2015
Financial liabilities
Financial liabilities at amortised cost RMB’000
As at 31 December 2013 Financial liabilities included in trade and other payables 160,621 Loans from a shareholder 30,000
Total 190,621
As at 31 December 2014 Financial liabilities included in trade and other payables 161,605
As at 31 December 2015 Financial liabilities included in trade and other payables 312,126
ASIMCO Shuanghuan
Financial assets
Available- for-sale Loans and financial receivables assets Total RMB’000 RMB’000 RMB’000
As at 31 December 2013 Financial assets included in trade and other receivables 191,198 – 191,198 Loans to a subsidiary 4,000 – 4,000 Loans to fellow subsidiaries 63,700 – 63,700 Available-for-sale financial assets – 1,041 1,041 Term deposits with initial terms over three months 50,000 – 50,000 Cash and cash equivalents 59,850 – 59,850
Total 368,748 1,041 369,789
As at 31 December 2014 Financial assets included in trade and other receivables 196,135 – 196,135 Loans to a subsidiary 10,650 – 10,650 Loans to a joint venture 17,227 – 17,227 Loans to fellow subsidiaries 49,000 – 49,000 Available-for-sale financial assets – 1,041 1,041 Pledged bank deposits 3,000 – 3,000 Cash and cash equivalents 58,121 – 58,121
Total 334,133 1,041 335,174
– III-230 – APPENDIX III-6 ACCOUNTANT’S REPORT OF ASIMCO SHUANGHUAN FOR THE THREE YEARS ENDED 31 DECEMBER 2015
Available- for-sale Loans and financial receivables assets Total RMB’000 RMB’000 RMB’000
As at 31 December 2015 Financial assets included in trade and other receivables 169,794 – 169,794 Loans to a subsidiary 20,000 – 20,000 Loans to a joint venture 27,206 – 27,206 Loans to fellow subsidiaries 56,000 – 56,000 Available-for-sale financial assets – 1,041 1,041 Pledged bank deposits 8,400 – 8,400 Term deposits with initial terms over three months 38,000 – 38,000 Cash and cash equivalents 91,009 – 91,009
Total 410,409 1,041 411,450
Financial liabilities
Financial liabilities at amortised cost RMB’000
As at 31 December 2013 Financial liabilities included in trade and other payables 154,781 Loans from a shareholder 30,000
Total 184,781
As at 31 December 2014 Financial liabilities included in trade and other payables 150,677
As at 31 December 2015 Financial liabilities included in trade and other payables 306,151
– III-231 – APPENDIX III-6 ACCOUNTANT’S REPORT OF ASIMCO SHUANGHUAN FOR THE THREE YEARS ENDED 31 DECEMBER 2015
III SUBSEQUENT FINANCIAL STATEMENTS
No audited financial statements have been prepared by ASIMCO Shuanghuan or any of its subsidiaries in respect of any period subsequent to 31 December 2015 up to the date of this report. No dividend or distribution has been declared or made by ASIMCO Shuanghuan or any of its subsidiaries in respect of any period subsequent to 31 December 2015.
Yours faithfully,
PricewaterhouseCoopers Certified Public Accountants Hong Kong
– III-232 – APPENDIX IV UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP
The information set out in this Appendix does not form part of the Accountant’s Reports of CACG I, ASIMCO Camshaft, ASIMCO Foundry, ASIMCO NVH, ASIMCO Shanxi and ASIMCO Shuanghuan, as set out in “Appendix III-1 Accountant’s Report of CACG I for the three years ended 31 December 2015”, “Appendix III-2 Accountant’s Report of ASIMCO Camshaft for the three years ended 31 December 2015”, “Appendix III-3 Accountant’s Report of ASIMCO Foundry for the three years ended 31 December 2015”, “Appendix III-4 Accountant’s Report of ASIMCO NVH for the three years ended 31 December 2015”, “Appendix III-5 Accountant’s Report of ASIMCO Shanxi for the three years ended 31 December 2015” and “Appendix III-6 Accountant’s Report of ASIMCO Shuanghuan for the three years ended 31 December 2015”, and is included herein for information only. The unaudited pro forma financial information should be read in conjunction with the Accountant’s Reports set out in “Appendix III-1 Accountant’s Report of CACG I for the three years ended 31 December 2015”, “Appendix III-2 Accountant’s Report of ASIMCO Camshaft for the three years ended 31 December 2015”, “Appendix III-3 Accountant’s Report of ASIMCO Foundry for the three years ended 31 December 2015”, “Appendix III-4 Accountant’s Report of ASIMCO NVH for the three years ended 31 December 2015”, “Appendix III-5 Accountant’s Report of ASIMCO Shanxi for the three years ended 31 December 2015” and “Appendix III-6 Accountant’s Report of ASIMCO Shuanghuan for the three years ended 31 December 2015”.
A. BASIS OF PREPARATION OF THE PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP
The pro forma financial information presented below is prepared to illustrate (a) the financial position of the Enlarged Group as if the Transaction had been completed on 31 December 2015; and (b) the financial performance and cash flows of the Enlarged Group as if the Transaction had been completed on 1 January 2015.
This pro forma financial information has been prepared for illustrative purposes only and because of its hypothetical nature, it may not give a true picture of the financial position of the Enlarged Group as at 31 December 2015 or at any future date had the Transaction been completed on 31 December 2015 or the financial performance and cash flows of the Enlarged Group for the year ended 31 December 2015 or for any future period had the Transaction been completed on 1 January 2015.
The pro forma financial information is prepared based on the audited consolidated statement of financial position as at 31 December 2015, the audited consolidated statement of profit or loss and other comprehensive income and audited consolidated statement of cash flows of the Group for the year ended 31 December 2015 extracted from the audited consolidated financial statements of the Group for the year ended 31 December 2015 after giving effect to the pro forma adjustments described in the accompanying notes and was prepared in accordance with Rules 4.29 and 14.69(4)(a)(ii) of the Listing Rules.
–IV-1– B. PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP INFORMATION FINANCIAL FORMA PRO UNAUDITED IV APPENDIX
Pro Forma adjustments Total pro The ASIMCO ASIMCO ASIMCO ASIMCO ASIMCO forma Enlarged The Group Shuanghuan Foundry Camshaft NVH CACG I Shanxi Sub total adjustments Group RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (Note 1) (Note 1) (Note 1) (Note 1) (Note 1) (Note 1) (Note 1) (Note 2) (Note 3) (Note 4) (Note 5)
Non-current assets Property, plant and equipment 1,607,658 204,582 57,603 115,273 161,685 111,507 302,834 207,686 1,161,170 1,161,170 2,768,828 Prepaid lease payments 381,013 12,684 5,281 – 12,364 4,539 8,256 123,379 166,503 166,503 547,516 Investment properties 47,187 –––––– – –47,187 Intangible assets 4,330 5,875 – 10 98 – 29 97,694 103,706 103,706 108,036 Investments in associates 420,424 –––––– – –420,424 Investments in joint ventures 2,383 22,860 ––––– (7)22,853 22,85325,236 Available-for-sale investments 31,174 1,041 ––––– 1451,186 1,186 32,360 Deferred tax assets 171,830 4,049 806 6,604 18,070 4,835 8,065 42,429 42,429 214,259 Debt investment 390,027 –––––– – –390,027 Finance lease receivables 58,096 –––––– – –58,096 Long-term receivables 131,206 –––––– – –131,206 Loans to fellow subsidiaries for long
–IV-2– term – 26,000 –––––(26,000) – – – Loan receivables from a joint venture – 19,226 ––––– 19,226 19,22619,226 Goodwill ––––––– –843,041 843,041 843,041
3,245,328 296,317 63,690 121,887 192,217 120,881 319,184 (26,000) 428,897 1,517,073 843,041 – 2,360,114 5,605,442 FTEELRE GROUP ENLARGED THE OF Pro Forma adjustments INFORMATION FINANCIAL FORMA PRO UNAUDITED IV APPENDIX Total pro The ASIMCO ASIMCO ASIMCO ASIMCO ASIMCO forma Enlarged The Group Shuanghuan Foundry Camshaft NVH CACG I Shanxi Sub total adjustments Group RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (Note 1) (Note 1) (Note 1) (Note 1) (Note 1) (Note 1) (Note 1) (Note 2) (Note 3) (Note 4) (Note 5)
Current assets Prepaid lease payments 8,681 –––––– – –8,681 Inventories 1,175,829 63,931 1,348 12,738 103,883 76,513 49,292 47,987 355,692 355,692 1,531,521 Loan receivables from an associate 80,000 –––––– – –80,000 Loans to fellow subsidiaries for short term – 30,000 – – 33,000 – 28,000 91,000 91,000 91,000 Loan receivables from a joint venture – 7,980 ––––– 7,980 7,980 7,980 Trade and other receivables 4,054,923 189,181 62,545 38,861 348,545 339,371 155,507 (58,280) 1,075,730 1,075,730 5,130,653 Finance lease receivables 25,992 –––––– – –25,992 Long-term receivables within one year 105,059 –––––– – –105,059 Other financial assets 1,063,000 –––––– – –1,063,000 Tax recoverable 1,374 892 273 –––– 1,165 1,165 2,539 Pledged bank deposits 278,080 8,400 – 2,500 1 – – 10,901 10,901 288,981 Bank balances and cash 2,011,221 133,520 1,022 3,277 12,555 138,902 46,134 335,410 (1,650,000) (32,648) (1,347,238) 663,983
8,804,159 433,904 65,188 57,376 497,984 554,786 278,933 (58,280) 47,987 1,877,878 (1,650,000) (32,648) 195,230 8,999,389 –IV-3– FTEELRE GROUP ENLARGED THE OF Pro Forma adjustments INFORMATION FINANCIAL FORMA PRO UNAUDITED IV APPENDIX Total pro The ASIMCO ASIMCO ASIMCO ASIMCO ASIMCO forma Enlarged The Group Shuanghuan Foundry Camshaft NVH CACG I Shanxi Sub total adjustments Group RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (Note 1) (Note 1) (Note 1) (Note 1) (Note 1) (Note 1) (Note 1) (Note 2) (Note 3) (Note 4) (Note 5)
Current liabilities Trade and other payables 2,193,738 342,764 10,020 23,646 360,509 460,524 120,930 (58,280) (1,976) 1,258,137 – 1,258,137 3,451,875 Advances from customers 198,888 14,719 – – 571 561 – 15,851 15,851 214,739 Tax liabilities 19,618 – – 1,637 2,733 3,452 5,263 13,085 (4,897) 8,188 27,806 Borrowings – – – 23,000 83,388 – – 106,388 106,388 106,388 Provision – 9,719 – 138 3,458 5,129 20,696 39,140 39,140 39,140
2,412,244 367,202 10,020 48,421 450,659 469,666 146,889 (58,280) (1,976) 1,432,601 – (4,897) 1,427,704 3,839,948
Non-current liabilities Other non-current liabilities 14,784 1,800 ––––– (1,530)270 27015,054 Loan from a fellow subsidiary – – – 26,000 – – – (26,000) – – – Deferred tax liabilities ––––––– 112,635 112,635 112,635 112,635
14,784 1,800 – 26,000 – – – (26,000) 111,105 112,905 – – 112,905 127,689 –IV-4– Capital and reserves Share capital 1,621,122 85,803 85,803 1,706,925 Share premium 3,409,354 559,439 559,439 3,968,793 Reserves 4,472,096 (27,751) (27,751) 4,444,345
Equity attributable to owners of the Company 9,502,572 645,242 (27,751) 617,491 10,120,063 Non-controlling interests 119,887 397,244 397,244 517,131
TOTAL EQUITY 9,622,459 1,042,486 (27,751) 1,014,735 10,637,194 FTEELRE GROUP ENLARGED THE OF Pro Forma adjustments INFORMATION FINANCIAL FORMA PRO UNAUDITED IV APPENDIX Total pro The ASIMCO ASIMCO ASIMCO ASIMCO ASIMCO forma Enlarged The Group Shuanghuan Foundry Camshaft NVH CACG I Shanxi Other Pro forma adjustment in respect of the Transaction adjustments Group RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (Note 1) (Note 1) (Note 1) (Note 1) (Note 1) (Note 1) (Note 1) (Note 2) (Note 5) (Note 6) (Note 7) (Note 8)
Revenue 4,510,858 477,554 84,720 103,762 667,107 669,889 548,124 (96,425) 2,454,731 6,965,589 Cost of sales (3,653,833) (338,204) (80,175) (70,599) (496,235) (521,213) (405,146) 96,425 (62,063) (47,987) (1,925,197) (5,579,030)
Gross profit 857,025 139,350 4,545 33,163 170,872 148,676 142,978 – (62,063) (47,987) 529,534 1,386,559 Other income 120,724 6,607 4 112 5,257 4,032 1,109 (2,143) 14,978 135,702 Other gains and losses (335,881) 2,443 567 377 (1,813) (1,036) (4,616) (4,078) (339,959) Selling and distribution expenses (214,900) (30,228) – (2,696) (40,999) (25,609) (38,562) (138,094) (352,994) Administrative expenses (304,242) (32,185) (4,269) (8,624) (33,305) (18,336) (23,170) (1,102) (120,991) (425,233) Other expenses ––––––– (32,648) (32,648) (32,648) Research and development expenses (102,562) (13,290) – (6,036) (36,676) (22,716) (20,212) (98,930) (201,492) Share of profit of associates 13,361 –––––– – 13,361 Share of loss of joint ventures (1,000) (2,170) ––––– (2,170) (3,170) Finance costs (2,160) – – (2,955) (5,235) – (6,482) 2,143 (12,529) (14,689)
Profit before tax 30,365 70,527 847 13,341 58,101 85,011 51,045 – (32,648) (63,165) (47,987) 135,072 165,437 Income tax expense (19,756) (10,571) (204) (62) (7,778) (20,132) (6,852) 4,897 12,571 11,067 (17,064) (36,820)
Profit for the year 10,609–IV-5– 59,956 643 13,279 50,323 64,879 44,193 – (27,751) (50,594) (36,920) 118,008 128,617 FTEELRE GROUP ENLARGED THE OF Pro Forma adjustments INFORMATION FINANCIAL FORMA PRO UNAUDITED IV APPENDIX Total pro The ASIMCO ASIMCO ASIMCO ASIMCO ASIMCO forma Enlarged The Group Shuanghuan Foundry Camshaft NVH CACG I Shanxi Other Pro forma adjustment in respect of the Transaction adjustments Group RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (Note 1) (Note 1) (Note 1) (Note 1) (Note 1) (Note 1) (Note 1) (Note 2) (Note 5) (Note 6) (Note 7) (Note 8)
Other comprehensive income (expense) for the year, net of income tax 64,659 ––––(115)–– (115) 64,544
Total comprehensive income for the year 75,268 59,956 643 13,279 50,323 64,764 44,193 – (27,751) (50,594) (36,920) 117,893 193,161
Profit for the year attributable to: Owners of the Company 42,198 59,554 643 13,279 50,323 29,491 44,193 (27,751) (39,490) (25,853) (27,141) 77,248 191,446 Non-controlling interests (31,589) 402 – – – 35,388 – (11,104) (11,067) 27,141 40,760 9,171
10,609 59,956 643 13,279 50,323 64,879 44,193 – (27,751) (50,594) (36,920) – 118,008 128,617
Total comprehensive income for the year attributable to: Owners of the Company 106,857 59,554 643 13,279 50,323 29,376 44,193 (27,751) (39,490) (25,853) (27,141) 77,133 183,990 Non-controlling interests (31,589)–IV-6– 402 – – – 35,388 – (11,104) (11,067) 27,141 40,760 9,171
75,268 59,956 643 13,279 50,323 64,764 44,193 – (27,751) (50,594) (36,920) – 117,893 193,161 FTEELRE GROUP ENLARGED THE OF Pro Forma adjustments INFORMATION FINANCIAL FORMA PRO UNAUDITED IV APPENDIX Total pro The ASIMCO ASIMCO ASIMCO ASIMCO ASIMCO Other Pro forma adjustment in forma Enlarged The Group Shuanghuan Foundry Camshaft NVH CACG I Shanxi respect of the Transaction adjustments Group RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (Note 1) (Note 1) (Note 1) (Note 1) (Note 1) (Note 1) (Note 1) (Note 2) (Note 4) (Note 5)
Net cash from operating activities 318,403 105,940 620 28,126 35,109 77,244 133,438 (27,751) 352,726 671,129
Interest income on bank deposits, long-term receivables and finance lease receivables 98,706 2,980 – – 1,744 1,221 – (1,771) 4,174 102,880 Interest income on debt security 11,132–––––– –11,132 Dividends income on available-for-sale-investments 1,256 59––––– 591,315 Dividends received from associates 10,200–––––– –10,200 Dividends received from joint ventures 98–––––– –98 Proceeds on disposal of property, plant and equipment 8,190–––2,885 17 93 2,995 11,185 Purchases of property, plant and equipment (60,893) (14,200) (364) (18,558) (50,104) (26,085) (8,942) (118,253) (179,146) Purchase of available-for-sale investment –––––(120,000) – (120,000) (120,000) Disposal of available-for-sale investments –––––120,000 – 120,000 120,000 Purchases of investment property (37,588) –––––– –(37,588) Payments for prepaid lease payments ––––(5,738) – – (5,738) (5,738) Purchases of other intangible assets (1,049) –––––– –(1,049) Purchase of other financial assets (2,623,418) –––––– –(2,623,418) Proceeds on other financial assets 2,065,418 –––––– –2,065,418 Payments for loan receivables from an associate (80,000) –––––– –(80,000) Repayment of loan receivables from an associate 80,000–––––– –80,000 Loan repayments from fellow subsidiaries/third parties – 18,000–––––(13,000) 5,000 5,000 Loans to fellow subsidiaries/third parties – (35,000) ––––(28,000) (63,000) (63,000) Placement of bank deposits with original maturity over
three months–IV-7– (310,000) (38,000) ––––– (38,000) (348,000) Withdrawal of bank deposits with original maturity over three months 571,657 –––––– –571,657 Payment of pledged bank deposits (519,057) (5,400) – (2,500) – – – (7,900) (526,957) Withdrawal of pledged bank deposits 487,294 – – – 3,087 – – 3,087 490,381 Acquisition of subsidiaries (1,650,000) (1,650,000) (1,650,000)
Net cash used in investing activities (298,054) (71,561) (364) (21,058) (48,126) (24,847) (36,849) (14,771) (1,650,000) (1,867,576) (2,165,630) FTEELRE GROUP ENLARGED THE OF Pro Forma adjustments INFORMATION FINANCIAL FORMA PRO UNAUDITED IV APPENDIX Total pro The ASIMCO ASIMCO ASIMCO ASIMCO ASIMCO Other Pro forma adjustment in forma Enlarged The Group Shuanghuan Foundry Camshaft NVH CACG I Shanxi respect of the Transaction adjustments Group RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (Note 1) (Note 1) (Note 1) (Note 1) (Note 1) (Note 1) (Note 1) (Note 2) (Note 4) (Note 5)
Financing activities Issue of A shares –– Contribution from ultimate controlling party of the Company 25,000–––––– –25,000 Proceeds from borrowings – – – 28,000 107,899 – – 135,899 135,899 Loans from a fellow subsidiary/third party – – – 3,000––––––3,000 3,000 Repayment of borrowings (97,170) – – (16,000) (102,415) – (86,620) (205,035) (302,205) Repayment of loans from a fellow subsidiary/third parties/ a shareholder – – – (17,977) – – – 13,000 (4,977) (4,977) Interest paid (2,160) – – (3,189) (5,253) – (7,481) 1,771 (14,152) (16,312) Dividends paid to the shareholders of the Company (61,603) –––––– –(61,603) Dividends paid to ASIMCO Technologies –––––(33,625) – (33,625) (33,625) Dividends paid to non-controlling interests –––––(35,896) – (35,896) (35,896) Dividends paid to the seller ––
Net cash (used in) from financing activities (135,933) – – (6,166) 231 (69,521) (94,101) 14,771 (154,786) (290,719)
Net (decrease) increase in cash and cash equivalents (115,584) 34,379 256 902 (12,786) (17,124) 2,488 (1,650,000) (27,751) (1,669,636) (1,785,220)
Effect of foreign exchange rate changes 20,148 926 – 34 1,812 111 (1,197) 1,686 21,834
Cash and cash equivalents at 1 January 2015 1,821,657 60,215 766 2,341 23,529 155,915 44,843 287,609 2,109,266 –IV-8– Cash and cash equivalents at 31 December 2015 1,726,221 95,520 1,022 3,277 12,555 138,902 46,134 (1,650,000) (27,751) (1,380,341) 345,880 FTEELRE GROUP ENLARGED THE OF APPENDIX IV UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP
C. NOTES TO THE PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP
1. The financial information of the Group is extracted from the annual report of the Company for the year ended 31 December 2015 as published on 28 April 2016. The financial information of ASIMCO Shuanghuan, ASIMCO Foundry, ASIMCO Camshaft, ASIMCO NVH, CACG I and ASIMCO Shanxi (the “Target Companies”) is extracted from the respective accountants’ report as set out in Appendix III to this Circular, after making certain reclassification adjustments to conform with the presentation of the Group’s financial information.
2. Elimination of inter-company transactions and balances among the Target Companies.
3. This represents the adjustments of the identifiable assets and liabilities of the Target Companies to their fair values as at 31 December 2015 with reference to the asset evaluation report for each of the Target Companies prepared by China United Assets Appraisal Group Company Limited (the “Asset Evaluation Report”), an independent professional valuer not connected to the Enlarged Group and its corresponding deferred tax impact on 31 December 2015.
Deferred tax liabilities is recognised at applicable tax rates arising from the future taxable temporary difference in relation to the increase in fair value of the Target Equity Interests on 31 December 2015.
The amounts of the fair value adjustments and corresponding deferred tax impact are subject to change when the purchase price allocation is finalised on the date of actual completion of the Transaction.
4. Pursuant to the Equity Transfer Agreement (as defined in the Circular), the Company conditionally agreed to acquire the Target Equity Interests for an aggregate consideration which shall be settled by the way:
i. The total cash consideration amounts to RMB1,650,000,000; and
ii. The issuance of consideration shares of the Company, which is preliminarily determined to be 85,803,432 shares and is subject to change in accordance with formula as stated in pages 12 to 13 of the Circular. These shares are RMB ordinary shares (A Shares) with nominal value of RMB1 each, which will be traded in the Shanghai Stock Exchange upon obtaining the approval of the China Securities Regulatory Commission.
–IV-9– APPENDIX IV UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP
These adjustments also include the goodwill arising from the Transaction determined provisionally based on the fair value of the identifiable assets and liabilities of the Target Companies with reference to the Asset Evaluation Report. For the purpose of the pro forma consolidated statement of financial position, the goodwill of RMB843,041,000 arising from the Transaction, which represents the amount by which the purchase consideration exceeds the fair value of the identifiable assets and liabilities of the Target Equity Interests to be acquired, is computed as if the Transaction has been completed on 31 December 2015. The amounts of goodwill, resulting goodwill impairment assessment are subject to change when the fair value of asset and liabilities of the Target Equity Interests is finalised on date of actual completion of the Transaction.
The following table summarises the consideration paid, the net assets acquired and goodwill recognised as if the Transaction had taken place at 31 December 2015 or 1 January 2015:
As if the Transaction had taken place at 31 December 1 January 2015 2015 RMB’000 RMB’000
Consideration: Number of consideration shares 85,803,432 85,803,432 Fair value per share (RMB) 7.52 (note 1) 7.63 (note 2) Fair value of consideration shares 645,242 654,680 Add: Cash consideration 1,650,000 1,650,000
Total consideration transferred 2,295,242 2,304,680
Goodwill: Total consideration transferred 2,295,242 2,304,680 Plus: Non-controlling interests (note 3) 397,244 397,244 Less: Net assets acquired (1,849,445) (1,849,445)
Goodwill arising on acquisition 843,041 852,479
Note 1: The trading in the A Shares of the Company was suspended from 18 December 2015 to 7 April 2016. For simplicity and the purpose of the pro forma consolidated statement of profit or loss and other comprehensive income, the fair value per share is determined with reference to the closing quoted market price of A Shares of the Company on 17 December 2015, as the directors of the Company believe there was no material change between the two dates.
Note 2: The fair value per share is determined with reference to the closing quoted market price of A Shares of the Company on 31 December 2014, as 1 January 2015 is not a business day.
– IV-10 – APPENDIX IV UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP
Note 3: The non-controlling interests of the Target Companies recognised at the acquisition date was measured at the non-controlling interests’ proportionate share of the recognised amounts of the acquiree’s identifiable net assets amounted to RMB397,244,000.
For simplicity and the purpose of the pro forma consolidated statement of profit or loss and other comprehensive income and pro forma consolidated statement of cash flows, the adjustments of the identifiable assets and liabilities is computed as if the Transaction has been completed on 1 January 2015 assuming the adjustments and the fair value of the identifiable assets and liabilities held by the Target Companies as at 1 January 2015 approximate the relevant amounts as at 31 December 2015 as detailed above, as the directors of the Company believe there was no material change between the two dates.
The directors of the Company confirm that consistent accounting policies and assumptions have been applied for the purpose of assessing impairment of goodwill under International Accounting Standards 36 Impairment of Assets (“IAS 36”). In assessing impairment on goodwill as at 31 December 2015, the directors of the Company have, after making reference to valuation reports of those cash-generating units, estimated the recoverable amounts of the cash-generating units containing goodwill based on value-in-use calculation to exceed their carrying amounts as at 31 December 2015. Therefore, no impairment of goodwill is considered necessary as at 31 December 2015.
The estimation of above-mentioned recoverable amounts has been made based on future cash flows expected to arise from the cash-generating units and a suitable discount rate in order to calculate the present value. Due to the nature of the forecast and the subjectivity and uncertainty of certain assumptions and inputs adopted in the model, the value of the recoverable amounts may change subject to variation in these assumptions, for example, the volatility of price of the products and possible changes in policies adopted by the PRC government which may adversely affect the business. If actual future cash flows are less than expected, a material impairment loss may arise.
The directors of the Company confirm that they will apply consistent accounting policies, principal assumptions and valuation method to assess impairment of goodwill in subsequent reporting periods in accordance with the requirements under IAS 36.
5. This represents the recognition of professional fee to be incurred by the Company for the Transaction. The amount is subject to change upon the actual completion of the Transaction.
6. This represents the adjustments on depreciation and amortisation in respect of the fair value adjustments recognised on the date of completion of the Transaction and the corresponding reversal of resulting deferred tax liabilities
–IV-11– APPENDIX IV UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP
for the year ended 31 December 2015. The fair values of the identifiable assets and liabilities held by the Target Companies was based on the Asset Evaluation Report.
The adjustment on depreciation of property, plant and equipment, release on prepaid lease payments and amortisation of intangible assets are calculated on a straight-line basis over the remaining useful lives.
7. This represents the adjustments on recognition of cost of sales in respect of the fair value adjustments of inventories recognised on the date of completion of the Transaction and the corresponding reversal of resulting deferred tax liabilities for the year ended 31 December 2015, assuming the fair value adjustment of inventory held by the Target Companies as at 1 January 2015 approximate the relevant amount as at 31 December 2015 (as the directors of the Company believe there was no material change between the two dates), and all the inventory held by the Target Companies as at 1 January 2015 are sold within the year ended 31 December 2015. The fair values of the inventories held by the Target Companies was based on the Asset Evaluation Report.
8. This represents the recognition of profit for the year attributable to non-controlling interests of ASIMCO Camshaft, ASIMCO Shuanghuan and ASIMCO Foundry.
– IV-12 – APPENDIX IV UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP
D. INDEPENDENT REPORTING ACCOUNTANTS’ ASSURANCE REPORT ON THE COMPILATION OF PRO FORMA FINANCIAL INFORMATION
The following is the text of a report, prepared for the purpose of inclusion in this circular, received from the Company’s reporting accountants, Deloitte Touche Tohmatsu.
TO THE DIRECTORS OF ZHENGZHOU COAL MINING MACHINERY GROUP COMPANY LIMITED
We have completed our assurance engagement to report on the compilation of pro forma financial information of Zhengzhou Coal Mining Machinery Group Company Limited (the “Company”) and its subsidiaries (hereinafter collectively referred to as the “Group”) by the directors of the Company (the “Directors”) for illustrative purposes only. The pro forma financial information consists of the pro forma consolidated statement of financial position as at 31 December 2015, the pro forma consolidated statement of profit or loss and other comprehensive income for the year ended 31 December 2015, the pro forma consolidated statement of cash flows for the year ended 31 December 2015 and related notes as set out on pages IV-1 to IV-12 of the circular issued by the Company dated 23 May 2016 (the “Circular”). The applicable criteria on the basis of which the Directors have compiled the pro forma financial information are described on page IV-1 to IV-12 of the Circular.
The pro forma financial information has been compiled by the Directors to illustrate the impact of the proposed acquisition of 63% equity interest in ASIMCO Shuanghuan Piston Ring (Yizheng) Co., Ltd. (“ASIMCO Shuanghuan”), 70% equity interest in ASIMCO Foundry (Yizheng) Co., Ltd. (“ASIMCO Foundry”), 63% equity interest in ASIMCO Camshaft (Yizheng) Co., Ltd (“ASIMCO Camshaft”), 100% equity interest in ASIMCO NVH Technologies Co., Ltd (Anhui) (“ASIMCO NVH”), 100% equity interest in CACG LTD. I (“CACG I”), 100% equity interest in ASIMCO International Casting Co., Ltd. (Shanxi) (“ASIMCO Shanxi”) and their respective subsidiaries (if any) (hereinafter collectively referred to as the “Transaction”) on the Group’s financial position as at 31 December 2015 as if the Transaction had taken place at 31 December 2015, and on the Group’s financial performance and cash flows for the year ended 31 December 2015 as if the Transaction had taken place at 1 January 2015. As part of this process, information about the Group’s financial position, financial performance and cash flows has been extracted by the Directors from the Group’s consolidated financial statements for the year ended 31 December 2015, on which an independent auditor’s report has been published.
– IV-13 – APPENDIX IV UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP
Directors’ Responsibilities for the Pro Forma Financial Information
The Directors are responsible for compiling the pro forma financial information in accordance with paragraph 4.29 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”) and with reference to Accounting Guideline 7 “Preparation of Pro Forma Financial Information for Inclusion in Investment Circulars” (“AG 7”) issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”).
Our Independence and Quality Control
We have complied with the independence and other ethical requirements of the “Code of Ethics for Professional Accountants” issued by the HKICPA, which is founded on fundamental principles of integrity, objectivity, professional competence and due care, confidentiality and professional behavior.
Our firm applies Hong Kong Standard on Quality Control 1 “Quality Control for Firms that Perform Audits and Reviews of Financial Statements, and Other Assurance and Related Services Engagements” issued by the HKICPA and accordingly maintains a comprehensive system of quality control including documented policies and procedures regarding compliance with ethical requirements, professional standards and applicable legal and regulatory requirements.
Reporting Accountants’ Responsibilities
Our responsibility is to express an opinion, as required by paragraph 4.29(7) of the Listing Rules, on the pro forma financial information and to report our opinion to you. We do not accept any responsibility for any reports previously given by us on any financial information used in the compilation of the pro forma financial information beyond that owed to those to whom those reports were addressed by us at the dates of their issue.
We conducted our engagement in accordance with Hong Kong Standard on Assurance Engagements (“HKSAE”) 3420 “Assurance Engagements to Report on the Compilation of Pro Forma Financial Information Included in a Prospectus” issued by the HKICPA. This standard requires that the reporting accountants plan and perform procedures to obtain reasonable assurance about whether the Directors have compiled the pro forma financial information in accordance with paragraph 4.29 of the Listing Rules and with reference to AG 7 issued by the HKICPA.
For purposes of this engagement, we are not responsible for updating or reissuing any reports or opinions on any historical financial information used in compiling the pro forma financial information, nor have we, in the course of this engagement, performed an audit or review of the financial information used in compiling the pro forma financial information.
The purpose of pro forma financial information included in an investment circular is solely to illustrate the impact of a significant event or transaction on unadjusted financial information of the Group as if the events had occurred or these transactions had been undertaken at an earlier date selected for purposes of the illustration. Accordingly, we do not provide any assurance that the actual outcome of the events or transactions at 31 December 2015 or 1 January 2015 would have been as presented.
– IV-14 – APPENDIX IV UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP
A reasonable assurance engagement to report on whether the pro forma financial information has been properly compiled on the basis of the applicable criteria involves performing procedures to assess whether the applicable criteria used by the Directors in the compilation of the pro forma financial information provide a reasonable basis for presenting the significant effects directly attributable to the event or transaction, and to obtain sufficient appropriate evidence about whether:
• the related pro forma adjustments give appropriate effect to those criteria; and
• the pro forma financial information reflects the proper application of those adjustments to the unadjusted financial information.
The procedures selected depend on the reporting accountants’ judgment, having regard to the reporting accountants’ understanding of the nature of the Group, the event or transaction in respect of which the pro forma financial information has been compiled, and other relevant engagement circumstances.
The engagement also involves evaluating the overall presentation of the pro forma financial information.
We believe that the evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Opinion
In our opinion:
a) the pro forma financial information has been properly compiled on the basis stated;
b) such basis is consistent with the accounting policies of the Group; and
c) the adjustments are appropriate for the purposes of the pro forma financial information as disclosed pursuant to paragraph 4.29(1) of the Listing Rules.
Deloitte Touche Tohmatsu Certified Public Accountants
Hong Kong 23 May 2016
– IV-15 – APPENDIX V SUMMARY OF THE ASSET EVALUATION REPORT — 1. SUMMARY OF THE ASSET EVALUATION REPORT
1. ASIMCO SHUANGHUAN PISTON RING (YIZHENG) CO., LTD. (“ASIMCO SHUANGHUAN”)
SUMMARY
China United Assets Appraisal Group Company Limited was engaged by Zhengzhou Coal Mining Machinery Group Company Limited to appraise the market value of the total shareholders’ equity of ASIMCO Shuanghuan, which is involved in the economic behaviour of the project whereby Zhengzhou Coal Mining Machinery Group Company Limited proposes to purchase the equity interests of ASIMCO Shuanghuan held by Axle ATL Cayman Limited by way of cash payment, on the Appraisal Reference Date of 31 December 2015 using the asset-based approach and income approach through necessary evaluation procedures in accordance with relevant laws, regulations and asset evaluation standards.
I. Purpose of Evaluation
Zhengzhou Coal Mining Machinery Group Company Limited proposes to purchase the equity interests of ASIMCO Shuanghuan held by Axle ATL Cayman Limited by way of cash payment.
The purpose of the evaluation is to reflect the market value of the total shareholders’ equity of ASIMCO Shuanghuan on the Appraisal Reference Date, so as to provide a value reference for the above economic behaviour of Zhengzhou Coal Mining Machinery Group Company Limited.
II. Subject and Scope of Evaluation
(1) Subject of Evaluation
The subject of evaluation is the total shareholders’ equity of ASIMCO Shuanghuan.
(2) Scope of Evaluation
The scope of evaluation covers all assets and relevant liabilities of ASIMCO Shuanghuan as at the Appraisal Reference Date.
III. Type of Value
Market value
IV. Appraisal Reference Date
31 December 2015
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V. Evaluation Approach
The asset-based approach and income approach have been adopted for the evaluation. The income approach has been adopted as a reference for assessing the net asset value of ASIMCO Shuanghuan.
1. Asset-based approach
The asset-based approach is based on the judgment of the overall asset value with the amount of investment needed to re-build an enterprise or an independent profit-making entity identical to the evaluation subject on the Appraisal Reference Date. In particular, the enterprise value is arrived at by summing up the appraised values of each component asset forming the enterprise and then deducting the appraised values of its liabilities.
2. Income approach
In accordance with the purpose of this evaluation, coupled with relevant national regulations and “Asset Evaluation Standards – Enterprise Value”, the discounted cash flow (DCF) approach has been adopted to estimate the value of the equity capital of ASIMCO Shuanghuan by sources of revenue.
The DCF approach is a method of assessing asset value through discounting the enterprise’s future expected net cash flows to the present value. This means the discounting to the present value through evaluation of the assets’ future expected net cash flows and adoption of an appropriate discount rate, in order to derive the appraised value.
VI. Evaluation Conclusion, Reasons and its Validity Period
In this evaluation, the income approach has been adopted as a reference for assessing the net asset value of ASIMCO Shuanghuan, from which interests attributable to owners of the company of RMB721.8587 million as at the Appraisal Reference Date is derived.
The value of total shareholders’ equity arrived at using the income approach amounts to RMB721.8587 million, which is 43.07% or RMB217.3023 million higher than the value of total shareholders’ equity of RMB504.5564 million arrived at using the asset-based approach. The difference arising from the use of the two approaches is primarily due to the following:
(1) The evaluation under the asset-based approach uses the replacement costs of assets as the evaluation standards, reflecting the labour of the society required and spent on the investment in the assets (costs of
–V-2– APPENDIX V SUMMARY OF THE ASSET EVALUATION REPORT — 1. SUMMARY OF THE ASSET EVALUATION REPORT
acquisition and construction). Usually this type of costs of acquisition and construction vary according to the changes in the national economy;
(2) The valuation under the income approach uses the projected future income of the assets as the valuation standards, reflecting the degree of the operating capability (profitability) of the assets. Such profitability is usually subject to various conditions, including the macroeconomic conditions, government control and the effective utilization of the assets;
(3) The income approach does not only take into account the effects of book assets on the total shareholders’ equity of the enterprise, but also takes into account the effects of the following factors:
1. Technological advancement
The possession of key cutting-edge technology of the industry and independent intellectual property rights, including industry-leading piston ring processing technology: ellipse processing technology, semi-inlay asymmetrical barrel processing technology, distortion processing technology, pyramidal oil ring processing technology, I-type oil ring processing technology, small-hole oil ring processing technology, and chrome-plating of oil ring processing technology; and advanced piston ring surface processing technology: PVD technology, DLC technology, chrome-ceramic complex plating technology, chrome diamond complex electroplating technology and flash plating technology.
2. Strong customer base
The key customers of ASIMCO Shuanghuan include Weichai, Cummins, Sinotruk, Yuchai, FAW Jiefang etc, accounting for more than 40% market share in the sector of piston rings for commercial vehicles. Its establishment of quality control system, development capability, synergy of resources and sustainable manufacturing level has brought forth numerous accolades of excellence awarded by various entities.
–V-3– APPENDIX V SUMMARY OF THE ASSET EVALUATION REPORT — 1. SUMMARY OF THE ASSET EVALUATION REPORT
3. Software and hardware equipment as well as strong technical support team
ASIMCO Shuanghuan is a key high-tech enterprise under the Torch Programme of the PRC. ASIMCO Shuanghuan has cooperated with renowned schools, institutions and tertiary education institutes both at home and abroad, including Lanzhou Institute of Chemical Physics under the China Academy of Sciences, Tsinghua University, Southeast University, Jiangsu University, AVL and Shanghai Institute of Internal Combustion Engines, in the establishment of CAS-Yizheng Shuanghuan High-performance Piston Ring Joint Research and Development Centre, Southeast University Piston Ring Technology Research Institute, Jiangsu University Piston Ring Research and Development Centre, Jiangsu Renowned Enterprises Technology Centre, Jiangsu Foreign Investment Research and Development Institute, Jiangsu Compound Plating Engineering Technology Research Centre, Jiangsu Post-doctoral Research Work Station and Jiangsu Enterprise Fellow Work Station.
The above factors contribute to the difference arising from the use of the two valuation methods.
The evaluation under the asset-based approach uses the replacement costs of assets as the evaluation standards, reflecting the labour of the society required and spent on the investment in the assets (costs of acquisition and construction). Usually this type of costs of acquisition and construction vary according to the changes in the national economy. The income approach not only takes into account the effects of book assets on the value of all shareholders’ equity of an enterprise, but also the effects of those factors which cannot possibly be covered by the asset-based approach on the value of all shareholders’ equity, such as industry competitiveness, corporate governance levels, technological research and development capability and premium customer resources. According to the industry in which ASIMCO Shuanghuan operates and its characteristics of operation, the income approach has generated an objective result which fully reflects the value of all shareholders’ equity of ASIMCO Shuanghuan.
The evaluation conclusion revealed in this asset evaluation report shall have a validity for one year commencing from the Appraisal Reference Date of 31 December 2015 and ending on 30 December 2016.
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VII. Special Matters Affecting the Evaluation Conclusion
(1) Reports cited from other agencies
In this asset evaluation report, the book value of each asset and liability as at the Appraisal Reference Date is quoted from the audit report of “PwC Zhong Tian Shen Zi (2016) No. 24669” issued by PricewaterhouseCoopers Zhong Tian LLP, which falls into the category of standard unqualified opinion.
(2) Defects in title
1. Buildings
As at the Appraisal Reference Date, there were some title holders of buildings whose names were not identical to those of business entities to be valued. Details are as follows:
Year/ Name of Month of No. Certificate No. Building Structure Completion Area (m2) Title Holder
1 Yi Zhen Zi No. 04002-1 Cold Drink Room Mixed September 310.6 Yizheng 1995 Shuanghuan Piston Ring Co., Ltd. 2 Yi Zhen Zi No. 04002-1 Forklift Shed and Mixed September 745.5 Yizheng Mud Shed 1995 Shuanghuan Piston Ring Co., Ltd. 3 Yi Zhen Zi No. 04002-1 Washroom Brick- September 20.9 Yizheng wood 1995 Shuanghuan Piston Ring Co., Ltd. 4 Yi Zhen Zi No. 04002-1 Overhaul Room Mixed September 547.7 Yizheng 1995 Shuanghuan Piston Ring Co., Ltd. 5 Yi Zhen Zi No. 04002-1 Lubricant Store Mixed September 190.7 Yizheng Site 1995 Shuanghuan Piston Ring Co., Ltd.
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Year/ Name of Month of No. Certificate No. Building Structure Completion Area (m2) Title Holder
6 Yi Zhen Zi No. 04002-1 Forklift Shed Mixed September 184.55 Yizheng 1995 Shuanghuan Piston Ring Co., Ltd. 7 Yi Zhen Zi No. 04002-1 Equipment Shed Steel- October 1,252.80 Yizheng (old) concrete 2010 Shuanghuan Piston Ring Co., Ltd. 8 Yi Zhen Zi No. 04002-1 Low Voltage Mixed September 147.7 Yizheng Electrical Room 1995 Shuanghuan Piston Ring Co., Ltd. 9 Yi Zhen Zi No. 04002-1 Four Components Mixed September 741.7 Yizheng 1995 Shuanghuan Piston Ring Co., Ltd. 10 Yi Zhen Zi No. 04002-1 Post-galvanising Mixed July 528.6 Yizheng Shed 2007 Shuanghuan Piston Ring Co., Ltd. 11 Yi Zhen Zi No. 04002-1 Chrome Plating Steel- September 4,136.90 Yizheng Workshop concrete 1995 Shuanghuan Piston Ring Co., Ltd. 12 Yi Zhen Zi No. 04002-1 Gold I, Gold II, Steel- September 6,310.00 Yizheng Gasoline concrete 1995 Shuanghuan Engine Casting Piston Ring Co., Ltd. 13 Yi Fang Quan Zheng Gold Processing Steel- October 4,227.82 Yizheng Zhen Zi No. Zhen before concrete 2010 Shuanghuan Zhou 2010015133 Galvanising Piston Ring Co., Ltd. 14 Yi Zhen Zi No. 04002-1 Eastern Gold Steel/ May 1998 13,500.00 Yizheng Processing steel- Shuanghuan Workshop concrete Piston Ring Co., Ltd.
–V-6– APPENDIX V SUMMARY OF THE ASSET EVALUATION REPORT — 1. SUMMARY OF THE ASSET EVALUATION REPORT
Year/ Name of Month of No. Certificate No. Building Structure Completion Area (m2) Title Holder
15 Yi Zhen Zi No. 04002-1 Substation Steel- September 885.5 Yizheng concrete 1995 Shuanghuan Piston Ring Co., Ltd. 16 Yi Zhen Zi No. 04002-1 Rear Workshop Steel- September 2,532.67 Yizheng concrete 1995 Shuanghuan Piston Ring Co., Ltd. 17 Yi Fang Quan Zheng R&D Laboratory Steel- April 2007 1,602.03 Yizheng Zhen Zi No. concrete Shuanghuan 0001026213 Piston Ring Co., Ltd.
Total 37,865.67
As of the Appraisal Reference Date, the property ownership certificate has not been obtained for some buildings. The particulars are as follows:
Year/ Month of No. Certificate No. Name of Building Structure Completion Area (m2)
1 Nil New Reception Office Steel-concrete November 2013 136.00 2 Nil Sales Reception Office Steel-concrete October 2002 50.00 3 Nil Equipment Shed (new) Steel-concrete May 1999 517.00 4 Nil Special Ring Workshop Steel-concrete January 2002 1,391.00 5 Nil Northern Space, Chrome Mixed October 2010 565.00 Plating Workshop 6 Nil Western Room, Chrome Mixed December 2000 691.87 Plating Workshop 7 Nil Steel Gasoline Engine Steel-concrete October 2001 3,093.00 8 Nil Molybdenum Spray Room Mixed October 2002 634.50 9 Nil High Rack Warehouse Steel-concrete January 2013 3,000.00 10 Nil Washroom Mixed May 1998 62.00
–V-7– APPENDIX V SUMMARY OF THE ASSET EVALUATION REPORT — 1. SUMMARY OF THE ASSET EVALUATION REPORT
Year/ Month of No. Certificate No. Name of Building Structure Completion Area (m2)
11 Nil Sewage Treatment Office, Steel-concrete October 2010 134.00 Duty Room 12 Nil Sewer Equipment Room Mixed November 2014 264.00 13 Nil Logistics Office Mixed September 1995 60.48 14 Nil Boiler Room Steel-concrete May 1998 365.00 15 Nil Mud House Mixed May 1998 83.72
16 Nil Northern Room, Substation Steel-concrete November 2014 130.00 17 Nil Southern Room, Rear Mixed/Steel September 1995 108.00 Workshop 18 Nil Southern Washroom, Rear Mixed January 2011 48.00 Workshop 19 Nil Roughcast Warehouse Mixed October 2002 220.00 20 Nil Infrastructure Warehouse Mixed May 2001 260.00 21 Nil Hazardous Material and Gas Mixed December 2000 241.00 Warehouse 22 Nil Compressor Room Steel-concrete May 1996 304.00
Total 12,358.57
For buildings that do not have a property ownership certificate or the non-conforming name of the title holders on the subject certificate to the name of the business, the business undertook that such part of the assets would be conferred to itself. The evaluation agency is not responsible for the disputes that may arise from such part of asset ownership. The area of the buildings that have not obtained a property ownership certificate was reported and measured on site with reference to the relevant blueprints.
2. Transport Vehicles
The holder of title to the Audi vehicle with the license plate number Su KA5888 is an individual, the name of which does not conform to the name of the business. ASIMCO Shuanghuan undertook to evaluate vehicle, whereas the property right thereof would be conferred to itself. The evaluation agency and the valuer are not responsible for any disagreements or disputes arising from such matter.
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3. As of the Appraisal Reference Date, the patent certificates which were granted to the business under authorization have not been renamed. The particulars are as follows:
Authorization no. or Date of Patent No. Name of the Patent Type of patent application no. Application Owner
1 Protection and Utility Model ZL201320798360.1 2013.12.09 Yizheng Control System of Shuanghuan the H-Type Ring Piston Forming Ring Co., Equipment Mould Ltd.
(3) Uncertainties Including Unsettled Matters and Legal Disputes
There are no uncertainties including unsettled matters or legal disputes found in the report.
(4) Obsolete Equipment
As of the Appraisal Reference Date, 12 machinery equipment including variable-frequency induction furnace, composite plating production line and coating thickness gauge, and 104 electronic equipment including facsimile machines and Samsung mobile phones have been retired.
(5) Descriptions on Other Matters
1. ASIMCO Foundry and ASIMCO Shuanghuan are entities under common control. In previous years, ASIMCO Foundry sold all its products to ASIMCO Shuanghuan at prices lower than market price. The evaluation assumes the continuing operation under the existing related-party sales.
2. The valuer performs the assets evaluation engagement for the purpose of making estimation on the value of the evaluation subject and expressing professional opinions, and does not assume responsibility towards the decision-making of the respective entrusting parties. The evaluation conclusion shall not be considered as the guarantee on the realized price of the evaluation subject.
3. The legal duties of the valuer and evaluation agency are to make professional judgment on the value of the assets under the evaluation purpose set out herein, which does not involve any judgment made by the valuer and evaluation agency in respect of the economic behaviors corresponding to such evaluation
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purpose. The evaluation work, to a great extent, relies on the information provided by the entrusting party and the appraised entity. Therefore, the prerequisite of the evaluation work is that the documents relating to the economic behaviors, titles document and certificates, accounting records relating to the assets and legal documents provided by the entrusting party and the appraised entity are authentic and legal.
4. For the data, tables and the relevant information adopted in the scope of the evaluation provided by the appraised entity, the entrusting party and the appraised entity shall be liable for the authenticity and completeness thereof.
5. The profit estimation of the appraised entity obtained by the evaluation agency is the basis of the income approach in this asset evaluation report. The valuer has conducted necessary investigation, analysis and judgment on the appraised entity. After rounds of discussions with the management of the appraised entity and its major shareholders and the further amendments and refinement to the profit estimation, the evaluation agency was satisfied with the relevant profit estimation data of the appraised entity. The evaluation agency’s adoption of the profit estimation of the business entity shall not be considered as a guarantee on the future profitability of the appraised entity.
6. The relevant documents of title and information contained in this asset evaluation report have been provided by the appraised entity. The entrusting party and the appraised entity shall be liable for the authenticity and legality thereof.
7. The carrying value of the financial assets available for sales in relation to the Huaijiang Highway of Yangzhou Huajin Transportation Construction Co., Ltd. and Yizheng Communications Construction Co., Ltd. amounted to an aggregate of RMB280,000. As the relevant information of the counter party has not been obtained, the carrying value will be presented as the appraised value.
8. The scope of the appraisal is subject to the form of declaration of appraisal provided by the entrusting party and the appraised entity, without consideration of the contingent assets or contingent liabilities, if any, not included in the list as provided by the entrusting party and the appraised entity.
– V-10 – APPENDIX V SUMMARY OF THE ASSET EVALUATION REPORT — 1. SUMMARY OF THE ASSET EVALUATION REPORT
9. During the validity period subsequent to the Appraisal Reference Date, in case of any change in the quantity and evaluation standard of the assets, the following principles shall apply:
(1) In case the quantity of assets changes, the amount of assets shall be adjusted accordingly based on the original evaluation approach;
(2) In case the price standard of assets changes and has an obvious impact on the appraised value of assets, the entrusting party shall engage a qualified evaluation agency to re-determine the appraised value in a timely manner;
(3) For any change in the quantity and price standard of assets after the Appraisal Reference Date, the entrusting party shall take due considerations and make adjustment accordingly during actual evaluation.
The above contents have been extracted from the text of the asset evaluation report. Please read the text of the asset evaluation report for details of this evaluation project and reasonable understanding of the evaluation conclusion.
Evaluation assumptions
The valuer has relied on the following evaluation assumptions in this evaluation:
(1) General assumptions
1. Transaction assumption. The transaction assumption assumes all assets to be valued are in the course of transaction and the evaluation assessed by the appraiser is based on simulated market including terms of transaction of the target assets. The transaction assumption is the most fundamental prerequisite of the appraisal of assets.
2. Open market assumption. The open market assumption assumes that the parties to the assets transaction or the proposed assets transaction in the market are dealing with each other at arm’s length and have opportunities and time to obtain sufficient market information in order to make rational and informed judgment on the assets including their functions, uses and transaction prices. The basis of open market assumption is that the assets can be traded openly in the market.
3. Going-concern assets assumption. The going-concern assets assumption means that the appraisal method, parameters and basis are to be determined in accordance with the condition that the target assets will be used in consistent with their current function, method, scale, frequency and environment, or used on the basis of certain changes.
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(2) Special assumptions
1. There will be no unforeseen material adverse changes to the external economic environment including macroeconomic and financial conditions and industry policies subsequent to the Appraisal Reference Date;
2. It is assumed that ASIMCO Shuanghuan may still meet the required standards of hi-tech enterprise and enjoy the preferential tax rate upon the expiry of its High-Tech Enterprise Certificate;
3. The social and economic environment where ASIMCO Shuanghuan operates, as well as the implemented policies in relation to the tax and the tax rate etc. will not be changed materially, and that credit policies, interest rate and exchange rate remain basically stable;
4. The future management of ASIMCO Shuanghuan is diligent and will maintain the existing management approach;
5. That the existing state of the business structure, revenue and cost structure in the future operation of the ASIMCO Shuanghuan and the sales strategy and cost control in its future business will continue and will not be changed materially. It does not take into account changes including the change in business structure arising from the changes in management and operational strategies and business environment;
6. The ASIMCO Shuanghuan operate in a lawful manner and there will be no unforeseen factors leading to its inability to operate in ongoing concern;
7. That no material contingent liabilities will affect the business of the ASIMCO Shuanghuan during the forecast period in such a way as to cause substantial increase in operating costs;
8. That the prevailing market value based on continual use and open market does not take into account future possible pledge or guarantee or the effect on appraised value rising from the additional payment based on special deals, nor does it take into account the effect on asset prices arising from changes in macroeconomic policies or acts of god or other force majeure;
9. ASIMCO Shuanghuan will maintain its existing structure and amount of share capital, and it does not take into account the future effect on ASIMCO Shuanghuan arising from the changes in the structure of share capital in future;
– V-12 – APPENDIX V SUMMARY OF THE ASSET EVALUATION REPORT — 1. SUMMARY OF THE ASSET EVALUATION REPORT
10. That there will be no material changes in the costs of operation and management of ASIMCO Shuanghuan, which will maintain the same trend as changes in recent years, and that changes will be in line with the expansion of scale of operation;
11. That the basic information and financial information provided by the entrusting party and the appraised entity is true, accurate and complete;
12. The scope of appraisal is solely based on the form of declaration for appraisal provided by the entrusting party and the appraised entity, without consideration of the contingent assets or contingent liabilities, if any, not included in the list provided by the entrusting party and the appraised entity.
The result of appraisal will generally fail in case of changes in the aforesaid conditions.
– V-13 – APPENDIX V SUMMARY OF THE ASSET EVALUATION REPORT — 1. SUMMARY OF THE ASSET EVALUATION REPORT
2. ASIMCO FOUNDRY (YIZHENG) CO., LTD. (“ASIMCO FOUNDRY”)
SUMMARY
China United Assets Appraisal Group Company Limited was engaged by Zhengzhou Coal Mining Machinery Group Company Limited to appraise the market value of the total shareholders’ equity of ASIMCO Foundry, which is involved in the economic behaviour of the project whereby Zhengzhou Coal Mining Machinery Group Company Limited proposes to purchase the equity interests of ASIMCO Foundry held by Axle ATL Cayman Limited by way of cash payment, on the Appraisal Reference Date of 31 December 2015 using the asset-based approach and income approach through necessary evaluation procedures in accordance with relevant laws, regulations and asset evaluation standards.
I. Purpose of Evaluation
Zhengzhou Coal Mining Machinery Group Company Limited proposes to purchase the 70% equity interests of ASIMCO Foundry held by Axle ATL Cayman Limited by way of cash payment.
The purpose of the evaluation is to reflect the market value of the total shareholders’ equity of ASIMCO Foundry on the Appraisal Reference Date, so as to provide a value reference for the above economic behavior of Zhengzhou Coal Mining Machinery Group Company Limited.
II. Subject and Scope of Evaluation
(1) Subject of Evaluation
The subject of evaluation is the total shareholders’ equity of ASIMCO Foundry.
(2) Scope of Evaluation
The scope of evaluation covers all assets and liabilities of ASIMCO Foundry as at the Appraisal Reference Date.
III. Type of Value
Market value
IV. Appraisal Reference Date
31 December 2015
– V-14 – APPENDIX V SUMMARY OF THE ASSET EVALUATION REPORT — 1. SUMMARY OF THE ASSET EVALUATION REPORT
V. Evaluation Approach
The asset-based approach and income approach have been adopted for the evaluation. The income approach has been adopted as a reference for assessing the value of all equity of ASIMCO Foundry.
1. Asset-based approach
The asset-based approach is based on the judgment of the overall asset value with the amount of investment needed to re-build an enterprise or an independent profit-making entity identical to the evaluation subject on the Appraisal Reference Date. In particular, the enterprise value is arrived at by summing up the appraised values of each component asset forming the enterprise and then deducting the appraised values of its liabilities.
2. Income approach
In accordance with the purpose of this evaluation, coupled with relevant national regulations and “Asset Evaluation Standards – Enterprise Value”, the discounted cash flow (DCF) approach has been adopted to estimate the value of the equity capital of ASIMCO Foundry by sources of revenue.
The DCF approach is a method of assessing asset value through discounting the enterprise’s future expected net cash flows to the present value. This means the discounting to the present value through evaluation of the assets’ future expected net cash flows and adoption of an appropriate discount rate, in order to derive the enterprise value.
VI. Evaluation Conclusion, Reasons and its Validity Period
In this evaluation, the income approach has been adopted as a reference for assessing the net asset value of ASIMCO Foundry, from which interests attributable to owners of the company of RMB9.7892 million as at the Appraisal Reference Date is derived.
The value of total shareholders’ equity arrived at using the income approach amounts to RMB9.7892 million, which is 93.33% or RMB136.9272 million lower than the value of total shareholders’ equity of RMB146.7164 million arrived at using the asset-based approach. The difference arising from the use of the two approaches is primarily due to the following:
ASIMCO Foundry and ASIMCO Shuanghuan are under common control. All products of ASIMCO Foundry are sold to ASIMCO Shuanghuan at prices below market prices, resulting in the lower valuation of ASIMCO Foundry using the income approach than that arrived at using the asset-based approach.
– V-15 – APPENDIX V SUMMARY OF THE ASSET EVALUATION REPORT — 1. SUMMARY OF THE ASSET EVALUATION REPORT
The evaluation under the asset-based approach uses the replacement costs of assets as the evaluation standards, reflecting the labour of the society required and spent on the investment in the assets (costs of acquisition and construction). Usually this type of costs of acquisition and construction vary according to the changes in the national economy. The income approach not only takes into account the effects of book assets on the value of all shareholders’ equity of an enterprise, but also the effects of those factors which cannot possibly be covered by the asset-based approach on the value of all shareholders’ equity, such as operation mode and corporate governance levels. Thus, the income approach has generated an objective result which fully reflects the value of all shareholders’ equity of ASIMCO Foundry.
The evaluation conclusion revealed in this asset evaluation report shall have a validity for one year commencing from the Appraisal Reference Date of 31 December 2015 and ending on 30 December 2016.
VII. Special Matters Affecting the Evaluation Conclusion
(1) Reports cited from other agencies
In this asset evaluation report, the book value of each asset and liability as at the Appraisal Reference Date is quoted from the audit report of “PwC Zhong Tian Shen Zi (2016) No. 24721” issued by PricewaterhouseCoopers Zhong Tian LLP, which falls into the category of standard unqualified opinion.
(2) Uncertainties Including Unsettled Matters and Legal Disputes
There are no uncertainties including unsettled matters or legal disputes found in the report.
(3) Descriptions on Other Matters
1. ASIMCO Foundry and ASIMCO Shuanghuan are entities under common control. In previous years, ASIMCO Foundry sold all its products to ASIMCO Shuanghuan at prices lower than market price. The evaluation assumes the continuing operation under the existing related-party sales.
2. The valuer performs the assets evaluation engagement for the purpose of making estimation on the value of the evaluation subject and expressing professional opinions, and does not assume responsibility towards the decision-making of the respective entrusting parties. The evaluation conclusion shall not be considered as the guarantee on the realized price of the evaluation subject.
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3. The legal duties of the valuer and evaluation agency are to make professional judgment on the value of the assets under the evaluation purpose set out herein, which does not involve any judgment made by the valuer and evaluation agency in respect of the economic behaviors corresponding to such evaluation purpose. The evaluation work, to a great extent, relies on the information provided by the entrusting party and the appraised entity. Therefore, the prerequisite of the evaluation work is that the documents relating to the economic behaviors, titles document and certificates, accounting records relating to the assets and legal documents provided by the entrusting party and the appraised entity are authentic and legal.
4. For the data, tables and the relevant information adopted in the scope of the evaluation provided by the appraised entity, the entrusting party and the appraised entity shall be liable for the authenticity and completeness thereof.
5. The profit estimation of the appraised entity obtained by the evaluation agency is the basis of the income approach in this asset evaluation report. The valuer has conducted necessary investigation, analysis and judgment on the appraised entity. After rounds of discussions with the management of the appraised entity and its major shareholders and the further amendments and refinement to the profit estimation, the evaluation agency was satisfied with the relevant profit estimation data of the appraised entity. It shall be brought to the attention of the entrusting party and users of the reports that the evaluation agency’s adoption of the profit estimation of the business entity shall not be considered as a guarantee on the future profitability of the appraised entity.
6. The relevant documents of title and information contained in this asset evaluation report have been provided by the appraised entity. The entrusting party and the appraised entity shall be liable for the authenticity and legality thereof.
7. The scope of the appraisal is subject to the form of declaration of appraisal provided by the entrusting party and the appraised entity, without consideration of the contingent assets or contingent liabilities, if any, not included in the list as provided by the entrusting party and the appraised entity.
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8. During the validity period subsequent to the Appraisal Reference Date, in case of any change in the quantity and evaluation standard of the assets, the following principles shall apply:
(1) In case the quantity of assets changes, the amount of assets shall be adjusted accordingly based on the original evaluation approach;
(2) In case the price standard of assets changes and has an obvious impact on the appraised value of assets, the entrusting party shall engage a qualified evaluation agency to re-determine the appraised value in a timely manner;
(3) For any change in the quantity and price standard of assets after the Appraisal Reference Date, the entrusting party shall take due considerations and make adjustment accordingly during actual evaluation.
The above contents have been extracted from the text of the asset evaluation report. Please read the text of the asset evaluation report for details of this evaluation project and reasonable understanding of the evaluation conclusion.
Evaluation assumptions
The valuer has relied on the following evaluation assumptions in this evaluation:
(1) General assumptions
1. Transaction assumption. The transaction assumption assumes all assets to be valued are in the course of transaction and the evaluation assessed by the appraiser is based on simulated market including terms of transaction of the target assets. The transaction assumption is the most fundamental prerequisite of the appraisal of assets.
2. Open market assumption. The open market assumption assumes that the parties to the assets transaction or the proposed assets transaction in the market are dealing with each other at arm’s length and have opportunities and time to obtain sufficient market information in order to make rational and informed judgment on the assets including their functions, uses and transaction prices. The basis of open market assumption is that the assets can be traded openly in the market.
3. Going-concern assets assumption. The going-concern assets assumption means that the appraisal method, parameters and basis are to be determined in accordance with the condition that the target assets will be used in consistent with their current function, method, scale, frequency and environment, or used on the basis of certain changes.
– V-18 – APPENDIX V SUMMARY OF THE ASSET EVALUATION REPORT — 1. SUMMARY OF THE ASSET EVALUATION REPORT
(2) Special assumptions
1. There will be no unforeseen material adverse changes to the external economic environment including macroeconomic and financial conditions and industry policies subsequent to the Appraisal Reference Date;
2. The social and economic environment where ASIMCO Foundry operates, as well as the implemented policies in relation to the tax and the tax rate etc. will not be changed materially, and that credit policies, interest rate and exchange rate remain basically stable;
3. The future management of ASIMCO Foundry is diligent and will maintain the existing management approach;
4. That the existing state of the business structure, revenue and cost structure in the future operation of ASIMCO Foundry and the sales strategy and cost control in its future business will continue and will not be changed materially. It does not take into account changes including the change in business structure arising from the changes in management and operational strategies and business environment;
5. ASIMCO Foundry operate in a lawful manner and there will be no unforeseen factors leading to its inability to operate in ongoing concern;
6. That no material contingent liabilities will affect the business of the ASIMCO Foundry during the forecast period in such a way as to cause substantial increase in operating costs;
7. That the prevailing market value based on continual use and open market does not take in account future possible pledge or guarantee or the effect on appraised value rising from the additional payment based on special deals, nor does it take into account the effect on asset prices arising from changes in macroeconomic policies or acts of god or other force majeure;
8. ASIMCO Foundry will maintain its existing structure and amount of share capital, and it does not take into account the future effect on ASIMCO Foundry arising from the changes in the structure of share capital in future;
9. That there will be no material changes in the costs of operation and management of ASIMCO Foundry, which will maintain the same trend as changes in recent years, and that changes will be in line with the expansion of scale of operation;
– V-19 – APPENDIX V SUMMARY OF THE ASSET EVALUATION REPORT — 1. SUMMARY OF THE ASSET EVALUATION REPORT
10. That the basic information and financial information provided by the entrusting party and the appraised entity is true, accurate and complete;
11. The scope of appraisal is solely based on the form of declaration for appraisal provided by the entrusting party and the appraised entity, without consideration of the contingent assets or contingent liabilities, if any, not included in the list provided by the entrusting party and the appraised entity.
The result of appraisal will generally fail in case of changes in the aforesaid conditions.
– V-20 – APPENDIX V SUMMARY OF THE ASSET EVALUATION REPORT — 1. SUMMARY OF THE ASSET EVALUATION REPORT
3. ASIMCO CAMSHAFT (YIZHENG) CO., LTD. (“ASIMCO CAMSHAFT”)
SUMMARY
China United Assets Appraisal Group Company Limited was engaged by Zhengzhou Coal Mining Machinery Group Company Limited to appraise the market value of the total shareholders’ equity of ASIMCO Camshaft, which is involved in the economic behaviour of the project whereby Zhengzhou Coal Mining Machinery Group Company Limited proposes to purchase the equity interests of ASIMCO Camshaft held by Axle ATL Cayman Limited by way of cash payment, on the Appraisal Reference Date of 31 December 2015 using the asset-based approach and income approach through necessary evaluation procedures in accordance with relevant laws, regulations and asset evaluation standards.
I. Purpose of Evaluation
Zhengzhou Coal Mining Machinery Group Company Limited proposes to purchase the 63% equity interests of ASIMCO Camshaft held by Axle ATL Cayman Limited by way of cash payment.
The purpose of the evaluation is to reflect the market value of the total shareholders’ equity of ASIMCO Camshaft on the Appraisal Reference Date, so as to provide a value reference for the above economic behaviour of Zhengzhou Coal Mining Machinery Group Company Limited.
II. Subject and Scope of Evaluation
(1) Subject of Evaluation
The subject of evaluation is the total shareholders’ equity of ASIMCO Camshaft.
(2) Scope of Evaluation
The scope of evaluation covers all assets and relevant liabilities of ASIMCO Camshaft as at the Appraisal Reference Date.
III. Type of Value
Market value
IV. Appraisal Reference Date
31 December 2015
– V-21 – APPENDIX V SUMMARY OF THE ASSET EVALUATION REPORT — 1. SUMMARY OF THE ASSET EVALUATION REPORT
V. Evaluation Approach
The asset-based approach and income approach have been adopted for the evaluation. The income approach has been adopted as a reference for assessing the net asset value of ASIMCO Camshaft.
1. Asset-based approach
The asset-based approach is based on the judgment of the overall asset value with the amount of investment needed to re-build an enterprise or an independent profit-making entity identical to the evaluation subject on the Appraisal Reference Date. In particular, the enterprise value is arrived at by summing up the appraised values of each component asset forming the enterprise and then deducting the appraised values of its liabilities.
2. Income approach
In accordance with the purpose of this evaluation, coupled with relevant national regulations and “Asset Evaluation Standards – Enterprise Value”, the discounted cash flow (DCF) approach has been adopted to estimate the value of the equity capital of ASIMCO Camshaft by sources of revenue.
The DCF approach is a method of assessing asset value through discounting the enterprise’s future expected net cash flows to the present value. This means the discounting to the present value through evaluation of the assets’ future expected net cash flows and adoption of an appropriate discount rate, in order to derive the appraised value.
VI. Evaluation Conclusion, Reasons and its Validity Period
In this evaluation, the income approach has been adopted as a reference for assessing the net asset value of ASIMCO Camshaft, from which interests attributable to owners of the company of RMB186.5707 million as at the Appraisal Reference Date is derived.
The value of total shareholders’ equity arrived at using the income approach amounts to RMB186.5707 million, which is 28.87% or RMB41.7989 million higher than the value of total shareholders’ equity of RMB144.7718 million arrived at using the asset-based approach. The difference arising from the use of the two approaches is primarily due to the following:
(1) The evaluation under the asset-based approach uses the replacement costs of assets as the evaluation standards, reflecting the labour of the society required and spent on the investment in the assets (costs of
– V-22 – APPENDIX V SUMMARY OF THE ASSET EVALUATION REPORT — 1. SUMMARY OF THE ASSET EVALUATION REPORT
acquisition and construction). Usually this type of costs of acquisition and construction vary according to the changes in the national economy;
(2) The valuation under the income approach uses the projected future income of the assets as the valuation standards, reflecting the degree of the operating capability (profitability) of the assets. Such profitability is usually subject to various conditions, including the macroeconomic conditions, government control and the effective utilization of the assets;
(3) The income approach does not only take into account the effects of book assets on the total shareholders’ equity of the enterprise, but also takes into account the effects of the following factors:
1. Technological advancement
Boasting a track record of more than 20 years in the research, development and production of camshafts, the company has in-depth capability in the research, manufacturing and application of chilled alloy cast iron, cold shock ball graphite cast iron, high strength nodular cast iron, steel material camshaft and combined camshafts (組合式凸輪 軸), and the technology and capability in the processing of complex camshaft lines. In particular, the company enjoys a globally-leading position in cold shock ball graphite cast iron camshafts and a domestically-leading position in high-end alloy steel camshafts, being highly regarded by its customers.
2. Strong customer base
Customers of ASIMCO Camshaft primarily comprise manufacturer of automotive engines, including engine factories under auto manufacturers. Auto manufacturers primarily include Dongfeng Motors, FAW Group, Naveco, SAIC-IVECO, Hualing Motors, FOTON Motors, IVECO and Paccar, to which ASIMCO Camshaft directly supplies engines. Customers to which ASIMCO Camshaft supplies engines primarily include Cummins (on a global basis), Fiat Power (on a global basis), FAW Wuxi Diesel Engine, FOTON Cummins, SFH, Dongfeng Cummins, Shanghai Diesel, Weichai etc, which are primary suppliers for auto manufacturers, while ASIMCO Camshaft is a secondary supplier for auto manufacturers.
As auto manufacturers generally do not alter the designs of car models, nor do they easily replace existing suppliers, the business of supplying parts and components is relatively stable. ASIMCO is an auto parts and components company specialized in the production of engine camshafts and is a secondary supplier for auto manufacturers. In
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general, it takes rounds of technology exchange and commercial negotiations, as well as examination and certification processes such as product development and sample production, sample testing and small-scale supply, before ASIMCO Camshaft is admitted to becoming a supplier enlisted under the engine factories of an auto manufacturer or a primary supplier.
The above factors contribute to the difference arising from the use of the two valuation methods.
The evaluation under the asset-based approach uses the replacement costs of assets as the evaluation standards, reflecting the labour of the society required and spent on the investment in the assets (costs of acquisition and construction). Usually this type of costs of acquisition and construction vary according to the changes in the national economy. The income approach not only takes into account the effects of book assets on the value of all shareholders’ equity of an enterprise, but also the effects of those factors which cannot possibly be covered by the asset-based approach on the value of all shareholders’ equity, such as industry competitiveness, corporate governance levels, research and development capability and premium customer resources. According to the industry in which ASIMCO Camshaft operates and its characteristics of operation, the income approach has generated an objective result which fully reflects the value of all shareholders’ equity of ASIMCO Camshaft.
The evaluation conclusion revealed in this asset evaluation report shall have a validity for one year commencing from the Appraisal Reference Date of 31 December 2015 and ending on 30 December 2016.
– V-24 – APPENDIX V SUMMARY OF THE ASSET EVALUATION REPORT — 1. SUMMARY OF THE ASSET EVALUATION REPORT
VII. Special Matters Affecting the Evaluation Conclusion
(1) Borrowing, pledge and guarantee
As at the Appraisal Reference Date, the particulars of short-term borrowings are as follows:
Annual Name of Lending Interest Means of Lending No. the Lending Bank Date Rate Guarantee Amount
1 Industrial and Commercial Bank 2015-12-23 4.785% Property pledge 7,000,000.00 of China Limited (Yizheng branch) 2 Industrial and Commercial Bank 2015-12-24 4.785% Property pledge 3,000,000.00 of China Limited (Yizheng branch) 3 Jiangsu Yizheng Rural 2015-04-08 5.885% Property pledge 4,000,000.00 Commercial Bank Co., Ltd. 4 Jiangsu Yizheng Rural 2015-05-11 5.885% Property pledge 2,000,000.00 Commercial Bank Co., Ltd. 5 Jiangsu Yizheng Rural 2015-12-18 5.000% Property pledge 2,000,000.00 Commercial Bank Co., Ltd. 6 Jiangsu Yizheng Rural 2015-12-09 5.000% Property pledge 5,000,000.00 Commercial Bank Co., Ltd.
Pursuant to the Revolving Loan Facility Agreement entered into by ASIMCO Camshaft and Industrial and Commercial Bank of China Limited (Yizheng branch) and the requirements under the Liquidity Revolving Loan Facility Agreement entered into by ASIMCO Camshaft and Jiangsu Yizheng Rural Commercial Bank Co., Ltd., ASIMCO Camshaft provided security and guarantee with its legally-possessed collateral assets, including land use rights and buildings, such as plants.
In March, April and July 2014, ASIMCO Shuanghuan entrusted Standard Chartered Bank (China) Ltd. (Beijing Branch) to release a loan of RMB26,000,000.00 in aggregate to ASIMCO Camshaft in 4 tranches. The term of the loan is 3 years, and the interest rate is fixed at 5% per annum. The borrowing is unsecured and shall be repaid in a lump sum at maturity of the principal. The interest of the borrowing is payable monthly.
ASIMCO Camshaft undertook that there is no other charge, pledge, security or external guarantee and security in addition to the aforementioned.
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(2) Defects in title
The buildings of ASIMCO Camshaft are self-constructed. Other than the warehouse, property ownership certificates have been obtained for all the buildings. ASIMCO Camshaft undertook to confer such part of the property to the company. The evaluation agency is not responsible for the disputes that may arise from such part of asset ownership. The area of such part of assets was reported and measured on site by the company with reference to the relevant blueprints. With respect to the reported area by the company, the valuers conducted evaluation on the area reported by the business upon sampling verification. In the event that actual area given for obtaining the property ownership certificates does not conform to the reported area, the evaluation conclusion shall be adjusted according to the area set up on the property ownership certificate.
(3) Land Use Rights
Pursuant to the agreement entered into by ASIMCO Camshaft and Automobile Industrial Park in 2004, the land grant premium is 1USD per acre. As of the Appraisal Reference Date, the land deed tax of the appraised entity has been paid, and the carrying value is nil.
(4) Reports cited from other agencies
In this evaluation, the book value of each asset and liability as at the Appraisal Reference Date is quoted from the audit report of “PwC Zhong Tian Shen Zi (2016) No. 24736” issued by PricewaterhouseCoopers Zhong Tian LLP, which falls into the category of standard unqualified opinion.
(5) Uncertainties Including Unsettled Matters and Legal Disputes
There are no uncertainties including unsettled matters or legal disputes found in the report.
(6) Descriptions on Other Matters
1. The valuer performs the assets evaluation engagement for the purpose of making estimation on the value of the evaluation subject and expressing professional opinions, and does not assume responsibility towards the decision-making of the respective entrusting parties. The evaluation conclusion shall not be considered as the guarantee on the realized price of the evaluation subject.
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2. The legal duties of the valuer and evaluation agency are to make professional judgment on the value of the assets under the evaluation purpose set out herein, which does not involve any judgment made by the valuer and evaluation agency in respect of the economic behaviors corresponding to such evaluation purpose. The evaluation work, to a great extent, relies on the information provided by the entrusting party and the appraised entity. Therefore, the prerequisite of the evaluation work is that the documents relating to the economic behaviors, titles document and certificates, accounting records relating to the assets and legal documents provided by the entrusting party and the appraised entity are authentic and legal.
3. For the data, tables and the relevant information adopted in the scope of the evaluation provided by the appraised entity, the entrusting party and the appraised entity shall be liable for the authenticity and completeness thereof.
4. The profit estimation of the appraised entity obtained by the evaluation agency is the basis of the income approach in this asset evaluation report. The valuer has conducted necessary investigation, analysis and judgment on the appraised entity. After rounds of discussions with the management of the appraised entity and its major shareholders and the further amendments and refinement to the profit estimation, the evaluation agency was satisfied with the relevant profit estimation data of the appraised entity. The evaluation agency’s adoption of the profit estimation of the business entity shall not be considered as a guarantee on the future profitability of the appraised entity.
5. The relevant documents of title and information contained in this asset evaluation report have been provided by the appraised entity. The entrusting party and the appraised entity shall be liable for the authenticity and legality thereof.
6. The scope of the appraisal is subject to the form of declaration of appraisal provided by the entrusting party and the appraised entity, without consideration of the contingent assets or contingent liabilities, if any, not included in the list as provided by the entrusting party and the appraised entity.
– V-27 – APPENDIX V SUMMARY OF THE ASSET EVALUATION REPORT — 1. SUMMARY OF THE ASSET EVALUATION REPORT
7. During the validity period subsequent to the Appraisal Reference Date, in case of any change in the quantity and evaluation standard of the assets, the following principles shall apply:
(1) In case the quantity of assets changes, the amount of assets shall be adjusted accordingly based on the original evaluation approach;
(2) In case the price standard of assets changes and has an obvious impact on the appraised value of assets, the entrusting party shall engage a qualified evaluation agency to re-determine the appraised value in a timely manner;
(3) For any change in the quantity and price standard of assets after the Appraisal Reference Date, the entrusting party shall take due considerations and make adjustment accordingly during actual evaluation.
The above contents have been extracted from the text of the asset evaluation report. Please read the text of the asset evaluation report for details of this evaluation project and reasonable understanding of the evaluation conclusion.
Evaluation assumptions
The valuer has relied on the following evaluation assumptions in this evaluation:
(1) General assumptions
1. Transaction assumption. The transaction assumption assumes all assets to be valued are in the course of transaction and the evaluation assessed by the appraiser is based on simulated market including terms of transaction of the target assets. The transaction assumption is the most fundamental prerequisite of the appraisal of assets.
2. Open market assumption. The open market assumption assumes that the parties to the assets transaction or the proposed assets transaction in the market are dealing with each other at arm’s length and have opportunities and time to obtain sufficient market information in order to make rational and informed judgment on the assets including their functions, uses and transaction prices. The basis of open market assumption is that the assets can be traded openly in the market.
3. Going-concern assets assumption. The going-concern assets assumption means that the appraisal method, parameters and basis are to be determined in accordance with the condition that the target assets will be used in consistent with their current function, method, scale, frequency and environment, or used on the basis of certain changes.
– V-28 – APPENDIX V SUMMARY OF THE ASSET EVALUATION REPORT — 1. SUMMARY OF THE ASSET EVALUATION REPORT
(2) Special assumptions
1. There will be no unforeseen material adverse changes to the external economic environment including macroeconomic and financial conditions and industry policies subsequent to the Appraisal Reference Date;
2. The social and economic environment where ASIMCO Camshaft operates, as well as the implemented policies in relation to the tax and the tax rate etc. will not be changed materially, and that credit policies, interest rate and exchange rate remain basically stable;
3. The future management of ASIMCO Camshaft is diligent and will maintain the existing management approach;
4. That the existing state of the business structure, revenue and cost structure in the future operation of the ASIMCO Camshaft and the sales strategy and cost control in its future business will continue and will not be changed materially. It does not take into account changes including the change in business structure arising from the changes in management and operational strategies and business environment;
5. It is assumed that ASIMCO Camshaft has sufficient financing ability to service the estimated interests arising from its debt after the Appraisal Reference Date, taking into account the entity’s current technology level and profitability;
6. ASIMCO Camshaft operates in a lawful manner and there will be no unforeseen factors leading to its inability to operate in ongoing concern;
7. That no material contingent liabilities will affect the business of the ASIMCO Camshaft during the forecast period in such a way as to cause substantial increase in operating costs;
8. That the prevailing market value based on continual use and open market does not take in account future possible pledge or guarantee or the effect on appraised value rising from the additional payment based on special deals, nor does it take into account the effect on asset prices arising from changes in macroeconomic policies or acts of god or other force majeure;
9. ASIMCO Camshaft will maintain its existing structure and amount of share capital, and it does not take into account the future effect on ASIMCO Camshaft arising from the changes in the structure of share capital in future;
– V-29 – APPENDIX V SUMMARY OF THE ASSET EVALUATION REPORT — 1. SUMMARY OF THE ASSET EVALUATION REPORT
10. That there will be no material changes in the costs of operation and management of ASIMCO Camshaft, which will maintain the same trend as changes in recent years, and that changes will be in line with the expansion of scale of operation;
11. That the basic information and financial information provided by the entrusting party and the appraised entity is true, accurate and complete;
12. The scope of appraisal is solely based on the form of declaration for appraisal provided by the entrusting party and the appraised entity, without consideration of the contingent assets or contingent liabilities, if any, not included in the list provided by the entrusting party and the appraised entity.
The result of appraisal will generally fail in case of changes in the aforesaid conditions.
4. ASIMCO NVH TECHNOLOGIES CO., LTD. (ANHUI) (“ASIMCO NVH”)
SUMMARY
China United Assets Appraisal Group Company Limited was engaged by Zhengzhou Coal Mining Machinery Group Company Limited to appraise the market value of the total shareholders’ equity of ASIMCO NVH, which is involved in the economic behaviour of the project whereby Zhengzhou Coal Mining Machinery Group Company Limited proposes to purchase the 100% equity interests of ASIMCO NVH held by ASIMCO (China) Limited and ASIMCO TECHNOLOGIES HONG KONG LIMITED by way of share issuance and cash payment, on the Appraisal Reference Date of 31 December 2015 using the asset-based approach and income approach through necessary evaluation procedures in accordance with relevant laws, regulations and asset evaluation standards.
I. Purpose of Evaluation
Zhengzhou Coal Mining Machinery Group Company Limited proposes to purchase the 100% equity interests of ASIMCO NVH held by ASIMCO (China) Limited and ASIMCO TECHNOLOGIES HONG KONG LIMITED by way of share issuance and cash payment.
The purpose of the evaluation is to reflect the market value of the total shareholders’ equity of ASIMCO NVH on the Appraisal Reference Date, so as to provide a value reference for the above economic behavior of Zhengzhou Coal Mining Machinery Group Company Limited.
II. Subject and Scope of Evaluation
(1) Subject of Evaluation
The subject of evaluation is the total shareholders’ equity of ASIMCO NVH.
– V-30 – APPENDIX V SUMMARY OF THE ASSET EVALUATION REPORT — 1. SUMMARY OF THE ASSET EVALUATION REPORT
(2) Scope of Evaluation
The scope of evaluation covers all assets and relevant liabilities of ASIMCO NVH as at the Appraisal Reference Date.
III. Type of Value
Market value
IV. Appraisal Reference Date
31 December 2015
V. Evaluation Approach
The asset-based approach and income approach have been adopted for the evaluation. The income approach has been adopted as a reference for assessing the net asset value of ASIMCO NVH.
1. Asset-based approach
The asset-based approach is based on the judgment of the overall asset value with the amount of investment needed to re-build an enterprise or an independent profit-making entity identical to the evaluation subject on the Appraisal Reference Date. In particular, the enterprise value is arrived at by summing up the appraised values of each component asset forming the enterprise and then deducting the appraised values of its liabilities.
2. Income approach
In accordance with the purpose of this evaluation, coupled with relevant national regulations and “Asset Evaluation Standards – Enterprise Value”, the discounted cash flow (DCF) approach has been adopted to estimate the value of the equity capital of ASIMCO NVH by sources of revenue. The DCF approach is a method of assessing asset value through discounting the enterprise’s future expected net cash flows to the present value. This means the discounting to the present value through evaluation of the assets’ future expected net cash flows and adoption of an appropriate discount rate, in order to derive the appraised value.
VI. Evaluation Conclusion, Reasons and its Validity Period
In this evaluation, the income approach has been adopted as a reference for assessing the net asset value of ASIMCO NVH, from which interests attributable to owners of the company of RMB622.7825 million as at the Appraisal Reference Date is derived.
– V-31 – APPENDIX V SUMMARY OF THE ASSET EVALUATION REPORT — 1. SUMMARY OF THE ASSET EVALUATION REPORT
The value of total shareholders’ equity arrived at using the income approach amounts to RMB622.7825 million, which is 74.81% or RMB266.5241 million higher than the value of total shareholders’ equity of RMB356.2584 million arrived at using the asset-based approach. The difference arising from the use of the two approaches is primarily due to the following:
(1) The evaluation under the asset-based approach uses the replacement costs of assets as the evaluation standards, reflecting the labour of the society required and spent on the investment in the assets (costs of acquisition and construction). Usually this type of costs of acquisition and construction vary according to the changes in the national economy;
(2) The valuation under the income approach uses the projected future income of the assets as the valuation standards, reflecting the degree of the operating capability (profitability) of the assets. Such profitability is usually subject to various conditions, including the macroeconomic conditions, government control and the effective utilization of the assets;
(3) The income approach does not only take into account the effects of book assets on the total shareholders’ equity of the enterprise, but also takes into account the effects of the following factors:
1. Technological advancement
ASIMCO NVH is primarily engaged in the production of rubber-based automotive products, which are required to meet numerous standards, such as high temperature, low temperature and rigidity. In rubber fabrication processes, calibration and handling technology should be used as appropriate to satisfy the strict requirements of high-end customers. These calibration and handling processes represent the core confidential knowhow of the company. Very few suppliers on the market can meet the requirements of high-end customers. Many suppliers are only able to compete in the low-end market.
2. Strengths in manufacturing
ASIMCO NVH is very strong at mould processing and at precisely controlling the production process as to how to better control the change of performance of rubber in the course of processing.
– V-32 – APPENDIX V SUMMARY OF THE ASSET EVALUATION REPORT — 1. SUMMARY OF THE ASSET EVALUATION REPORT
3. Creditworthiness among customers
A braking system is part of the safety system of a vehicle. As such, any defect may cause tremendous damage to customers. Therefore, customers such as Bosch are very quality-demanding in choosing suppliers. Once chosen its suppliers, a customer tends not to change its suppliers as high cost will be involved in redesigning and re-testing products.
The above factors contribute to the difference arising from the use of the two valuation methods.
The evaluation under the asset-based approach uses the replacement costs of assets as the evaluation standards, reflecting the labour of the society required and spent on the investment in the assets (costs of acquisition and construction). Usually this type of costs of acquisition and construction vary according to the changes in the national economy. The income approach not only takes into account the effects of book assets on the value of all shareholders’ equity of an enterprise, but also the effects of those factors which cannot possibly be covered by the asset-based approach on the value of all shareholders’ equity, such as industry competitiveness, corporate governance levels, research and development capability and premium customer resources. According to the industry in which ASIMCO NVH operates and its characteristics of operation, the income approach has generated an objective result which fully reflects the value of all shareholders’ equity of ASIMCO NVH.
The evaluation conclusion revealed in this asset evaluation report shall have a validity for one year commencing from the Appraisal Reference Date of 31 December 2015 and ending on 30 December 2016.
VII. Special Matters Affecting the Evaluation Conclusion
(1) Reports cited from other agencies
In this asset evaluation report, the book value of each asset and liability as at the Appraisal Reference Date is quoted from the audit report issued by PricewaterhouseCoopers Zhong Tian LLP, which falls into the category of standard unqualified opinion.
(2) Mortgages
ASIMCO NVH and Industrial and Commercial Bank of China Limited (Ningguo Branch) entered into the Mortgage Contract with Maximum Amount (No. 13170040-2014 Nian Ning Guo (Di) Zi No. 0052). The guarantee is valid from 28 March 2014 to 28 March 2017, with a maximum security
– V-33 – APPENDIX V SUMMARY OF THE ASSET EVALUATION REPORT — 1. SUMMARY OF THE ASSET EVALUATION REPORT
amount of RMB64,600,000.00(sixty four million six hundred thousand). The collaterals are: (1) land use rights: Ning Guo Yong (2006) Zi No. 696, Ning Guo Yong (2006) Zi No. 700, Ning Guo Yong (2006) Zi No.701; (2) industrial plants: Fang Di Quan Ning Zi No. 12326, Fang Di Quan Ning Zi No. 12329, Fang Di Quan Ning Zi No. 12331.
The above loan was acquired by ASIMCO NVH and Agricultural Bank of China Limited (Xuancheng Zhuangyuan Road Branch). On 13 November 2013, ASIMCO NVH and Agricultural Bank of China Limited (Xuancheng Zhuangyuan Road Branch) entered into the Mortgage Contract with Maximum Amount (Agreement No.: 34100620130004584). ASIMCO NVH provided security and guarantee with the corresponding land use rights under the State-owned Land Use Rights Certificates Ning Guo Yong (2006) Zi Di No. 702, No. 703, No. 695, No. 699 and the buildings under the property ownership certificates No. 12328, No. 12330, No. 12332 and No. 12333. On 5 November 2015, ASIMCO NVH and Agricultural Bank Of China Limited (Xuancheng Zhuangyuan Road Branch) then entered into the Mortgage Contract with Maximum Amount (Agreement No.: 34100720150000189). As the pledgor, ASIMCO NVH provided the banker’s acceptances as security for the debt of Agricultural Bank of China (Xuancheng Branch) with the maximum amount of RMB28.704 million for the period of 5 November 2015 to 7 February 2016.
ASIMCO NVH and Huishang Bank (Ning Guo Branch) entered into the Mortgage Contract with Maximum Amount (Zui Di Zi No. 201511004). The guarantee is valid from 20 August 2015 to 20 August 2018, with a maximum security amount of RMB10 million. The collaterals: Land Use Rights Certificate Ning Guo Yong (2015) Zi No. 442.
(3) Defects in title
ASIMCO NVH has not obtained property ownership certificates for 37 buildings. Assets that fall into the category of buildings are self-constructed and acquired units, which are mainly used for production and storage and as offices. ASIMCO NVH undertook that such part of assets would be conferred to themselves. The evaluation agency is not responsible for the disputes that may arise from such part of asset ownership. The area of such part of assets was reported and measured on site with reference to the relevant blueprints.
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Investment property without certificates – table of property particulars
Year/ Book value Month of Original Net No. Name of the property Source Structure Completion GFA (m2) value value
1 Fitter Warehouse Self-construction Brick-concrete 1996/12 21.00 6,067.46 880.18 Structure 2 Washing Room Self-construction Brick-concrete 1994/08 29.00 8,946.54 894.65 Structure 3 Plant Water Pump House Self-construction Brick-concrete 1996/01 21.00 9,296.82 937.41 Structure 4 Floor Paint Self-construction Brick-concrete 1996/12 32.00 10,888.79 1,579.27 Structure 5 Yard Cottage Self-construction Brick-concrete 1994/12 45.00 15,415.82 1,541.58 Structure 6 Gas Pump Building Self-construction Brick-concrete 1997/05 44.00 12,310.20 2,016.22 Structure 7 Steel Warehouse Self-construction Steel Structure 1998/07 371.70 11,673.00 2,524.73 8 Fine Steel Warehouse Self-construction Mixed Structure 1997/05 48.00 15,651.76 2,563.51 9 Oxygen House Self-construction Brick-concrete 2000/11 42.00 13,910.78 4,448.24 Structure 10 Pumping Station Self-construction Brick-concrete 1989/01 32.00 31,409.08 14,134.10 Structure 11 Washroom (Hardware Self-construction Brick-concrete 1994/12 58.00 31,673.58 3,167.35 Warehouse) Structure 12 Substation Self-construction Mixed Structure 1994/12 39.50 32,446.54 3,244.70 13 New Waste Room, Steel Self-construction Brick-concrete 1998/09 190.73 42,759.80 9,567.41 Warehouse Structure 14 Compounding Room Self-construction Brick-concrete 1994/12 245.00 75,440.59 7,544.06 Structure 15 Warehouse (the original Self-construction Brick-concrete 1994/12 281.00 85,974.02 8,597.40 office) Structure 16 Washroom and others, Self-construction Brick Structure 1996/01 53.80 132,401.40 13,343.75 Steel Warehouse
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Property without certificates – table of property particulars
Year/ Book value Month of GFA/ Original Net No. Name of the property Structure Completion Capacity value value
1 Non-ferrous Metal Warehouse, Steel Structure 2004/05 116.13 5,389.79 1,772.06 Hardware Plant 2 Woodworking Room Mixed Structure 1992/05 97.10 6,192.06 624.10 3 Mold Sandblasting Room Steel Structure 2004/05 49.20 6,281.24 1,900.55 4 Chemical Warehouse Brick Structure 1999/10 60.00 9,800.00 3,846.50 5 Plastic Workshop Warehouse Mixed Structure 1992/10 159.50 12,726.78 1,272.68 6 Steel Warehouse, Mold factory Brick-concrete 1997/04 182.33 15,332.00 2,453.74 structure 7 Dormitory 1 Brick-concrete 1992/10 2,056.00 27,985.52 4,547.43 Structure 8 Bungalow, Living Area Mixed Structure 1992/04 89.67 32,708.91 4,742.58 9 Loading Platform of Elevator Steel Structure 2000/07 123.58 49,591.80 16,861.14 Shaft 10 Dormitory 2 Mixed Structure 1992/10 70.18 61,641.83 13,029.33 11 New Hardware Living Area 57# Mixed Structure 1992/10 979.23 65,802.40 16,475.36 12 Section Room for Plastic Box Mixed Structure 1992/10 256.30 70,595.39 15,373.51 13 Old Hardware Living Area 48-51# Mixed Structure 1992/06 1,398.00 92,048.84 18,053.83 14 Water Pump Room Mixed Structure 1992/05 28.30 198,934.20 26,607.93 15 Garage, New Area Steel Structure 2003/08 440.80 221,319.35 47,030.05 16 Dormitory 9 Mixed Structure 1988/06 1,194.80 350,115.96 35,011.59 17 New Hardware Living Area 59-63# Mixed Structure 1992/08 3,065.00 1,095,676.53 110,322.15 18 Mould Warehouse Mixed Structure 1984/04 205.00 83,149.16 8,314.92 19 Waste Material Compartment Brick Structure 2012/06 345.00 66,500.00 56,026.25 20 Corporate Washroom Mixed Structure 2012/06 82.00 126,070.00 106,213.97 21 Monitoring Room, Sewage Steel Structure 2013/10 12.00 10,250.00 8,866.25 Treatment Station
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As at the Appraisal Reference Date of 31 December 2015, intangible assets that are not recognized include 7 patented inventions and 25 utility model patents. The summary of other intangible assets are as follows:
Type of Date of No. Name of Patent Patent Application Patent No.
1 Assembling Method of the Top Invention Patent 2008/8/15 ZL200810022550.8 Cover of Shock Absorber 2 Method of Riveting Triangular Invention Patent 2009/3/16 ZL200910116359.4 Frame 3 Self-Lubricating Rubber Coating Invention Patent 2010/9/25 ZL201010290070.7 Material and Its Preparation Method 4 Left Suspension Damping Device Invention Patent 2010/11/22 ZL201010553131.4 for Electric Vehicle 5 Suspended Heat Resistant for Invention Patent 2010/9/25 ZL201010290072.6 Engines and Its Preparation Method 6 Bolt Mould for Boosters Utility Model 2015/9/25 ZL201520754754.6 7 Moulds for Piston Shield Utility Model 2009/2/26 ZL200920143109.5 8 Chassis Swing Arm Hydraulic Invention Patent 2014/1/23 ZL201410033348.0 Bushing Device and Chassis Swing Arm System 9 Vibration Absorber for Vehicle Utility Model 2010/8/18 ZL201020504454.X Door 10 Rear Torsion Beam Bushing for Utility Model 2010/8/18 ZL201020504443.1 Saloons 11 Generally Applicable Retractable Utility Model 2011/1/26 ZL201120024467.1 Diameter Clamp Kit 12 Mould for Anti-dust Rings Utility Model 2011/1/26 ZL201120024497.2 13 Punching Device for Joint Seat Utility Model 2011/1/26 ZL201120024483.0 14 Packaging Device Utility Model 2012/3/19 ZL201220104305.3 15 Bushing Forming Mould Utility Model 2012/3/19 ZL201220104250.6 16 Two-piece Blanking Mould Utility Model 2012/3/19 ZL201220104218.8 17 Joint-seat Mould Utility Model 2012/3/19 ZL201220104504.4 18 Spin Riveting Equipment Utility Model 2012/3/19 ZL201220104248.9 19 Dust Cover with Punching Edge Utility Model 2012/10/17 ZL201220531666.6 Structure 20 Piston Dust Cover Mould Utility Model 2014/1/10 ZL201420016181.2 21 Transmission Suspension Utility Model 2014/3/3 ZL201420094497.3 Assembly 22 Double-headed Bolt Sleeve Utility Model 2014/3/3 ZL201420094500.1 23 Dust Cover Mould with Cable Utility Model 2014/5/27 ZL201420275818.X 24 Self-ejector Mould Utility Model 2014/5/27 ZL201420276113.X 25 Self-releasing Hinge Mould Utility Model 2014/5/27 ZL201420275887.0
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Type of Date of No. Name of Patent Patent Application Patent No.
26 Vibration Isolation System for Utility Model 2014/5/27 ZL201420275968.0 Diesel Engine 27 Left Suspension Cushion Invention Patent 2014/3/3 ZL201410075596.1 Assembly for Engine 28 Square Hydraulic Suspension Utility Model 2014/7/23 ZL201420409276.0 Combined Riveting Clamp 29 Supporting Arm and Inner-core Utility Model 2014/7/23 ZL201420409262.9 Press-mounting Assembly Clamp 30 Supporting Arm and Inner Core Utility Model 2014/5/27 ZL201420275999.6 Pressing Suspension 31 Rear Axle Bushing Utility Model 2014/9/18 ZL201420538879.0 32 Transmission Shaft Vibration Utility Model 2014/9/18 ZL201420537884.X Absorber
(4) Subsequent Events
Nil.
(5) Uncertainties Including Unsettled Matters and Legal Disputes
There are no uncertainties including unsettled matters or legal disputes found in the report.
(6) Descriptions on Other Matters
1. The valuer performs the assets evaluation engagement for the purpose of making estimation on the value of the evaluation subject and expressing professional opinions, and does not assume responsibility towards the decision-making of the respective entrusting parties. The evaluation conclusion shall not be considered as the guarantee on the realized price of the evaluation subject.
2. The legal duties of the valuer and evaluation agency are to make professional judgment on the value of the assets under the evaluation purpose set out herein, which does not involve any judgment made by the valuer and evaluation agency in respect of the economic behaviors corresponding to such evaluation purpose. The evaluation work, to a great extent, relies on the information provided by the entrusting party and the appraised entity. Therefore, the prerequisite of the evaluation work is that the documents relating to the economic behaviors, titles document and certificates, accounting records relating to the assets and legal documents provided by the entrusting party and the appraised entity are authentic and legal.
3. For the data, tables and the relevant information adopted in the scope of the evaluation provided by the appraised entity, the
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entrusting party and the appraised entity shall be liable for the authenticity and completeness thereof.
4. The profit estimation obtained by the evaluation agency is the basis of the income approach in this asset evaluation report. The valuer has conducted necessary investigation, analysis and judgment on the profit estimation of the appraised entity. After rounds of discussions with the management of the appraised entity and its major shareholders and the further amendments and refinement to the profit estimation, the evaluation agency was satisfied with the relevant profit estimation data of the appraised entity. The evaluation agency’s adoption of the profit estimation of the business entity shall not be considered as a guarantee on the future profitability of the appraised entity.
5. The relevant documents of title and information contained in this asset evaluation report have been provided by the appraised entity. The entrusting party and the appraised entity shall be liable for the authenticity and legality thereof.
6. The scope of the appraisal is subject to the form of declaration of appraisal provided by the entrusting party and the appraised entity, without consideration of the contingent assets or contingent liabilities, if any, not included in the list as provided by the entrusting party and the appraised entity.
7. During the validity period subsequent to the Appraisal Reference Date, in case of any change in the quantity and evaluation standard of the assets, the following principles shall apply:
(1) In case the quantity of assets changes, the amount of assets shall be adjusted accordingly based on the original evaluation approach;
(2) In case the price standard of assets changes and has an obvious impact on the appraised value of assets, the entrusting party shall engage a qualified evaluation agency to re-determine the appraised value in a timely manner;
(3) For any change in the quantity and price standard of assets after the Appraisal Reference Date, the entrusting party shall take due considerations and make adjustment accordingly during actual evaluation.
The above contents have been extracted from the text of the asset evaluation report. Please read the text of the asset evaluation report for details of this evaluation project and reasonable understanding of the evaluation conclusion.
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Evaluation assumptions
The valuer has relied on the following evaluation assumptions in this evaluation:
(1) General assumptions
1. Transaction assumption. The transaction assumption assumes all assets to be valued are in the course of transaction and the evaluation assessed by the appraiser is based on simulated market including terms of transaction of the target assets. The transaction assumption is the most fundamental prerequisite of the appraisal.
2. Open market assumption. The open market assumption assumes that the parties to the assets transaction or the proposed assets transaction in the market are dealing with each other at arm’s length and have opportunities and time to obtain sufficient market information in order to make rational and informed judgment on the assets including their functions, uses and transaction prices. The basis of open market assumption is that the assets can be traded openly in the market.
3. Going-concern assets assumption. The going-concern assets assumption means that the appraisal method, parameters and basis are to be determined in accordance with the condition that the target assets will be used in consistent with their current function, method, scale, frequency and environment, or used on the basis of certain changes.
(2) Special assumptions
1. There will be no unforeseen material adverse changes to the external economic environment including macroeconomic and financial conditions and industry policies subsequent to the Appraisal Reference Date;
2. ASIMCO NVH obtained its High-Tech Enterprise Certificate on 20 October 2014, with a term of 3 years. It is assumed that ASIMCO NVH may still meet the required standards of hi-tech enterprise and enjoy the preferential tax rate upon the expiry of its High-Tech Enterprise Certificate;
3. The social and economic environment where ASIMCO NVH operates, as well as the implemented policies in relation to the tax and the tax rate etc. will not be changed materially, and that credit policies, interest rate and exchange rate remain basically stable;
4. The future management of ASIMCO NVH is diligent and will maintain the existing management approach;
5. That the existing state of the business structure, revenue and cost structure in the future operation of the ASIMCO NVH and the sales strategy and cost control in its future business will continue and will not
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be changed materially. It does not take into account changes including the change in business structure arising from the changes in management and operational strategies and business environment;
6. It is assumed that ASIMCO NVH has sufficient financing ability to service the estimated interests arising from its debt after the Appraisal Reference Date, taking into account the entity’s current technology level and profitability;
7. ASIMCO NVH operate in a lawful manner and there will be no unforeseen factors leading to its inability to operate in ongoing concern;
8. That no material contingent liabilities will affect the business of the ASIMCO NVH during the forecast period in such a way as to cause substantial increase in operating costs;
9. That the prevailing market value based on continual use and open market does not take in account future possible pledge or guarantee or the effect on appraised value rising from the additional payment based on special deals, nor does it take into account the effect on asset prices arising from changes in macroeconomic policies or acts of god or other force majeure;
10. ASIMCO NVH will maintain its existing structure and amount of share capital, and it does not take into account the future effect on ASIMCO NVH arising from the changes in the structure of share capital in future;
11. That there will be no material changes in the costs of operation and management of ASIMCO NVH, which will maintain the same trend as changes in recent years, and that changes will be in line with the expansion of scale of operation;
12. That the basic information and financial information provided by the entrusting party and the appraised entity is true, accurate and complete;
13. The scope of appraisal is solely based on the form of declaration for appraisal provided by the entrusting party and the appraised entity, without consideration of the contingent assets or contingent liabilities, if any, not included in the list provided by the entrusting party and the appraised entity.
The result of appraisal will generally fail in case of changes in the aforesaid conditions.
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5. CACG LTD. I (“CACG I”)
SUMMARY
China United Assets Appraisal Group Company Limited was engaged by Zhengzhou Coal Mining Machinery Group Company Limited to appraise the market value of the total shareholders’ equity of CACG I, which is involved in the economic behaviour of the project whereby Zhengzhou Coal Mining Machinery Group Company Limited proposes to purchase the equity interests of CACG I held by ASIMCO Technologies Limited by way of cash payment, on the Appraisal Reference Date of 31 December 2015 using the asset-based approach through necessary evaluation procedures in accordance with relevant laws, regulations and asset evaluation standards.
I. Purpose of Evaluation
Zhengzhou Coal Mining Machinery Group Company Limited proposes to purchase the equity interests of CACG I held by ASIMCO Technologies Limited by way of cash payment.
The purpose of the evaluation is to reflect the market value of the total shareholders’ equity of CACG I on the Appraisal Reference Date, so as to provide a value reference for the above economic behaviour of Zhengzhou Coal Mining Machinery Group Company Limited.
II. Subject and Scope of Evaluation
(1) Subject of Evaluation
The subject of evaluation is the total shareholders’ equity of CACG I.
(2) Scope of Evaluation
The scope of evaluation covers all assets and relevant liabilities of CACG I as at the Appraisal Reference Date.
III. Type of Value
Market value
IV. Appraisal Reference Date
31 December 2015
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V. Evaluation Approach
This evaluation has been conducted around the asset-based approach taken by CACG I and has adopted the result of its evaluation as a reference for assessing the net asset value of CACG I. This evaluation has also been conducted around the asset-based approach and income approach taken by ASIMCO Electric Motor and has adopted the result of its evaluation as a reference for assessing the net asset value of ASIMCO Electric Motor.
1. Asset-based approach
The asset-based approach is based on the judgment of the overall asset value with the amount of investment needed to re-build an enterprise or an independent profit-making entity identical to the evaluation subject on the Appraisal Reference Date. In particular, the enterprise value is arrived at by summing up the appraised values of each component asset forming the enterprise and then deducting the appraised values of its liabilities.
2. Income approach
In accordance with the purpose of this evaluation, coupled with relevant national regulations and “Asset Evaluation Standards – Enterprise Value”, the discounted cash flow (DCF) approach has been adopted to estimate the value of the equity capital of ASIMCO Electric Motor by sources of revenue.
The discounted cash flow (DCF) approach is a method of assessing enterprise value through discounting the enterprise’s future expected cash flows to the present value. This means the discounting of the enterprise’s future expected cash flows to the present value through evaluation of its expected cash flows and adoption of an appropriate discount rate, in order to derive the value of the enterprise.
VI. Evaluation Conclusion, Reasons and its Validity Period
(1) CACG I
As at the Appraisal Reference Date of 31 December 2015, the book value of CACG I’s assets is RMB160.5724 million and the appraised value is RMB566.4360 million. The appraised value is RMB405.8636 million higher than the book value with an appreciation rate of 252.76 %. The book value of its liabilities is RMB67.1220 million and the appraised value is RMB67.1220 million, with no appraisal appreciation or depreciation. The book value of its
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net asset is RMB93.4504 million and the appraised value is RMB499.3140 million. The appraised value is RMB405.8636 million higher than the book value with an appreciation rate of 434.31 %. A table is set out below for details:
Consolidation Table of the Asset Evaluation Results Appraisal Reference Date: 31 December 2015
Appraised entity: CACG I
Unit: RMB0’000
Appreciation Appraised or Appreciation Item Book Value Value Depreciation Rate % B C D=C-B E=D/B×100%
1 Current assets 6,712.20 6,712.20 – – 2 Non-current assets 9,345.04 49,931.40 40,586.36 434.31 3 Including: Long-term equity investment 9,345.04 49,931.40 40,586.36 434.31 4 Total assets 16,057.24 56,643.60 40,586.36 252.76 5 Current liabilities 6,712.20 6,712.20 – – 6 Total liabilities 6,712.20 6,712.20 7 Net assets (Owners’ equity) 9,345.04 49,931.40 40,586.36 434.31
Please refer to the evaluation breakdown list for the evaluation conclusion of the asset-based approach.
Since CACG I was established for investment purposes and is not engaged in any actual operations, it can be seen from the past years that the revenue from its main operation is nil and its operating results for future years are engulfed with uncertainties, the income approach is not suitable for this evaluation.
The evaluation conclusion revealed in this asset evaluation report shall have a validity for one year commencing from the Appraisal Reference Date of 31 December 2015 and ending on 30 December 2016.
(2) ASIMCO Electric Motor
In this evaluation, the income approach has been adopted as a reference for assessing the net asset value of ASIMCO Electric Motor, from which interests attributable to owners of the company of RMB979.0471 million as at the Appraisal Reference Date is derived.
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The value of total shareholders’ equity arrived at using the income approach amounts to RMB979.0471 million, which is 244.81% or RMB695.1104 million higher than the value of total shareholders’ equity of RMB283.9367 million arrived at using the asset-based approach. The difference arising from the use of the two approaches is primarily due to the following:
(1) The evaluation under the asset-based approach uses the replacement costs of assets as the evaluation standards, reflecting the labour of the society required and spent on the investment in the assets (costs of acquisition and construction). Usually this type of costs of acquisition and construction vary according to the changes in the national economy;
(2) The valuation under the income approach uses the projected future income of the assets as the valuation standards, reflecting the degree of the operating capability (profitability) of the assets. Such profitability is usually subject to various conditions, including the macroeconomic conditions, government control and the effective utilization of the assets;
(3) The income approach does not only take into account the effects of book assets on the total shareholders’ equity of the enterprise, but also takes into account the effects of the following factors:
1. Strong at technology research
ASIMCO Electric Motor has obtained the certificates for more than ten patents, including Starter with Protection of Limited Time for Starting (Patent No. ZL 201120495283.3), Sealing Equipment with Vertically Installed Starter (Patent No. ZL 201120495285.2) and Circuit Controlled by Power Source Specially for Testing Starters (Patent No. ZL 201120531481.0). ASIMCO Electric Motor has been accredited on a national and provincial level in a number of occasions, including the recognition by specialists of its JFZ-series engines as national key new products in year 2001.
2 Brand recognition and high market share in the PRC
The early establishment of ASIMCO Electric Motor has brought in a large pool of key customers including FAW-Volkswagen Automotive Co., Ltd., Dongfeng Peugeot Citroen Automobile Company Ltd, Guangxi Yuchai Machinery Group Co., Ltd. and Chery Automobile Co., Ltd. and in turn its high reputation.
The above factors contribute to the difference arising from the use of the two valuation methods.
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The evaluation under the asset-based approach uses the replacement costs of assets as the evaluation standards, reflecting the labour of the society required and spent on the investment in the assets (costs of acquisition and construction). Usually this type of costs of acquisition and construction vary according to the changes in the national economy. The income approach not only takes into account the effects of book assets on the value of all shareholders’ equity of an enterprise, but also the effects of those factors which cannot possibly be covered by the asset-based approach on the value of all shareholders’ equity, such as industry competitiveness, corporate governance levels, research and development capability and premium customer resources. The appraised value derived from the income approach demonstrates the value of a company’s intangible assets, such as operating quality, customer relations, sales network, human resources and the management, and better exhibits its growth and profitability, which is in line with the notion of value under the conditions of market economy. Accordingly, the valuer is of the opinion that the income approach has generated an objective result which fully reflects the value of all shareholders’ equity of ASIMCO Electric Motor.
VII. Special Matters Affecting the Evaluation Conclusion
(1) Reports cited from other agencies
In this asset evaluation report, the book value of each asset and liability as at the Appraisal Reference Date is quoted from the audit report of “PwC Zhong Tian Shen Zi (2016) No. 24839” issued by PricewaterhouseCoopers Zhong Tian LLP, which falls into the category of standard unqualified opinion.
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(2) Defects in title
1. Buildings
(1) Apart from a certain portion, the buildings reported by ASIMCO Electric Motor in this evaluation were without property ownership certificates. As at the Appraisal Reference Date, the buildings without property ownership certificates are set out in the following table:
Year/ Certificate Month of No. No. Name of Building Structure Completion Area (m2)
1 Nil Cafeteria Brick-concrete 2008-01-01 729.00 2 Nil Electricity Distribution Brick-concrete 2008-01-01 415.32 Room 3 Nil Lodge Brick-concrete 2008-01-01 25.00 4 Nil Scrap Shed Brick-concrete 2008-01-01 990.00
Sub-total 2,159.32
(2) ASIMCO Electric Motor has obtained the building ownership certificate of “Chang Fang Quan Zi No. 1803434” for purchasing the Changchun Interchange Station. As the building ownership certificate went lost and is in the process of recovery, it is currently unavailable. ASIMCO Electric Motor undertook that the above buildings would be conferred to ASIMCO Electric Motor. ASIMCO Electric Motor will be fully responsible for any disputes arising from building ownership.
2. Vehicles for transportation
The nine vehicles in total of ASIMCO Electric Motor - Fukang auto, Peugeot saloon, FAW light vehicle, Volkswagen Jetta auto, Southwest Isuzu, Xiaojiefang truck, Dongfeng auto, motorcycle with sidecar and motor tricycle – are not in existence and the mid-sized coach (yellow) has been scrapped. No auto licenses are available.
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(3) Book records submitted by the company or status of the intangible assets not recorded
As at the Appraisal Reference Date of 31 December 2015, the intangible asset in the book records was one land use right in total, the book value of which was RMB4,539,576.29. It was situated on Dongfang Avenue, Jingzhou City, Hunan Province, with a registered total area of 80,799.64 m2. The certificate is numbered “Jing Zhou Guo Yong (2007) No. 10610014”. The registered owner is ASIMCO Electric Motor. The land is for industrial use, with its land use right being state-owned land grant in type.
As at the Appraisal Reference Date of 31 December 2015, the off-balance-sheet intangible assets were 13 proprietary technologies. The enterprise expensed the research and development costs of part of the proprietary technologies during that period, and accordingly no research and development costs had been recorded in the books. The use of these proprietary technologies has brought excess revenue to the enterprise, which makes it necessary for them to be included in the appraised enterprise’s assets. Therefore we have incorporated these proprietary technologies into the scope of evaluation. A list of the patents the enterprise has been granted is as follow:
Date of Date of announcing No. Name of Patent Type Application Patent No. (ZL) authorisation Holder of Patent
1 Starter with Protection Utility Model 2011/12/02 ZL 201120495283.3 2012/08/01 ASIMCO Electric of Limited Time for Motor Starting 2 Sealing Equipment with Utility Model 2011/12/02 ZL 201120495285.2 2012/08/01 ASIMCO Electric Vertically Installed Motor Starter 3 Circuit Controlled by Utility Model 2011/12/19 ZL 201120531481.0 2011/08/01 ASIMCO Electric Power Source Motor Specially for Testing Starters 4 Fixing Structure for DC Utility Model 2011/12/02 ZL 201120495294.1 2012/08/08 ASIMCO Electric Power Engine Using Motor Permanent-magnet 5 Breathing Water-proof Utility Model 2011/12/02 ZL 201120495281.4 2012/08/01 ASIMCO Electric Equipment for Motor Electromagnetic Switch Chamber in Starters 6 Rack for Securing Utility Model 2011/12/02 ZL 201120495292.2 2012/08/01 ASIMCO Electric Starters Motor
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Date of Date of announcing No. Name of Patent Type Application Patent No. (ZL) authorisation Holder of Patent
7 Protector with Limited Utility Model 2012/06/18 ZL 201220285916.2 2013/03/20 ASIMCO Electric Timeframe Motor 8 Drills Embedded in Utility Model 2013/08/23 ZL 201320516767.0 2014/03/05 ASIMCO Electric Armature Motor Commutator s for Starters 9 Integral Structure of Utility Model 2013/08/23 ZL 201320516705.X 2014/03/05 ASIMCO Electric Starters for Fixing Motor Screws and Bolts 10 Overall Sealing Utility Model 2014/12/31 ZL 201420862292.5 2015/05/20 ASIMCO Electric Equipment for Motor Electromagnetic Switch Chambers in Starters 11 Sealing Equipment for Utility Model 2014/12/31 ZL 201420862293.X 2015/05/20 ASIMCO Electric Speed Reducers in Motor Starting and Stopping Motors 12 Cold Extrusion Die Utility Model 2014/12/31 ZL 201420862338.3 2015/08/05 ASIMCO Electric Equipment Motor 13 Thin-wall Clamp for Utility Model 2014/12/31 ZL 201420862291.0 2015/09/09 ASIMCO Electric Processing Small Cogs Motor
(4) Uncertainties Including Unsettled Matters and Legal Disputes
There are no uncertainties including unsettled matters or legal disputes found in the report.
(5) Descriptions on Other Matters
1. The profit estimation of ASIMCO Electric Motor obtained by the evaluation agency is the basis of the income approach adopted for long-term equity investment in this asset evaluation report. The valuer has conducted necessary investigation, analysis and judgment on the profit estimation of the appraised entity. After rounds of discussions with the management of the appraised entity and its major shareholders and the further amendments and refinement to the profit estimation, the evaluation agency was satisfied with the relevant profit estimation data of the appraised entity. It shall be brought to the attention of the entrusting party and users of the reports that the evaluation agency’s adoption of the profit estimation of the business entity shall not be considered as a guarantee on the future profitability of the appraised entity.
2. The valuer performs the assets evaluation engagement for the purpose of making estimation on the value of the evaluation
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subject and expressing professional opinions, and does not assume responsibility towards the decision-making of the respective entrusting parties. The evaluation conclusion shall not be considered as the guarantee on the realized price of the evaluation subject.
3. The legal duties of the valuer and evaluation agency are to make professional judgment on the value of the assets under the evaluation purpose set out herein, which does not involve any judgment made by the valuer and evaluation agency in respect of the economic behaviors corresponding to such evaluation purpose. The evaluation work, to a great extent, relies on the information provided by the entrusting party and the appraised entity. Therefore, the prerequisite of the evaluation work is that the documents relating to the economic behaviors, titles document and certificates, accounting records relating to the assets and legal documents provided by the entrusting party and the appraised entity are authentic and legal.
4. For the data, tables and the relevant information adopted in the scope of the evaluation provided by the appraised entity, the entrusting party and the appraised entity shall be liable for the authenticity and completeness thereof.
5. The profit estimation of ASIMCO Electric Motor obtained by the evaluation agency is the basis of the income approach adopted for long-term equity investment in this evaluation report. The valuer has conducted necessary investigation, analysis and judgment on its profit estimation. After rounds of discussions with the appraised entity, the management of ASIMCO Electric Motor and its major shareholders and the further amendments and refinement to the profit estimation, the evaluation agency was satisfied with the relevant profit estimation data. It shall be brought to the attention of the entrusting party and users of the reports that the evaluation agency’s adoption of the profit estimation of the business entity shall not be considered as a guarantee on the future profitability.
6. The relevant documents of title and information contained in the evaluation report have been provided by the appraised entity. The entrusting party and the appraised entity shall be liable for the authenticity and legality thereof.
7. The scope of the appraisal is subject to the form of declaration of appraisal provided by the entrusting party and the appraised entity, without consideration of the contingent assets or contingent liabilities, if any, not included in the list as provided by the entrusting party and the appraised entity.
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8. During the validity period subsequent to the Appraisal Reference Date, in case of any change in the quantity and evaluation standard of the assets, the following principles shall apply:
(1) In case the quantity of assets changes, the amount of assets shall be adjusted accordingly based on the original evaluation approach;
(2) In case the price standard of assets changes and has an obvious impact on the appraised value of assets, the entrusting party shall engage a qualified evaluation agency to re-determine the appraised value in a timely manner;
(3) For any change in the quantity and price standard of assets after the Appraisal Reference Date, the entrusting party shall take due considerations and make adjustment accordingly during actual evaluation.
The above contents have been extracted from the text of the asset evaluation report. Please read the text of the asset evaluation report for details of this evaluation project and reasonable understanding of the evaluation conclusion.
Evaluation assumptions
The valuer has relied on the following evaluation assumptions in this evaluation:
(1) General assumptions
1. Transaction assumption. The transaction assumption assumes all assets to be valued are in the course of transaction and the evaluation assessed by the appraiser is based on simulated market including terms of transaction of the target assets. The transaction assumption is the most fundamental prerequisite of the appraisal of assets.
2. Open market assumption. The open market assumption assumes that the parties to the assets transaction or the proposed assets transaction in the market are dealing with each other at arm’s length and have opportunities and time to obtain sufficient market information in order to make rational and informed judgment on the assets including their functions, uses and transaction prices. The basis of open market assumption is that the assets can be traded openly in the market.
3. Going-concern assets assumption. The going-concern assets assumption means that the appraisal method, parameters and basis are to be determined in accordance with the condition that the target assets will be used in consistent with their current function, method, scale, frequency and environment, or used on the basis of certain changes.
– V-51 – APPENDIX V SUMMARY OF THE ASSET EVALUATION REPORT — 1. SUMMARY OF THE ASSET EVALUATION REPORT
(2) Special assumptions
1. There will be no unforeseen material adverse changes to the external economic environment including macroeconomic and financial conditions and industry policies subsequent to the Appraisal Reference Date;
2. The High-Tech Enterprise Certificate of ASIMCO Electric Motor, a subsidiary, was obtained on 16 December 2013, which was good for three years. It is assumed that ASIMCO Electric Motor may still meet the required standards of hi-tech enterprise and enjoy the preferential tax rate upon the expiry of its High-Tech Enterprise Certificate;
3. The social and economic environment where CACG I operates, as well as the implemented policies in relation to the tax and the tax rate etc. will not be changed materially, and that credit policies, interest rate and exchange rate remain basically stable;
4. The CACG I operate in a lawful manner and there will be no unforeseen factors leading to its inability to operate in ongoing concern;
5. That the prevailing market value based on continual use and open market does not take in account future possible pledge or guarantee or the effect on appraised value rising from the additional payment based on special deals, nor does it take into account the effect on asset prices arising from changes in macroeconomic policies or acts of god or other force majeure;
6. CACG I will maintain its existing structure and amount of share capital, and it does not take into account the future effect on CACG I arising from the changes in the structure of share capital in future;
7. That the basic information and financial information provided by the entrusting party and the appraised entity is true, accurate and complete;
– V-52 – APPENDIX V SUMMARY OF THE ASSET EVALUATION REPORT — 1. SUMMARY OF THE ASSET EVALUATION REPORT
8. The scope of appraisal is solely based on the form of declaration for appraisal provided by the entrusting party and the appraised entity, without consideration of the contingent assets or contingent liabilities, if any, not included in the list provided by the entrusting party and the appraised entity.
The result of appraisal will generally fail in case of changes in the aforesaid conditions.
– V-53 – APPENDIX V SUMMARY OF THE ASSET EVALUATION REPORT — 1. SUMMARY OF THE ASSET EVALUATION REPORT
6. ASIMCO INTERNATIONAL CASTING CO., LTD. (SHANXI) (“ASIMCO SHANXI”)
SUMMARY
China United Assets Appraisal Group Company Limited was engaged by Zhengzhou Coal Mining Machinery Group Company Limited to appraise the market value of the total shareholders’ equity of ASIMCO Shanxi, which is involved in the economic behaviour of the project whereby Zhengzhou Coal Mining Machinery Group Company Limited proposes to purchase the equity interests of ASIMCO Shanxi held by ASIMCO (China) Limited by way of share issuance., on the Appraisal Reference Date of 31 December 2015 using the asset-based approach and income approach through necessary evaluation procedures in accordance with relevant laws, regulations and asset evaluation standards.
I. Purpose of Evaluation
Zhengzhou Coal Mining Machinery Group Company Limited proposes to purchase the 100% equity interests of ASIMCO Shanxi held by ASIMCO (China) Limited by way of share issuance.
The purpose of the evaluation is to reflect the market value of the total shareholders’ equity of ASIMCO Shanxi on the Appraisal Reference Date, so as to provide a value reference for the above economic behaviour of Zhengzhou Coal Mining Machinery Group Company Limited.
II. Subject and Scope of Evaluation
(1) Subject of Evaluation
The subject of evaluation is the total shareholders’ equity of ASIMCO Shanxi.
(2) Scope of Evaluation
The scope of evaluation covers all assets and relevant liabilities of ASIMCO Shanxi as at the Appraisal Reference Date.
III. Type of Value
Market value
IV. Appraisal Reference Date
31 December 2015
– V-54 – APPENDIX V SUMMARY OF THE ASSET EVALUATION REPORT — 1. SUMMARY OF THE ASSET EVALUATION REPORT
V. Evaluation Approach
The asset-based approach and income approach have been adopted for the evaluation. The income approach has been adopted as a reference for assessing the net asset value of ASIMCO Shanxi.
1. Asset-based approach
The asset-based approach is based on the judgment of the overall asset value with the amount of investment needed to re-build an enterprise or an independent profit-making entity identical to the evaluation subject on the Appraisal Reference Date. In particular, the enterprise value is arrived at by summing up the appraised values of each component asset forming the enterprise and then deducting the appraised values of its liabilities.
2. Income approach
In accordance with the purpose of this evaluation, coupled with relevant national regulations and “Asset Evaluation Standards – Enterprise Value”, the discounted cash flow (DCF) approach has been adopted to estimate the value of the equity capital of ASIMCO Shanxi by sources of revenue.
The DCF approach is a method of assessing asset value through discounting the enterprise’s future expected net cash flows to the present value. This means the discounting to the present value through evaluation of the assets’ future expected net cash flows and adoption of an appropriate discount rate, in order to derive the appraised value.
VI. Evaluation Conclusion, Reasons and its Validity Period
In this evaluation, the income approach has been adopted as a reference for assessing the net asset value of ASIMCO Shanxi, from which interests attributable to owners of the company of RMB528.6923 million as at the Appraisal Reference Date is derived.
The value of total shareholders’ equity arrived at using the income approach amounts to RMB528.6923 million, which is 0.75% or RMB3.9596 million higher than the value of total shareholders’ equity of RMB524.7337 million arrived at using the asset-based approach. The difference arising from the use of the two approaches is primarily due to the following:
(1) The evaluation under the asset-based approach uses the replacement costs of assets as the evaluation standards, reflecting the labour of the society required and spent on the investment in the assets (costs of acquisition and construction). Usually this type of costs of acquisition and construction vary according to the changes in the national economy;
– V-55 – APPENDIX V SUMMARY OF THE ASSET EVALUATION REPORT — 1. SUMMARY OF THE ASSET EVALUATION REPORT
(2) The valuation under the income approach uses the projected future income of the assets as the valuation standards, reflecting the degree of the operating capability (profitability) of the assets. Such profitability is usually subject to various conditions, including the macroeconomic conditions, government control and the effective utilization of the assets;
(3) The income approach does not only take into account the effects of book assets on the total shareholders’ equity of the enterprise, but also takes into account the effects of corporate strengths.
The above factors contribute to the difference arising from the use of the two valuation methods.
The evaluation under the asset-based approach uses the replacement costs of assets as the evaluation standards, reflecting the labour of the society required and spent on the investment in the assets (costs of acquisition and construction). Usually this type of costs of acquisition and construction vary according to the changes in the national economy. The income approach not only takes into account the effects of book assets on the value of all shareholders’ equity of an enterprise, but also the effects of those factors which cannot possibly be covered by the asset-based approach on the value of all shareholders’ equity, such as industry competitiveness, corporate governance levels, research and development capability and premium customer resources. According to the industry in which ASIMCO Shanxi operates and its characteristics of operation, the income approach has generated an objective result which fully reflects the value of all shareholders’ equity of ASIMCO Shanxi.
The evaluation conclusion revealed in this asset evaluation report shall have a validity for one year commencing from the Appraisal Reference Date of 31 December 2015 and ending on 30 December 2016.
VII. Special Matters Affecting the Evaluation Conclusion
(1) Reports cited from other agencies
In this asset evaluation report, the book value of each asset and liability as at the Appraisal Reference Date is quoted from the audit report of “PwC Zhong Tian Shen Zi (2016) No. 24809” issued by PricewaterhouseCoopers Zhong Tian LLP, which falls into the category of standard unqualified opinion.
(2) Defects in title
1. Buildings
For buildings that do not have a property ownership certificate, ASIMCO Shanxi undertook that those buildings would be conferred to it. The evaluation agency is not responsible for any disputes arising from property ownership. That part of the assets was reported and
– V-56 – APPENDIX V SUMMARY OF THE ASSET EVALUATION REPORT — 1. SUMMARY OF THE ASSET EVALUATION REPORT
measured on site with reference to the relevant blueprints. Details of buildings lacking a certificate are as follows:
Date of Gross Floor No. Name of Building Completion Building Structure Area (m2)
1 Oil Shed 2013-01-14 Brick-concrete 34.42 2 Staff Lounge and Signs 2013-02-01 Steel structure 671.23 3 Core Bolt Recycling Plant 2013-02-01 Steel structure 431.00 4 Plant Phase II 2013-03-01 Steel structure 14,488.32 5 New Plant 104 2015-10-01 Steel structure 2,585.00 6 Boiler Chamber 2011-11-01 Brick-concrete 80.00 7 Maintenance Centre 2011-03-01 Steel Structure 1,302.00 8 Culture and Recreation Centre 2010-09-01 Steel Structure 1,152.00 9 Bungalow for Newly Manufactured 2002-03-01 Brick-concrete 180.00 Core South Survey 10 Goods Discharge Zone 104 2001-06-01 Brick-concrete 384.00 11 Warehouse 107 2000-05-01 Brick-concrete 304.00 12 Air Compressor Site Plant 2000-12-01 Brick-concrete 904.00 13 Warehouse 207 1998-12-01 Brick-concrete 240.00
– V-57 – APPENDIX V SUMMARY OF THE ASSET EVALUATION REPORT — 1. SUMMARY OF THE ASSET EVALUATION REPORT
Date of Gross Floor No. Name of Building Completion Building Structure Area (m2)
14 Changing Room 1985-12-01 Brick-concrete 9.00 15 Male and female baths 1985-12-01 Brick-concrete 40.00 16 Warehouse 1985-12-01 Brick-concrete 60.00 17 Fitters’ Changing Room 1985-12-01 Brick-concrete 30.00 18 Mould Shed 1985-12-01 Brick-concrete 12.00 19 Baths 1985-12-01 Brick-concrete 28.00 20 Weighing Room 1985-12-01 Brick-concrete 120.00
Total 23,054.97
2. Land Use Rights
(i) The benchmark land of “Guo Yong (2003) No. 126” with a registered area of 268,117.48 m2 has had the land use rights of its part of 42,007.00 m2 transferred to CITIC Machinery Manufacturing Co., Ltd. pursuant to an Agreement entered into with CITIC Machinery Manufacturing Co., Ltd. on 8 March 2006. The transfer fee received of RMB1,993,760.34 has been listed in other payables. The transferred land use rights have yet to go through the procedures of ownership change. This evaluation is based on the remaining actual attributable area of 226,110.48 m2 after the transfer, while the land premium of RMB1,993,760.34 charged to other payables is valued at nil. In addition, this evaluation does not take into account the effects on the evaluation conclusion of the tax expenses which may arise from matters related to this transfer of land use rights.
(ii) Pursuant to the land transfer agreement entered into on 20 March 2004 by Huaxin Development District Branch of the Shanxi Province State-owned Land Resources Bureau (transferrer) and ASIMCO Shanxi (transferee), 3,822.22 m2 of land in the start-up zone of Huaxin Development District shall be transferred to ASIMCO Shanxi. As at the Appraisal Reference Date, the land procurement cost had not been recorded in the books. The residential flats and part of the apartments on the land have been sold. The land area of the apartments currently in the enterprise’s possession which shall be divided is 783.08 m2 according to the enterprise’s information. For the land use rights which shall be included in the scope of evaluation, the appraised entity undertook that the property ownership would be conferred to itself. The evaluation agency is not responsible for any disputes arising from property ownership.
– V-58 – APPENDIX V SUMMARY OF THE ASSET EVALUATION REPORT — 1. SUMMARY OF THE ASSET EVALUATION REPORT
(3) Subsequent Events
Two patents have been authorised, as detailed below:
Date of Date of Announcing Holder of No. Name of patent Type Application Patent No. (ZL) Authorisation Patent
1 A Type of Vent Utility Model 2015/9/6 2015206816189 2016/2/24 ASIMCO Controlled by Gas Shanxi 2 Sulphur Dioxide Utility Model 2015/9/6 2015206816193 2016/2/24 ASIMCO Carburetor Shanxi
(4) Descriptions on Other Matters
1. The valuer performs the assets evaluation engagement for the purpose of making estimation on the value of the evaluation subject and expressing professional opinions, and does not assume responsibility towards the decision-making of the respective entrusting parties. The evaluation conclusion shall not be considered as the guarantee on the realized price of the evaluation subject.
2. The legal duties of the valuer and evaluation agency are to make professional judgment on the value of the assets under the evaluation purpose set out herein, which does not involve any judgment made by the valuer and evaluation agency in respect of the economic behaviors corresponding to such evaluation purpose. The evaluation work, to a great extent, relies on the information provided by the entrusting party and the appraised entity. Therefore, the prerequisite of the evaluation work is that the documents relating to the economic behaviors, titles document and certificates, accounting records relating to the assets and legal documents provided by the entrusting party and the appraised entity are authentic and legal.
3. For the data, tables and the relevant information adopted in the scope of the evaluation provided by the appraised entity, the entrusting party and the appraised entity shall be liable for the authenticity and completeness thereof.
4. The profit estimation of the appraised entity obtained by the evaluation agency is the basis of the income approach in this asset evaluation report. The valuer has conducted necessary investigation, analysis and judgment on the appraised entity. After rounds of discussions with the management of the appraised entity and its major shareholders and the further amendments and refinement to the profit estimation, the evaluation agency was satisfied with the relevant profit
– V-59 – APPENDIX V SUMMARY OF THE ASSET EVALUATION REPORT — 1. SUMMARY OF THE ASSET EVALUATION REPORT
estimation data of the appraised entity. The evaluation agency’s adoption of the profit estimation of the business entity shall not be considered as a guarantee on the future profitability of the appraised entity.
5. The relevant documents of title and information contained in the evaluation report have been provided by the appraised entity. The entrusting party and the appraised entity shall be liable for the authenticity and legality thereof.
6. The scope of the appraisal is subject to the form of declaration of appraisal provided by the entrusting party and the appraised entity, without consideration of the contingent assets or contingent liabilities, if any, not included in the list as provided by the entrusting party and the appraised entity.
7. During the validity period subsequent to the Appraisal Reference Date, in case of any change in the quantity and evaluation standard of the assets, the following principles shall apply:
(1) In case the quantity of assets changes, the amount of assets shall be adjusted accordingly based on the original evaluation approach;
(2) In case the price standard of assets changes and has an obvious impact on the appraised value of assets, the entrusting party shall engage a qualified evaluation agency to re-determine the appraised value in a timely manner;
(3) For any change in the quantity and price standard of assets after the Appraisal Reference Date, the entrusting party shall take due considerations and make adjustment accordingly during actual evaluation.
– V-60 – APPENDIX V SUMMARY OF THE ASSET EVALUATION REPORT — 1. SUMMARY OF THE ASSET EVALUATION REPORT
The above contents have been extracted from the text of the asset evaluation report. Please read the text of the asset evaluation report for details of this evaluation project and reasonable understanding of the evaluation conclusion.
Evaluation assumptions
The valuer has relied on the following evaluation assumptions in this evaluation:
(1) General assumptions
1. Transaction assumption. The transaction assumption assumes all assets to be valued are in the course of transaction and the evaluation assessed by the appraiser is based on simulated market including terms of transaction of the target assets. The transaction assumption is the most fundamental prerequisite of the appraisal of assets.
2. Open market assumption. The open market assumption assumes that the parties to the assets transaction or the proposed assets transaction in the market are dealing with each other at arm’s length and have opportunities and time to obtain sufficient market information in order to make rational and informed judgment on the assets including their functions, uses and transaction prices. The basis of open market assumption is that the assets can be traded openly in the market.
3. Going-concern assets assumption. The going-concern assets assumption means that the appraisal method, parameters and basis are to be determined in accordance with the condition that the target assets will be used in consistent with their current function, method, scale, frequency and environment, or used on the basis of certain changes.
(2) Special assumptions
1. There will be no unforeseen material adverse changes to the external economic environment including macroeconomic and financial conditions and industry policies subsequent to the Appraisal Reference Date;
2. In September 2014, ASIMCO Shanxi was certified as a hi-tech enterprise (Certificate Number: GR201414000139). Pursuant to the Corporate Income Tax Law of the PRC, from 2014 to 2016, ASIMCO Shanxi shall be subject to enterprise income tax at a preferential rate of 15%. It is assumed that ASIMCO Shanxi may still meet the required standards of hi-tech enterprise and enjoy the preferential tax rate upon the expiry of its High-Tech Enterprise Certificate;
– V-61 – APPENDIX V SUMMARY OF THE ASSET EVALUATION REPORT — 1. SUMMARY OF THE ASSET EVALUATION REPORT
3. The social and economic environment where ASIMCO Shanxi operates, as well as the implemented policies in relation to the tax and the tax rate etc. will not be changed materially, and that credit policies, interest rate and exchange rate remain basically stable;
4. The future management of ASIMCO Shanxi is diligent and will maintain the existing management approach;
5. That the existing state of the business structure, revenue and cost structure in the future operation of the ASIMCO Shanxi and the sales strategy and cost control in its future business will continue and will not be changed materially. It does not take into account changes including the change in business structure arising from the changes in management and operational strategies and business environment;
6. The ASIMCO Shanxi operate in a lawful manner and there will be no unforeseen factors leading to its inability to operate in ongoing concern;
7. That no material contingent liabilities will affect the business of the ASIMCO Shanxi during the forecast period in such a way as to cause substantial increase in operating costs;
8. That the prevailing market value based on continual use and open market does not take in account future possible pledge or guarantee or the effect on appraised value rising from the additional payment based on special deals, nor does it take into account the effect on asset prices arising from changes in macroeconomic policies or acts of god or other force majeure;
9. ASIMCO Shanxi will maintain its existing structure and amount of share capital, and it does not take into account the future effect on ASIMCO Shanxi arising from the changes in the structure of share capital in future;
10. That the basic information and financial information provided by the entrusting party and the appraised entity is true, accurate and complete;
11. The scope of appraisal is solely based on the form of declaration for appraisal provided by the entrusting party and the appraised entity, without consideration of the contingent assets or contingent liabilities, if any, not included in the list provided by the entrusting party and the appraised entity.
The result of appraisal will generally fail in case of changes in the aforesaid conditions.
– V-62 – APPENDIX V SUMMARY OF THE ASSET EVALUATION REPORT — 1. SUMMARY OF THE ASSET EVALUATION REPORT
The major quantitative assumptions used for each of the asset evaluation report are as follows:
1. APPROACHES TO DETERMINING FUTURE EXPECTED INCOME GROWTH RATE AND DISCOUNT RATE
(1) Growth Rate
The estimation of future income in this evaluation is essentially a professional judgement made based on the operation history, future market development and other general conditions on the basis of verifying the historical revenue, costs and financial data revealed in the statements of the entity appraised and researching and analysing of the market conditions.
(2) Discount Rate
Discount rate r is determined using the weighted average cost of capital (WACC) model
r=rd x wd + re x we (1)
Where:
Wd: Debt ratio of the entity appraised;
D wd = (2) (E+D) We: Equity capital ratio of the entity appraised;
E we = (3) (E+D) rd: Rate of interest on interest-bearing liabilities after income tax;
re: Cost of equity capital, which is determined using the capital asset pricing model (CAPM);
re=rf+βe× (rm-rf) + ε (4)
Where:
rf: Risk-free rate of return;
rm: Expected return on market;
ε: Risk-adjusted coefficient in respect of the characteristics of the entity appraised;
βe: Expected risk coefficient of equity capital of the entity appraised;
D β β e = u x (1+(1–t)x ) (5) E βu: Unleveraged market risk coefficient of comparable companies.
– V-63 – APPENDIX V SUMMARY OF THE ASSET EVALUATION REPORT — 1. SUMMARY OF THE ASSET EVALUATION REPORT
2. EVALUATION AND ESTIMATION PROCESS OF EACH OF THE TARGET COMPANIES
(1) ASIMCO Camshaft
① Growth Rate Estimation
The principal business of ASIMCO Camshaft is researching, manufacturing and selling camshafts. As one of the 5C parts of an engine, the camshaft opens and closes the intake and exhaust valve. Driven by a crankshaft, a camshaft constantly rotates and compresses the air door with a rocker arm or an ejector rod, so as to control the opening and closing of the intake valve and exhaust valve.
Major products: chilled alloy cast iron, cold shock ball graphite cast iron, high strength nodular cast iron and steel material camshaft, with the technology and capability in the processing of complex camshaft lines; having closely worked with world renowned engine R&D centres, it successfully designed and developed a variety of high-end engine camshaft.
Major customers: Cummins (on a global basis), IVECO (on a global basis), FOTON Cummins, Dongfeng Cummins, SAIC Fiat Hongyan, FAW Wuxi Diesel Engine, Naveco, Hualing Motors, Shanghai Diesel, Weichai etc, and it has become their strategic and major partner in parts and components of camshafts.
A. Sales volume forecast
ASIMCO Camshaft forecasted and formulated a general sales plan for future years based on the production progress and development progress of new vehicles of its automobile manufacturing customers and Ànished product manufacturing customers. The forecast was conducted based on the detailed speciÀcations of every kind of product, and the forecast results so derived were combined according to product categories.
B. Forecast of unit selling price
The camshaft products sold by ASIMCO Camshaft come in many speciÀcations and models. This evaluation has been conducted in accordance with the prudence principle. The unit selling prices of the existing kinds for the forecast period are determined on the basis of a slight decrease every year, while those of new kinds are determined on the basis of their expected costs taking into account factors such as gross proÀt and customer bargaining power.
– V-64 – APPENDIX V SUMMARY OF THE ASSET EVALUATION REPORT — 1. SUMMARY OF THE ASSET EVALUATION REPORT
C. Forecast of revenue
Revenue from main business = Sales volume × Unit price
② Estimation of Discount Rate
A. Risk-free rate of return, or rf, is determined as being approximate the risk-free rate of return of the average level of treasury bonds with maturity of more than 10 years, i.e. rf=4.12%, with reference to the average level of interest rate on medium-term and long-term treasury bonds issued by China in the past 5 years (see table below).
B. Expected return on market, or rm. It is generally considered that the volatility of stock index reÁects the volatility of the market as a whole and that the long-term average yield of index reÁects the average rate of return expected by the market. By estimating the average rate of return of index from 21 May 1992 which represented the commencement date of stock price liberation and open price bidding under Shanghai Composite Index up to 31 December 2015, an approximate value of the rate of return on market is determined as rm=11.53%.
C. βe value is estimated based on the market prices of comparable stocks on the Shanghai and Shenzhen markets during the 150-week period from January 2013 to December 2015, from which the expected unleveraged risk coefficient of the entity appraised is estimated at βu=0.6852. The comparable companies are identiÀed based on the following:
From formula (5) the expected risk coefficient of equity capital of the entity appraised is estimated at βe=0.8202.
D. Cost of equity capital, or re: Risk-adjusted coefficient in respect of the characteristics of the entity appraised is determined as ε=2% for this evaluation, taking into account the risks associated with the intrinsic characteristics arising from the difference between the entity appraised and the comparable companies in terms of Ànancing conditions, liquidity, governance structure and debt-capital position. From formula (4) the cost of equity capital of the entity appraised is determined as re=12.20%.
E. Applicable tax rate: Income tax rate of 25% is applied to ASIMCO Camshaft for this evaluation.
F. From formula (2) and formula (3) the debt ratio and the equity ratio are determined.
– V-65 – APPENDIX V SUMMARY OF THE ASSET EVALUATION REPORT — 1. SUMMARY OF THE ASSET EVALUATION REPORT
G. Discount rate r: by substituting the aforesaid values to formula (1), we have r=10.45%.
(2) ASIMCO Shuanghuan
① Growth Rate Estimation
Products manufactured by ASIMCO Shuanghuan mainly comprise the piston ring applied to the internal combustion engine of commercial vehicles, passenger vehicles, construction machinery. Such products are mainly for the domestic market with limited export sales. The major customers of ASIMCO Shuanghuan include Sinotruk, Cummins, Weichai, Wuxi Diesel etc.
With other conditions being constant, the revenue of piston ring enterprises mainly comes under the inÁuence of downstream industries, such as those of engines and automobiles.
A. Sales Volume Forecast
As the domestic automobile industry has been affected by the slackened growth of the macro economy, the shortfall in market demand has generally curtailed the sales of most automotive parts and components enterprises to lower than expected. ASIMCO Shuanghuan failed to meet expectations due to the inadequate installation of automobile plants, but it managed to win over the recognition of important automobile customers in the development speed and supporting shares of their new products. Those customers include Cummins and SFH, which are foreign-owned diesel engine manufacturers in the international after-sale market. Accordingly, the market share of ASIMCO Shuanghuan has enlarged.
ASIMCO Shuanghuan forecasted and formulated a general sales plan for future years based on the production progress and development progress of new vehicles of its automobile manufacturing customers and Ànished product manufacturing customers. The forecast was conducted based on the detailed speciÀcations of every kind of product, and the forecast results so derived were combined according to product categories.
B. Forecast of Unit Selling Price
The piston ring products sold by ASIMCO Shuanghuan come in many speciÀcations and models, involving hundreds of customers and thousands of speciÀcations and models. This evaluation has been conducted in accordance with the prudence principle. The unit selling prices of the same kind during its life cycle are determined on the basis of a slight decrease every year, while the unit selling prices of new kinds are determined on the basis of their expected costs taking into
– V-66 – APPENDIX V SUMMARY OF THE ASSET EVALUATION REPORT — 1. SUMMARY OF THE ASSET EVALUATION REPORT
account factors such as gross proÀt and customer bargaining power. With the stricter requirements for environment-friendly emission under the change from Phase Four National Vehicle Pollutant Emission Standards to Phase Five National Vehicle Pollutant Emission Standards in future years, ASIMCO Shuanghuan has introduced a series of new products, which will result in a year-on-year increase in its average unit price.
C. Forecast of Revenue
Revenue from main business = Sales volume × Unit price
② Estimation of Discount Rate
A. Risk-free rate of return, or rf. Please refer to “A. Risk-free rate of return, or rf” under “② Estimation of Discount Rate” in the section headed “ASIMCO Camshaft” in this report.
B. Expected return on market, or rm. Please refer to “B. Expected return on market, or rm” under” “② Estimation of Discount Rate” in the section headed “ASIMCO Camshaft” in this report.
C. βe value. Please refer to “βu=0.6852” set out in “C. βe value” under “② Estimation of Discount Rate” in the section headed “ASIMCO Camshaft” in this report. From formula (5) the expected risk coefficient of equity capital of the entity appraised is estimated at βe=0.6852.
D. Cost of equity capital, or re: Risk-adjusted coefficient in respect of the characteristics of the entity appraised is determined as ε=2% for this evaluation, taking into account the risks associated with the intrinsic characteristics arising from the difference between the entity appraised and the comparable companies in terms of Ànancing conditions, liquidity, governance structure and debt-capital position. From formula (4) the cost of equity capital of the entity appraised is determined as re=11.20%.
E. Applicable tax rate: The policy of preferential income tax rate for high-tech enterprises applied to ASIMCO Shuanghuan, pursuant to which the preferential income tax rate of 15% applied for this evaluation.
F. From formula (2) and formula (3) the debt ratio and the equity ratio are determined.
G. Discount rate r: by substituting the aforesaid values to formula (1), we have r=11.20%.
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(3) ASIMCO Foundry
① Growth Rate Estimates
ASIMCO Foundry and ASIMCO Shuanghuan are entities under common control. ASIMCO Foundry was established to sell all the raw components of piston rings manufactured in its initial process to ASIMCO Shuanghuan.
Since ASIMCO Foundry’s products are all sold to ASIMCO Shuanghuan, the forecast of its main business is dependent on the operation of ASIMCO Shuanghuan. The forecast for the future years is based on the revenue growth of ASIMCO Shuanghuan.
② Estimation of Discount Rate
A. Risk-free rate of return, or rf. Please refer to “A. Risk-free rate of return, or rf” under “② Estimation of Discount Rate” in the section headed “ASIMCO Camshaft” in this report.
B. Expected return on market, or rm. Please refer to “B. Expected return on market, or rm” under “② Estimation of Discount Rate” in the section headed “ASIMCO Camshaft” in this report.
C. βe value. Please refer to “βu=0.6852” set out in “C. βe value” under “② Estimation of Discount Rate” in the section headed “ASIMCO Camshaft” in this report. From formula (5) the expected risk coefficient of equity capital of the entity appraised is estimated at βe=0.6852.
D. Cost of equity capital, or re: Risk-adjusted coefficient in respect of the characteristics of the entity appraised is determined as ε=2% for this evaluation, taking into account the risks associated with the intrinsic characteristics arising from the difference between the entity appraised and the comparable companies in terms of Ànancing conditions, liquidity, governance structure and debt-capital position. From formula (4) the cost of equity capital of the entity appraised is determined as re=11.20%.
E. Applicable tax rate: Income tax rate of 25% is applied to ASIMCO Foundry for this evaluation.
F. From formula (2) and formula (3) the debt ratio and the equity ratio are determined.
G. Discount rate r: by substituting the aforesaid values to formula (1), we have r=11.20%.
– V-68 – APPENDIX V SUMMARY OF THE ASSET EVALUATION REPORT — 1. SUMMARY OF THE ASSET EVALUATION REPORT
(4) ASIMCO Shanxi
① Growth Rate Estimation
The main products of ASIMCO International Casting Co., Ltd. (Shanxi) are diesel engine cylinder blocks and heads, crankcase and the foundry products of raw components for others (Áywheel casing and disk and motor base), and the primary products of which are blocks and heads to be mainly used in medium-duty and heavy-duty commercial vehicles and other parts and components of commercial vehicles. Such products are mainly for the domestic market with limited export sales.
A. Sales Volume Forecast
Based on the period of cooperation with customers and the promotional efforts of products in the market, the sales volume for future years is estimated under three scenarios. The forecast conducted by the management of the Company is as follows:
The Àrst type: the forecast of sales volume for future years in respect of the products of long-standing customers who have cooperated with us in recent years without latest plans for new products (existing products of long-standing customers): As of the Appraisal Reference Date, the production of engines of a speciÀc model, which was launched by the relevant host plants, has reached a certain stage. The forecast by ASIMCO International Casting Co., Ltd. (Shanxi) is based on the market adaptability, market acceptance, progress of batch production, technical upgrade and the future sales plan of the host plants in respect of the engines of a speciÀcmodelof host plants. Examples include Dongfeng Cummins, CCEC, Weichai, Linamar Wuxi, Changsha Xi Mai, Komatsu and other long-standing customers;
The second type: the forecast of sales volume for future years in respect of the products of long-standing customers who have cooperated with us in recent years and have plans for new products (new products of long-standing customers): the number of such host plants is forecast in two parts. The Àrst part involves host plants with launched engines of a speciÀc model which have reached a certain stage. The forecast method for this part is same as that for existing products of long-standing customers. The second part involves products which have been developed in recent years, but the production of which will commence in future years. Based on the host plants’ forecast production volume and sales plan for future years, ASIMCO International Casting Co., Ltd. (Shanxi) took into account the host plants’ commencement of newly-developed projects, market acceptance and the achievability of the anticipated production volume in the forecast, such as SFH;
– V-69 – APPENDIX V SUMMARY OF THE ASSET EVALUATION REPORT — 1. SUMMARY OF THE ASSET EVALUATION REPORT
The third type: the forecast of sales volume for future years in respect of the new products of new customers (new products of new customers): On 28 September 2015, ASIMCO International Casting Co., Ltd. (Shanxi) entered into the Initial Procurement Target Agreement of JMC Heavy Duty Vehicle Co., Ltd with JMC Heavy Duty Vehicle Co., Ltd, a new customer. Pursuant to the agreement, ASIMCO International Casting Co., Ltd. (Shanxi) shall provide manufactured tooling samples by February 2016 (provided in February 2016) and commence the production of the qualiÀed samples by October 2017. Based on the production volume forecast of JMC for future years as stated in the agreement, ASIMCO International Casting Co., Ltd. (Shanxi) shall take into account the commencement of newly-developed projects, market acceptance and the achievability of the anticipated production volume in the forecast.
The sales volume forecast by the management of the company has not exceeded the designed capacity of the production line. Thus, the production of the company shall satisfy the sales growth.
As of the Appraisal Reference Date, the company’s production capacity reached 100,000 tons after capacity expansion. On the basis of not exceeding the designed capacity of production line, the production of the company shall satisfy sales growth.
B. Forecast of Unit Selling Price
The selling price of products is subject to the price of major industrial products including pig iron, scrap iron and other materials, customer demand and various aspects including technology advancement, competitive environment and development of the downstream industry.
With the implementation of corporate strategic adjustments, while steadying the new products from long-standing customers, the company will progressively increase the sales of the new products of new customers. Through analyzing the main factors contributing to the changes of the average selling price of various kinds of products, ASIMCO International Casting Co., Ltd. (Shanxi) will rely on the upgrade of new products and on keeping the historical selling price of existing products for achieving price rise. As of the Appraisal Reference Date, the selling price of existing products for future years will remain at the historical level in 2015 in accordance with the actual circumstance of the business. The selling price of new products for future years is determined based on the agreed target price, which is in turn based on the model, quality and complexity of the products.
– V-70 – APPENDIX V SUMMARY OF THE ASSET EVALUATION REPORT — 1. SUMMARY OF THE ASSET EVALUATION REPORT
C. Revenue from Main Business
Revenue from main business=Sales volume x Unit price
② Estimation of Discount Rate
A. Risk-free rate of return, or rf. Please refer to “A. Risk-free rate of return, or rf” under “② Estimation of Discount Rate” in the section headed “ASIMCO Camshaft” in this report.
B. Expected return on market, or rm. Please refer to “B. Expected return on market, or rm” under “② Estimation of Discount Rate” in the section headed “ASIMCO Camshaft” in this report.
C. βe value. Please refer to “βu=0.6852” set out in “C. βe value” under “② Estimation of Discount Rate” in the section headed “ASIMCO Camshaft” in this report. From formula (5) the expected risk coefficient of equity capital of the entity appraised is estimated at βe=0.6852;
D. Cost of equity capital, or re: Risk-adjusted coefficient in respect of the characteristics of the entity appraised is determined as ε=2% for this evaluation, taking into account the risks associated with the intrinsic characteristics arising from the difference between the entity appraised and the comparable companies in terms of Ànancing conditions, liquidity, governance structure and debt-capital position. From formula (4) the cost of equity capital of the entity appraised is determined as re=11.20%.
E. Applicable tax rate: The policy of preferential income tax rate for high-tech enterprises applied to ASIMCO Shanxi, pursuant to which the preferential income tax rate of 15% applied for this evaluation.
F. From formula (2) and formula (3) the debt ratio and the equity ratio are determined.
G. Discount rate r: by substituting the aforesaid values to formula (1), we have r=11.20%.
– V-71 – APPENDIX V SUMMARY OF THE ASSET EVALUATION REPORT — 1. SUMMARY OF THE ASSET EVALUATION REPORT
(5) ASIMCO NVH
① Growth Rate Estimation
The main products of ASIMCO NVH Technologies Co., Ltd. (Anhui) mainly include various rubber products for use in automobiles and for industrial use, which are mainly used in commercial vehicles and passenger vehicles. Currently, the market can be divided into two markets: domestic and international. The strengths in management, technology and products of the enterprise will enable it to maintain its industry-leading position. Success in the research, manufacturing and trial operation of certain new products will create favourable conditions for the increase in revenue from its main business.
A. Sales Volume Forecast
ASIMCO NVH forecasted and formulated a general sales plan for future years based on the production progress and development progress of new vehicles of its automobile manufacturing customers and Ànished product manufacturing customers. The forecast was conducted based on the detailed speciÀcations of every kind of product, and the forecast results so derived were added up to constitute a combined forecast.
B. Forecast of Product Selling Price
There is a rich diversity of speciÀcations and models of rubber products being sold by ASIMCO NVH and rubber products for industrial use, involving dozens of customers and thousands of speciÀcations. The selling price varies greatly among different models and the unit price ranges from a few dollars to a few-ten dollars. The arithmetic mean price (total sales amount/ total number of units sold) calculated based on the product types and different customers may not be an accurate indicator of the trend in the actual price movements of all models of products. Based on the aforesaid reasons, the unit price was not shown based on the arithmetic mean price of different models or different customers.
In forecasting the unit price of products in this proÀt forecast, the combined effect of the current unit selling price, unit price variation and bargaining power of customers was fully taken into consideration. The unit price of the existing products showed a decreasing trend at a certain rate annually during the forecast period. The main reasons for the increase in the unit price of suspended type and miscellaneous type products for future years are as follows:
Currently, the development of suspended type products in the market has come to its 3rd generation – T-type suspension. The 1st and
– V-72 – APPENDIX V SUMMARY OF THE ASSET EVALUATION REPORT — 1. SUMMARY OF THE ASSET EVALUATION REPORT
2nd generations were gum suspension and hydraulic suspension, respectively. As the 3rd generation, it has better overall performance and higher added value. As a result, there is an increasing trend in the average unit price in the forecast for future years. The increasing trend in the average unit price of miscellaneous type products was due to optimisation of product structure.
C. Revenue from Main Business
Revenue from main business = Sales volume × Unit price
② Estimation of Discount Rate
A. Risk-free rate of return, or rf. Please refer to “A. Risk-free rate of return, or rf” under “② Estimation of Discount Rate” in the section headed “ASIMCO Camshaft” in this report.
B. Expected return on market, or rm. Please refer to “B. Expected return on market, or rm” under “② Estimation of Discount Rate” in the section headed “ASIMCO Camshaft” in this report.
C. βe value. Please refer to “βu=0.6852” set out in “C. βe value” under “② Estimation of Discount Rate” in the section headed “ASIMCO Camshaft” in this report.
D. Cost of equity capital, or re: Risk-adjusted coefficient in respect of the characteristics of the entity appraised is determined as ε=2% for this evaluation, taking into account the risks associated with the intrinsic characteristics arising from the difference between the entity appraised and the comparable companies in terms of Ànancing conditions, liquidity, governance structure and debt-capital position. From formula (4) the cost of equity capital of the entity appraised is determined as re=11.79%.
E. Applicable tax rate: The policy of preferential income tax rate for high-tech enterprises applied to ASIMCO NVH but did not apply to its subsidiaries, pursuant to which the consolidated tax rate of 13.56% applied for this evaluation.
F. From formula (2) and formula (3) the debt ratio and the equity ratio are determined.
G. Discount rate r: by substituting the aforesaid values to formula (1), we have r=10.88%.
– V-73 – APPENDIX V SUMMARY OF THE ASSET EVALUATION REPORT — 1. SUMMARY OF THE ASSET EVALUATION REPORT
(6) ASIMCO Electric Motor
① Growth Rate Estimation
The main products of Hubei Super-Elec Auto Electric Motor Co. Ltd. include various motors, generators and starting and stopping motors for automobiles, which are mainly used in commercial vehicles and passenger vehicles. Such products are mainly for the domestic market with limited export sales.
A. Sales Volume Forecast
ASIMCO Electric Motor forecasted and formulated a general sales plan for future years based on the production progress and development progress of new vehicles of its automobile manufacturing customers and Ànished product manufacturing customers. The forecast was conducted based on the detailed speciÀcations of every kind of product, and the forecast results so derived were added up to constitute a combined forecast. The detailed forecast is as follows:
Direct-driven motor: Due to a decline in every historical year and the shrinking market, the enterprise decided to cease the production of this product in 2016. As such, no future forecast was conducted.
High-power decelerator motor: The decline in every historical year was mainly attributable to the impact of decrease in sales volume of commercial vehicles, which in turn was due to a decrease in sales volume of its major customer, Yuchai. In 2016, the enterprise entered into a supply agreement with Yunnei Power in relation to the supply of 120,000 units of motors. The number of orders from Lovol and Chaochai also show an increasing trend. As such, it is expected that there will be a signiÀcant increase in the sales volume in 2016 and a certain level of increase will be maintained in 2017 and beyond.
Generator: The decline in every historical year was mainly attributable to the impact of decrease in sales volume of commercial vehicles. In 2016, the overall sales volume will stay stable, and the current share remains unchanged in the forecast.
Motor for passenger vehicles: The increase was mainly derived from major automobile manufacturers such as SAIC Volkswagen, FAW-Volkswagen and Dongfeng Peugeot Citroen. The share for every year was relatively stable. This forecast took into consideration the growth rate of passenger vehicles.
– V-74 – APPENDIX V SUMMARY OF THE ASSET EVALUATION REPORT — 1. SUMMARY OF THE ASSET EVALUATION REPORT
Starting and stopping motor: This kind of product is an energy-efficient and environment-friendly product. There are limited competitors in the domestic market. This project has completed development and small batch production, and passed the test of German Volkswagen. As an alternative to motor for passenger vehicles, this kind of product possesses huge market potential in the future. As the entering into of framework agreements with SAIC Volkswagen, FAW-Volkswagen and Dongfeng Peugeot Citroen, it is expected that mass production will commence in 2016 with signiÀcant growth in the future, and in 2020, it will enter into a stable stage.
Components: They serve as spare parts of the aforesaid products, and thus there exists a certain proportional relation between the production volume of components and of the aforesaid Ànished products. The forecast for future years was conducted based on the proportion in 2015.
B. Forecast of Product Selling Price
In forecasting the unit price of products in this proÀt forecast, ASIMCO Electric Motor has fully taken into consideration the combined effect of the current unit selling price, unit price variation and bargaining power of its customers. The unit price of the existing products showed a decreasing trend at a certain rate annually during the forecast period, but the Áuctuation was relatively small. Certain degree of decrease was taken into account in the forecast for future years based on the historical data.
C. Revenue from Main Business
Revenue from main business = Sales volume × Unit price
② Estimation of Discount Rate
A. Risk-free rate of return, or rf. Please refer to “A. Risk-free rate of return, or rf” under “② Estimation of Discount Rate” in the section headed “ASIMCO Camshaft” in this report.
B. Expected return on market, or rm. Please refer to “B. Expected return on market, or rm” under “② Estimation of Discount Rate” in the section headed “ASIMCO Camshaft” in this report.
C. βe value. Please refer to “βu=0.6852” set out in “C. βe value” under “② Estimation of Discount Rate” in the section headed “ASIMCO Camshaft” in this report.
– V-75 – APPENDIX V SUMMARY OF THE ASSET EVALUATION REPORT — 1. SUMMARY OF THE ASSET EVALUATION REPORT
D. Cost of equity capital, or re: Risk-adjusted coefficient in respect of the characteristics of the entity appraised is determined as ε=2% for this evaluation, taking into account the risks associated with the intrinsic characteristics arising from the difference between the entity appraised and the comparable companies in terms of Ànancing conditions, liquidity, governance structure and debt-capital position. From formula (4) the cost of equity capital of the entity appraised is determined as re=11.20%.
E. Applicable tax rate: The policy of preferential income tax rate for high-tech enterprises applied to ASIMCO Electric Motor but did not apply to its subsidiaries, pursuant to which the consolidated tax rate of 15% applied for this evaluation.
F. From formula (2) and formula (3) the debt ratio and the equity ratio are determined.
G. Discount rate r: by substituting the aforesaid values to formula (1), we have r=11.20%.
– V-76 – APPENDIX V SUMMARY OF THE ASSET EVALUATION REPORT — 1. SUMMARY OF THE ASSET EVALUATION REPORT
Assuming other variables remain unchanged, the effect of changes in the revenue and discount rate of ASIMCO Camshaft, ASIMCO Shuanghuan, ASIMCO Foundry, ASIMCO Shanxi, ASIMCO NVH and ASIMCO Electric Motor on the appraised value of ASIMCO Camshaft, ASIMCO Shuanghuan, ASIMCO Foundry, ASIMCO Shanxi, ASIMCO NVH and CACG I is estimated and analyzed as follows:
1. Effect of changes in revenue on evaluation result
ASIMCO Shuanghuan % Change in revenue from –3% –2% –1% 0% 1% 2% 3% main business Appraised value 63,072.87 66,110.53 69,148.20 72,185.87 75,223.53 78,261.20 81,298.87 % Change in appraised –12.62% –8.42% –4.21% 0.00% 4.21% 8.42% 12.62% value Sensitivity coefficient 4.21 4.21 4.21 4.21 4.21 4.21
ASIMCO Camshaft % Change in revenue from –3% –2% –1% 0% 1% 2% 3% main business Appraised value 15,769.12 16,730.56 17,693.26 18,657.07 19,621.86 20,587.52 21,553.96 % Change in appraised –15.48% –10.33% –5.17% 0.00% 5.17% 10.35% 15.53% value Sensitivity coefficient 5.16 5.16 5.17 5.17 5.17 5.18
ASIMCO Shanxi % Change in revenue from –3% –2% –1% 0% 1% 2% 3% main business Appraised value 36,274.67 41,806.22 47,337.78 52,869.33 58,400.89 63,932.44 69,464.00 % Change in appraised –31.39% –20.93% –10.46% 0.00% 10.46% 20.93% 31.39% value Sensitivity coefficient 10.46 10.46 10.46 10.46 10.46 10.46
ASIMCO Foundry % Change in revenue from –3% –2% –1% 0% 1% 2% 3% main business Appraised value –300.32 126.09 552.51 978.92 1,405.33 1,831.74 2,258.16 % Change in appraised –130.68% –87.12% –43.56% 0.00% 43.56% 87.12% 130.68% value Sensitivity coefficient 43.56 43.56 43.56 43.56 43.56 43.56
ASIMCO NVH % Change in revenue from –3% –2% –1% 0% 1% 2% 3% main business Appraised value 42,182.33 48,863.94 55,564.34 62,278.25 69,002.21 75,733.82 82,471.40 % Change in appraised –32.27% –21.54% –10.78% 0.00% 10.80% 21.61% 32.42% value Sensitivity coefficient 10.76 10.77 10.78 10.80 10.80 10.81
CACG I % Change in revenue from –3% –2% –1% 0% 1% 2% 3% main business Appraised value 39,159.33 42,563.97 46,247.69 49,931.40 53,615.12 57,577.90 60,982.54 % Change in appraised –21.57% –14.76% –7.38% 0.00% 7.38% 15.31% 22.13% value Sensitivity coefficient 7.19 7.38 7.38 7.38 7.66 7.38
– V-77 – APPENDIX V SUMMARY OF THE ASSET EVALUATION REPORT — 1. SUMMARY OF THE ASSET EVALUATION REPORT
2. Effect of changes in discount rate on evaluation result
ASIMCO Shuanghuan % change in discount rate –3% –2% –1% 0% 1% 2% 3% discount rate 10.86% 10.97% 11.09% 11.20% 11.31% 11.42% 11.53% appraised value 74,142.14 73,476.67 72,824.71 72,185.87 71,559.75 70,945.97 70,344.18 % change in appraised 2.71% 1.79% 0.88% 0.00% –0.87% –1.72% –2.55% value sensitivity coefficient –0.90 –0.89 –0.88 –0.87 –0.86 –0.85
ASIMCO Camshaft % change in discount rate –3% –2% –1% 0% 1% 2% 3% discount rate 10.16% 10.26% 10.35% 10.45% 10.55% 10.64% 10.74% appraised value 19,509.65 19,219.31 18,935.18 18,657.07 18,384.79 18,118.17 17,857.05 % change in appraised 4.57% 3.01% 1.49% 0.00% –1.46% –2.89% –4.29% value sensitivity coefficient –1.52 –1.51 –1.49 –1.46 –1.44 –1.43
ASIMCO Shanxi % change in discount rate –3% –2% –1% 0% 1% 2% 3% discount rate 10.86% 10.97% 11.09% 11.20% 11.31% 11.42% 11.53% appraised value 54,518.12 53,957.05 53,407.57 52,869.33 52,342.00 51,825.26 51,318.79 % change in appraised 3.12% 2.06% 1.02% 0.00% –1.00% –1.97% –2.93% value sensitivity coefficient –1.04 –1.03 –1.02 –1.00 –0.99 –0.98
ASIMCO Foundry % change in discount rate –3% –2% –1% 0% 1% 2% 3% discount rate 10.86% 10.97% 11.09% 11.20% 11.31% 11.42% 11.53% appraised value 987.36 984.48 981.67 978.92 976.23 973.60 971.03 % change in appraised 0.86% 0.57% 0.28% 0.00% –0.27% –0.54% –0.81% value sensitivity coefficient –0.29 –0.28 –0.28 –0.27 –0.27 –0.27
ASIMCO NVH % change in discount rate –3% –2% –1% 0% 1% 2% 3% discount rate 10.56% 10.67% 10.77% 10.88% 10.98% 11.08% 11.19% appraised value 65,145.91 64,169.41 63,213.73 62,278.25 61,362.36 60,465.47 59,587.04 % change in appraised 4.60% 3.04% 1.50% 0.00% –1.47% –2.91% –4.32% value sensitivity coefficient –1.53 –1.52 –1.50 –1.47 –1.46 –1.44
CACG I % change in discount rate –3% –2% –1% 0% 1% 2% 3% discount rate 10.86% 10.97% 11.09% 11.20% 11.31% 11.42% 11.53% appraised value 51,598.96 51,031.57 50,475.84 49,931.40 49,397.93 48,875.10 48,362.60 % change in appraised 3.34% 2.20% 1.09% 0.00% –1.07% –2.12% –3.14% value sensitivity coefficient –1.11 –1.10 –1.09 –1.07 –1.06 –1.05
– V-78 – APPENDIX V SUMMARY OF THE ASSET EVALUATION REPORT — 2. LETTER FROM THE BOARD
LETTER FROM THE BOARD OF ZHENGZHOU COAL MINING MACHINERY GROUP COMPANY LIMITED
28 April 2016
The Stock Exchange of Hong Kong Limited 11th Floor, One International Finance Centre 1 Harbour View Street Central, Hong Kong
Dear Sirs or Madams,
VERY SUBSTANTIAL ACQUISITION OF ZHENGZHOU COAL MINING MACHINERY GROUP COMPANY LIMITED (THE “COMPANY”)
The Board of Zhengzhou Coal Mining Machinery Group Company Limited confirms that the following estimated value of the equity interests of the Target Companies to be acquired, which is based on the income approach, is determined after the due and careful enquiries of the Board:
According to the Asset Evaluation Report issued on 13 April 2016 prepared by China United Assets Appraisal Group Company Limited, the estimated value of the total equity interests of the Target Companies to be acquired as of 31 December 2015, based on the income approach, amounted to RMB2,229,951,762.
On behalf of the Board Zhengzhou Coal Mining Machinery Group Company Limited Zhang Haibin Secretary to the Board
Executive Directors:
Mr. JIAO Chengyao, Mr. XIANG Jiayu, Mr. WANG Xinying, Mr. GUO Haofeng and Mr. LIU Qiang
Independent non-executive Directors:
Ms. LIU Yao, Mr. JIANG Hua, Mr. LI Xudong and Mr. WU Guangming
– V-79 – APPENDIX V SUMMARY OF THE ASSET EVALUATION REPORT — 3. LETTER FROM PRICEWATERHOUSECOOPERS
The following is the text of a report received from PricewaterhouseCoopers, Certified Public Accountants, Hong Kong, pursuant to Listing Rule 14.62.
INDEPENDENT REPORTING ACCOUNTANT’S ASSURANCE REPORT ON THE CALCULATION OF DISCOUNTED FUTURE ESTIMATED CASH FLOWS IN CONNECTION WITH THE BUSINESS VALUATION OF THE TARGET COMPANIES
TO THE BOARD OF DIRECTORS OF ZHENGZHOU COAL MINING MACHINERY GROUP COMPANY LIMITED
We have completed our assurance engagement to report on the calculations of the discounted future estimated cash flows on which the business valuations (the “Valuations”) dated 13 April 2016 prepared by China United Assets Appraisal Group Company Limited in respect of the appraisal of the fair value of the 100% equity interests in CACG Ltd. I, the 63% equity interests in ASIMCO Camshaft (Yizheng) Co., Ltd., the 63% equity interests in ASIMCO Shuanghuan Piston Ring (Yizheng) Co., Ltd., the 100% equity interests in ASIMCO NVH Technologies Co., Ltd., the 100% equity interests in ASIMCO International Casting (Shanxi) Co., Ltd. and the 70% equity interests in ASIMCO Foundry (Yizheng) Co., Ltd. (collectively referred as to the “Target Companies”), respectively are based. The bases and principal assumptions adopted for the Valuations are set out on pages 2 to 4 of the announcement of Zhengzhou Coal Mining Machinery Group Company Limited (the “Company”) dated 28 April 2016 (the “Announcement”) in connection with the acquisition by the Company of equity interests in the Target Companies. The Valuations based on the discounted future estimated cash flows are regarded as a profit forecast under Rule 14.61 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”).
Directors’ Responsibility for the Discounted Future Estimated Cash Flows
The directors of the Company are responsible for the preparation of the discounted future estimated cash flows in accordance with the bases and assumptions determined by the directors and as set out on pages 2 to 4 of the Announcement. This responsibility includes carrying out appropriate procedures relevant to the preparation of the discounted future estimated cash flows for the Valuations and applying an appropriate basis of preparation; and making estimates that are reasonable in the circumstances.
Our Independence and Quality Control
We have complied with the independence and other ethical requirement of the Code of Ethics for Professional Accountants issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”), which is founded on fundamental principles of integrity, objectivity, professional competence and due care, confidentiality and professional behaviour.
– V-80 – APPENDIX V SUMMARY OF THE ASSET EVALUATION REPORT — 3. LETTER FROM PRICEWATERHOUSECOOPERS
Our firm applies Hong Kong Standard on Quality Control 1 issued by the HKICPA and accordingly maintains a comprehensive system of quality control including documented policies and procedures regarding compliance with ethical requirements, professional standards and applicable legal and regulatory requirements.
Reporting Accountant’s Responsibilities
It is our responsibility to report, as required by paragraph 14.62(2) of the Listing Rules, on the calculations of the discounted future estimated cash flows on which the Valuations are based. We are not reporting on the appropriateness and validity of the bases and assumptions on which the discounted future estimated cash flows are based and our work does not constitute any valuation of the Target Companies.
We conducted our work in accordance with the Hong Kong Standard on Assurance Engagements 3000 (Revised) “Assurance Engagements Other Than Audits or Reviews of Historical Financial Information” issued by the HKICPA. This standard requires that we plan and perform the assurance engagement to obtain reasonable assurance on whether the discounted future estimated cash flows, so far as the calculations are concerned, has been properly compiled in accordance with the bases and assumptions as set out on pages 2 to 4 of the Announcement. We reviewed the arithmetical calculations and the compilation of the discounted future estimated cash flows in accordance with the bases and assumptions.
The discounted cash flows do not involve the adoption of accounting policies. The discounted cash flows depend on future events and on a number of assumptions which cannot be confirmed and verified in the same way as past results and not all of which may remain valid throughout the period. Our work has been undertaken for the purpose of reporting solely to you under paragraph 14.62(2) of the Listing Rules and for no other purpose. We accept no responsibility to any other person in respect of our work, or arising out of or in connection with our work.
Opinion
In our opinion, based on the foregoing, so far as the calculations are concerned, the discounted future estimated cash flows, has been properly compiled in all material respects in accordance with the bases and assumptions made by directors of the Company as set out on pages 2 to 4 of the Announcement.
PricewaterhouseCoopers Certified Public Accountants Hong Kong, 28 April 2016
– V-81 – APPENDIX VI GENERAL INFORMATION
1. RESPONSIBILITY STATEMENT
This circular, for which the Directors of the Company collectively and individually accept full responsibility, includes particulars given in compliance with the Hong Kong Listing Rules for the purpose of giving information with regard to the Company. The Directors, having made all reasonable enquiries, confirm that to the best of their knowledge and belief the information contained in this circular is accurate and complete in all material respects and not misleading or deceptive, opinions expressed in this circular have been arrived at after due and careful consideration and there are no other matters the omission of which would make any statement in this circular misleading.
Further, the Directors jointly and severally accept full responsibility for the accuracy of information contained in this circular and confirm, having made all reasonable enquiries, that to the best of their knowledge, opinions expressed in this circular have been arrived at after due and careful consideration, and there are no other facts not contained in this circular, the omission of which would make any statement in this circular misleading.
2. SHARE CAPITAL
As at the Latest Practicable Date, the total share capital of the Company was, and immediately following the completion of the Acquisition will be, as follows:
Latest Practicable Date After Acquisition
Total share capital: RMB1,621.122 million RMB2,045.908482 million divided into 1,621.122 divided into 2,045.908482 million Shares of RMB1.00 million Shares of RMB1.00 each each
The Company did not conduct any fundraising on issue of any equity securities in the 12 months immediately preceding the date of this circular.
The Company intends to continue to meet and it expects to meet the public float requirement under Rule 8.08 of the Listing Rules after the completion of the Acquisition.
All the Shares in issue (including the Consideration Shares) rank pari passu in all respects with each other including as regards to dividends, voting rights and return of capital.
– VI-1 – APPENDIX VI GENERAL INFORMATION
There had been no reorganisation of capital of the Company during the two financial years preceding the date of this circular. Since 31 December 2015, the date to which the latest audited consolidated accounts of the Company were made up, and up to the Latest Practicable Date, there had not been any share buy-backs; during the 12 months preceding the date of this circular and up to the Latest Practicable Date, the Company had not bought back any Shares; and during the two years preceding the date of this circular and up to the Latest Practicable Date, the Company had not bought back any Shares.
As at the Latest Practicable Date, the Company does not have any options, warrants and securities convertible or exchangeable into the Shares.
3. DISCLOSURE OF DIRECTORS’ INTERESTS
To the best knowledge of the Directors, as at the Latest Practicable Date, the Directors, the Supervisors and chief executives of the Company had interests or short positions in the shares, underlying shares or debentures of the Company or any of its associated corporations (as defined in the Securities and Futures Ordinance (the “SFO”) of Hong Kong) which were required to be notified to the Company and the Stock Exchange pursuant to the provisions of Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which they are taken or deemed to have under relevant provisions of the SFO); or were required, pursuant to section 352 of the SFO, to be recorded in the register referred to therein (including interests and short positions which they are taken or deemed to have under relevant provisions of the SFO); or were required to be notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Companies under the Listing Rules of the Stock Exchange as follows:
Approximate percentage Approximate of the percentage Director/ relevant of the total Long position/ Supervisor/ Capacity/ Nature Class of Number of class of number of Short position/ Name Chief executive of interest shares shares shares % shares % Lending pool
Jiao Chengyao Director Beneficial owner A Share 2,901,964 0.21 0.18 Long position
Xiang Jiayu Director Beneficial owner A Share 1,895,120 0.14 0.12 Long position
Wang Xinying Director Beneficial owner A Share 1,895,040 0.14 0.12 Long position
Guo Haofeng Director Beneficial owner A Share 2,226,720 0.16 0.14 Long position
Liu Qiang Director Beneficial owner A Share 11,500 0.00 0.00 Long position
Zhang Zhiqiang Supervisor Beneficial owner A Share 600 0.00 0.00 Long position
– VI-2 – APPENDIX VI GENERAL INFORMATION
Approximate percentage Approximate of the percentage Director/ relevant of the total Long position/ Supervisor/ Capacity/ Nature Class of Number of class of number of Short position/ Name Chief executive of interest shares shares shares % shares % Lending pool
Ni Heping Supervisor Beneficial owner A Share 2,217,200 0.16 0.14 Long position
Xu Mingkai Supervisor Beneficial owner A Share 16,000 0.00 0.00 Long position
Zhou Rong Supervisor Beneficial owner A Share 40,000 0.00 0.00 Long position
Liu Fuying Supervisor Beneficial owner A Share 599,060 0.04 0.04 Long position
Fu Zugang Chief Executive Beneficial owner A Share 2,526,720 0.18 0.16 Long position Interest of spouse A Share 239,840 0.02 0.02 Long position
Gao Youjin Chief Executive Beneficial owner A Share 2,380,000 0.17 0.15 Long position
Zhang Minglin Chief Executive Beneficial owner A Share 1,895,040 0.14 0.12 Long position
Wang Yongqiang Chief Executive Beneficial owner A Share 54,500 0.00 0.00 Long position
Guo Desheng Chief Executive Beneficial owner A Share 2,012,500 0.15 0.12 Long position
Save as disclosed above, as at the Latest Practicable Date, none of the Directors, the Supervisors or chief executives of the Company had any interest or short position in the shares, underlying shares or debentures of the Company or any of its associated corporations (as defined in the SFO of Hong Kong) which were required to be notified to the Company and the Stock Exchange pursuant to the provisions of Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which they are deemed to have); or which were required, pursuant to Section 352 of the SFO, to be recorded in the register referred to therein; or which were required to be notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Companies under the Listing Rules of the Stock Exchange.
– VI-3 – APPENDIX VI GENERAL INFORMATION
4. DISCLOSURE OF SUBSTANTIAL SHAREHOLDERS’ INTERESTS
As at the Latest Practicable Date, so far as the Directors were aware, the following shareholders (other than the Directors, Supervisors or chief executives) had interests or short positions in any shares and the underlying shares of the Company which were required to be notified to the Company pursuant to the provisions of Divisions 2 and 3 of Part XV of the SFO, or which were required, pursuant to section 336 of the SFO, to be recorded in the register kept by the Company:
Approximate Approximate percentage percentage of the of the relevant total Long position/ Capacity/ Class of Number class of number of Short position/ Name Nature of interest shares of shares shares % shares % Lending pool
State-owned Assets Supervision Beneficial owner A Share 521,087,800 37.82 32.14 Long position and Administration Commission of Henan Provincial People’s Government
Henan Machinery Investment Beneficial owner A Share 521,087,800 37.82 32.14 Long position Group Co., Ltd.
National Council for Social Beneficial owner H Share 23,709,400 9.75 1.46 Long position Security Fund
CITIC Securities Company Interest of controlled H Share 22,402,600 9.21 1.38 Long position Limited(1) corporation
CITIC Securities International Interest of controlled H Share 22,402,600 9.21 1.38 Long position Company Limited(1) corporation
CSI Capital Management Beneficial owner H Share 22,402,600 9.21 1.38 Long position Limited(1)
Note:
(1) CSI Capital Management Limited directly held 22,402,600 shares in the H Shares of the Company. CSI Capital Management Limited was a wholly-owned subsidiary of CITIC Securities International Company Limited, which was wholly-owned by CITIC Securities Company Limited. By virtue of the SFO, CITIC Securities International Company Limited and CITIC Securities Company Limited were deemed to own 22,402,600 shares in the H Shares of the Company which were in the same block directly held by CSI Capital Management Limited.
Save as disclosed above and so far as the Directors, Supervisors and senior management of the Company were aware, as at the Latest Practicable Date, no substantial shareholder of the Company or other person held any interest or short position in the
– VI-4 – APPENDIX VI GENERAL INFORMATION
Shares or underlying Shares (as the case may be) which was required to be disclosed to the Company and the Stock Exchange under the provisions of Divisions 2 and 3 Part XV of the SFO, or was directly or indirectly interested in ten percent or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of the Company.
5. DIVIDENDS
The frequency and amount of dividends that have been proposed or paid out by the Company to the Shareholders during the three-year period immediately preceding the Latest Practicable Date are as follows:
2015 2014 2013 (RMB) (RMB) (RMB)
Interim dividend per Share for the six months ended 30 June – – – Final dividend per Share for the year ended 31 December 0.008 0.038 0.165
The Company’s ability to pay dividends to Shareholders depends on a number of factors including the financial position of the Group, investment opportunities available to the Group and the general market conditions. The Company will strike a balance between preserving cash for the Group for its operational and investment needs and distributing dividends to Shareholders. The Company has no plan or intention to alter its present dividend policy.
6. DIRECTORS’ SERVICE CONTRACTS
As at the Latest Practicable Date, none of the Directors had any existing or proposed service contracts with the Company or any of its subsidiaries or associated companies in force which (i) including both continuous and fixed term contracts, had been entered into or amended within 6 months before the date of this circular; (ii) were continuous contracts with a notice period of 12 months or more; or (iii) were not determinable by the Group within one year without payment of compensation (other than statutory compensation).
7. COMPETING INTEREST
As at the Latest Practicable Date, so far as the Directors were aware, none of the Directors or their respective associates had any interest in a business which competed or was likely to compete with the business of the Company.
– VI-5 – APPENDIX VI GENERAL INFORMATION
8. INTEREST IN ASSETS AND/OR CONTRACTS AND OTHER INTERESTS
As at the Latest Practicable Date, none of the Directors had any direct or indirect interest in any asset which had been, since 31 December 2015, being the date to which the latest published audited accounts of the Company were made up, acquired or disposed of by or leased to, or were proposed to be acquired or disposed of by or leased to, the Company or any member of the Group.
As at the Latest Practicable Date, none of the Directors was materially interested in any contract or arrangement which was significant in relation to the business of the Group.
9. MATERIAL CHANGE
The Directors confirm that there was no material change in the financial or trading position or outlook of the Group subsequent to 31 December 2015, being the date to which the latest published audited accounts of the Company were made up, and up to the Latest Practicable Date.
10. STATEMENT OF INDEBTEDNESS
As at the close of business on 31 March 2016, being the latest practicable date for the purpose of this indebtedness statement prior to the printing of this circular, the Group and the Target Companies had the following indebtedness:
The Target Enlarged The Group Companies Group 31 March 31 March 31 March 2016 2016 2016 RMB’000 RMB’000 RMB’000
Amounts due to a non-controlling shareholder of a subsidiary of the Company — unsecured and unguaranteed 101,937 – 101,937 Short-term bank loans — secured and unguaranteed – 96,338 96,338
101,937 96,338 198,275
As at 31 March 2016, short-term bank loans of RMB96,338,000 of the Target Companies were secured by pledges on the Target Group’s property, plant and equipment with carrying amount of RMB37,406,000, prepaid lease payments with carrying amount of RMB11,749,000, bill receivables with carrying amount of RMB26,681,000 and trade receivables with carrying amount of RMB7,221,000.
– VI-6 – APPENDIX VI GENERAL INFORMATION
In addition, as at 31 March 2016, the Group endorsed and derecognised certain bills receivables for the settlement of trade and other payables with full recourse, which were issued and guaranteed by reputable banks in the PRC. The maximum exposure to the Group that may result from the default of these endorsed and derecognised bills receivable as at 31 March 2016 is approximately RMB315.9 million.
Save as aforesaid and apart from intra-group liabilities and normal trade payables, as at 31 March 2016, the Group and the Target Companies did not have any material loan capital issued and outstanding or authorised or otherwise created but unissued, bank overdrafts, loans or other similar indebtedness, liabilities under acceptance or acceptable credits, debentures, mortgages, charges, hire purchases commitments, guarantees or other material contingent liabilities.
The directors of the Company confirm that, there has not been any material change in the indebtedness and contingent liabilities of the Group and the Target Group since 31 March 2016 and up to the date of this circular.
11. WORKING CAPITAL SUFFICIENCY
The Directors are of the opinion that, after taking into account of the Enlarged Group’s internal resources, cash flow from operations, the present facilities available, the settlement of the consideration payable in cash, the Enlarged Group will have sufficient working capital to satisfy its present requirements, that is, for at least the next twelve months from the date of this circular in the absence of unforeseen circumstances.
12. THE RESULTS ANNOUNCEMENTS
The Company published its annual results announcement for the year 2015 on 4 March 2016.
13. THE FINANCIAL AND TRADING PROSPECTS OF THE ENLARGED GROUP
With the structural adjustment in both the global economy as well as the industry, coupling with the expedited pace of transformation and upgrading of China’s economy, merger, acquisition and reorganization are expected to flourish in various industries including the coal mining machinery industry in the near future. Capitalizing on the domestic and overseas platform of investment and financing, the Company may consolidate high-quality resources in the global coal mining machinery industry, actively probe into potential opportunities in other industries, explore a second line of principal business through merger and acquisition, and bring forth new revenue streams and sources of profit growth.
Looking at the trend of macroeconomic development, coal will remain a key source of energy in the PRC in the long term. Policies related to the state’s initiatives on supply-side reform for coal mining encourage and support the transformation of coal mining machinery operations into becoming more automated and machine-intensive, promote the use of key technology in green and smart mines, and in turn enhance the
– VI-7 – APPENDIX VI GENERAL INFORMATION production level of advanced equipment for large-scale coal mining activities. Meanwhile, a peak period of machine replacements is expected in the coal mining machinery industry under the “Golden Decade for Coal”. This will present a new round of opportunities of driving demand for high-end and smart comprehensive coal mining equipment and the upgrading of technology for coal mining.
The Company is an industry leader in the sector of hydraulic roof supports for comprehensive coal mining. However, amidst the prevailing excessive capacity in the coal mining machinery industry, the Company needs to adjust the structure of its principal businesses to identify additional and stable driver for profit growth.
The products to be covered under the Acquisition of the Target Companies include auto parts and components products including camshafts, piston rings, cylinder blocks and covers, starter motors etc. The production processes involved is largely similar to those applicable to our existing products. Those principal businesses largely match the working experience and academic background of the management of the Company. The auto parts industry has very promising prospects, as the auto parts industry stands more sturdy against cyclical fluctuations than the coal mining machinery industry and boasts more stable operating conditions. The Acquisition will contribute to the more enhanced business structure of the Company in future, uplift its profitability and provide new driver for profit growth.
14. NO QUALIFICATIONS IN THE AUDITORS’ REPORT
There has been no qualifications contained in the auditors’ report in respect of the Company for each of the last three financial years.
15. QUALIFICATIONS AND CONSENTS OF EXPERTS
The following sets out the qualifications of the experts (as defined under the Listing Rules and/or the Takeovers Code) which have given their opinion or advice as contained in this circular:
NAME Qualification
Central China a licensed corporation with the right to engage in type International Capital 1 (dealing in securities) and type 6 (advising on Limited corporate finance) regulated activities as defined by the SFO, as well as an Independent Financial Adviser who is appointed to advise the Independent Board Committee and the Independent Shareholders on the potential connected transactions
China United Assets PRC certified public valuer Appraisal Group Company Limited
– VI-8 – APPENDIX VI GENERAL INFORMATION
NAME Qualification
Deloitte Touche Tohmatsu certified public accountants
Zhong Lun Law Firm legal advisers as to PRC law
PricewaterhouseCoopers certified public accountants
The above experts have given and have not withdrawn their written consents to the issue of this circular with the inclusion of their letters and/or references to their name in the form and context in which they are included.
As at the Latest Practicable Date, none of the above experts had any beneficial interests in any members of the Enlarged Group (including any company to become a subsidiary of the Company by virtue of the agreed or proposed acquisitions since 31 December 2015, the date to which the Company’s latest published audited accounts were made up) or any rights (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any members of the Enlarged Group (including any company to become a subsidiary of the Company by virtue of the agreed or proposed acquisitions since 31 December 2015, the date to which the Company’s latest published audited accounts were made up).
As at the Latest Practicable Date, none of the above experts had any interest in any assets which had been acquired or disposed of by or leased to any members of the Group since 31 December 2015, the date to which the latest published audited accounts of the Company were made up, or which were proposed to be acquired or disposed of by or leased to any members of the Enlarged Group (including any company to become a subsidiary of the Company by virtue of the agreed or proposed acquisitions since 31 December 2015, the date to which the Company’s latest published audited accounts were made up).
16. LITIGATION
As at the Latest Practicable Date, neither the Company, any of its subsidiaries nor any of the Target Companies was engaged in any litigation or arbitration of material importance and no litigation or claim of material importance was known to the Directors to be pending or threatened by or against the Company, any of its subsidiaries or any of the Target Companies.
17. MATERIAL CONTRACTS
The following contracts (not being contracts entered into in the ordinary course of business) have been entered into by the Enlarged Group after the date of two years preceding the date of this circular and up to and including the date of issue of this circular and which are or may be material:
(a) Equity Transfer Agreement; and
(b) Supplemental Agreement to Equity Transfer Agreement.
18. GENERAL
(a) The registered office of the Company is at No. 167, 9th Street, Econ-Tech Development Zone, Zhengzhou, Henan Province, the PRC.
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(b) The principal place of business in Hong Kong of the Company is situated at 18/F, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong.
(c) As at the Latest Practicable Date, the Directors comprise Mr. Jiao Chengyao, Mr. Xiang Jiayu, Mr. Wang Xinying, Mr. Guo Haofeng, Mr. Liu Qiang, Ms. Liu Yao, Mr. Jiang Hua, Mr. Li Xudong, Mr. Wu Guangming.
(d) The correspondence address of the Independent Financial Adviser is Unit 1504, 15th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong.
(e) The Hong Kong branch share registrar and transfer office of the Company (for H Shares) is Computershare Hong Kong Investor Services Limited at Shops 1712–1716, 17th Floor, Hopewell Centre, 183 Queen’s Road East, Hong Kong.
(f) The secretary of the Company is Mr. Zhang Haibin. Mr. Zhang graduated from China University of Mining and Technology and obtained a bachelor’s degree in law in July 2005.
(g) In the event of any inconsistency, the English language text of this circular shall prevail over the Chinese language text.
(h) Save as disclosed herein, none of the Directors was materially interested, directly or indirectly, in any contract or arrangement entered into by any member of the Group subsisting as at the Latest Practicable Date and which was significant in relation to the business of the Group.
19. SHAREHOLDINGS AND DEALINGS IN SECURITIES OF THE COMPANY
(a) Save as disclosed above, no Director held any Shares or any convertible securities, warrants, options or derivatives which confer any right to subscribe for, convert or exchange into Shares as at the Latest Practicable Date.
(b) As at the Latest Practicable Date, neither any subsidiary of the Company, any pension fund of the Group, any professional adviser named under this Appendix nor any adviser to the Company as specified in class (2) of the definition of an associate under the Takeovers Code (but excluding exempt principal traders) had any shareholdings in the Company.
(c) As at the Latest Practicable Date, no shareholding in the Company was managed on a discretionary basis by fund managers (other than exempt fund managers) connected with the Company.
(d) Mr. WANG Xinying, Mr. GUO Haofeng and Mr. LIU Qiang, all being directors of the Company, are materially interested in the Transaction by virtue of their possible participation in the employee stock ownership plan and have abstained from voting on the Acquisition and the issue of Placing Shares.
– VI-10 – APPENDIX VI GENERAL INFORMATION
(e) As at the Latest Practicable Date, the Company, the Directors, Supervisors, Chief Executives and any persons acting in concert with them had not borrowed or lent out any of their Shares or any other relevant securities in the Company (as defined in Note 4 to Rule 22 of the Takeovers Code).
(f) There were no dealings for value in the Shares or securities of the Company by the Directors of the Company or any parties acting in concert with them during the six months prior to the date of this circular, and ending on the Latest Practicable Date.
(g) Neither any subsidiary of the Company, any pension fund of the Group, any professional adviser named in this Appendix, any adviser to the Company as specified in class (2) of the definition of an associate under the Takeovers Code (excluding exempt principal traders), nor any fund manager (other than exempt fund managers) connected with the Company is interested in any shareholding in the Company as at the Latest Practicable Date.
20. DOCUMENTS AVAILABLE FOR INSPECTION
Copies of the following documents will be available for inspection (i) at the office of Clifford Chance at 27th Floor, Jardine House, One Connaught Place, Hong Kong during normal business hours on any weekday, except public holidays, and (ii) on the Company’s website (www.zzmj.com) from the date of this circular up to and including 13 June 2016, being the date of the 2015 AGM and 2016 first H Shareholders Class Meeting:
(a) the Articles of Association;
(b) the contracts referred to in the paragraph headed “material contracts” of this Appendix;
(c) the letter from the Board, the text of which is set out on pages 9 to 68 of this circular;
(d) the letter from the Independent Board Committee, the text of which is set out on page 69 of this circular;
(e) the letter from the Independent Financial Adviser, the text of which is set out on pages 70 to 92 of this circular;
(f) the accountants report(s) of Target Companies, the text of which is set out in Appendix III in this circular;
(g) the Unaudited Pro Forma Financial Information of the Enlarged Group, the text of which is set out in Appendix IV to this circular;
(h) the summary of the Asset Evaluation Report of the Target Companies, the text of which is set out in Appendix V to this circular;
– VI-11 – APPENDIX VI GENERAL INFORMATION
(i) the written consents of the experts mentioned in the section headed “Qualifications and Consents of Experts” in this appendix;
(j) the annual reports of the Company for the years ended 31 December 2013, 31 December 2014 and 31 December 2015 respectively;
(k) this circular.
In addition, in compliance with the Hong Kong Listing Rules, copies of the following documents will be available for inspection at the office of Clifford Chance at 27th Floor, Jardine House, One Connaught Place, Hong Kong during normal business hours, on any weekday, except public holidays, from the date of this circular up to and including 13 June 2016, being the date of the AGM and 2016 first H Shareholders Class Meeting:
(aa) Equity Transfer Agreement
(bb) Supplemental Agreement to Equity Transfer Agreement
– VI-12 –