Chongqing Changan Automobile Company Limited 2004 Annual Report
I. Important notes and contents:
The Board of Directors of Chongqing Changan Automobile Co., Ltd. (hereinafter referred to as “the Company”) and the directors guarantee that the information contained in the annual report are free of false records, misguiding statements or significant omissions, and assume individual and joint liabilities for the truthfulness, accuracy and integrity of the annual report.
No director has raised any disagreement with regard to the truthfulness, accuracy and completeness of the report.
Directors Mr. Li Shouwu, Mr Xu Liuping and Mr. Ma jun were absent; independent director Mr Xia Donglin were absent. Directors Mr. Li Shouwu entrusted directors Mr. Yin Jiayu, directors Mr Xu Liuping entrusted directors Deng Tengjiang, independent director Mr. Xia Donglin entrusted Mr. Wen zhong yu to attend and vote on their behalf, respectively.
Chairman Mr. Yin Jiaxu, General Manager Mr. Zhao Luchuan and Chief Accountant Mr. Cui Yunjiang guarantee the truthfulness and completeness of the financial statements of the annual report.
Content I. Important notes and contents 2
II. General Introduction to the Company 4
III. Extracts of Accounting and Operating Data 6
IV. Changes in Shares and Information about Shareholders 7
V. Information about Directors, Supervisors, Senior Management and Employees 11
VI. Corporate Governance Structure 19
VII. Shareholders’ general meeting 22
VIII. Report by Board of Directors 24
IX. Report by Board of Supervisors 36
X. Important Issues 41
XI. Financial Reports 42
XII. Documents for Inspection 86 II. General Introduction of the Company
1. The Company’s legal Chinese name: 重庆长安汽车股份有限公司 The Company’s legal English name: Chongqing Changan Automobile Company Limited
2. Legal representative of the Company: Mr. Yin Jiaxu
3. Secretaries of the Board: Mr. Cui Yunjiang, Ms. Li Jun Address: No. 260, Jian Xin East Road, Jiang Bei District, Chongqing Telephone: (023) 67591349 Fax: (023) 67866055 Email address: [email protected]
4. Registered address: No. 260, Jian Xin East Road, Jiang Bei District, Chongqing Post code: 400023 Office Address: No. 260, Jian Xin East Road, Jiang Bei District, Chongqing Post code: 400023 Internet Website of the Company: http://www.changan.com.cn Email Address of the Company: [email protected]
5. Publications for information disclosure of the Company: China Securities, Securities Daily and Hong Kong Business Website for information disclosure of the Company: http://www.cninfo.com.cn Annual Report preparation: Office of the Board of Directors
6. Place of listing: Shenzhen Stock Exchange Abbreviated name of the stock: Changan Automobile Changan B Stock Code: 000625 200625
7. The Company was first registered on: October 31, 1996 Registered Address: No. 309, Nan Cheng Road, Nan An District, Chongqing Date of change in registration: September 27, 2004 Registered Address: No. 260, Jian Xin East Road, Jiang Bei District, Chongqing Business license number: Yu Zi 5000001805570 Taxation registration number: State Taxation Chong Zi 51021120286320X, Di Shui Zi 500112736570882 The name and address of the accounting firm for the reporting year: Domestic CPA firm: PricewaterhouseCoopers Zhongtian CPA Address: 11th Floor PricewaterhouseCoopers Center 202 Hu Bin Road Shanghai, 200021, PRC International CPA firm: PricewaterhouseCoopers Zhongtian CPA Address: 11th Floor PricewaterhouseCoopers Center 202 Hu Bin Road Shanghai, 200021, PRC III. Extracts of Accounting and Operating Data
1. The Company’s accounting data for the current year (RMB thousand): Profit before tax 1,468,239 Net profit 1,197,215 Profit from major business lines 3,920,501 Other operating income 132,198 Operating profit 1,439,903 Net cash in-flow from operating activities 1,452,499 Net increase in cash and cash equivalents 1,356,433
2. Reconciliation of the net profits presented under the PRC accounting standards and International Financial Reporting Standards (“IFRS”) (RMB thousand) Net assets Net profit As reported under PRC accounting standards: 6,977,455 1,317,300 Adjustment under IFRS 1. Staff bonus and welfare fund of Changan Suzuki appropriated from profit after tax - (9,690) 2. Reversal of revaluation surpluses from long-term assets relating to revaluation made in 1995 (15,456) 8,735 3. Deferred tax assets 90,553 (5,231) 4. Government grants relating to purchase of assets (251,392) (73,049) 5. Tax credit arising from purchase of domestically manufactured machinery and equipment (41,660) (41,660) 6. Others - 810 As restated in conformity with IFRS: 6,759,500 1,197,215
3. Key accounting data and financial indicators of the recent three years 2004 2003 2002 Sales (RMB ’000) 18,526,610 14,358,768 9,884,068 Net profit (RMB ’000) 1,197,215 1,435,616 865,146 Total assets (RMB ’000) 14,848,265 10,984,325 8,775,246 Shareholders’ equity (RMB ’000) 6,759,500 4,810,372 3,472,889 Earnings per share (yuan/share) 0.84 1.17 0.71 Net assets per share (yuan/share) 4.17 3.92 2.83 Adjusted net assets per share(yuan/share) 4.15 3.74 2.79 Net cash flow from operating activities per share(yuan/share) 0.90 1.31 1.70 Return on net assets (%) 17.71 29.84 24.91
Note: The Earnings per share, Net assets per share, Adjusted net assets per share, and Net cash flow from operating activities per share in 2004 are based upon the share capital of 1,620,489.2 thousand shares subsequent to the bonus shares issuance of 2003 and the additional “A” share issue in 2004. The aforementioned figures per share in 2003 and 2002 are based upon the original share capital of 1,226,666 thousand shares. IV. Changes in Shareholdings and Information on Shareholders
1. Changes in shareholdings (Unit: share): Balance before Additional “A” Balance after current change Bonus shares Share Issue change I.Non-circulated shares 1. Promoter shares 708,666,000 141,733,200 - 850,399,200 Including: State-owned legal person shares --- - Domestic legal person shares 708,666,000 141,733,200 - 850,399,200 Foreign legal person shares - - - - Others - - - - 2. Legal entity shares raised - - - - 3. Employee shares 21,000 4,200 1,566 26,766 4. Preference shares and others - - Sub-total of non-circulated shares 708,687,000 141,737,400 1,566 850,425,966 II. Circulated shares 1. Domestic listed RMB shares 167,979,000 35,595,800 148,848,434 350,423,234 2. Domestic listed foreign shares 350,000,000 70,000,000 - 420,000,000 3. Overseas listed foreign shares - - - - 4. Others - - - - Subtotal circulated shares 517,979,000 103,595,800 148,848,434 770,423,234 III. Total shares 1,226,666,000 245,333,200 148,850,000 1,620,849,200 Note: Employee shares refer to shares held by the Directors and Supervisors.
2. Issue and Listing of Shares
(1) Share issue in the three years up to the year of the report:
As approved by China Securities Regulatory Commission (Document No. [2004]131), the Company issued an
additional 148,850,000 common shares of RMB 1 each at RMB 7.39 per share. The listing date of the additional
shares is 26 September 2004.
(2) In the year ended 31 December 2004, the Company issued bonus shares on the basis of 2 shares for each 10
shares according to the profit distribution plan regarding 2003, thereby increasing the Company’s total share
capital to 1,471,999,200 shares. In August 2004, the Company issued an additional 148,850,000 common stocks,
thereby increasing the Company’s total share capital to 1,620,849,200 shares. Please refer to the table of changes
in shareholdings for detailed information.
3. Information on the shareholders
(1) At the end of the reporting period, the shareholders of the Company totaled 54,268, of which 39,118 were A share
shareholders and 15,150 were B share shareholders.
(2) The largest ten share holders: Increase/ Shares held at % of total Pledged/ Shareholde Name of shareholders Decrease in the Share type the year-end shares Frozen shares rs year 1.CHANGAN AUTOMOBILE Non- State- GROUP COMPANY (“CAC”) 141,733,200 850,399,200 52.47 circulated 354,333,000 owned 2. BOSHI VALUE ADDED A share SECURITIES INVESTMENT share- FUND 7,606,576 15,228,959 0.94 circulated unknown holder 3. HTHK-VALUE PARTNERS 'A' FD Unknown 14,427,910 0.89 circulated Unknown Foreign 4. KGI ASIA LIMITED 7,436,366 10,105,018 0.62 circulated Unknown Foreign 5. BBH BOSTON A/C GMO EMERGING MARKETS FUND -2,339,479 9,589,461 0.59 circulated Unknown Foreign 6. HTHK-BOBL/MANNUL IFE GLOBAL FUND-CHINA VALUE Unknown 9,279,902 0.57 circulated Unknown Foreign 7. CHINA-RELATED STOCKS MOTHER FUND Unknown 9,121,678 0.56 circulated Unknown Foreign A share 8. KINGHING TRUST & share- INVESTMENT CO., LTD. 7,754,816 8,463,351 0.52 circulated Unknown holder 9. MERRILL LYNCH PLERCE FENNER & SMITH INC 6,034,712 9,298,993 0.57 circulated Unknown Foreign 10. GUOTAI JUNAN SECURIES HONG KONG LIMITED -282,569 7,649,794 0.47 circulated Unknown Foreign
Note:
a. Shares held by CAC, one of the shareholders of the Company, were stated-owned, which were non-circulated.
b. CAC had no relationship with the other shareholders in the above table, and nor was the party who agreed to act
alike as stipulated in Administrative Measures on Information Disclosure Concerning Changes in Shareholdings of
Listed Companies; the Company did not know whether there was relationship among the other shareholders, and
nor knew whether they were the parties who agreed to act alike as stipulated in Administrative Measures on
Information Disclosure Concerning Changes in Shareholdings of Listed Companies.
(3) The controlling shareholder
Controlling shareholder: Changan Automobile Group Company
Legal representative: Yin Jiaxu
Date of establishment: October 28, 1996
Business scope and major products: manufacturing, development and sale of Changan series cars and spare
parts; manufacturing and sale of firearms for civil use, ammunition, general use machinery, dies, tools etc.
Registered capital: RMB 740,000,000
(4) The ultimate parent of the controlling shareholder
The ultimate parent of CAC: China South Industries Group Corp.
Legal representative: Xu Bin
Date of establishment: June 29, 1999
Business scope and major products: investment and management of state-owned assets; manufacturing of guns
and firearms; engineering prospecting, designing, construction, contracting, construction supervision; equipment
installation, etc.
Registered capital: RMB 12,645,210,000
(5) Relationship among the Company and its controlling shareholders:
China South Industries Group
100%
Changan Automobile Group Company
52.47%
Chongqing Changan Automobile Co., Ltd.
(6) The ten largest circulated shareholders
Shares at the year- No. Name of Shareholders Type of Shares end 1 BOSHI VALUE ADDED SECURITIES INVESTMENT FUND 15,228,959 A Share 2 HTHK-VALUE PARTNERS 'A' FD 14,427,910 B Share 3 KGI ASIA LIMITED 10,105,018 B Share 4 BBH BOSTON A/C GMO EMERGING MARKETS FUND 9,589,461 B Share 5 HTHK-BOBL/MANNUL IFE GLOBAL FUND-CHINA VALUE 9,279,902 B Share 6 CHINA-RELATED STOCKS MOTHER FUND 9,121,678 B Share 7 KINGHING TRUST & INVESTMENT CO., LTD. 8,463,351 A Share 8 MERRILL LYNCH PLERCE FENNER & SMITH INC 9,298,993 B Share 9 GUOTAI JUNAN SECURIES HONG KONG LIMITED 7,649,794 B Share STATE SOCIAL SECURITIES FUND ONE-ZERO-SEVEN 10 PACKAGE 7,340,000 A Share
The company did not know whether there was relationship among the large ten circulated shareholders , and nor
knew whether they were the parties who agreed to act alike as stipulated in Administrative Measures on
Information Disclosure Concerning Changes in Shareholdings of Listed Companies. V. Information on Directors, Supervisors, Senior Management and Employees
1. Information on directors, supervisors and senior management Shares held Name Position Gender Age Term of office At beginning At end of Reasons for of year year change Yin Jiaxu Chairman M 48 2003.05-2006.05 4,200 5,040 Bonus shares Zhao Luchuan Deputy Chairman, M 51 2003.05-2006.05 4,200 5,040 Bonus General Manager shares Li Shouwu Director M 38 2003.05-2006.05 0 0 Xu Liuping Director M 40 2003.05-2006.05 0 0 Deng Tengjiang Director M 48 2003.05-2006.05 0 0 Wang Director M 46 2003.05-2006.05 4,200 5,040 Bonus Chongsheng shares Guo Xuewu Director M 48 2003.05-2006.05 0 0 Zhang Baolin Director, Executive M 42 2003.05-2006.05 0 0 Deputy General Manager Ma Jun Director M 45 2003.05-2006.05 0 0 Cui Yunjiang Director, Deputy M 41 2003.05-2006.05 0 0 General Manager, Board Secretary Guo Konghui Independent Director M 69 2003.05-2006.05 0 0 Xia Donglin Independent Director M 43 2003.05-2006.05 0 0 Gao Zhikai Independent Director M 42 2003.05-2006.05 0 0 Wen Zongyu Independent Director M 41 2003.05-2006.05 0 0 Liu Wei Independent Director M 40 2003.05-2006.05 Shi Yubao Organizer of the Board M 51 2003.05-2006.05 0 0 of Supervisors Zhou Xiaying Supervisor F 55 2003.05-2006.05 4,200 6,606 Bonus shares; additional share issue Peng Minggeng Supervisor M 54 2003.05-2006.05 4,200 5,040 Bonus shares Cao Dongping Supervisor F 51 2003.05-2006.05 0 0 Xiong Huilin Supervisor F 45 2003.05-2006.05 0 0 Zhu Zhiping Supervisor M 42 2003.05-2006.05 0 0 Hua Dubiao Supervisor M 39 2003.05-2006.05 0 0 Fu Xiangyu Supervisor F 49 2003.05-2006.05 0 0 Zhu Huarong Senior Deputy General M 39 2003.03-2006.03 0 0 Manager Huang Senior deputy general M 36 2003.03-2006.03 0 0 Zhongqiang manager Jia Tingyue Deputy general M 41 2003.03-2006.03 0 0 manager Zou Yi Deputy general M 41 2003.03-2006.03 0 0 manager Cui Xiaomei Deputy general F 49 2003.03-2006.03 0 0 manager Li Jun Board Secretary F 35 2003.03-2006.03 0 0 Note: Positions of the Directors and Supervisors in their respective shareholder companies are as below: Name Shareholders Company Position Term of office President, Board Chairman, Yin Jiaxu Changan Automobile Group Company 1998.07- Secretary of the Party Committee Vice President, Wang Changan Automobile Group Company Deputy Secretary of the Party 1996.01- Chongsheng Committee Guo Xuewu Changan Automobile Group Company Director, Chief Financial Officer 1999.12- Director, Deputy Secretary of the Shi Yubao Changan Automobile Group Company Party Committee, Chairman of the 2000.09- Worker’s Union Deputy Secretary of the Party Peng Changan Automobile Group Company Committee, Secretary of the 2004.09- Minggeng Discipline Committee Vice President, Deputy Director of Ma Jun Changan Automobile Group Company the Information Center, Director of 2001.02- the Administration Office Cao Dongping Changan Automobile Group Company Director of Finance Department 2000.03-
2. Major work experiences and positions in entities other than the share holder of the Directors, Supervisors and the
senior management:
(1) Directors
Mr. Yin Jiaxu, Board Chairman, was born in 1956. With a master’s degree, he is a senior engineer. He used to be
Manager of Yuzhou Gear Factory, Director of the Administrative Office and Deputy General Director of South-
west Industries Bureau of China Industries Company, and Vice Chairman of the Board, Deputy General Manager
and General Manager of CAC. He is currently Vice General Manager of China South Industries Group, Board
Chairman, President and Secretary of the Party Committee of CAC.
Mr. Zhao Luchuan, Vice Chairman and General Manager, was born in 1953. With a master’s degree, he is a senior
economist. He used to be Vice Secretary of the Party Committee and Vice General Manager of Jiangling
Machinery Factory, and Director and Deputy President of CAC.
Mr. Li Shouwu, Director, has a doctor’s degree and is a senior accountant. Born in 1966, he used to be Vice Head and
Head of Finance Department and Property Management Department, Director Assistant and Vice General
Director of Administrative Bureau in China North Industries (Group) Company. He is currently Vice General
Manager and Chief Financial Officer of China South Industries Group. Mr. Xu Liuping, Director, has a doctor’s degree and is a senior economist. Born in 1964, he used to be Vice Director of
the Planning Department of China South Industries Group. At present, he serves as General Manager Assistant
and Director of Automobile Department of China South Industries Group.
Mr. Deng Tengjiang, Director, was born in 1956. He has obtained a post-graduate degree and professorship and
used to be Department Head and School Vice Dean at Chongqing Industries College. He also used be Vice
General Manager of North Industry Finance Co. of China Industries Company, Vice General Director of South-
west Industries Bureau in China Industries Group Corp., and Vice General Manager and General Manager of
Construction Industries Group Corp. He currently serves as Director of the Audit Department of China South
Industries Group Corp.
Mr. Wang Chongsheng, Director, is a senior economist with post-graduate qualifications. Born in 1958, he used to be
Secretary of the League Committee of Changan Machinery Factory, Vice Secretary of the Party Committee and
Secretary of the Discipline Committee of 5023 Factory, Head of Marketing Department of the Automobile Bureau
in China Industries Company, Director of the General Manager’s Office of CAC. Currently he is Vice President and
Vice Secretary of the Party Committee of CAC.
Mr. Guo Xuewu, Director, was born in 1956. He has scholar’s degree and is a senior accountant. He used to be Head
of the Finance Department of Changan Machinery Factory, Vice Director and Director of the Finance Department
of CAC, and General Manager Assistant, and Vice President of CAC. He currently serves as Director and Chief
Financial Officer of CAC.
Mr. Zhang Baolin, Director, has scholar’s degree and is a senior political worker. Born in 1962, he used to work as Vice
Secretary and Secretary of the League Committee of the South-west Industries Bureau in China Industries
Company, Secretary of the Party Committee of Chongqing Changfeng Machinery Factory, Vice General
Manager and General Manager of Chengdu Wanyou Company, and Director and Vice President of CAC.
Mr. Majun, Director, was born in 1959. He has obtained master’s degree in engineering and is a senior engineer. He
used to be Vice Head of the Technical Department One, Head of the Technical Department Two, Head of the
Standardized Information Department, Vice Director and Director of the General Administration Office, General
Manager Assistant, and Deputy Director of the Information Center of Changan Machinery Factory. Currently, he serves as Vice President, Director of the General Administration Office and Director of the Information Center of
CAC.
Mr. Cui Yunjiang, Director, Deputy General Manager and Board Secretary, was born in 1963. He has obtained
master’s degree and is a senior accountant. He used to be Vice Head of the Finance Department of Changan
Machinery Factory, Head of the Finance Department of Changan Suzuki Automobile Company, Head of the
Securities Department and General Assistant of the Company.
Mr. Guo Konghui, Independent Director, was born in 1935. He used to be Chief Engineer of Changchun Automobile
Research Academy, and Vice President of Jilin Industries University. He is currently Dean of the Automobile
School of Jilin University, Director of National Key Laboratory of Automotive Dynamic Simulations at Jilin University,
Deputy Chairman of China Association of Automobile Manufacturers, Member of China Academy of Engineering,
Professor, and Tutor of doctor.
Mr. Xia Donglin, Independent Director, was born in 1961. He has doctor’s degree and is a certified public accountant.
He used to be tutor and vice-professor at Jiangxi University of Finance and Economics, Manager of China
Consultants of Accounting and Financial Management Company, and Director of Accounting Department at
School of Economics and Management, Tsinghua University. He is currently professor and tutor of doctor at the
Accounting Department at School of Economics and Management, Tsinghua University.
Mr. Gao Zhikai, the Independent Director, has a doctor’s degree of Law was born in 1962, he is the Executive Director
of PCCW China, the international director of the Asia Association. He used to serve as executive director in
HongKong telecom Yingke(China) Co. Ltd., the vice president in Morgenstanley Investment Bank and specially
Appointed Researcher of Guanghua Management School, Peking University and Consultant of BOC International.
Mr. Wen Zongyu, Independent Director, was born in 1963. He has obtained doctor’s degree and used to work as
Director of Domestic Economy in the National Research Academy of State-owned Assets Management Bureau.
He is currently Deputy Director of the State-owned Assets Allocation Optimization Research Center of the Ministry
of Finance, primarily involved in capital market studies and the design of corporate incentives.
Mr. Liu Wei, Independent Director, was born in 1964. He has doctor’s degree and used to work as tutor, Department
Head Assistant, Vice Dean and vice professor at Chongqing University. He is currently professor and tutor of
doctor at Chongqing University involved in strategy management, technical innovations and management studies. (2) Supervisors
Mr. Shi Yubao, Organizer of the Board of Supervisors, was born in 1953. He has obtained scholar’s degree and is a
senior economist. He used to be Vice Director of the Party Council Office of CAC, and Secretary of the Party
Committee, Deputy Manager and Manager of Automobile Manufacturing Factory. He is currently Director, Vice
Secretary of the Party Committee and Chairman of the Labors’ Union of CAC.
Ms. Zhou Xiaying, Supervisor, was born in 1949. She has a scholar’s degree and is a senior economist. She used to
be Vice Chairman of the Labors’ Union of Jiangling Factory and CAC, and Vice Secretary of the Party Committee,
and Secretary of the Discipline Committee of CAC. She is presently retired.
Mr. Peng Minggeng, Supervisor, was born in 1950. He graduated from a junior colleague and used to serve as Vice
Manager of the Machinery Factory of CAC, Head of the Department of Managers, Vice Director of the Human
Resource Department and Head of Employment Relationship Department of CAC, and Vice Secretary of the
Party Committee and Vice President of CAC. He is currently Vice Secretary of the Party Committee and
Secretary of the Discipline Committee of CAC.
Mr. Cao Dongping, Supervisor, was born in 1953. He graduated from a junior colleague and obtained the title of
senior accountant. He used to be Head of the Finance Department of Jiangling Engine Company, and Vice
Director of the Finance Department of CAC. He is currently Director of the Finance Department of CAC.
Ms. Xiong Huilin, Supervisor, was born in 1959. She has master’s degree and used to be Director of Administrative
Office of Automobile Manufacturing Factory of CAC, and Vice Chairman of the Labors’ Union of CAC. At present,
she serves as Chairman of the Labors’ Union of Changan Suzuki Automobile Company.
Mr. Zhu Zhiping, Supervisor, was born in 1962. He has obtained master’s degree and is an economist. He used to
be Head of the Human Resource Department of Automobile Manufacturing Factory and Vice Head of the Human
Resource Department of the Company. He currently serves as Director of Human Resource Department and
Labor and Salary Department of the Company.
Mr. Hua Dubiao, Supervisor, was born in 1965. He graduated from a junior colleague and has obtained the title of
Accountant. He used to be Vice Head and Head of the Audit Department of the Company. He is currently Vice
Director of Audit and Supervision Department and Head of Audit Department of the Company. Ms. Fu Xiangyu, Supervisor, was born in 1955. He graduated from a junior colleague and has obtained the title of
Accountant. He used to be Vice Head and Head of the Finance Department at the Automobile Manufacturing
Factory. She is currently Head of the Cost and Price Department of the Company.
(3) Senior Management other than Directors and Supervisors:
Mr. Zhu Huarong, Senior Vice General Manager, was born in 1965. He has master’s degree in engineering and is a
senior engineer. He used to be Vice Director of the Engine Research Academy of Jiangling Machinery Factory,
Vice Director of Technical Department of CAC, Chief Engineer of the Automobile Manufacturing Factory of the
Company, General Manager Assistant and Vice President of CAC.
Mr. Huang Zhongqiang, Senior Vice General Manager of the Company and Deputy General Manager of Changan
Suzuki Automobile Company. He was born in 1968 and has a master’s degree in engineering. He is a senior
engineer and used to be Vice Director and Director of the General Manager’s Office of CAC, Director of the Quality
Department, General Manager Assistant and Vice President of CAC.
Mr. Jia Tingyue, Vice General Manager, was born in 1963. He has scholar’s degree and is a senior engineer. He
used to be Vice Director of Machinery and Dynamics Department of Changan Machinery Factory, Vice Director of
the Engineering Design Academy of CAC, Vice President of CAC and Vice Chief Engineer, Vice Manager and
Manager of the Automobile Manufacturing Factory of the Company.
Mr. Zou Yi, born in 1963, is Vice General Manager of the Company and General Manager of Nanjing Changan
Automobile Company. He has master’s degree and is a senior engineer. He used to be Vice Head of Supplies
Department of the Company, Vice Head of Supplies Department of CAC, Head of Supplies Department, Vice
Chief Engineer and Director of the Civil Products Research Academy of Changan Special Machinery Factory,
Vice Manager and Head of Purchase Department of Automobile Manufacturing Factory of the Company,
Manager of the Engine Company, and Vice President of CAC.
Ms. Cui Xiaomei, Vice General Manager and Vice General Manager of Changan Suzuki Automobile Company,
was born in 1955. She has obtained a double scholar’s degree, and is a senior economist. She used to be Vice
Director of the Final Assembly Workshop, Vice Manager of Sub-factory One, Vice Head of Planning Department,
Vice Head of External Business Department of Jiangling Machinery Factory, Secretary of the Party Committee of
Precision Machinery Factory in CAC, Secretary of the Party Committee and Deputy General Manager of
Changan Automobile Sales Company, and General Manager Assistant of CAC.
Ms. Li Jun, Secretary of the Board and Head of the Capital Operations Department of the Company, was born in
1969. She has obtained scholar’s degree and the title of Senior Accountant. She used to be Vice Head of the
Securities Department of the Company.
3. Remuneration of the year
In 2004, the annual remuneration for the directors, supervisors and senior management had been duly paid by
month according to the relevant policy on management salary and by ranks and grades set by China South Industries
Group.
During the reporting period, total remuneration of directors, supervisors and senior management was RMB 2.39
million. The total remuneration for the three highest paid directors was at RMB 0.8 million, and total remuneration for
the three highest paid senior managers was RMB 0.9 million.
Of the directors, supervisors and senior managers who receive payment from the Company, three received
payment between RMB 50,000 and 100,000, five received payment between 100,000 and 150,000, and five received
payment between 200,000 and 350,000.
Remuneration for independent directors was RMB 50,000 (tax included) per person per year. Expenses incurred
in the discharge of responsibilities in attending board of directors meetings and shareholders’ general meetings and in
connection with the Company’s Article of Association were reimbursed by the Company.
During the reporting period, Mr. Li Shouwu, Mr. Xu Liuping and Mr. Deng Tengjiang did not receive remuneration
from the Company. They received remuneration from the shareholder companies or related companies. Mr. Yin Jiaxu,
Mr. Wang Chongsheng, Mr. Guo Xuewu, Mr. Ma Jun, Mr. Shi Yubao, Ms. Zhou Xiaying, Mr. Peng Minggeng and Ms.
Cao Dongping received incentive fund from the Company. 4. During the reporting period, no Director, Supervisor or Senior Management was disengaged from the original position.
5. The Employees of the Company
By the end of the year, total headcount of the Company was at 7,944, including 4,829 production workers, 1,306
salespersons, 1,114 technicians, 173 finance staff, and 522 administrative staff. Of the total, there were 5 with doctorate
degree, 52 with master degree, 1,047 with bachelor degree, and 1,306 with college education or above.
The number of retired employees for which the Company is required to bear their expenses was 1,700. VI. Corporate Governance Structure
1. Corporate Governance
The Company has been strictly complying with the relevant laws and regulations, including the Company Law, the
Securities Law, the Regulations for the Governance of Listed Companies, the Guidelines for the establishment of
Independent Directors system in Listed Companies, Regulations on Strengthening the Protection of Social and Public
Shareholders’ Interests and continuously improving the corporate governance structure of the Company, adopting
modern best practices and standardizing the management and operations of the Company. The Company drew up
and executed a series of disciplines, including Articles of Association, Regulations on Shareholders’ general meeting,
Regulations on Board of Directors, Regulations on Board of Supervisors, Regulations on Guarantee, and
Management Regulations on Investment Relationship. The actual conditions of the Company’s corporate
governance do not differ substantially from those stipulated by the regulations on corporate governance of listed
companies issued by China Securities Regulatory Commission.
2. The Independent Directors
There are 5 Independent Directors on the Board of the Company, which is in accordance with relevant regulations by
the China Securities Regulatory Commission. The independent directors of the Board have been honest, diligent and
industrious in fulfilling their duties and expressed independent opinions on investment, related party transactions,
incentives and other significant transactions, thus contributing to the improvement in the corporate governance of the
Company, the decision-making mechanism of the Company and the safeguard of the Company’s interest, especially
of the minority shareholders’ interests. The independent directors also made contributions in areas of innovation,
remuneration-system, corporate governance and financial management.
(1) Independent Directors’ Attendance of the Board Meetings: Name of Times of Attendance Times of Attendance Times of Entrusted Times of Independent director Required in Person Attendance Absence Guo Konghiu 7 4 2 1 Xia Donglin 7 6 1 Wen Zongyu 7 6 1 Gao Zhikai 7 7 Liu Wei 7 7
(2) In the reporting period, no negative opinion is raised by the Independent Directors.
3. The 5 Areas of Segregation
(1) Operation:
The main business scope of the Company includes the development, manufacture and sale of automobiles,
engines and automobile related parts. The main business has been approved by government authorities and the
Company does not solely rely on any other entity. The Company has the technology, production capacity and
sales employees related to its business scope and can undertake the operations independently.
(2) Assets:
The Company has necessary fixed assets, current assets, intangible assets and related departments to meet its
operation needs, and has developed a complete system.
(3) Employee:
The Company signed labor contracts with the employees based on the registered employee list. It takes
responsibilities for the employees’ performance, salary, pension, housing fund and other welfare of the employees
independently.
The Directors, Supervisors and senior managers are recommended by Changan Automobile Group Company,
the selection and engagement of who are in conformity with Corporate Laws and Article of Association. The senior
managers work for the Company full time and received salary from the Company.
(4) Organization:
Each division and department of the Company is independent from the controlling shareholders and exercises
their rights in accordance with the relevant regulations.
(5) Finance:
The Company has its independent financial department, established independent accounting system and financial
management system.
4. Performance Review System of the Senior Management
(1) Performance review system:
According to the performance review management system of the Company, the Board is responsible for
reviewing the performance of the General Manager and other senior management. The performance review
combines periodic and regular reviews, as well as quantifying and qualifying reviews.
(2) Incentive system
The income of senior management comprises basic salary and performance-related pay. Performance-related
pay is related to performance reviews.
(3) Regulating system
The Company has signed Employment contracts with the senior management, and regulates the exercise of
power, the limitations of power and duties and responsibilities of the senior management.
(4) The establishment and implementation of the incentive system
The plan of appropriation of incentive fund was passed in the Annual General Meeting of the Company 2003,
according to which 6% of prior year’s consolidated net profit is appropriated as incentive fund when the audited
Rate of Return on Shareholders’ Equity of the prior year reaches 10%. No such fund is appropriated when the rate
is below 10%. The Remuneration Committee is responsible for the distribution plan, and incentives are awarded to
Board member, Supervision Board member, the senior and mid-level management, key management and
technical staff and staff with outstanding contributions. In 2004, the Company has appropriated RMB 86.12 million
for incentive fund, and has distributed RMB 40.16 million. The remaining RMB 45.96 million will be used for
awards in 2005. VII. Shareholders’ general meeting
During the reporting period, two Shareholders’ general meetings were held:
1. The Board of Directors announced the First Session of the Temporary Shareholders’ general meeting 2004 on
February 17, 2004 through China Securities, Securities Daily and Hong Kong Business. The meeting was held on
March 18, 2004 at Chongqing Changan Hotel. The meeting discussed and passed through voting the following
resolutions:
(1) Adjustments to the projects on which capital raised by the additional share issue will be used, and to adjustments to
the amount of the capital raise.
(2) The extension of the valid period of resolutions regarding the issue of additional shares 2003.
The resolutions were announced on China Securities, Securities Daily and Hong Kong Business on March 19, 2004.
2. The Board of Directors announced the Shareholders’ general meeting of 2003 on March 18, 2004 through China
Securities, Securities Daily and Hong Kong Business. The meeting was held on April 23, 2004 at Chongqing
Changan Hotel. The meeting discussed and passed through voting the following resolutions:
(1) Report of Board of Directors
(2) Report of Board of Supervisors
(3) 2003 Annual Report and Extracts
(4) Final financial settlement of 2003 and financial budgets for 2004
(5) Appropriation of incentive fund of 2003
(6) The profit distribution scheme for 2003
(7) Reappointment of the auditor for the Company
(8) Use of proceeds raised from previous public offering
(9) The Company’s qualifications for the new issue of shares
(10) Plans for the new issue of shares
(11) Feasibility of the projects in which the proceeds raised from new issue of shares are invested
(12) The sharing the retained earning prior to the issue of additional shares by original and new shareholders (13) The authorization by the Shareholders’ general meeting for the Board of Directors to deal with matters related to the issue of additional shares
(14) Supplementary agreement on land use right leases
(15) Amendments to the Article of Association
The resolutions were announced on China Securities, Securities Daily and Hong Kong Business on March 19, 2004. VIII. Report of the Board of Directors
1. General operation status in the reporting period
(1) Industrial status in the reporting period
The year 2004 has seen a large number of new laws and government regulations and rules related to the
automobile industry, such as Policies on the Development of the Automobile Industry, Regulations on the Recall of
Defective Automobiles. In this background, the automobile manufacture industry of China returned from explosive
growth in the previous two years to a more stable status. Growth of automobile manufacture and sales decreased
from 2003, under the influence of stricter automobile sales credit, limitations of urban traffic environment, increasing
oil prices and consumers’ tendency to wait to buy with cash in hand resulting from frequent deductions in car
prices. On the whole, however, the automobile industry still grew rapid and smoothly in 2004. According to China
Express News on Automobile Manufacture and Sales, total numbers of vehicles produced and sold of the year
reached 5,075 thousand and 5,071 thousand respectively, namely 14.11% and 15.50% increase.
(2) General operation status of the Company in the reporting period
Faced with changes in the national macro control, a less promising market, fierce price competitions, and growing
competitors, all the staff of the Company concerted their endeavors and overcome numerous difficulties with
creativity. In this way, the strategies and plans of “3337” were well followed, and various operation objectives were
successfully reached, thereby the first step in “3337” was completed one year ahead of the original expectations.
Number of automobiles sold in the year totaled 454,262 a 17.84% increase from 2003. Revenue increased
29.03% to RMB 18,527 million, and net profit RMB 1,197 million.
2. Business operations of the Company
(1) The scope of key business lines and a summary of operational activities
The Company was mainly engaged in the development, manufacture and sales of mini cars and vans, mini
business cars and sedans including Changan Star mini-car series, Changan mini-van, Changan Suzuki’s Alto
mini sedans and Lingyang, Changan Ford’s Fiesta and Mondeo sedans, and the manufacture and sales of
various types of Jiangling brand engines.
In 2004, the Company totally produced 475,357 vehicles, a 23.95% increase from 2003. And a total number of
454,262 vehicles were sold, a 17.84% increase from 2003. The Company has 8.96% share in the national
automobile market, and manufacture and sales status are shown in the table below: 2004 2003 Entity Name Production Volume Sales Volume Production Volume Sales Volume The Company 217,190 204,988 217,130 219,083 Changan Suzuki 107,337 110,052 102,086 100,018 Changan Ford 25,003 23,361 3,857 4,135 Nanjing Changan 65,007 58,216 38,437 43,063 Hebei Changan 60,820 57,645 21,998 19,199 Total 475,357 454,262 383,508 385,498
Note: The production and sales volume of Ford only represents the Company’s interest in Ford, namely 50% of Ford’s
total volume, which in the same scope as that of the consolidated financial statements. The figures of Ford in 2003
only represents 50% of Ford’s production and sales volume from September to December.
(2) The following table illustrates the Company’s sales and cost of sales by line of business and product category (in
RMB million): Sales Cost of sales Gross margin rate Line of Amount Fluctuation Amount Fluctuation Amount Fluctuation business/product from 2003 from 2003 from 2003 Automobile sales 18,149 28.10% 13,701 32.75% 24.48% -9.73% Part sales 332 146.53% 242 120.10% 26.82% 48.75% Others 47 -17.64% 30 -0.84% 35.96% -9.83% Total 18,527 29.03% 13,973 33.00% 24.58% -9.19%
(3) The following table illustrates the Company’s domestic and foreign sales and cost of sales (in RMB million): Domestic/Foreign Sales Fluctuation from 2003 Domestic 18,398 28.36% Foreign 129 80.11%
(4) The following table illustrates the major products whose revenue or gross margin comprises over 10% of the
Company’s total revenue or gross margin (in RMB million): Product Sales Cost of sales Gross margin rate Mini-car 9,944 7,485 24.67% Sedan 8,205 6,216 24.24% (5) The following table illustrates the business operation information and results of the major subsidiaries and joint-
ventures (in RMB Million except unless otherwise stated):
Registered Attributable Total Net Entity Capital Equity Principal activities assets Profit Chongqing Changan Suzuki Manufacture and sale of automobiles Automobile Co., Ltd. USD 70 51% and spare parts 2,635 259 Changan Ford Automobile Manufacture and sale of automobiles Co., Ltd. USD 108 50% and spare parts 3,939 905 Nanjing Changan Automobile Manufacture and sale of mini auto- Co., Ltd. 602 71.05% mobiles and spare parts 1,241 -15 Hebei Changan Automobile Manufacture and sale of auto-mobiles Co., Ltd. 180 66.51% and spare parts 514 18 Jiangxi Jiangling Holding Co., Operations have Ltd. 100 50% Investment, foreign trading not yet started 189 Sales Offices 113 80%-100%Sale of automobiles and spare parts 1,169 -9 Chongqing Changan Automobile Import and Export Import and export, sale of Co., Ltd. 14 95% automobiles and spare parts 118 -2 Chongqing Changan Sale of automobiles, engines and Automobile Sales Co., Ltd. 49 98.97% spare parts 45 0 Chongqing Changan Special Sale of special automobiles and Automobile Co., Ltd. 5 50% spare parts, automobile repair 43 5 Chongqing Changan Service Co., Ltd. 30 99% Sale of automobiles and spare parts 64 7 Chongqing Anfu Automobile Co., Ltd. 32 50% Sale of automobiles and spare parts 111 12
(6) Major suppliers and clients
In 2004, gross purchase by the Company from the top five suppliers was RMB 2,341.22 million, which accounted
for 16.34% of total purchase of the year; gross revenue from the top five clients is RMB 1,631.39 million, which
accounted for 8.81% of the total revenue of the Company.
(7) Difficulties encountered during operation and solutions
a. Difficulties encountered during operation
The status of the automobile industry of China shifted from explosive growth in the previous two years and
has entered a more stable stage, thus the Company’s sustainable development capabilities are at trial.
The competition in the automobile market is deepening continuously, which poses great challenges to the
Company’s new product development, cost control, and quality improvement capabilities.
Price reductions are increasingly frequent with greater scales, and consumers consequently are inclined to
wait. Therefore greater efforts are needed in cost control. Stimulated by the new policies in the automobile industry, a new round of mergers and acquisitions will put
the Company’s mass production capabilities on test.
The implementation of the vehicle recall will be immense challenges for the Company’s capabilities to cope
with sudden issues. b. Solutions
The Company will strengthen cooperation and aim for new breakthroughs in strategic partnership. The
sedan project of Factory Two Changan Ford has been approved by the State Development Planning
Commission, and is in progress.
Capital operations will step up. The Company has issued additional “A” shares with success, raising RMB
1,058,580 thousand. Jiangling Holding was established in cooperation with Jiangling Automobile Group
Company, and new bases will be open, more products will be produced and industrial position stabilized.
With the completion of the production line in “Changan Production Area”, and the smooth progress of
capacity enlargement projects in Changan Ford, Changan Suzuki, Nanjing Changan and Hebei Changan,
production capacities are continuously enhanced.
Greater stress is put on the development of new products. The Company has successfully developed and
marketed the Changan CM8 series, whose intellectual property rights are held by the Company. Dual-power
vehicles have also passed the tests organized by related government authorities, and a revised car model by
Hebei Changan debuted before the year end. Mondeo, produced by Changan Ford, has been well-accepted
among customers, and the construction of Changan Automobile Research Academy has been successfully
completed.
The Company has fulfilled much in enhancing management and creativity capabilities, full-scope quality
and budget management capabilities and improving market services.
3. Investments of the Company in the reporting period
(1) Analysis of the Company’s investment
In the reporting period, the Company injected RMB 50 million in the newly-established Jiangling Holding, and
increased its interest in Nanjing Changan and Sales Offices. Please refer to the table of business operation
information and results of the major subsidiaries and joint-ventures in this chapter.
(2) The use of proceeds from previous public offering (in RMB million)
a. The use of proceeds from “A” share issue in 1997 Committed Actual investment Investment Progress Expected earnings investment project project amount status Technology Technology 34.76 In progress Included in the Development Development earnings of the Center Center Company By 31 December 2004, the proceeds from “A” share issue in 1997 have been fully put in use.
b. The use of proceeds from additional “A” share issue in 2004
In the reporting period, the Company issued a total number of 148.85 million additional “A” shares, thereby raising RMB
1,058.58. By 31 December 2004, the proceeds have been fully put in use. Related information is shown in the
table below: (in ten thousand)
Actual No. Investment project committed Actual investment project Earnings investment 1 CM8 CM8 19,984 Earnings Ecdemic expansion project for the inner Ecdemic expansion project for the inner not 2-1 4,221 trimming production line of minicar trimming production line of minicar occurred Ecdemic expansion project for the chassis Ecdemic expansion project for the chassis yet 2-2 4,633 and sub-assembly line of minicar and sub-assembly line of minicar Ecdemic expansion project for the Ecdemic expansion project for the 2-3 4,982 detecting and debugging line of minicar detecting and debugging line of minicar Ecdemic expansion project for the welding Ecdemic expansion project for the welding 2-4 line on front and rear panel & lower body line on front and rear panel & lower body 4,527 of minicar of minicar Ecdemic expansion project for the Ecdemic expansion project for the 2-5 4,270 inspecting and reworking line of minicar inspecting and reworking line of minicar Ecdemic expansion project for the Ecdemic expansion project for the 2-6 4,714 cathode electrophoresis line of minicar cathode electrophoresis line of minicar Ecdemic expansion project for the final Ecdemic expansion project for the final 2-7 4,002 assembly line of minicar assembly line of minicar Ecdemic expansion project for the welding Ecdemic expansion project for the welding 2-8 line on vehicle body and finishing line of line on vehicle body and finishing line of 7,279 minicar minicar Ecdemic expansion project for the surface Ecdemic expansion project for the surface 2-9 8,412 painting line of minicar painting line of minicar Ecdemic expansion project for the pre- Ecdemic expansion project for the pre- 2-10 4,923 treating line of minicar treating line of minicar Ecdemic expansion project for the welding Ecdemic expansion project for the welding 2-11 line on front and rear side panel and door line on front and rear side panel and door 5,738 of minicar of minicar Ecdemic expansion project for the inner Ecdemic expansion project for the inner 2-12 6,821 trimming production line of minicar trimming production line of minicar Technology innovation project on die of Technology innovation project on die of 3 4,984 minicar minicar 4 Complementary current capital Complementary current capital 16,368 Total 115,858
(3) The use of proceeds other than from previous public offering (in RMB million)
No. Funds Investment project Project stage Earnings injected 1 Automobile production line 57.90 In progress 2 Engine production line 177.22 In progress Included in the overall 3 ERP project 16.18 In progress earnings of 4 Technology Development Centre 49.58 In progress the Company 5 Others 10.88 In progress Total 311.76
4. Analysis of financial status and operation results of the Company (in RMB million) Variance from the Project 2004 2003 Reasons for variance previous year Increases in manufacture and sales Total asset 14,848.27 10,984.33 35.18% scale, cash, short-term investment, inventory and fixed assets Share issue and net profit in the reporting Shareholders’ equity 6,759.50 4,810.37 40.52% period Revenue from major 3,920.50 3,523.02 11.28% Increases in sedan sales business lines Net profit 1,197.22 1,435.62 -16.61% Product price reductions Net increase in cash and Caused by the profit gained from the 1,356.43 98.20 1281.25% cash equivalents operating activities
5. The impact of significant changes in the productive and operating environment and macro policies and laws and
regulations on the Company.
For the detailed information, please refer to this section on difficulties encountered during operation and solutions
6. Operation plans for 2005
In 2005, the company will strive for the “3337” objectives and sustainable development by focusing on cost control
and CPS (Changan Production System), and stressing the development of new products, improvement of product
quality, and marketing and services. The Company aims at stable progresses on the existing basis, and increasing
automobile production and sales volume to 600 thousand (100% of Ford’s volume incorporated).
7. The work of the Board of the Directors
(1) The meetings of the Board and the resolutions in the year
During the reporting period, there are seven meetings of the Board of the Directors.
a. The six session of the Board of the Directors’ third meeting was held in the Company on February 16, 2004, and
the following proposals were passed.
(a). Adjustment to the projects using proceeds from the current public offering and the budget.
(b). Proposal to the General Meeting to extend the effective period of the public offering
(c). Proposal of holding the first temporary general meeting for the year 2004
b. The seven session of the Board of the Directors’ third meeting was held on March 16, 2004 and the following
proposals were passed:
(a). Report of the Board of the Directors.
(b). Report of the general manager
(c). Annual financial report and the extract for the year 2003
(d). Final financial settlement for the year 2003 and the financial budget for the year 2004
(e). Proposal of setting up incentive fund. (f). Profit distribution scheme for the year 2003
(g). Reappointment of the auditor.
(h). The explanation of the usage of the proceeds from the previous public offering
(i). Additional investment to Nanjing Changan
(j). The qualification of the Company as to the new public offering
(k). The planning of the new public offering
(l). The report of the feasibility of the project using the proceeds from the new public offering
(m). Sharing of retained earnings among both new and old shareholders before the new issuance of A share
(n). The full-pledged entrustment to the Board of the Director to deal with the new public offering on behalf of the
general meeting
(o). Review of
(p). The proposal of the disposal of the assets
(q). The proposal to executing
(r). Qualification to the management to deal with the current operating capital.
(s). Proposal to the
(t). Amendment to the Article of Association
(u). Notice to hold the General Meeting for the year 2003 c. The eighth session of the Board of the Directors ‘ third meeting was held on April 19, 2004, and the financial
report for the quarter one of the year 2004 was passed on the meeting. d. The ninth session of the Board of the Directors ‘third meeting was held on August 1st, 2004, and the following
proposals was passed:
(a). The semi-annual financial report and the extract for the year 2004
(b). The discussion for the semi-annual financial report for the year 2004
(c). Setting up 30 sales offices with the investment of 18,700 thousand.
(d). Proposal to set up Chongqing Changan Automobile Co. Ltd Shanghai Chang’an Automobile Research
Branch e. The tenth session of the Board of the Directors’ third meeting was held on October 19, 2004, and the following
proposals were passed:
(a). The financial report for the quarter three of the year 2004
(b). The proposal to set up the remuneration and evaluation committee. f. The eleventh session of the Board of the Directors’ third meeting was held on October 28, 2004 and the
following proposals were discussed and passed:
(a). Setting up Jiangling Holding with the Company’s own capital RMB 50 million.
(b). Entrustment the management to deal with the incorporation of Jiangling Holding g. The twelfth session of the Board of the Directors ‘ third meeting was held on December 6, 2004, and the
following proposals were discussed and passed:
(a). The additional investment to Jiangling Holding
(b). The notice to hold the first temporary general meeting for the year 2005
(c). Entrustment the management to deal with the additional investment in Jiangling Holding
(2) During the reporting period, the Board of the Directors executed the resolution passed in the General Meeting
strictly and the following jobs were accomplished. a. Based on the profit distribution scheme passed in the General Meeting on April 23, 2004, the Company’s Board
of the Directors announced the dividend distribution in Business Express> on May 19, 2005 and execute the scheme accordingly b. Qualified by the General Meeting, the Board of the Directors take initiatives to carry forward the additional public offering and accomplish it in the reporting period successfully. c. Based on the approval of the General Meeting, the Company appropriated the incentive fund with the amount RMB 86.12 million. According to the plan of the Company’s remuneration management committee, RMB 40.16 million has been used to encourage the management, the technical personnel and the key workers. 8. The draft scheme for the profit distribution of 2004 The net profit of 2004 is RMB 1,317,299,675 (RMB 1,197,215 thousand under IFRS), add the retained earning RMB 1,562,812,020, and the profit available to be distributed is RMB 2,880,111,695. Transfer from statement of income to statutory reserve fund is RMB 135,180,290, to statutory common reserve fund is RMB 134,428,687. As to Changan Suzuki, who was included in the consolidation scope, the transfer to staff bonus and welfare fund is RMB 9,690,000, to reserve fund is RMB 100,470,000, to enterprise expansion fund is RMB 27, 540, 000. The retained earning is that of the lower of the two statements of income audited by domestic and foreign audit companies, which is RMB 2,472,802,718 minus the common share dividend RMB 306,666,500 and the common share dividend transferred to the capital RMB 245,333,200, and the result is RMB 1,920,803,018.According to the scheme of the profit distribution, the cash dividend is RMB 3.2 (including tax) per 10 shares, totaled RMB 518,671,744 (including tax). There was no transfer from capital reserve to share capital. 9. Other Matters (1) Auditors have issue special review report on fund transfer between the companies and its related parties with the details of the report as follows: To the Board of Directors of Chongqing Changan Automobile Co.,Ltd: We have audited the consolidated balance sheet of Chongqing Changan Automobile Co., Ltd. (the “Company”) and its subsidiaries and its joint venture as of 31 December 2004 and the related consolidated income and cash flow statements for the year then ended, and have issued the unqualified report “Puhuayongdao Zhongtian(2005)No.1448” dated April 13, 2005. In accordance with Circular on certain issues relating to fund transfer between listed companies and their related parties and guarantees provided by listed companies(Zheng Jian Fa[2003]No.56) issued by China Securities Regulatory Commission and the Stated-owned Assets Supervision and Administration Commission, the Company prepared the attached statement relating to funds occupation by its controlling shareholders or other related parties for the year ended 31 December, 2004 (hereinafter collectively referred to as “the Statement”). It is the Company’s responsibility to prepare, disclose the Statement on the base of being true, legal and complete. We reviewed the information disclosed in the Statement and noted no material difference between the information in the statement and accounting records we reviewed during the audit. Besides the audit of related party transactions we conducted during the audit of financial statement in 2004, we did not conduct any extra audit procedures as regards to the issues presented in the Statement. In order to better understand the issues relating to the fund occupation by the controlling shareholders or other related parties, we suggest the attached statement be read together with the audited consolidated financial statement. This report is intended solely for the use of disclosing the issues relating to funds occupation by the controlling shareholders or other related parties, and should not be used for any other purpose. Attachment: The statement of issues relating to fund occupation by the controlling shareholders or other related parties of Chongqing Changan Automobile Company Ltd PricewaterhouseCoopers Zhong Tian CPAs Co.,Ltd 13 April, 2005 Attachment: The statement of issues relating to fund occupation by the controlling shareholders or other related parties: (RMB million) Transactions (RMB 10 Issues Name Relationship Accounts Balance Notes thousand) Debit Credit Operating Fund Controlling Accounts 95.47 98.21 21.57 Transfers CAC shareholder receivable [1] Chongqing Changan Support Accounts 38.23 38.29 1.12 Services Co., Ltd Subsidiary of CAC receivable [1] Chongqing Guohao Automobile Accounts 30.79 21.61 9.18 Sales Co. Ltd. Subsidiary of CAC receivable [1] Chongqing Changan Jinling Accounts 70.12 69.97 0.15 Vehicles Parts Co., Ltd Subsidiary of CAC receivable [1] ChongqingChangan Lingyun Accounts - 3.34 Automobile Parts Co. Ltd. Subsidiary of CAC 3.34 receivable [1] Changan Ford Automobile Co., Accounts 39.50 50.36 1.00 Ltd. Joint Venture receivable [2] Chengdu Lingchuan Machinery Accounts 69.80 69.80 1.91 Factory Subsidiary of CSIG receivable [1] Chengdu Wanyou Economic Technological Development Co., 217.23 Notes 51.86 171.09 Ltd Subsidiary of CSIG receivable [1] Changan Shengli Automobile Advance to 58.49 53.08 15.13 Company Subsidiary of CAC suppliers [1] Provides interest Non bearing or interest free loans Provide entrust loans Non Entrust to make investment Non Issues commercial notes without any real commercial means Non Extinguish a liability on behalf of the controlling shareholders and its related parties Non Others Non [1] Caused by sales of automobiles and raw materials [2] Caused by sales of materials and the balance listed above is the one not eliminated because of the adoption of proportionate consolidation (2) Independent Directors have prepared the special reports and expressed their independent opinions on the Company’s external guarantee in previous and current years, the details are as follows: Under Zheng Jian Fa[2003]No.56 their related parties and guarantees provided by listed companies>(hereafter refer to as “the Circular”) issued by China Securities Regulatory Commission, we, as the Independent Directors of Chongqing Changan Automobile Co., Ltd, reviewed the Company’s external guarantee and the details are as follows: a. External guarantee. There is no guarantee during the reporting period. b. The observation to the circular (a) As of Dec 31, 2004, the Company did not provide any guarantee to shareholders, related parties who held less than 50% shares of the Company, any non-entity companies and personnel. (b) During the year 2004, there is non external guarantee. (c) The Company’s external guarantees are in conformity to Companies>, materials relating to external guarantee to auditors. In general, in our opinion, the Company observed the Circular seriously, regulated the external guarantee, kept the financial risks under control, and protected the interests of investors (3) The publication for information disclosure of the Company is China Securities, Securities Daily and Hong Kong Business IX Report of the Board of the Supervisors 1. The basic information of the meeting During the reporting period, there are two meetings of the Board of the Supervisors. (1) The third session of the Board of the Supervisors’ third meeting was held on March 16, 2004 and the report of the Board of the Supervisors for the year 2003, the annual financial report and the extract for the year 2003, the final financial settlement for the year 2003, the financial budget for the year 2004 and the X. Important Matters 1. Major litigations and arbitrations of the year In February, 2004, the Company’s subsidiary Changan Automobile Sales Co., Ltd. sued Beifang Pudong Economic and Technology Development Co., Ltd. for disputes over RMB 7,960,000 and RMB 1,500,000 has been executed and Chongqing Wanyou Economic Development Co., Ltd. paid back RMB 2,000,000 and will repay another RMB 3,800,000 by others means. 2. The acquisition and disposal of asset, and merger and acquisition during the year (1) Acquisition of assets The net profit Acquired Contributed to the Impact on the Transferring Acquired Price company from financial status and Company Assets (RMB acquisition date to operating results million) the year end (RMB million) Contribute to the arrangement and effectiveness of the 10 sales net of the CAC Subsidiaries of 2.47 -1.15 Company and no CAC disadvantage to the Company’s financial condition and operating results. (2) There was no sale of assets, merger and acquisitions in the reporting period. 3. Significant related party transactions In the reporting period, the information of the related party transactions with the accumulated amount over 30 million and 5% of the net assets is as follows: (1) Transaction Category a. Purchase of materials In the reporting period, the Company purchased automobile spare parts from Chongqing Changan Jinling Vehicles Parts Co., Ltd with the market price. The total transaction amount is RMB 521,098,456, which comprises 3.64% of the total transaction amount with same nature. The Company also sold raw materials to it at market price with total transaction amount of RMB59,929,453, which comprises 0.32% of the total amount of the same nature of transaction. In the reporting period, the Company purchased automobile spare parts from Chongqing Tsingshan Industries Co., Ltd at market price. The total transaction amount is RMB353,270,846, which comprises 2.47% of the total amount of the same nature transaction. The company also sold raw materials to it at market price with total transaction amount of RMB1,309,642, which comprised 0.01% of the total transaction amount with same nature. (2) Purchase of service In the reporting period, Chongqing Changan Minsheng Logistics Co. Ltd. Provide service of warehouse, logistic and transportation to the Company with the market price. The total transaction amount is RMB 608,554,286, which comprises 98.2% of the total transaction amount with same nature. (3) Impact on the Company Changan Jinling Vehicles Parts Co., Ltd and Chongqing Tsingshan Industries Co., Ltd are the mass producer of the automobile spare parts with the large capability and good quality, from whom the purchase could lower the cost and be good to the R&D of the new spare parts. The purchase from such related parties is necessary and will go on in the future. Chongqing Changan Minsheng Logistics Co. Ltd. is the professional provider of the logistic service, who transports the automobile and spare parts for the Company, which is good to the logistic management of the Company. Such transaction is necessary to the Company’s sales and production and will go on in the future. The above transaction is dealt based on the market price or the presumption price, and is fair and reasonable, which is necessary to the Company’s business and no harm to the Company and the non- related parties ‘benefits. 4. Major contracts and their fulfillment (1) There were no major entrustment, contracting by the Company of the assets of other companies and there were no major entrustment, contracting of the Company’s assets by other companies. The lease of the assets of other companies by the Company and lease of the assets of the Company was shown as follows According to the production needs, the Company rented the office building of Changan Automobile Group Company’s Sales Company, the total area is 4,560 square meters, the monthly rental is RMB 40 per sq. m., the remaining building is 34,355 square meters and monthly rental is RMB 35 per sq. m. The Company rented land of CAC of 405,152 square meters, monthly rental is RMB 10 per sq. m. CAC rented the offices of 5th, 8th, 9th and 10th floors of the Science and Technology Building of the Company due to office needs, the area is 9,056 square meters and monthly rental is RMB 40 per sq. m. (2) Major guarantee. There is no guarantee in the reporting period, or other guarantee, which occurred in the previous years and last in the reporting period. (3) Asset entrustment matters There is no entrustment of cash management occurred in the reporting period or one, which occurred in the previous years and last in the reporting period. 5. Commitment. During the reporting period, there is no commitment as to the Company or the shareholders who held more than 5% of total shares 6. During the reporting period, there were no changes of CPA firm. Auditor’s remuneration is shown below: In RMB Ten thousand Year Auditor Audit fees Others Note 2004 Pricewaterhous RMB 270 RMB 90 The Company provided eCoopers accommodation, but did not Zhongtian CPA bear traveling expenses Others is the charged due diligence service fee, which does not impact the audit opinion. PricewaterhouseCoopers Zhongtian CPA has provided the audit service to the Company for four years. 7 During the reporting period, nor did the Company, the Board and its directors receive any audit and investigation, disciplinary punishment, public criticism nor public censure from China Securities Regulatory Commission from the stock exchange. 8. Other important issues. (1)In August, 2004, the Company issues 148,850 thousand A shares, collecting RMB 1,058,580.thousand (2)On January 7, 2005, the Project of auto in No.2 factory, Changan Ford Automobile Co., Ltd obtained the approval from the National Development and Revolution Commission. For details of the issue, please refer to the notice of the Board of the Directors, notice No. 2005-02. (3) In the reporting period, the Company and Jiangling Automobile Group Corp jointly invested to in incorporate Jiangxi Jiangling Holding Co., Ltd. At present, the company is in the process of incorporation. For details of the issues, please refer to the notice of the Board of the Directors, notice No. 2004-17, 2004-18, 2004-19, 2004-20. CHONGQING CHANGAN AUTOMOBILE CO., LTD. CONSOLIDATED FINANCIAL STATEMENTS AND REPORT OF THE AUDITORS FOR THE YEAR ENDED 31 DECEMBER 2004 PwC ZT Shen Zi (2005) No. 2005/SH-081/WCML/MMJJ Report of the auditors To the shareholders of Chongqing Changan Automobile Co., Ltd. We have audited the accompanying consolidated balance sheet of Chongqing Changan Automobile Co., Ltd. (hereafter referred to as the “Company”) and its subsidiaries and its joint venture (hereafter collectively referred to as the “Group”) as of 31 December 2004 and the related consolidated statement of income, cash flow and changes in shareholders’ equity for the year then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as of 31 December 2004, and the Group’s results of operations and cash flows for the year then ended in accordance with International Financial Reporting Standards. PricewaterhouseCoopers Zhong Tian CPAs Ltd., Co. Shanghai, the People’s Republic of China 13 April 2005 CHONGQING CHANGAN AUTOMOBILE CO., LTD. CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2004 All amounts in Renminbi (“RMB”) thousands, except per share data Year ended 31 December Note 2004 2003 Sales 4 18,526,610 14,358,768 Sales tax and surcharge (632,618) (370,448) Net sales 17,893,992 13,988,320 Cost of sales (13,973,491) (10,465,301) Gross profit 3,920,501 3,523,019 Distribution costs (1,504,775) (1,194,687) Administrative expenses (1,108,021) (630,150) Other operating income and expenses 132,198 52,539 Profit from operations 5 1,439,903 1,750,721 Finance income – net 6 28,336 45,309 Share of result of associates 14 -946 Profit before tax 1,468,239 1,796,976 Taxation 8 (147,988) (258,496) Profit before minority interests 1,320,251 1,538,480 Minority interests 33 (123,036) (102,864) Net profit 1,197,215 1,435,616 Basic earnings per share (RMB per share) 9 0.84 1.17 The accompanying notes form an integral part of these consolidated financial statements. These consolidated financial statements have been approved by the Board of Directors of Chongqing Changan Automobile Co., Ltd. on 13 April 2005. CHONGQING CHANGAN AUTOMOBILE CO., LTD. CONSOLIDATED BALANCE SHEET AS AT 31 DECEMBER 2004 All amounts in Renminbi (“RMB”) thousands As at 31 December Note 2004 2003 ASSETS Non-current assets Property, plant and equipment 11 4,759,172 3,553,950 Land use rights 12 451,556 241,147 Intangible assets 13 176,637 118,307 Investments in associates 14 4,500 4,500 Available-for-sale investments 15 21,780 44,798 Other non-current assets 16 3,982 67,339 Deferred tax assets 17 97,410 100,447 5,515,037 4,130,488 Current assets Inventories 18 3,043,572 1,994,629 Receivables and prepayments 19 1,814,237 1,663,154 Trading investments 20 219,254 - Held-to-maturity investments 21 247,298 99,729 Pledged deposits 22 17,500 10,000 Term deposits with initial terms of over three months 23 423,000 680,000 Cash and cash equivalents 24 3,568,367 2,406,325 9,333,228 6,853,837 Total assets 14,848,265 10,984,325 The accompanying notes form an integral part of these consolidated financial statements. These consolidated financial statements have been approved by the Board of Directors of Chongqing Changan Automobile Co., Ltd. on 13 April 2005. CHONGQING CHANGAN AUTOMOBILE CO., LTD. CONSOLIDATED BALANCE SHEET (CONTINUED) AS AT 31 DECEMBER 2004 All amounts in Renminbi (“RMB”) thousands As at 31 December Note 2004 2003 EQUITY Shareholders’ equity Ordinary shares 30 1,620,849 1,226,666 Share premium 31 1,743,168 833,438 Reserves 32 1,451,496 1,053,878 Retained earnings 1,943,987 1,696,390 6,759,500 4,810,372 Minority interests 33 1,144,218 947,461 LIABILITIES Non-current liabilities Borrowings 26 535,000 245,000 Retirement benefit obligations 28 21,976 19,884 Deferred income 29 369,613 - 926,589 264,884 Current liabilities Trade and other payables 25 5,236,788 4,366,684 Current tax liabilities (17,032) 121,056 Borrowings 26 523,943 277,759 Provisions 27 274,259 196,109 6,017,958 4,961,608 Total liabilities 6,944,547 5,226,492 Total equity and liabilities 14,848,265 10,984,325 The accompanying notes form an integral part of these consolidated financial statements. These consolidated financial statements have been approved by the Board of Directors of Chongqing Changan Automobile Co., Ltd. on 13 April 2005. CHONGQING CHANGAN AUTOMOBILE CO., LTD. CONSOLIDATED SATATEMENT OF CHANGES IN SHAREHOLDERS’ EQUTIY FOR THE YEAR ENDED 31 DECEMBER 2004 All amounts in Renminbi (“RMB”) thousands Share Share Retained Note capital premium Reserves earnings Total (Note 30) (Note 31) (Note 32) Balance at 1 January 2003 1,226,666 833,438 627,955 784,830 3,472,889 Dividend relating to 2002 - - - (98,133) (98,133) Net profit for the year - - - 1,435,616 1,435,616 Reserve transfer - - 425,923 (425,923) - Balance at 1 January 2004 1,226,666 833,438 1,053,878 1,696,390 4,810,372 Cash dividend relating to 2003 10 - - - (306,667) (306,667) Bonus share relating to 2003 30 245,333 - - (245,333) - Issue of shares 30 148,850 909,730 - - 1,058,580 Net profit for the year - - - 1,197,215 1,197,215 Reserve transfer 32 - - 397,618 (397,618) - Balance at 31 December 2004 1,620,849 1,743,168 1,451,496 1,943,987 6,759,500 The accompanying notes form an integral part of these consolidated financial statements. These consolidated financial statements have been approved by the Board of Directors of Chongqing Changan Automobile Co., Ltd. on 13 April 2005. CHONGQING CHANGAN AUTOMOBILE CO., LTD. CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2004 All amounts in Renminbi (“RMB”) thousands Year ended 31 December Note 2004 2003 Cashflow from Operating Activities Cash generated from operations 35 1,687,480 1,882,912 Tax paid (234,981) (270,760) Net cash generated from operating activities 1,452,499 1,612,152 Cashflow from Investing Activities Proceeds from disposal of property, plant and equipment 35 17,255 2,613 Proceeds from disposal of land use rights -1,780 Decrease in term deposits with initial terms of over three months 257,000 - Investment income from securities investment 9,275 958 Cash received in relation to obtaining government grant 78,561 - Sub-total of cash inflow 362,091 5,351 Purchase of property, plant and equipment (1,470,312) (1,129,241) Purchase of land use rights (99,915) (27,302) Purchase of intangible assets (2,784) (14,310) Purchase of deferred assets (1,941) (1,288) Purchase of held-to-maturity investment (172,432) - Increase in term deposits with initial terms of over three months - (223,950) Purchase of available-for-sale investments - (2,900) Acquisition of a jointly controlled entity, net of cash acquired - (139,313) Acquisition of subsidiaries, net of cash acquired 34 (2,008) - Cash paid relating to other investing activities - (6,800) Sub-total of cash outflow (1,749,392) (1,545,104) Net cash used in investing activities (1,387,301) (1,539,753) CHONGQING CHANGAN AUTOMOBILE CO., LTD. CONSOLIDATED CASH FLOW STATEMENT (CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2004 All amounts in Renminbi (“RMB”) thousands Year ended 31 December Note 2004 2003 Cashflow from Financing Activities Contribution from minority shareholders 56,900 2,650 Gross proceeds from issue of shares 1,100,002 - Proceeds from borrowings 911,270 416,259 Sub-total of cash inflow 2,068,172 418,909 Repayment of borrowings (375,086) (260,000) Payment of interest expenses (28,132) (16,352) Dividends paid to shareholders (306,667) (98,133) Dividends paid to minority shareholders (18,130) (18,620) New share issue expenses (41,422) - Increase in pledged deposits (7,500) - Sub-total of cash outflow (776,937) (393,105) Net cash generated from financing activities 1,291,235 25,804 Net Increase in cash and cash equivalents 1,356,433 98,203 Cash and cash equivalents at beginning of year 2,506,054 2,407,851 Cash and cash equivalents at end of year 24 3,862,487 2,506,054 The accompanying notes form an integral part of these consolidated financial statements. These consolidated financial statements have been approved by the Board of Directors of Chongqing Changan Automobile Co., Ltd. on 13 April 2005. 1 General information Chongqing Changan Automobile Co. Ltd. (hereafter referred to as “the Company”) was established in the People’s Republic of China (hereafter referred to as the “PRC”) under the Company Law of the PRC on 31 October 1996. The Legal Representative’s Operating License issued by Chongqing Industrial and Commercial Administrative Bureau is Yu-Jing No. 28546236-3. 2 Summary of significant accounting policies The principal accounting policies adopted in the preparation of these consolidated financial statements are set out below: A Basis of preparation The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”), including International Accounting Standards (“IAS”) and Interpretations issued by the International Accounting Standards Board (“IASB”). The consolidated financial statements have been prepared under the historical cost convention except as disclosed in the accounting policies below. The Group adopted IFRS 3 “Business Combinations”, IAS 36 “Impairment of Assets” and IAS 38 “Intangible Assets” in relation to acquisitions with respective agreements dated on or after 31 March 2004 (Notes 2 G and I). Goodwill arising from the acquisitions with respective agreements dated before 31 March 2004 was amortised using the straight-line method over their estimated useful lives and recognised in the income statement. In accordance with the provisions of IFRS 3, goodwill arising from acquisitions with respective agreements dated on or after 31 March 2004 is not amortised but tested annually for impairment and carried at cost less accumulated impairment losses. There is no impact on opening retained earnings as at 1 January 2004 from the adoption of these standards. IASB has issued a number of new and revised IFRS which are effective for accounting periods beginning on or after 1 January 2005. The Group has not early adopted these new IFRS in these financial statements for the year ended 31 December 2004. The Group has already commenced an assessment of the impact of these new IFRS but is not yet in a position to state whether these new IFRS would have a significant impact on its results of operations and financial position. The preparation of financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management’s best knowledge of current event and actions, actual results ultimately may differ from those estimates. 2 Summary of significant accounting policies (continued) B Group accounting (1) Subsidiaries Subsidiaries, which are those entities in which the Group has an interest of more than one half of the voting rights or otherwise has power to govern the financial and operating policies, are consolidated. The existence and effect of potential voting rights that are presently exercisable or presently convertible are considered when assessing whether the Group controls another entity. Subsidiaries are consolidated from the date on which control is transferred to the Group and are no longer consolidated from the date that control ceases. The purchase method of accounting is used to account for the acquisition of subsidiaries. The cost of an acquisition is measured as the fair value of the assets given up, shares issued or liabilities undertaken at the date of acquisition plus costs directly attributable to the acquisition. The excess of the cost of acquisition over the fair value of the net assets of the subsidiary acquired is recorded as goodwill. See note G for the accounting policy on goodwill. Inter-company transactions, balances and unrealised gains on transactions between group companies are eliminated. Unrealised losses are also eliminated unless cost cannot be recovered. Where necessary, accounting policies of subsidiaries have been changed to ensure consistency with the policies adopted by the Group. (2) Jointly controlled entities A jointly controlled entity is a joint venture in respect of which a contractual arrangement is established between the participating venturers and whereby the Group together with the other venturers undertake an economic activity which is subject to joint control and none of the venturers has unilateral control over the economic entity. The Group’s interests in jointly controlled entities are accounted for by proportionate consolidation. The Group combines its share of the jointly controlled entity’s individual income and expenses, assets and liabilities and cash flows on a line-by-line basis with similar items in the Group’s financial statements. The Group recognises the portion of gains or losses on the sale of assets by the Group to the jointly controlled entity that is attributable to the other venturers. The Group does not recognise its share of profits or losses from the jointly controlled entity that results from the purchase of assets by the Group from the jointly controlled entity until it resells the assets to an independent party. However, if a loss on the transaction provides evidence of a reduction in the net realisable value of current assets or an impairment loss, the loss is recognised immediately. (3) Associates Investments in associates are accounted for by the equity method of accounting. Under this method the Company’s share of the post-acquisition profits or losses of associates is recognised in the income statement and its share of post-acquisition movements in reserves is recognised in reserves. The cumulative post-acquisition movements are adjusted against the cost of the investment. Associates are entities over which the Group generally has between 20% and 50% of the voting rights, or over which the Group has significant influence, but which it does not control. Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates; unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. The Group’s investment in associates includes goodwill (net of accumulated amortisation) on acquisition. When the Group’s share of losses in an associate equals or exceeds its interest in the associate, the Group does not to recognise further losses, unless the Group has incurred obligations or made payments on behalf of the associates. 2 Summary of significant accounting policies (continued) C Foreign currency translation (1) Measurement currency Items included in the financial statements of each entity in the Group are measured using the currency that best reflects the economic substance of the underlying events and circumstances relevant to that entity (“the measurement currency”).The consolidated financial statements are presented in RMB, which is the measurement currency of the Company. (2) Transactions and balances Foreign currency transactions are translated into the measurement currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies, are recognised in the income statement. D Property, plant and equipment (1) Owned assets Property, plant and equipment are stated at historical cost or, in the case of assets injected into the Group at the time of its reorganisation, at valuation less accumulated depreciation representing the deemed cost to the Group, less accumulated depreciation and any impairment losses. All direct and indirect costs relating to the acquisition or construction of property, plant and equipment including interest costs on related borrowed funds during the construction period are capitalised as property, plant and equipment. (2) Subsequent expenditure Repairs and maintenance are charged to the income statement during the financial period in which they are incurred. The cost of major renovations is included in the carrying amount of the asset when it is probable that future economic benefits in excess of the originally assessed standard of performance of the existing asset will flow to the Group. Major renovations are depreciated over the remaining useful life of the related asset. (3) Depreciation Depreciation is calculated over the actual production output or on a straight-line basis over their estimated useful life to write off the cost of each asset, to their residual values. Estimated useful life of property, plant and equipment is as follows: Buildings & Plants 20-40 years Equipment & Machinery 10-20 years Motor Vehicles 5-8 years Others 5 years 2 Summary of significant accounting policies (continued) D Property, plant and equipment (continued) (4) Construction in progress Construction of a building or plant is considered to be completed and transferred to property, plant and equipment on the date when substantially all the activities necessary to prepare the asset for its intended use are complete notwithstanding any delays in the issue of the relevant commissioning certificate by the appropriate PRC authorities. Interest costs on borrowings to finance the construction of property, plant and equipment are capitalised, during the period of time that is required to complete and prepare the asset for its intended use. All other borrowing costs are expensed. (5) Disposal and impairment Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount. Gains and losses on disposals are determined by comparing proceeds with carrying amount and are included in operating profit. E Land use rights Land use rights are stated at cost less accumulated amortisation and impairment losses. Cost represents consideration paid for the rights to use the land on which various plants and buildings are situated for periods varying from 30 to 50 years. Amortisation of the land use rights is calculated on a straight-line basis over the period of the land use rights. F Investments The Group classified its investments in debt and equity securities into the following categories: trading, held-to-maturity and available-for-sale. The classification is dependent on the purpose for which the investments were acquired. Management determines the classification of its investments at the time of the purchase and re-evaluates such designation on a regular basis. Investments that are acquired principally for the purpose of generating a profit from short-term fluctuations in price are classified as trading investments and included in current assets. Investments with a fixed maturity that management has the intent and ability to hold to maturity are classified as held-to-maturity and are included in non-current assets, except for maturities within 12 months from the balance sheet date which are classified as current assets. Investments intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, are classified as available-for-sale; and are included in non-current assets unless management has the express intention of holding the investment for less than 12 months from the balance sheet date or unless they will need to be sold to raise operating capital, in which case they are included in current assets. Purchase and sales of investments are recognised on the trade date, which is the date that the Group commits to purchase or sell the asset. Cost of purchase includes transaction costs. Trading and available-for-sale investments are subsequently carried at fair value at each balance sheet date where an active market exists. The fair values of investments are based on quoted bid prices or amounts derived from cash flow models. Fair values for unlisted investments are estimated using applicable price/earnings or price/cash flow ratios refined to reflect the specific circumstances of the investee company. Realised and unrealised gains and losses arising from changes in the fair value of trading and available-for-sale investments are included in the consolidated income statement in the period in which they arise. 2 Summary of significant accounting policies (continued) F Investments (continued) Investments for which fair values cannot be measured reliably because of the absence of a quoted market price in an active market, and for which other methods of reasonably estimating fair value are clearly unworkable, are recognised at cost less impairment. Held-to-maturity investments are carried at amortised cost using the effective yield method. G Intangible assets (1) Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net identifiable assets of the acquired subsidiary/jointly controlled entity/associate at the date of acquisition. Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill on acquisitions of associates is included in investments in associates. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Goodwill arising from acquisitions with respective agreements dated before 31 March 2004 is amortised using the straight-line method over its estimated useful life. Management determines the estimated useful life of goodwill based on its evaluation of the respective companies at the time of the acquisition, considering factors such as existing market share, potential growth and other factors inherent in the acquired companies. For all acquisitions, goodwill is generally amortised over 10 years. At each balance sheet date the Group assesses whether there is any indication of impairment. If such indications exist an analysis is performed to assess whether the carrying amount of goodwill is fully recoverable. A write down is made if the carrying amount exceeds the recoverable amount. In accordance with the provisions of IFRS 3, goodwill arising from acquisitions with respective agreements dated on or after 31 March 2004 is not amortised but tested annually for impairment and carried at cost less accumulated impairment losses. Goodwill is allocated to cash-generating units for the purpose of impairment testing. Negative goodwill represents the excess of the fair value of the Group’s share of the net assets of the acquired subsidiary/jointly controlled entity/associate over the cost of an acquisition. Negative goodwill arising from acquisitions with respective agreements dated before 31 March 2004 is amortised using the straight-line method over their estimated useful lives and recognised in the income statement until 31 December 2004, and will be derecognised on 1 January 2005, with a corresponding adjustment to retained earnings as at 1 January 2005. Management determines the estimated useful lives of negative goodwill based on the remaining weighted average useful lives of the identifiable acquired depreciable /amortisable assets of the respective business at the time of the acquisition. For negative goodwill arising from acquisitions with respective agreements dated on or after 31 March 2004, the Group reassesses the identification and measurement of the identifiable assets and liabilities and contingent liabilities and the measurement of the cost of the combination. Any excess of the fair value of the Group’s share of net assets of the subsidiary/jointly controlled entity/associate over the cost of the acquisition after that reassessment is recognised immediately in the income statement. (2) Proprietary technology Proprietary technology is stated at cost less amortisation. Amortisation is calculated on a straight-line basis over the expected beneficial period starting from the date of use. 2 Summary of significant accounting policies (continued) G Intangible assets (continued) (3) Trademark Trademark is stated at cost less accumulated amortisation. Amortisation is calculated on a straight-line basis over the expected beneficial period starting from the date of use. (4) Software Software is stated at cost less accumulated amortisation. Amortisation is calculated on a straight- line basis over the expected beneficial period starting from the date of use. H Deferred assets Deferred assets are stated at cost less accumulated amortisation. Amortisation is calculated on a straight-line basis over the useful life of the deferred assets. I Impairment of assets Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. 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). J Leases (1) A group company is the lessee 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 income statement on a straight-line basis over the period of the lease. (2) A group company is the lessor Assets leased out under operating leases are included in property, plant and equipment in the balance sheet. They are depreciated over their expected useful lives on a basis consistent with similar owned property, plant and equipment. Rental income (net of any incentives given to lessees) is recognised on a straight-line basis over the lease term. K Inventories Inventories are stated at the lower of cost or 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) but excludes borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business, less the costs of completion and selling expenses. 2 Summary of significant accounting policies (continued) L Trade receivables Trade receivables are carried at original invoice amount less provision made for impairment of these receivables. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. The amount of the provision is the difference between the carrying amount and the recoverable amount, being the present value of estimated future cash flows, discounted at the effective interest rate. The amount of the provision is recognised in the income statement. M Cash and cash equivalents Cash and cash equivalents are carried in the balance sheet at cost. For the purposes of the cash flow statement, cash and cash equivalents includes cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less, and bank overdrafts. Bank overdrafts are included within borrowings in current liabilities on the balance sheet. N Share capital Share capital consists of “A” and “B” ordinary shares. Incremental external costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds. O Borrowings Borrowings are recognised initially at the proceeds received, net of any transaction costs incurred. Borrowings are subsequently stated at amortised cost using the effective yield method; any difference between proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings. P Deferred income tax Deferred income tax is provided in full, using the liability method, on temporary differences between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Currently enacted tax rates are used in the determination of deferred income tax. Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred income tax is provided on temporary differences arising from investments in subsidiaries, associates and jointly controlled entities, except where the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. 2 Summary of significant accounting policies (continued) Q Employee benefits (1) Pension obligations The Group contributes on a monthly basis to various defined contribution retirement schemes managed by the PRC government. The contributions to the schemes are charged to the income statement as and when incurred. The Group’s obligations are determined at a certain percentage of the salaries of the employees. In addition, the Group provides supplementary pension subsidies to certain qualified employees. Such pension obligation is estimated based on the present value of the estimated future cash outflows discounted using interest rates typically available to the Group through bank deposit accounts. (2) Termination benefits Termination benefits are payable whenever an employee’s employment is terminated before the normal retirement date or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Group recognises termination benefits when it is demonstrably committed to either terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal or providing termination benefits as a result of an offer made to encourage voluntary redundancy. Benefits falling due more than 12 months after balance sheet date are discounted to present value. (3) Housing fund and other benefits The Group’s full-time employees are entitled to participate in a state-sponsored housing fund. The fund can be used by the employees for the purchase of apartment accommodation, or may be withdrawn upon their retirement. The Group is required to make annual contributions to the state- sponsored housing fund equivalent to a certain percentage of the employees’ salaries. In addition, the Company provided subsidies to eligible employees for the purchase of flats and accounted for such subsidies when occurred. In addition, the Group makes a provision at 14% of the total salary of its employee for general welfare. (4) Profit sharing and bonus plan The Company recognises a liability and expense for bonus plans based on a formula that takes into consideration the profit attributable to the Company’s shareholders. The Group recognises a provision where contractually obliged or where there is a past practice that has created a constructive obligation. R Provisions Provisions, mainly warranty cost, are recognised when the 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 a reliable estimate of the amount can be made. Where the Group expects a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. 2 Summary of significant accounting policies (continued) S Revenue recognition Revenue comprises the invoiced value for the sale of goods and services net of value-added tax, rebates and discounts, and after eliminating sales within the Group. Revenue from the sale of goods is recognised when significant risks and rewards of ownership of the goods are transferred to the buyer. Revenue from rendering of services is based on the stage of completion determined by reference to services performed to date as a percentage of total services to be performed. Rental income is recognised on an accrual basis. Interest income is recognised on a time proportion basis, taking account of the principal outstanding and the effective rate over the period to maturity, when it is determined that such income will accrue to the Group. Dividends are recognised when the right to receive payment is established. T Dividends Dividend distribution to the Company’s shareholders is recognised as a liability in the Group’s financial statement in the period in which they are approved by the Company’s shareholders. U Research and development Research expenditure is recognised as an expense as incurred. Costs incurred on development projects (relating to the design and testing of new or improved products) are recognised as intangible assets when it is probable that the project will be a success considering its commercial and technological feasibility, and only if the cost can be measured reliably. Other development expenditures are recognised as an expense as incurred. Development costs previously recognised as an expense are not recognised as an asset in a subsequent period. Development costs that have been capitalised are amortised from the commencement of the commercial production of the product on a straight-line basis over the period of its expected benefit. No development costs were capitalised by the Group during the year ended 31 December 2004 (2003: nil). V 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 the Group will comply with all attached conditions. Government grants relating to costs are deferred and recognised in the income statement over the period necessary to match them with the costs they are intended to compensate. Government grants not relating to future costs are recognised on receipt basis. Government grants relating to the purchase of property, plant and equipment are included in non-- current liabilities as deferred income and are credited to the income statement on a straight line basis over the expected lives of the related assets. 2 Summary of significant accounting policies (continued) W Segment reporting The Group’s turnover and profit for the year were mainly derived from the manufacture and domestic sale of automobiles and the principal assets employed by the Group are located in the PRC. Accordingly, no segmental analysis by business and geographical segments has been provided for the year. 3 Financial risk management The financial assets of the Group include cash and bank balances, cash and time deposits with a related financial institution, investments, accounts and bills receivable, prepayments and other receivables, and amounts due from related companies. The financial liabilities of the Group include bank loans, accounts and bills payable, receipts in advance, accruals and other payables, accrued staff welfare and benefits and amounts due to related companies. (1) Interest rate risk The Group’s income and operating cash flows are substantially independent of changes in market rates. The interest rates and terms of the repayment of bank borrowings of the Group are disclosed in Note 26 to the financial statements. (2) Credit risk The Group does not have a significant exposure to any individual customer or counterparty. Credit risk on receivables has already been accounted for in the financial statements as they are shown net of provisions for bad and doubtful debts. (3) Liquidity risk Due to the dynamic nature of the underlying businesses, the Group aims at maintaining flexibility in funding by keeping committed credit lines available. (4) Fair values The fair values of cash and bank balances, cash placed with a related financial institution, short term investments, receivables and prepayments, trade and other payables, current tax liabilities, provisions, are not materially different from their carrying amounts. The carrying values of short term borrowings are estimated to approximate their fair values based on the nature or short term maturity of these instruments. The fair values of long term borrowings, estimated by applying a discounted cash flow using current market interest rates for similar financial instruments, approximate their carrying values. Fair value estimates are made at a specific point in time and are based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgement, and therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Notes to the consolidated financial statements 4 Sales The Group principally derives its turnover from the manufacture, assembly and sale of automobiles, related spare parts and components. Sales represent the total invoiced value of goods supplied to customers, net of returns and allowances. Sales are made principally in the PRC. 5 Profit from operations The following items have been included in arriving at profit from operations: 2004 2003 Depreciation on property, plant and equipment (Note 11) 373,104 287,086 Amortisation of land use rights (Note 12) 7,688 4,343 Amortisation of intangible assets (Note 13) 17,081 12,013 Amortisation of deferred assets (Note 16) 3,131 6,438 Impairment charge for property, plant and equipment (Note 11) 767 2,164 (Reversal of)/Impairment charge for bad and doubtful debts (Note 35) (11,512) 32,609 Loss on disposal of property, plant and equipment (Note 35) 9,753 98,118 Loss on disposal of land use rights (Note 35) - 1,873 Loss on disposal of other non-current assets (Note 35) 67 - Repairs and maintenance expenditure on property, plant and equipment 106,273 113,722 Research and development expenditure 546,884 297,801 Operating lease rentals − property and land use rights 56,589 28,276 Cost of inventories included in cost of sales 13,973,491 10,465,301 Provision for/(reversal of) slow moving and obsolete inventories (Note 35) 5,323 (38,688) Staff costs (Note 7) 596,170 505,584 Impairment charge for/(reversal of) available-for-sale investment (Note 35) 27,918 (678) Income from securities investment (Note 35) (9,275) (958) Government grants relating to costs (Note a) (27,168) (21,409) Amortisation of deferred income (Note 29) (8,815) - Note a: In 2004, the Group obtained and recognised government grants of RMB 27,168 in relation to research and development activities (2003: RMB 21,409). 6 Finance income – net 2004 2003 Interest expense (Note 35) (25,366) (15,115) Interest income 66,506 66,314 Net foreign exchange gain 1,130 1,612 Discount expense (10,921) (7,412) Others (3,013) (90) 28,336 45,309 7 Staff costs 2004 2003 Wages and salaries 439,737 384,602 Social security costs 85,178 66,546 Pension costs − defined contribution plans 66,140 56,569 Other pension costs 5,115 (2,133) 596,170 505,584 The average number of employees in 2004 was 14,571 (2003: 13,158), 696 of whom (2003: 460) were part-time. The employees of the Group participate in various defined contribution pension plans organised by relevant municipal and provincial governments under which the Group was required to make monthly contributions to these plans. Other pension costs represent supplementary pension subsidies provided by the Group to certain qualified employees (See also Note 28). 8 Taxation (1) Enterprise Income Tax (“ EIT”) Details of taxation charged during the year are as follows: 2004 2003 Current tax charge (144,951) (261,731) Deferred tax (charge)/credit (Note 17) (3,037) 3,235 (147,988) (258,496) The tax on the Group’s profit before tax differs from the theoretical amount that would arise using the applicable tax rate of the Company as follows: 2004 2003 Profit before tax 1,468,239 1,796,976 Tax calculated at the Company’s tax rate of 15% (2003: 15%) 220,236 269,546 Effect of different tax rates for subsidiaries (59,444) (21,667) Tax credit/refund (3,000) (23,993) Tax deduction arising from research and development expenditure (25,375) (424) Expenses not deductible for tax purposes 18,261 35,034 Utilisation of previously unrecognised tax losses (2,690) - Tax charge 147,988 258,496 8 Taxation (continued) The Company is qualified as a domestic enterprise in encouraged industries. As approved by the relevant tax authorities, the Company is entitled to a preferential EIT rate of 15% and is exempt from local income tax. Chongqing Changan Suzuki Automobile Co., Ltd. (hereafter referred to as “Changan Suzuki”) is qualified as a foreign investment production enterprise as well as advanced technology enterprise. Accordingly, the applicable EIT rate is 15%. As approved by the tax authorities, Changan Suzuki is entitled to a two year exemption from income taxes followed by three years of a 50% tax reduction, commencing from the first cumulative profit-making year net of losses carried forward. Year 2002 was the third year of 50% tax reduction. According to Preferential Policies for Encouraging Foreign Investment issued by local government of Chongqing, Changan Suzuki is entitled to three additional years of 50% tax reduction at a minimum EIT rate of 10%. Accordingly, Changan Suzuki is subject to a preferential EIT rate of 10% for three years from 2003 to 2005. Changan Ford Automobile Co., Ltd. (hereafter referred to as “Changan Ford”), a jointly controlled entity of the Company, is qualified as a foreign investment production enterprise as well as advanced technology enterprise. Accordingly, the applicable EIT rate is 15%. As approved by the tax authorities, Changan Ford is entitled to a two year exemption from income taxes followed by three years of a 50% tax reduction, commencing from the first cumulative profit-making year net of losses carried forward. Year 2004 is the first cumulative profit-making year net of losses carried forward. Accordingly, Changan Ford is entitled to EIT exemption in 2004. As approved by relevant tax authorities, Chongqing Changan Special Automobile Co., Ltd. (hereafter referred to as “Changan Special”) is entitled to EIT exemption for 2004. The EIT rate of other subsidiaries of the Group is 33%. (2) Value-Added Tax (“VAT”) Output VAT is levied at a general rate of 17% on the selling price of goods. Input VAT paid on purchase of goods can be used to offset the output VAT to determine the net VAT payable. (3) Consumption Tax (“CT”) The Group’s automobile sale is subject to CT at rates ranging from 3% to 8% on the selling price of goods. In October 2003, Changan Suzuki obtained an approval from the Ministry of Finance (hereafter referred to as “MOF”) and the National Tax Bureau (hereafter referred to as “NTB”) (Document caishui [2003] No. 218) to enjoy a 30% CT reduction for certain of its products manufactured and sold during the period from April 2002 to December 2003. During the year, Changan Suzuki recognised RMB 35.38 million (2003: RMB 37.49 million) of such CT reduction. In February 2004, the Company obtained an approval from the MOF and the NTB (Document caishui [2004] No. 5) to enjoy a CT reduction amounting to RMB 3.76 million for certain of its products manufactured and sold during the period from March 2001 to December 2003. 9 Earnings per share Basic earnings per share is calculated by dividing the net profit attributable to shareholders of the Company by the weighted average number of ordinary shares in issue during the year. 2004 2003 Net profit attributable to shareholders of the Company 1,197,215 1,435,616 Weighted average number of ordinary shares in issue (thousands) 1,419,394 1,226,666 Basic earnings per share (RMB per share) 0.84 1.17 No diluted earnings per share is presented as there were no dilutive potential ordinary shares outstanding during the years ended 31 December 2004 and 2003. 10 Dividend per share On 13 April 2005, for every ten shares, the Board of Directors proposed a final cash dividend of RMB 3.2 Yuan (relevant tax included), amounting to a total of RMB 518,672 (2003: cash dividend: RMB 306,667, bonus share: 245,333,200 shares) for the year ended 31 December 2004. The proposed dividend distribution is subject to the shareholders’ approval in their next meeting and will be recorded in the Group’s financial statements for the year ending 31 December 2005. 11 Property, plant and equipment Buildings & Equipment & Construction Plants Machinery Motor Vehicles in progress Others Total Year ended 31 December 2003 Opening net book amount 525,109 1,464,248 23,435 504,612 18,091 2,535,495 Acquisition of jointly controlled entity 53,907 139,439 4,581 27,908 52,734 278,569 Additions 3,240 333,944 3,290 779,145 14,306 1,133,925 Transfers 63,967 316,006 7,942 (402,660) 14,745 - Disposals (Note 35) (2,204) (88,854) (627) (7,967) (586) (100,238) Others - (3,510) - - (1,041) (4,551) Depreciation charge (Note 5) (21,002) (246,284) (5,053) - (14,747) (287,086) Impairment charge (Note 5) - - (2,164) - - (2,164) Closing net book amount 623,017 1,914,989 31,404 901,038 83,502 3,553,950 At 31 December 2003 Cost 753,746 3,358,943 54,394 901,038 132,334 5,200,455 Accumulated depreciation (130,729) (1,443,954) (20,826) - (48,832) (1,644,341) Impairment charge - - (2,164) - - (2,164) Net book amount 623,017 1,914,989 31,404 901,038 83,502 3,553,950 Year ended 31 December 2004 Opening net book amount 623,017 1,914,989 31,404 901,038 83,502 3,553,950 Acquisition of subsidiaries (Note 34) - 298 - - - 298 Additions 140,608 94,760 12,862 1,365,027 20,631 1,633,888 Transfers 358,275 938,025 18,474 (1,444,616) 129,842 - Disposals (Note 35) (1,575) (48,954) (3,027) (1,536) (1) (55,093) Depreciation charge (Note 5) (57,395) (281,026) (8,226) - (26,457) (373,104) Impairment charge (Note 5) - (2,931) 2,164 - - (767) Closing net book amount 1,062,930 2,615,161 53,651 819,913 207,517 4,759,172 At 31 December 2004 Cost 1,249,362 4,298,128 78,078 819,913 281,773 6,727,254 Accumulated depreciation (186,432) (1,680,036) (24,427) - (74,256) (1,965,151) Impairment charge - (2,931) - - - (2,931) Net book amount 1,062,930 2,615,161 53,651 819,913 207,517 4,759,172 11 Property, plant and equipment (continued) During 2004, interest expenses of RMB 4,241 (2003: RMB 1,237) arising from financing specifically entered into for the construction of property, plant and equipment were capitalised in the cost of construction in progress at the rate of 5.72% (2003: 5.76%) per annum. All of the Group’s buildings are located in the PRC. The Group is in the process of obtaining building ownership certificates for properties with an aggregate net book value of RMB 300,058 (2003: RMB 49,448). As at 31 December 2004, buildings with an aggregate net book value of RMB 12,990 (2003: RMB 20,595) have been pledged as securities for short-term loans (Note 26). The Company was established in the PRC on 31 October 1996 as a joint stock limited company as part of the restructuring of Changan Automobile Group Co. Ltd. (hereafter referred to as “CAC”), a state-owned enterprise. On the same date, the mini-automobile and engine equipment manufacturing business of CAC together with the relevant assets and liabilities were taken over by the Company. As required by relevant PRC rules and regulations a valuation of the assets and liabilities to be injected into the Company was carried out on 31 December 1995 and approved by the State-owned Assets Administration Bureau and the injected assets and liabilities were reflected in the accounts on this basis. The 1995 valuation was a one-off exercise that established the deemed cost of the property, plant and equipment injected on the formation of the Company. Subsequent revaluations have not been performed and all further additions have been recorded at cost. 12 Land use rights 2004 2003 At beginning of year 241,147 149,655 Acquisition of jointly controlled entity - 72,186 Additions 218,097 27,302 Disposals - (3,653) Amortisation charge (Note 5) (7,688) (4,343) At end of year 451,556 241,147 As at 31 December 2004, no land use right (2003: land use right with a net book value of RMB 61,620) has been pledged as securities for short-term loans (Note 26). During the year, the Group agreed to acquire land use right at a total consideration of RMB 125,775, of which the Group prepaid RMB 78,561 as at 31 December 2004. As at 31 December 2004, the Group is in the process of obtaining land use right certificates with an aggregate net book value of RMB 20,305 (2003: RMB 10,000). 13 Intangible assets Goodwill Trademark Proprietary technology Software Total Year ended 31 December 2003 Opening net book amount - 30,437 16,898 2,331 49,666 Additions 66,344 - 11,321 2,989 80,654 Amortisation charge (Note 5) (1,915) (2,451) (6,836) (811) (12,013) Closing net book amount 64,429 27,986 21,383 4,509 118,307 At 31 December 2003 Cost 66,344 33,502 38,487 5,558 143,891 Accumulated amortisation (1,915) (5,516) (17,104) (1,049) (25,584) Net book amount 64,429 27,986 21,383 4,509 118,307 Year ended 31 December 2004 Opening net book amount 64,429 27,986 21,383 118,307 4,509 Additions 73,043 - 228 2,556 75,827 Amortisation charge (Note 5) (6,635) (2,451) (6,840) (1,155) (17,081) Other transfer out (416) - - - (416) Closing net book amount 130,421 25,535 14,771 5,910 176,637 At 31 December 2004 Cost 138,971 33,502 38,715 8,114 219,302 Accumulated amortisation (8,550) (7,967) (23,944) (2,204) (42,665) Net book amount 130,421 25,535 14,771 5,910 176,637 Intangible assets represent goodwill arising principally from acquisition of subsidiaries and jointly controlled entity, trademark of “Chana” and proprietary technology for the manufacturing of advanced model of the “Alto” mini-sedan and “Changan Star” automobile. 14 Investments in associates 2004 2003 At beginning of year 4,500 156,150 Share of results (Note 35) - 946 Transfer to jointly controlled entity - (152,596) At end of year 4,500 4,500 Details of the associate, which is unlisted, are: Country of Attributable establishment equity Chongqing Changan Information Technology Co., Ltd. PRC 21.43% 15 Available-for-sale investments 2004 2003 South-western Securities Co., Ltd. 50,000 50,000 Chongqing International Golf Club Co., Ltd. 4,900 - Chongqing Baoteman Biotechnology Co., Ltd. 3,000 3,000 Chongqing Certification Authority Co., Ltd. 1,000 1,000 Chongqing Changan Jinling Vehicles Parts Co., Ltd. 2,900 2,900 Sub-total 61,800 56,900 Less: impairment provision (40,020) (12,102) Total 21,780 44,798 All of the Group’s available-for-sale investments represent investment in unlisted companies, which do not have a quoted market price in an active market and for which other methods of reasonably estimating fair value are clearly unworkable. Accordingly, these investments are carried at cost less accumulated impairment losses. South-western Securities Co., Ltd. (hereafter referred to as “South-western Securities”), is a limited liability company established in the PRC as approved by the China Securities Regulatory Commission. The business of South-western Securities includes purchases and sales of securities, securities underwriting, and investment consulting. The Group holds 3.07% equity interest in South-western Securities. As at 31 December 2004, an impairment provision of RMB 40,020 has been made. Directors are of the opinion that the underlying value of the investments is not less than their carrying value as at 31 December 2004. 16 Other non-current assets 2004 2003 Deferred assets 3,982 5,239 Long-term receivable (Note 26) - 62,100 3,982 67,339 65 16 Other non-current assets (continued) Movement of deferred assets Year ended 31 December 2003 Opening net book amount 10,389 Additions 1,288 Amortisation charge (Note 5) (6,438) Closing net book amount 5,239 At 31 December 2003 Cost 21,808 Accumulated amortisation (16,569) Net book amount 5,239 Year ended 31 December 2004 Opening net book amount 5,239 Additions 1,941 Amortisation charge (Note 5) (3,131) Disposal (67) Closing net book amount 3,982 At 31 December 2004 Cost 17,525 Accumulated amortisation (13,543) Net book amount 3,982 17 Deferred tax assets Deferred income taxes are calculated in full on temporary differences under the liability method using a principal tax rate of 15% (2003: 15%). The movement on the deferred income tax account is as follows: 2004 2003 At beginning of year 100,447 97,212 Income statement (charge)/credit (Note 8) (3,037) 3,235 At end of year 97,410 100,447 Provisions Deferred tax assets and accruals Impairment loss Others Total At 1 January 2004 75,362 23,914 1,171 100,447 Income statement (charge)/credit (4,639) (824) 2,426 (3,037) At 31 December 2004 70,723 23,090 3,597 97,410 66 17 Deferred tax assets (Continued) The amounts shown in the balance sheet include the following: 2004 2003 Deferred tax assets to be recovered after more than 12 months 13,902 7,299 18 Inventories 2004 2003 Raw materials (at net realisable value) 942,554 636,759 Work in progress (at cost) 83,577 90,395 Finished goods (at net realisable value) 1,980,733 1,245,362 Consumables (at cost) 36,708 22,113 3,043,572 1,994,629 19 Receivables and prepayments 2004 2003 Trade receivables 417,689 527,461 Less : Provision for bad and doubtful debts (115,306) (146,892) Trade receivables – net 302,383 380,569 Notes receivables 1,175,940 999,797 Advances to suppliers 234,939 152,232 Other receivables 100,975 130,556 1,814,237 1,663,154 Receivables from related parties are disclosed in Note 36. 20 Trading investments As at 31 December 2004, the Group has marketable securities of RMB 219,254 (2003: nil) that were acquired principally for the purpose of generating a profit from short-term fluctuations in price. Trading investments are stated at fair value at the close of business at year end. 21 Held-to-maturity investments As at 31 December 2004, held-to-maturity investments comprise marketable securities of RMB 247,298 (2003: RMB 99,729) with fixed maturity within 12 months from the balance sheet date. As at 31 December 2004, marketable securities of RMB 74,866 (2003: RMB 99,729) are of original maturity less than three months and are included in cash and cash equivalents for the purpose of the cash flow statement (Note 24). 22 Pledged deposits 2004 2003 Pledged deposits 17,500 10,000 Corresponding bank borrowings 535,000 245,000 67 23 Term deposits with initial terms of over three months As at 31 December 2004, RMB 423,000 (2003: RMB 680,000) of the Group’s term deposits with initial terms of over three months were denominated in Renminbi and deposited with banks in the PRC. The weighted average effective interest rate on such deposits was 1.91% per annum for the year ended 31 December 2004 (2003: 1.90%). 24 Cash and cash equivalents 2004 2003 Cash at bank and in hand 3,568,367 2,406,325 As at 31 December 2004, the Company had deposits of RMB 382,077 (2003: RMB 156,961) with North Industry Group Finance Co., Ltd. The interest rate is 1.44% per annum. North Industry Group Finance Co., Ltd., a non-bank financial institution, is an associate of the ultimate parent of the Company. For the purpose of the cash flow statement, cash and cash equivalents comprise the following: 2004 2003 Cash at bank and in hand 3,568,367 2,406,325 Trading investments (Note 20) 219,254 - Held-to-maturity investments with original maturity less than three months (Note 21) 74,866 99,729 Cash and cash equivalents in the cash flow statement 3,862,487 2,506,054 25 Trade and other payables 2004 2003 Trade payables 2,875,566 2,694,073 Notes payable 976,608 131,366 Other payables 493,136 633,515 Accrued expenses 314,182 179,102 Accrued sales compensation 237,350 274,658 Accrued payroll and welfare 87,099 86,795 Advances from customers 252,847 367,175 5,236,788 4,366,684 Payables to related parties are disclosed in Note 36. 26 Borrowings 2004 2003 Current Bank borrowings - unsecured 415,943 183,259 - secured 33,000 94,500 448,943 277,759 Unsecured borrowings from CAC (Note 36 (4)) 75,000 - 523,943 277,759 Non-current Bank borrowings - secured 535,000 245,000 Total borrowings 1,058,943 522,759 68 26 Borrowings (continued) Current bank loans bear interest at rates ranging from 2.77% to 5.48% per annum (2003: 1.98% to 6.96%). RMB 33,000 (2003: RMB 84,000) of such loans were secured by buildings with net book value of RMB 12,990 (2003: buildings with net book value of RMB 20,595 and land use rights with net book value of RMB 61,620). Other current secured bank loans as at 31 December 2003 were guaranteed by letters of credit provided by two commercial banks. Non-current bank loans bear interest at rates ranging from 5.58% to 5.85% per annum (2003: 5.76% to 6.21%) and were guaranteed by CAC and secured by cash at bank of RMB 17,500 (2003: RMB 10,000). Maturity of non-current borrowings is as follows: 2004 2003 Between 3 and 4 years 100,000 - Between 4 and 5 years 280,000 100,000 Over 5 years 155,000 145,000 535,000 245,000 The Group has the following undrawn borrowing facilities: 2004 2003 Floating rate - expiring beyond one year 665,000 955,000 The Company has obtained a loan facility of RMB 1,200,000 for the financing of upgrading the Company’s production technology. As granted by the bank, RMB 205,000 of such bank facility can be utilised by Chongqing Tsingshan Industries Co., Ltd. (hereafter referred to as “Chongqing Tsingshan”), which will bear the related interest expense. As at 31 December 2003, an advance of RMB 62,100 was made by the Company to Chongqing Tsingshan by utilisation of the bank loan facility and the Company recognised such advance as other non-current assets. As at 31 December 2004, pursuant to an agreement between the Company and Chongqing Tsingshan, the Company settled the total advance of RMB 92,100 made to Chongqing Tsingshan by offsetting the Group’s trade payables due to Chongqing Tsingshan. 27 Provisions 2004 2003 At beginning of year 196,109 96,564 Acquisition of jointly controlled entity - 8,864 Charged for the year 262,605 258,032 Utilised during year (184,455) (167,351) At end of year 274,259 196,109 The above represents the warranty costs for repairs and maintenance, which are estimated based on present after-sale service policies and prior years’ experiences on the incurrence of such costs. 28 Retirement benefit obligations 2004 2003 At beginning of year 23,751 28,956 Interest cost 1,009 1,098 Actuarial loss/(gain) 4,106 (3,231) Payments (3,697) (3,072) At end of year 25,169 23,751 28 Retirement benefit obligations (continued) 2004 2003 69 Current (included in other payables) 3,193 3,867 Non-current 21,976 19,884 25,169 23,751 In addition to monthly contributions to various defined contribution retirement schemes managed by the PRC government, the Group provided supplementary pension subsidies to certain qualified employees. Such pension obligations were actuarially recorded using the projected unit credit method and the material actuarial assumptions used in valuing these obligations are as follows: i. Discount rate adopted: 5% for normal retiree and 3% for early retiree; ii. Mortality: 80% of average life expectancy of residents in the PRC. 29 Deferred income 2004 2003 At beginning of year - - Addition -- Purchase of property, plant and equipment and land use right by the Company (Note a) 251,809 - - Purchase of land use right by Changan Ford (Note b) 78,561 - - Tax credit arising from purchase of domestically manufactured machinery and equipment (Note c) 48,058 - Amortisation charge (Note 5) (8,815) - At end of year 369,613 - Note: a. In 2004, the Company increased its equity interest in Nanjing Changan by injecting certain of its property, plant and equipment (“PPE”) and land use right to Nanjing Changan. The Company purchased these PPE and land use right at a consideration of RMB 50,000 from the local government of Nanjing, Jiangsu Province, while their fair values are RMB 301,809. Difference of RMB 251,809 represented government grant and was recognised as deferred income during the year ended 31 December 2004. b. In 2004, Changan Ford signed an agreement to purchase certain land use right at a total consideration of RMB 251,550 from the local government of Nanjing, Jiangsu Province and has prepaid RMB 157,122 as at 31 December 2004. A government grant of RMB 157,122 was received and recognised by Changan Ford as deferred income during the year ended 31 December 2004. The Company’s proportionate interest in such deferred income of RMB 78,561 was recognised in the consolidated financial statements of the Group. As at 31 December 2004, Changan Ford has not obtained the land use right and accordingly no amortisation of this deferred income is recognised. c. In 2004, the Group obtained certain tax credit of RMB 48,058 arising from purchase of domestically manufactured machinery and equipment. Such tax credit was recognised as deferred income during the year ended 31 December 2004. 70 30 Share capital Non-tradable Tradable Number of shares Domestic Internal (in thousands) legal entity employee shares shares “A” shares “B” shares Total Year ended 31 December 2003 Balance at 31 December 2002 and 2003 708,666 21 167,979 350,000 1,226,666 Year ended 31 December 2004 Balance at 1 January 2004 708,666 21 167,979 350,000 1,226,666 Bonus shares 141,733 4 33,596 70,000 245,333 Issue of shares - 2 148,848 - 148,850 Balance at 31 December 2004 850,399 27 350,423 420,000 1,620,849 All the “A” and “B” shares are registered, issued and fully paid ordinary shares of RMB 1 Yuan each. All the “A” and “B” shares rank pari passu in all respects. Upon established as a joint stock limited company on 31 October 1996, the Company issued 506,190,000 shares to its sole sponsor CAC in exchange for the operating net assets and related assets of the mini-automobile and engine equipment manufacturing lines. In addition, the Company issued 250,000,000 “B” shares to overseas investors, resulting in an aggregate share capital of RMB 756,190 on the date of establishment. On 19 May 1997, with the approval of China Securities Regulatory Commission, the Company issued 120,000,000 “A” shares to domestic public investors, thereby increasing the total share capital to RMB 876,190. On 26 June 1998, the Company issued bonus shares on the basis of 4 shares for each 10 shares to the existing 876,190,000 shares in issue as at 31 December 1997. The bonus shares were issued as a distribution from the share premium account. As a result, RMB 350,476 was transferred from the share premium account to share capital, thereby increasing the share capital to RMB 1,226,666. On 26 May 2004, the Company issued bonus shares on the basis of 2 shares for each 10 shares to the existing 1,226,666,000 shares in issue as at 31 December 2003. The bonus shares were issued as a distribution from the retained earnings account. As a result, RMB 245,333 was transferred from the retained earning account to share capital, thereby increasing the share capital to RMB 1,471,999. On 26 August 2004, with the approval of China Securities Regulatory Commission, the Company issued 148,850,000 “A” shares of RMB 1 Yuan each to domestic public investors at RMB 7.39 Yuan per share, thereby increasing the total share capital to RMB 1,620,849 and resulting in a share premium of RMB 909,730. 71 31 Share premium Year ended 31 December 2003 Balance at 31 December 2002 and 2003 833,438 Year ended 31 December 2004 Balance at 1 January 2004 833,438 Issue of shares 909,730 Balance at 31 December 2004 1,743,168 32 Reserves Statutory Statutory common public Enterprise reserve welfare Reserve expansion fund fund fund fund Total Year ended 31 December 2003 Balance at 1 January 2003 173,482 173,463 200,940 80,070 627,955 Transfers 145,641 145,642 106,080 28,560 425,923 Balance at 31 December 2003 319,123 319,105 307,020 108,630 1,053,878 Year ended 31 December 2004 Balance at 1 January 2004 319,123 319,105 307,020 108,630 1,053,878 Transfers 135,180 134,428 100,470 27,540 397,618 Balance at 31 December 2004 454,303 453,533 407,490 136,170 1,451,496 Statutory common reserve fund According to the Articles of Association, the Company and all domestically invested subsidiaries are required to transfer 10% of profit after taxation, as determined under relevant PRC regulations, to the statutory common reserve fund until the reserve balance reaches 50% of the registered capital. The statutory common reserve fund can be used to offset previous years’ losses, if any, and may be converted into share capital by the issuance of new shares to the shareholders in proportion to their existing shareholdings. The transfer to this reserve must be made before the distribution of dividends to the shareholders. This reserve is un-distributable other than upon the liquidation of the Company. Statutory public welfare fund According to the Articles of Association, the Company and all domestically invested subsidiaries are required to transfer 5% to 10% of profit after taxation, as determined under relevant PRC regulations, to the statutory public welfare fund. The statutory public welfare fund can only be utilised on capital items for the collective benefits of the companies’ employees such as the construction of dormitories, canteens and other staff welfare facilities. The transfer to this reserve must be made before distribution of dividends to the shareholders. This reserve is non-distributable other than upon liquidation of the Company. 72 32 Reserves (continued) Reserve fund According to the resolution of the Board of Directors of Changan Suzuki for the 2004 profit appropriation, an amount of RMB 197 million was transferred to reserve fund from its distributable profits at 31 December 2004. The reserve fund can be used for working capital purposes and to make good losses incurred. The reserve fund can also be used to increase capital. The transfer to this reserve must be made before the distribution of the dividends to the investors. No cash distribution is allowed other than in the event of liquidation. Enterprise expansion fund According to the resolution of the Board of Directors of Changan Suzuki for the 2004 profit appropriation, an amount of RMB 54 million was transferred to enterprise expansion fund from its distributable profits at 31 December 2004. The enterprise expansion fund can be used for Changan Suzuki’s business development purposes and for working capital purposes. The enterprise expansion fund can also be used to increase capital of Changan Suzuki. The transfer to this reserve must be made before the distribution of the dividends to the investors of Changan Suzuki. No cash distribution is allowed other than in the event of liquidation. 33 Minority interests 2004 2003 At beginning of year 947,461 829,079 Newly incorporated subsidiaries 50,000 2,650 Share of net profits of subsidiaries 123,036 102,864 Dividends paid (18,130) (286) Additional share of net assets by minority shareholders due to additional injection by the Company 35,137 11,071 Increase in net assets due to additional injection from minority shareholders 6,900 - Others (186) 2,083 At end of year 1,144,218 947,461 73 34 Business combinations According to the contract between the Group and CAC, the Group acquired 10 sales offices from CAC. The acquisition was made on 31 August 2004 at a consideration of RMB 2,470. After the acquisition, the Group has 100% equity interests in these 10 sales offices. Details of net assets acquired and goodwill are as follows: i. Purchase consideration: Cash paid 2,258 Cash to be paid 212 Less: Fair value of net assets acquired (3,280) Negative goodwill (810) ii. The assets and liabilities at the date of acquisition are as follows: Cash and cash equivalents 250 Property, plant and equipment 298 Inventories 32,540 Receivables 10,045 Payables (39,853) Fair value of net assets acquired 3,280 Negative goodwill (810) Total purchase consideration paid 2,470 Less: Cash to be paid (212) Total cash paid for acquisition 2,258 Less: Cash and cash equivalents in subsidiaries acquired (250) Cash outflow on acquisition 2,008 74 35 Cash generated from operations 2004 2003 Profit before tax 1,468,239 1,796,976 (Reversal of)/Impairment charge for bad and doubtful debts (Note 5) (11,512) 32,609 Provision for/(reversal of) slow moving and obsolete inventories (Note 5) 5,323 (38,688) Impairment charge for property, plant and equipment (Note 11) 767 2,164 Impairment charge for/(reversal of) available-for-sale investments (Note 15) 27,918 (678) Depreciation of property, plant and equipment (Note 11) 373,104 287,086 Amortisation of land use rights (Note 12) 7,688 4,343 Amortisation of intangible assets (Note 13) 17,081 12,013 Amortisation of deferred assets (Note 16) 3,131 6,438 Loss on disposal of property, plant and equipment (Note 5) 9,753 98,118 Loss on disposal of land use rights (Note 5) - 1,873 Loss on disposal of other non-current assets (Note 5) 67 - Interest expense (Note 6) 25,366 15,115 Income from securities investment (Note 5) (9,275) (958) Share of results of associates (Note 14) - (946) Amortisation of deferred income (Note 5) (8,815) - Recognition of negative goodwill (810) - Changes in working capital: Increase in inventories (1,021,727) (49,055) Increase in operating receivables (44,240) (530,048) Increase in operating payables 845,422 246,550 Cash generated from operations 1,687,480 1,882,912 In the cash flow statement, proceeds from sale of property, plant and equipment comprise: 2004 2003 Net book amount of property, plant and equipment disposed (Note 11) 55,093 100,238 Less: Loss on disposal of property, plant and equipment (Note 5) (9,753) (98,118) (Increase)/decrease of receivables (28,085) 493 Proceeds from sale of property, plant and equipment 17,255 2,613 75 36 Related party transactions The Company is controlled by CAC (incorporated in the PRC), which owns 52.47% of the Company’s shares. The remaining 47.53% of the shares are widely held. The ultimate parent of the Company is China South Industries Group Corp. (hereafter referred to as “CSIG”, also a company incorporated in the PRC). Related parties, other than subsidiaries, and their relationship with the Company are as follows: Related parties’ name Relationship Chongqing Changan Automobile Manufacturing Factory Subsidiary of CAC Chongqing Changan Transportation Company Subsidiary of CAC Changqing Changan Trading Company Subsidiary of CAC Chongqing Changan Construction Co., Ltd. Subsidiary of CAC Chongqing Jiangli Machinery Factory Subsidiary of CAC Chongqing Jiangchuan Machinery Factory Subsidiary of CAC Chongqing Jiangchao Engine Industry Co., Ltd. Subsidiary of CAC Chongqing Changan Minsheng Logistics Co., Ltd. Subsidiary of CAC Changan Shengli Automobile Company Subsidiary of CAC Chongqing Changan Design Academy Subsidiary of CAC Chongqing Changan Support Services Co., Ltd. Subsidiary of CAC Chongqing Guohao Automobile Sales Co. Ltd. Subsidiary of CAC Chongqing Shanrui Automobile Parts Co. Ltd Subsidiary of CAC Chongqing Changan Lingyun Automobile Parts Co. Ltd. Subsidiary of CAC Chongqing Jinhai Standard Parts Co. Ltd. Subsidiary of CAC Chongqing Haitai Property Management Co. Ltd. Subsidiary of CAC Chongqing Changan Jinling Vehicles Parts Co., Ltd Subsidiary of CAC Chongqing Automobile Air-conditioner Co., Ltd. Subsidiary of CAC Chongqing Changan Information Technology Co., Ltd. Associate of the Company Changan Ford Automobile Co., Ltd. Jointly controlled entity of the Company Chengdu Wanyou Economic Technological Development Co., Ltd. Subsidiary of CSIG Chongqing Wanyou Economic Development Co., Ltd. Subsidiary of CSIG Southwest Industries Corporation Subsidiary of CSIG Chongqing Tsingshan Industries Co., Ltd. Subsidiary of CSIG Chongqing Hongyu Precision Industries Co., Ltd. Subsidiary of CSIG Sichuan Jianan North Automobile Bridge Co., Ltd. Subsidiary of CSIG Chongqing Jianshe Automobile Air-conditioner Co., Ltd. Subsidiary of CSIG Sichuan Ningjiang Precision Industries Co., Ltd. Subsidiary of CSIG Chongqing Changjiang Electrics (Group) Co., Ltd. Subsidiary of CSIG Longchang Shanchuan Shock-absorbing Works Industries Co., Ltd. Subsidiary of CSIG Yunnan Xiyi Industries Co., Ltd. Subsidiary of CSIG Hubei Xiaogan Huazhong Automobile Light Co., Ltd. Subsidiary of CSIG Chongqing Yihong Engineering Plastic Products Co., Ltd. Subsidiary of CSIG Sichuan Huaqing Machinery Co., Ltd. Subsidiary of CSIG Chengdu Lingchuan Machinery Factory Subsidiary of CSIG Chongqing Changfeng Machinery Co., Ltd. Subsidiary of CSIG Sichuan Hongguang Machinery and Electrics Co., Ltd. Subsidiary of CSIG China Yanxing Northwest Co. Subsidiary of CSIG 76 36 Related party transactions (continued) The following transactions are entered into at terms agreed with corresponding related parties in the ordinary course of business with reference to those entered into with other independent third parties, where applicable. (1) Sales of goods and services 2004 2003 Sales of goods (excluding VAT): CAC and its related companies 81,602 140,251 Chongqing Changan Support Services Co., Ltd. 32,673 26,982 Chengdu Wanyou Economic Technological Development Co., Ltd. 325,807 488,928 Chongqing Wanyou Economic Development Co.,Ltd. 341,279 222,853 Chengdu Lingchuan Machinery Factory 59,657 68,175 Chongqing Changan Jinling Vehicles Parts Co., Ltd. 59,929 33,924 China Yanxing Northwest Co. 38,383 76,943 Changan Ford Automobile Co., Ltd. (Note a) 33,758 18,850 Chongqing Changan Automobile Manufacturing Factory 8,029 3,837 Chongqing Jiangchao Engine Industry Co., Ltd. 3,629 4,465 Chongqing Jiangli Machinery Factory 6,493 7,430 Sichuan Hongguang Machinery and Electrics Co., Ltd. 31,837 36,897 Chongqing Jiangchuan Machinery Factory 1,297 1,574 Chongqing Guohao Automobile Sales Co. Ltd. 26,318 9,796 Chongqing Shanrui Automobile Parts Co. Ltd 3,407 - Chongqing Changan Lingyun Automobile Parts Co. Ltd. 2,853 - Chongqing Tsingshan Industries Co., Ltd 1,310 2,342 Chongqing Hongyu Precision Industries Co., Ltd. 4,500 565 Sichuan Jianan North Automobile Bridge Co., Ltd. 1,282 1,407 Chongqing Jianshe Automobile Air-conditioner Co., Ltd. 319 406 Sichuan Ningjiang Precision Industries Co., Ltd. 1,062 1,256 Longchang Shanchuan Shock-absorbing Works Industries Co., Ltd. 1,119 1,345 Interest income: CAC and its related companies - 882 Rental income: CAC 4,347 4,347 Note a: The transactions with Changan Ford shown above are after elimination of the Company’s proportionate interests in Changan Ford. 77 36 Related party transactions (continued) (2) Purchases of goods and services 2004 2003 Purchases of goods (excluding VAT): Chongqing Changan Jinling Vehicles Parts Co., Ltd. 521,098 413,219 Chongqing Changan Automobile Manufacturing Factory 52,809 34,011 CAC 87,548 169,238 Chongqing Jiangli Machinery Factory 82,554 75,537 Chongqing Wanyou Economic Development Co.,Ltd. 94,538 63,019 Sichuan Jianan North Automobile Bridge Co., Ltd. 123,354 109,106 Sichuan Ningjiang Precision Industries Co., Ltd. 50,784 51,970 Chongqing Hongyu Precision Industries Co., Ltd. 287,945 248,195 Hubei Xiaogan Huazhong Automobile Light Co., Ltd. 26,820 22,002 Chongqing Jiangchuan Machinery Factory 68,983 61,251 Chongqing Changjiang Electrics (Group) Co., Ltd. 40,837 32,895 Chongqing Jiangchao Engine Industry Co., Ltd. 16,057 18,524 Chongqing Jianshe Automobile Air-conditioner Co., Ltd. 150,668 200,974 Sichuan Hongguang Machinery and Electrics Co., Ltd. 61,155 54,911 Longchang Shanchuan Shock-absorbing Works Industries Co., Ltd. 56,910 61,975 Chongqing Tsingshan Industries Co., Ltd. 353,271 312,928 Yunnan Xiyi Industries Co., Ltd. 27,842 23,911 Changan Shengli Automobile Company 49,991 19,543 Chengdu Lingchuan Machinery Factory 143,232 131,839 Changan Ford Automobile Co., Ltd. (Note a) 142,960 103,403 Chongqing Automobile Air-conditioner Co. Ltd. 4,173 - Chongqing Shanrui Automobile Parts Co. Ltd 10,503 - Chongqing Changan Lingyun Automobile Parts Co. Ltd. 708 515 Chongqing Jinhai Standard Parts Co. Ltd. 11,240 - Chongqing Yihong Engineering Plastic Products Co., Ltd. 20,241 15,437 Sichuan Huaqing Machinery Co., Ltd. 17,637 17,689 Chongqing Changfeng Machinery Co., Ltd. 7,174 676 Note a: The transactions with Changan Ford shown above are after elimination of the Company’s proportionate interests in Changan Ford. 78 36 Related party transactions (continued) (2) Purchases of goods and services (continued) 2004 2003 Purchases of services: CAC --Construction fee 3,230 13,779 --Trademark fee 13,035 13,028 --Lease of land use right 4,052 4,052 --Building rental fee 16,618 16,618 --Water and electricity fee 108,366 97,701 --Welfare 32,876 28,796 --Telephone charges 1,829 1,930 --Education fee 7,211 7,804 --Security and fire fighting fee 9,473 8,500 --Labours’ union fee 4,813 4,645 --Others 7,662 7,604 Chongqing Changan Minsheng Logistics Co., Ltd. --Transportation fee 608,554 395,369 Chongqing Changan Information Technology Co., Ltd. --Construction fee 15,586 21,191 --Technology service fee 31,690 28,269 Chongqing Changan Construction Co., Ltd. --Construction fee 205,265 156,935 Chongqing Changan Design Academy --Construction fee 50,601 16,685 Chongqing Changan Transportation Company --Transportation fee 11,164 1,313 Changan Shengli Automobile Company --Comprehensive services 598 - 79 36 Related party transactions (continued) (3) Other transactions 2004 2003 CAC --Loan interest expense 2,035 1,539 --Purchase of properties, plant and equipment 1,252 - --Purchase of land use right 12,627 - --Acquisition of jointly controlled entity - 196,138 --Acquisition of subsidiaries 2,470 - Chongqing Changan Jinling Vehicles Parts Co., Ltd --Sales of properties, plant and equipment 3,936 - Southwest Industries Corporation --Sales of properties, plant and equipment 524 - Chongqing Haitai Property Management Co. Ltd. --Property management fee 7,430 1,557 Changan Shengli Automobile Company --Purchase of properties, plant and equipment 1,086 - (4) Year-end balances arising from sales/purchases of goods/services 2004 2003 Receivables from related parties: CAC and its related companies 21,572 24,308 Chongqing Changan Support Services Co., Ltd. 1,122 1,180 Chengdu Wanyou Economic Technological Development Co.,Ltd. 51,860 98,000 Chongqing Changan Jinling Vehicles Parts Co., Ltd 150 - Chongqing Guohao Automobile Sales Co. Ltd. 9,179 - Chongqing Changan Lingyun Automobile Parts Co. Ltd. 3,338 - Changan Ford Automobile Co., Ltd. (Note a) 1,000 11,855 Chengdu Lingchuan Machinery Factory 1,911 1,911 90,132 137,254 2004 2003 Prepayments to related parties: Changan Shengli Automobile Company 15,133 9,720 Note a: The balance with Changan Ford shown above is after elimination of the Company’s proportionate interests in Changan Ford. 80 36 Related party transactions (continued) (4) Year-end balances arising from sales/purchases of goods/services (continued) 2004 2003 Payables to related parties: Chongqing Changan Minsheng Logistics Co. Ltd. 135,899 58,703 Chongqing Jiangli Machinery Factory 11,225 11,028 Chongqing Jiangchuan Machinery Factory 7,308 9,622 Chongqing Jiangchao Engine Industry Corporation 4,031 5,232 Chongqing Changan Jinling Vehicles Parts Co., Ltd 3,393 2,300 CAC 6,657 - Chongqing Changan Information Technology Co., Ltd. 5,588 3,180 Chongqing Changan Design Academy 466 4,757 Changan Ford Automobile Co., Ltd. (Note a) 2,860 - Chongqing Wanyou Economic Development Co.,Ltd 23,809 24,412 Changan Shengli Automobile Company 1,372 1,147 Chongqing Shanrui Automobile Parts Co. Ltd. 3,893 - Chongqing Jinhai Standard Parts Co. Ltd. 4,421 - Sichuan Hongguang Machinery and Electrics Co., Ltd. 10,832 7,869 Chongqing Tsingshan Industries Co., Ltd. 3,735 96,986 Chongqing Hongyu Precision Industries Co., Ltd. 45,203 42,425 Sichuan Jianan North Automobile Bridge Co., Ltd. 10,353 13,111 Chongqing Changfeng Machinery Co., Ltd. 1,171 670 Chongqing Jianshe Automobile Air-conditioner Co., Ltd. 19,130 65,810 Sichuan Ningjiang Precision Industries Co., Ltd. 7,512 10,676 Chongqing Changjiang Electrics (Group) Co., Ltd. 10,281 8,435 Longchang Shanchuan Shock-absorbing Works Industries Co., Ltd. 16,937 19,500 Yunnan Xiyi Industries Co., Ltd. 5,100 9,128 Hubei Xiaogan Huazhong Automobile Light Co., Ltd. 8,337 10,587 Chongqing Yihong Engineering Plastic Products Co., Ltd. 5,130 3,007 Sichuan Huaqing Machinery Co., Ltd. 2,272 3,015 Chengdu Lingchuan Machinery Factory 12,457 8,680 Chengdu Wanyou Economic Technological Development Co., Ltd. 27,160 6,458 Chongqing Guohao Automobile Sales Co. Ltd. 276 - Chongqing Changan Transportation Company 3,409 1,151 Chongqing Changan Construction Co., Ltd. 10,113 - Chongqing Changan Lingyun Automobile Parts Co. Ltd. 247 88 Chongqing Changan Automobile Manufacturing Factory 75 836 Chongqing Haitai Property Management Co. Ltd. 100 - 410,752 428,813 Note a: The balance with Changan Ford shown above is after elimination of the Company’s proportionate interests in Changan Ford. 81 36 Related party transactions (continued) (4) Year-end balances arising from sales/purchases of goods/services (continued) 2004 2003 Current loans from CAC, parent company: At beginning of year - - Addition during the year 95,000 95,000 Repaid during the year (20,000) (95,000) At end of year 75,000 - The above loans are unsecured and bear interest rate at 5.04% (2003: 5.04%) per annum. (5) Directors’ remuneration In 2004, the total remuneration of the directors was RMB 800 (2003: RMB 649). (6) Others a. CAC has provided a guarantee for the Company to obtain bank borrowings of RMB 535,000 (2003: RMB 245,000). b. The Company has provided a guarantee for a bank loan facility of RMB 31,200 granted to Changan Ford. The period of the guarantee is from 15 April 2002 to 15 May 2005. CAC has also provided a counter-guarantee to the Company on behalf of Changan Ford. As at 31 December 2004, Changan Ford has not drawn any borrowing from such loan facility. 82 37 Principal subsidiaries Entity Country of Principal activities incorporation Chongqing Changan Automobile Import PRC Import and export, sale of and Export Co., Ltd. (“Changan Import and automobiles and spare parts Export”) (95%) Chongqing Changan Automobile Sales Co., PRC Sale of automobiles, engines and Ltd. (“Changan Sales”) (100%) spare parts Chongqing Changan Suzuki Automobile PRC Manufacture and sale of Co., Ltd. (51%) automobiles and spare parts Nanjing Changan Automobile Co., Ltd. PRC Manufacture and sale of mini auto- (“Nanjing Changan”) (71.05%) mobiles and spare parts Hebei Changan Automobile Co., Ltd. PRC Manufacture and sale of auto- (“Hebei Changan”) (66.51%) mobiles and spare parts Chongqing Anfu Automobile Co., Ltd. PRC Sale of automobiles and spare parts (“Chongqing Anfu”) (50%) 189 Sales Offices (80%-100%) PRC Sale of automobiles and spare parts Chongqing Changan Special Automobile PRC Sale of special automobiles and Co., Ltd. (“Changan Special”) (50%) spare parts, automobile repair Chongqing Changan Service Co., Ltd. PRC Sale of automobiles and spare parts (99%) Jiangxi Jiangling Holding Co., Ltd. PRC Investment, foreign trading (“Jiangling Holding”) (50%) In 2004, the Company’s equity interest in Nanjing Changan increased from 41.92% to 71.05%. The Company is deemed to have effective control over Chongqing Anfu and Changan Special as the Company has the power to control their strategic operating, investing and financing policies. In 2004, the Company and Jiangling Automobile Group Co., Ltd. (hereafter referred to as “Jiangling Group”) jointly established Jiangling Holding. According to the Articles of Association, the Company has the power to govern the financial and operating policies of Jiangling Holding, and thereby Jiangling Holding is considered a subsidiary of the Company. 38 Interest in a jointly controlled entity Changan Ford is considered a jointly controlled entity for IFRS reporting purposes because its strategic operating, investing and financing activities are jointly controlled by the Company and the jointly controlled entity partners. The Company’s profit and loss sharing from the jointly controlled entity correspond to its equity interest percentage. The following amounts represent the Group’s 50% share of the assets and liabilities and sales and results of the jointly controlled entity which are included in the consolidated balance sheet and income statement: 2004 2003 Assets: Property, plant and equipment 528,892 303,251 Land use right 161,129 71,660 Deferred tax assets 3,598 1,171 Current assets 1,279,685 456,101 1,973,304 832,183 38 Interest in a jointly controlled entity (continued) 2004 2003 83 Liabilities: Deferred income (78,561) - Short term borrowings (372,443) (157,259) Provisions (54,055) (15,493) Other current liabilities (758,577) (326,322) (1,263,636) (499,074) Net assets 709,668 333,109 Sales 3,633,418 521,108 Profit/(loss) from operations 375,324 (2,288) Profit/(loss) after income tax 376,558 (248) Proportionate interest in jointly controlled entity’s commitments as at 31 December 2004 120,670 76,029 There are no contingent liabilities relating to the Group’s interest in the jointly controlled entity. The average number of employees in the jointly controlled entity in 2004 was 2,093 (2003: 1,506). 39 Commitments (1) Capital commitments Capital expenditure contracted for at the balance sheet date but not yet incurred is as follows: 2004 2003 Property, plant and equipment 819,402 571,435 Land use right 49,082 - 868,484 571,435 (2) Operating commitments The future aggregate minimum amount contracted for at the balance sheet date but not recognised in the financial statements is as follows: Lease of buildings 2004 2003 Not later than 1 year 19,855 18,338 Later than 1 year and not later than 5 years 74,097 77,937 Later than 5 years 36,006 52,623 129,958 148,898 Lease of land use rights Not later than 1 year 4,438 4,757 Later than 1 year and not later than 5 years 17,750 20,694 Later than 5 years 13,795 12,830 35,983 38,281 84 39 Commitments (continued) (3) Others The future aggregate minimum amount contracted for at the balance sheet date but not recognised in the financial statements is as follows: 2004 2003 Production technology development Not later than 1 year 177,345 205,477 Later than 1 year and not later than 5 years 8,657 35,848 186,002 241,325 ERP project contract Not later than 1 year 4,593 4,012 40 Subsequent events Apart from dividend distribution as disclosed in Note 10, the following events occurred subsequent to 31 December 2004: a. As stated in Note 37, in November 2004, the Company and Jiangling Group jointly established Jiangling Holding. According to a further capital injection agreement entered by the Company, Jiangling Group and Jiangling Holding on 6 December 2004, the Company will inject RMB 450 million cash into Jiangling Holding, while Jiangling Group will increase its interests in Jiangling Holding by way of transferring its 354,176,000 shares in Jiangling Automobile Co., Ltd. (representing 41.03% of total ordinary shares of Jiangling Automobile Co., Ltd.) and related liabilities. After the completion of the capital injection, the Company and Jiangling Group will each own 50% interests of Jiangling Holding and Jiangling Holding will become a major shareholder of Jiangling Automobile Co., Ltd. As at the date of this report, the transfer of shares in Jiangling Automobile Co., Ltd. has not been finalised and is subject to obtaining approval from relevant government authorities. b. On 13 April 2005, the Board of Directors proposed to provide 3% of the Company’s consolidated net profit for the year ended 31 December 2004 as a special bonus to certain employees of the Company, which is subject to shareholders’ approval in their next meeting. 85 Impact of IFRS adjustments on the consolidated profit after taxation and shareholders’ fund Net assets Net profit As reported in the accounts of the Group under PRC accounting regulations 6,977,455 1,317,300 1. Staff and workers’ bonus and welfare fund charged to income statement - (9,690) 2. Reversal of revaluation made in 1995 (15,456) 8,735 3. Deferred tax assets 90,553 (5,231) 4. Government grants relating to purchase of assets (251,392) (73,049) 5. Tax credit arising from purchase of domestically manufactured machinery and equipment (41,660) (41,660) 6. Others - 810 As restated in conformity with IFRS 6,759,500 1,197,215 86 XXI. Documents for inspection 1. Financial statements with signatures and stamps of the legal representative, the head of the accounting and the head of accounting departments. 2. The original copy of audit report with the stamp of the CPA firm and the signature and stamp of the Certified Public Accountant. 3. All the original documents and manuscripts of the Company which has been disclosed in the reporting period in the newspapers designated by China Securities Regulatory Commission. 4. Annual reports published in other securities markets. Chairman of the Board of Directors: Mr. Yin Jiaxu General Manager: Mr. Zhao Luchuan Chongqing Changan Automobile Company Limited 15 April 2005 87