ANNUAL REPORT 2015 CONTENTS 2 Corporate Information 3 Chairman’s Statement 5 Chief Executive Officer’s Statement 9 Management Discussion and Analysis 15 Corporate Governance Report 24 Directors and Senior Management 29 Report of the Directors 39 Independent Auditors’ Report 41 Consolidated Statement of Profit or Loss 42 Consolidated Statement of Comprehensive Income 43 Consolidated Statement of Financial Position 45 Consolidated Statement of Changes in Equity 46 Consolidated Statement of Cash Flows 48 Notes to Financial Statements 116 Financial Summary CORPORATE INFORMATION BOARD OF DIRECTORS LEGAL ADVISERS TO HONG KONG LAW Freshfields Bruckhaus Deringer EXECUTIVE DIRECTORS 11th Floor, Two Exchange Square Mr. Huang Yi (Chairman) Central Mr. Li Guoqiang (President and CEO) Hong Kong Mr. Du Qingshan Mr. Yu Guangming JOINT COMPANY SECRETARIES Mr. Si Wei Ms. Kam Mei Ha Wendy Mr. Zhang Zhicheng Ms. Mak Sze Man NON-EXECUTIVE DIRECTORS AUTHORIZED REPRESENTATIVES Mr. Adam Keswick Mr. Huang Yi Mr. Leng Xuesong (resigned on 16 June 2015) Ms. Kam Mei Ha Wendy INDEPENDENT NON-EXECUTIVE DIRECTORS AUDIT COMMITTEE Mr. Shigeno Tomihei (retired on 16 June 2015) Mr. Ng Yuk Keung (Chairman) Mr. Ng Yuk Keung Mr. Shen Jinjun Mr. Shen Jinjun Mr. Lin Yong (appointed on 31 August 2015) Mr. Lin Yong Mr. Shoichi Ota (appointed on 31 August 2015) REMUNERATION COMMITTEE CORPORATE HEADQUARTERS Mr. Lin Yong (Chairman) (appointed on 31 August 2015) Mr. Li Guoqiang No. 20 Hequ Street Mr. Shen Jinjun Shahekou District Dalian NOMINATION COMMITTEE PRC Mr. Shen Jinjun (Chairman) PRINCIPAL PLACE OF BUSINESS IN Mr. Huang Yi HONG KONG Mr. Lin Yong (appointed on 31 August 2015) Room 3504–12 COMPLIANCE COMMITTEE 35th Floor, Sun Hung Kai Centre Mr. Du Qingshan (Chairman) 30 Harbour Road Mr. Huang Yi Wanchai Mr. Li Guoqiang Hong Kong RISK COMMITTEE (ESTABLISHED ON 31 REGISTERED OFFICE MARCH 2016) Cricket Square Mr. Yu Guangming (Chairman) Hutchins Drive Mr. Si Wei P.O. Box 2681 Grand Cayman KY1-1111 HONG KONG SHARE REGISTRAR Cayman Islands Computershare Hong Kong Investor Services Limited PRINCIPAL SHARE REGISTRAR Shops 1712–1716 AND TRANSFER OFFICE 17th Floor, Hopewell Centre 183 Queen’s Road East Royal Bank of Canada Trust Company (Cayman) Limited Wanchai 4th Floor, Royal Bank House Hong Kong 24 Shedden Road George Town STOCK CODE Grand Cayman KY1-1110 881 Cayman Islands AUDITORS Ernst & Young Certified Public Accountants 22nd Floor, CITIC Tower 1 Tim Mei Avenue Central Hong Kong 2 ZHONGSHENG GROUP HOLDINGS LIMITED CHAIRMAN’SAIRMAN’S STATEMENT Huang Yi Chairman Dear shareholders, On behalf of the board (the “Board”) of directors of Zhongsheng Group Holdings Limited (“Zhongsheng Group” or the “Company”), I am pleased to present the annual report of the Company and its subsidiaries (the “Group”) for the year ended 31 December 2015 (the “Reporting Period”). In 2015, China’s development faced enormous difficulties and severe challenges. Under the government regulatory measures to sustain economic growth, adjust economic structure and prevent risks, China’s economy maintained moderate but sound and stable development. According to the report of the National Bureau of Statistics, China’s GDP in 2015 amounted to RMB67,670.8 billion, representing a year-on-year growth of 6.9%. The disposable income per capita in China was RMB21,966, representing a year-on-year nominal growth of 8.9%. These achievements were made amidst an exceptionally complex and severe global environment. In 2015, the production volume and sales volume of automobiles in China achieved a breakthrough of more than 24.50 million units, hitting the world’s new high and ranking first in the world for seven consecutive years. Sales volume of passenger vehicles reached 21.1463 million units in 2015, exceeded 20 million units for the first time and representing a year-on-year growth of 7.30%. The luxury automobile market continued to grow rapidly. In particular, the sales volume of Mercedes-Benz in China amounted to 373,500 units in 2015, having exceeded the estimated volume of 300,000 units at the beginning of the year. This achievement made China outstrip the U.S. and become the single largest market of Mercedes-Benz in the world. However, in contrast to the growth in sales volume, selling price and gross profit margin of new automobiles remained low. The intense competition in market price lowered gross profit margin of new automobiles as compared to last year. As at 31 December 2015, the Group recorded a revenue of RMB59,142.6 million, representing an increase of 8.0% as compared to a revenue of RMB54,786.7 million in 2014. In particular, revenue from new car sales business increased from RMB47,961.6 million in 2014 to RMB51,842.7 million, representing an increase of 8.1%. Revenue from after-sales and accessories business increased from RMB6,825.1 million in 2014 to RMB7,299.9 million, representing an increase of 7.0%. Our profit attributable to owners of the parent for 2015 was RMB460.1 million, representing a decrease of 38.6% as compared to the same period of 2014. Earnings per share was RMB0.21 (same period in 2014: RMB0.35). The year of 2015 is the last year of the “12th Five Year Plan”, during which the automobile industry was still undergoing a process of in-depth adjustment with intensified elimination and integration in the dealership industry. Though facing the impact ANNUAL REPORT 2015 3 Chairman’s Statement (continued) of macro-economic environment and challenges brought by the complex business environment, Zhongsheng Group, leveraging on its corporate management, strived to strengthen its footholds, paid close attention to the trend of policies and consumption demand, solidified and enlarged its market share in various cities, and capitalized on the competitive edge of its brand to continuously expand its business scale. As at 31 December 2015, the Group had 213 automobile dealership stores, covering 20 provincial level regions and over 70 cities in China. Despite undergoing a difficult phase of adjustments, Zhongsheng Group still received wide recognition from domestic and international authorities. In May 2015, Zhongsheng Group ranked fourth among the 2014 Top 100 Automobile Dealer Groups in China issued by the China Automobile Dealers Association for the second consecutive year with annual revenue of RMB54.79 billion. In July 2015, Zhongsheng Group was selected once again as one of the Fortune China 500, an internationally recognized ranking and ranked 114th. In November 2015, it was granted the “2015 Most Influential Brand in China’s Automobile Dealer Industry” by the China Automobile Dealers Association. 2016 is the first year of the “13th Five-Year Plan” and also a year for pushing through the structural reform of China’s economy. The automobile and dealership industry in China will face more difficulties and greater challenges. However, Zhongsheng Group is fearless of difficulties and challenges as its has been heading forward amidst difficulties. We are pleased to see numerous positive signs which are beneficial to the future development of automobile and dealership industry from the government work report of the fourth meeting of the 12th National People’s Congress, including further improvement in the living standard of citizens, continuous increase in disposable income, comprehensive upgrade of infrastructure facilities, highway traffic mileage exceeding 120,000 miles and further promotion in the new urbanization. Looking forward, there exist both opportunities and challenges as China’s automobile industry has reached a critical phase of transformation and upgrading. While steadily optimizing our network coverage and enhancing our management standards, we will strive for excellence, continually increase our service capabilities and standards as well as enlarge the effect of scale economies. As an automobile dealership group which provides one- stop services including sales of new and second-hand automobiles, refitting, after-sales maintenance, accessories, finance, insurance and leasing services, we will stand by our corporate motto of “Zhongsheng Group – Lifetime Partner” as always, consistently uphold our operational policy of “Integrity and Innovation”, strengthen our own management and enhance our core competitiveness. In light of the core mission under the “13th Five-Year Plan” to fully construct a moderately prosperous society, the Group will make its best endeavors to take a step forward to achieve comprehensive development. Thanks to the dedication of our staff from all departments, the cooperation with all business partners and the trust of all shareholders, the Group is able to gain stable achievements in face of the complicated and difficult market condition. On behalf of the Board, I would like to express our sincere gratitude to all of you for your valuable contributions to our development. Huang Yi Chairman Hong Kong, 31 March 2016 4 ZHONGSHENG GROUP HOLDINGS LIMITED CHIEF EXECUTIVE OFFICER’S STATEMENT Li Guoqiang President and Chief Executive Officer MARKET REVIEW In 2015, the international economic environment remained complicated with increasing pressure from economic downturn. Despite a slowdown, China’s economic growth rate remained at a reasonable range. China’s GDP for the year amounted to RMB67.7 trillion, representing a year-on-year growth of 6.9%, and ranked high among the world’s major economies. In general, China’s economy showed moderate but sound and stable development momentum. Notably, the living standard of the citizens was further improved. The disposable income per capita in China recorded an actual increase of 7.4%, outpacing the economic growth rate. As at the end of last year, the balance of savings deposits of residents increased by more than RMB4 trillion, representing an increase of 8.5%. In particular, the employment situation kept stable in general with an increase in the employed population in urban areas of 13.12 million, marking a significant breakthrough in the construction of new urbanization. All of these have laid a solid foundation and provided opportunities for long-term development of the automobile market.