2016 Annual Report (Translation)

Stock Codeꢀ2204 China Motor Corporation 2016 Annual Report (Translation) Printed on March 31, 2017 Notice to Readers The Annual Report have been translated into English from the original Chinese version. If there is any conflict between the English version and the original Chinese version or any difference in the interpretation of the two versions, the Chinese version shall prevail. I. Information regarding Spokesperson, Deputy Spokesperson Spokesperson: Ching-Wu Chien Title: Vice President Deputy Spokesperson: Yu-Chun Su Title: General Manager, Corporate Planning Division, China Motor Corporation Tel: 886-3-4783191 Email: [email protected] II. Contact Information of Headquarter, Branch Company and Plant Headquarter Address: 11F., No.2, Sec. 2, Dunhua S. Rd., Da’an Dist., Taipei City 106, Taiwan Tel: 886-2-23250000 China Motor Training Center Address: No.3, Qingnian Rd., Yangmei Dist., Taoyuan City 326, Taiwan Tel: 886-3-4641100 Yang Mei Plant Address: No.618, Xiucai Rd., Yangmei Dist.,Taoyuan City 326, Taiwan Tel: 886-3-4783191 Hsin Chu Plant Address: No.2, Guangfu Rd., Hukou Township, Hsinchu County 303, Taiwan Tel: 886-3-5985841 III. Common Share Transfer Agent and Registrar Company: China Motor Corporation Address: 7F., No.150, Sec. 2, Nanjing E. Rd., Zhongshan Dist., Taipei City 104, Taiwan Tel: 886-2-25156421 <a href="/goto?url=http:// www.china-motor.com.tw" target="_blank">Website: http:// www.china-motor.com.tw </a>IV. Information regarding 2016 Auditors Company: Deloitte & Touche Auditors: Eddie Shao, Lilac Shue Address: 12F, 156, Sec. 3, Min-Sheng E. Rd., Taipei 105-96, Taiwan Tel: 886-2-25459988 <a href="/goto?url=http://www.deloitte.com.tw" target="_blank">Website: http://www.deloitte.com.tw </a><ul style="display: flex;"><li style="flex:1">V. </li><li style="flex:1">N.A. </li></ul>Information regarding Depositary: VI. Corporation We<a href="/goto?url=http:// www.china-motor.com.tw" target="_blank">bsite: http:// www.china-motor.com.tw </a>Table of Contents [Letter to Shareholders]────────────────────────── 4 [Company Profile]──────────────────────────── 6 6612 I. Founding Date ···································································································· II. Company History································································································ III. Business Results································································································ IV. Charity············································································································ 13 [Corporate Governance]────────────────────────── 21 21 I. Organization······································································································· II. Directors and Management Team ···································································· 22 22 35 (I) Information Regarding Board of Directors ····································································· (II) Directors' Professional Qualifications and Independent Analysis ·········································· (III) Information Regarding President, Executive Vice President, Vice President, and General Manager of Each Department······························································································ (IV) Remuneration Paid to Board of Directors, Supervisors, President, and Executive Vice President in the Latest Year ································································································· (V) Employment Compension Granted to Management Team·················································· III. Implementation of Corporate Governance································································· (I) Board of Directors Meeting Status··············································································· (II) Attendance of Supervisors for Board Meetings ······························································· (III) Audit Committee Meeting Status··············································································· (IV) Corporate Governance Execution Status and Deviations from “Corporate Governance 36 42 47 48 48 49 50 53 58 60 Best-Practice Principles for TWSE/GTSM Listed Companies”··········································· (V) Composition, Responsibilities and Operations of Compensation Committee···························· (VI) Social Responsibility ···························································································· (VII) Taiwan Corporate Conduct and Ethics Implementation as Required by the Taiwan 64 67 67 68 Financial Supervisory Commission··········································································· (VIII) Corporate Governance Guidelines and Regulations······················································· (IX) Other Important Information Regarding Corporate Governance·········································· (X) Internal Control System Execution Status ····································································· (XI) Punishment and Improvement Status of Violation Internal Control System during the 2016 Calendar Year and up to March 31, 2017················································································· (XII) Major Resolutions at Shareholders Meetings and Board of Directors Meetings during the 2016 Calendar Year and up to March 31, 2017 ···································································· (XIII) Major Issues of Record or Written Statements Made byAny Director or Supervisor Dissenting to Important Resolutions Passed by the Board of Directors during the 2016 Calendar Year and up to March 31, 2017 ································································································· (XIV) Resignation or Dismissal of Chairperson, President, and General Manager of Accounting, Finance, Internal Audit and R&D during the 2016 Calendar Year and up to March 31, 2017················· IV. Information RegardingAudit Fees ·········································································· V. Information Regarding Replacement or Rotation of Accountants ······································ VI. Chairperson, Prisident and General Manager of Financial Affairs or Accounting Working in CMC’s Independent Audit Firm or its affiliates during 2016··········································· VII. Changes in Shareholding of Directors, Managers and Major Shareholders ························ VIII. Information Disclosing the Relationship between any of the Top 10 Shareholders ·············· IX. Long-Term Investment Ownership ········································································· 69 69 71 71 72 73 73 74 75 76 1Table of Contents [Capital Overview]──────────────────────────── 77 77 I. Capital and Shares································································································ 77 77 77 78 78 79 79 80 80 82 82 82 82 82 82 82 (I) Sources of Capital ·································································································· (II) Type of Stock······································································································· (III) Status of Shareholders ··························································································· (IV) Shareholding Distribution Status··············································································· (V) List of Major Shareholders······················································································· (VI) Market Price, Net Worth, Earnings, and Dividends per Share············································· (VII) Corporate Dividend Policy and Implementation Status ··················································· (VIII) The Impact of Stock Dividend Issuance on Business Performance and EPS·························· (IX) Employee Compension and Directors' Remuneration ······················································ (X) Buyback of Treasury Stock ······················································································ II. Issurance of Corporate Bonds················································································· III. Issurance of Preferred Stock·················································································· IV. Issuance of Depository Receipts············································································· V. Status of Employee Stock Option Plan and Employee Restricted Stock······························· VI. Status of New Share Issuance in Connection with Mergers and Acquisitions······················· VII. Financing Plans and Implementation······································································ 83 83 83 86 88 89 89 89 93 94 [Operational Highlights]──────────────────────────── I. Business Activities ······························································································· (I) Business Scope······································································································ (II) Industry Overview································································································· (III)Technology and R&D Overview················································································ (IV) Long- and Short-term Business Development Plan ························································· II. Market, Production, and Sales Overview ··································································· (I) Market Analysis····································································································· (II) Main Uses and Production Processes of Major Products···················································· (III) Supply Status of Main Materials··············································································· (IV) Major Suppliers and Clients Taking over 10% of the Amount of Incoming (Sales) over the Last Two Years ········································································································· (V) Production over the Last Two Years············································································ (VI) Sales over the Last Two Years·················································································· III. Human Resources······························································································ IV. Environmental Cost···························································································· (I) Losses and Fines Caused by Environmental Pollution during the 2016 Calendar Year and up to March 31, 2017······································································································ (II) Forecast of Environmental Cost for the Next Three Years ·················································· V. Labor and Management Relationship········································································ (I) Employee's Benefits, Training, Retirement Measures and Implementation ······························· 94 96 96 96 97 97 97 97 97 102 103 (II) Dispute between Labor and Management during the 2016 Calendar Year and up to March 31, 2017 VI. Major Contracts ································································································ [Financial Highlights]──────────────────────────── 104 104 I. Condensed Balance Sheet and Statement of Comprehensive Income over the Last Five Years···· 104 107 (I) Condensed Balance Sheet and Statement of Comprehensive Income ······································ (II) Auditors' Opinions over the Last Five Years··································································· 2Table of Contents 108 II. Financial Analysis over the Last Five Years ································································ III. Audit Committee's Review Report·········································································· IV. Consolidated Financial Statements and Appendix························································ V. Financial Statements and Appendix of the Corporation ·················································· 111 112 196 256 March 31, 2017 <ul style="display: flex;"><li style="flex:1">VI. Financial Difficulties during the 2016 Calendar Year and up to </li><li style="flex:1">···················· </li></ul>[ Revi ew of Fi n an ci al Stat us , O p era ti ng R es ul ts , a n d Ri s k Management]─────────────────────────────────── 258 258 I. Analysis of Financial Status ···················································································· II. Analysis of Operating Results················································································· III. Analysis of Cash Flow························································································· IV. Major Capital Expenditure···················································································· 259 260 260 V. Re-investment Policies in last year and Major causes for Profit/Loss and Improvement, and Investment Plans in the coming year········································································· VI. Risk Management······························································································ 261 262 (I) Impact on profits/losses of Interest rate volatility, Exchange rate volatility and Inflation and the Future Countermeasures······················································································ (II) Risks Associated with High-risk/High-leveraged Investment; Lending, Endorsement and Guarantees; 262 263 and Derivative Transactions····················································································· (III) Future R&D Plans and Expected R&D Spending ··························································· (VI) Effects of and Response to Changes of Government Policies and Regulatory Environment ········· (V) Effects of and Response to Changes in Technology and Industry·········································· (VI) Effects of and Response to Changes in Corporate Image on Company's Crisis Management········ (VII) Expected Benefits from, Risks Relating to and Response to Merger and Acquisition Plans········· (VIII) Expected Benefits from, Risks Relating to and Response to Capacity Expansion···················· (IX) Risks Associated with Sales and Purchase Concentration·················································· 263 263 263 263 263 263 264 (X) Effects of, Risks Relating to and Response to Sales of Significant Numbers of Shares by Directors, 264 and/ or Major Shareholders Who Own 10% or More of the Corporation’s Total Outstanding Share · (XI) Effects of, Risks Relating to and Response to Changes in Control over the Corporation ············· (XII) Risks Associated with Litigation or Non-litigation Matters··············································· (XIII) Other Risks······································································································ VII.Other Information Matters···················································································· 264 264 264 264 [Special Disclosure]────────────────────────────────── 265 265 I. Summary of Affiliated Companies············································································ 265 275 276 277 (I) Consolidated Business Report of Affiliated Enterprises ······················································ (II) Consolidated Financial Statement of Affiliated Enterprises················································· (III) Affiliation Report································································································· March 31, 2017 <ul style="display: flex;"><li style="flex:1">II. Private Placement Securities during the 2016 Calendar Year and up to </li><li style="flex:1">············· </li></ul>III. Status of Shares Held or, Disposed of, by Subsidiaries during the 2016 Calendar Year and up to March 31, 2017································································································· IV. Other Special Notes···························································································· V. Impacts of Significant Events on Shareholders' Rights or Stock Value during the 2016 Calendar 277 277 277 March 31, 2017 <ul style="display: flex;"><li style="flex:1">Year and up to </li><li style="flex:1">················································································· </li></ul>3Letter to Shareholders In 2016, demands for replacement vehicles have soared in the automotive market in Taiwan following the government’s policy of subsidizing the replacement of old vehicles. About 439 thousand licenses were issued for the entire automotive market, equivalent to a 4.5% growth compared to the previous year. To stimulate market demand, CMC released the all-new Outlander and a number of other vehicle models with enhanced competitiveness last year (2016), including the smart and enhanced version of the Colt Plus and imported vehicles such as the Lancer Sportback and Pajero, all of which have been positively received by the consumers. The aforementioned new car models sold 46,952 vehicles domestically in 2016 and achieved a consolidated revenue of NT$ 40.73 billion, a consolidated net revenue of NT$ 2.6 billion, a consolidated net income after tax of NT$ 3.6 billion, and an after-tax EPS of NT$ 2.34, wherein the figure for net income after tax reached a new high since 2006. For the overseas market, dedicated sales expansion by overseas dealers and fellow colleagues sold 1,280 vehicles last year (2016) and 13,530 sets of CKD parts, which was a nearly 30% growth compared to the external sales achieved in 2015. Looking to 2017, CMC shall continue pursue expansions to domestic and overseas sales as well as upgrades to vehicle models in order to improve the competitiveness of the CMC brand. For domestic sales, in addition to the completely upgraded GRAND LANCER as well as the Zinger compact multi-purpose vehicle (MPV) with improved internal furnishings and external styling, and upgraded safety features that were introduced in April, the improved Colt Plus and the all-new Eclipse Cross crossover sport utility vehicle (CUV) imported directly from Japan will be released in the second half of the year to satisfy the market’s diverse requirements and leverage the continuing implementation of the policy for subsidizing replacement of old vehicles. Such measures are expected to achieve improvements in year-round sales for this year (2017) compared to 2016. For overseas sales for this year (2017), in addition to continued expansions in the Southeast Asia, Middle East, and Central and South American markets, CMC shall also pursue expansions in Central America and Lebanon to generate new overseas sales opportunities. For the Mainland Chinese auto market, South East Motor (SEM), an investee of CMC, has 4Letter to Shareholders continued to achieve good sales performance for the DX7 SUV model. In November last year (2016), SEM further released the mini-SUV DX3 and achieved total auto sales of 118 thousand vehicles last year (2016), a 54.8% growth compared to the same period in 2015. New models of DX7 and DX3 as well as the DX3 sports special edition model to be released this year (2017) are expected to sell 158 thousand units and set a record achievement. Furthermore, Fujian Benz, an investee of CMC, sold 12.6 thousand vehicles in 2016 (nearly 80% growth compared to the same period in 2015) with the V-class luxurious multi-functional model and the New Vito new car model. For 2017, continuing positive reception and sales performance for the V-class are expected to raise annual sales to 21 thousand vehicles. For new business development, two-wheeled electric vehicle sales from CMC sold 6,295 units in 2016, including 4,632 units of electric scooters for a market share of 22.1%. CMC continues to have high expectations for the potential of the electric scooter market, and will continue promotional efforts targeting environmentally-conscious individuals and continue to plan and release normal-sized and heavy electric scooters with greater performance and longer ranges to expand the client base for the electric scooter market. Annual sales are expected to increase beyond the figures achieved last year (2016). CMC sincerely thanks all shareholders for their dedicated support and encouragement. Market competition is expected to become more intensive in 2017, but we will continue to work towards improving our sales performance to express gratitude towards our shareholders. Kenneth K.T. YEN Chairperson March 31, 2017 5Company Profile I. Founding Date June 13, 1969 II. Company History <ul style="display: flex;"><li style="flex:1">June 1969: </li><li style="flex:1">The Corporation was founded by late Yen Tjing Ling with capital NT$100 </li></ul>million. October 1970: December 1973: The Corporation signed technique cooperation contract with Mitsubishi Motors Corporation. Yangmei Plant was built, manufacturing Fuso and Delica. November 1983: A new paiting plant was built. October 1984: June 1986: Equipment for processing crank shafts and cam shafts were implemented and started production. Mitsubishi Motors Corporation (MMC) and Mitsubishi Corporation officially invested the Corporation, holding 19% and 6% of the stock respectively. Verica, a light commercial vehicle, was developed by the Corporation successfully, launched for formal production. December 1988: <ul style="display: flex;"><li style="flex:1">May 1989: </li><li style="flex:1">Practicing two-shift rotation production. </li></ul>December 1990: March 1991: Mechanical stamping plant was built, and Hsinchu Plant was built. The stock of the Corporation was officially listed in Taiwan Stock Market. September 1993: Authorized ISO 9002 certification by Bureau of Standards, Metrology, and Inspection. October 1993: December 1993: March 1994: June 1994: Won National Quality Award, Executive Yaun. Lancer was released. Authorized ISO 9002 certification by BSI. Libero was released. <ul style="display: flex;"><li style="flex:1">June 1994: </li><li style="flex:1">China Motor Training Center was initiated. </li></ul>November 1995: Founded South East (Fujian) Motor Co., Ltd.(SEM) with Fujian Motor Industry Group Co., Ltd.(FJMOTOR) November 1996: Lancer Virage was released. April 1997: July 1997: Authorized ISO 14001 certification by BSI. Space Gear was released, the Corporation entering RV market.

2016 Annual Report (Translation)

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