BENGANG STEEL PLATES CO., LTD. Annual Report 2003

Transcription

1 BENGANG STEEL PLATES CO., LTD. Annual Report 2003 Table of Contents Important Statements...2 I. Company Profile...2 II. Financial Highlights...3 III. Change of Share Capital and Shareholders...6 IV. Particulars about the Directors, Supervisors, Senior Managements and the Employees....9 V. Management Structure...11 VI. The Shareholders General Meeting...11 VII. Report of the Board of Directors...12 VIII. Report of the Supervisory Committee...20 IX. Significant Events...21 X. Financial Report...29 XI. Documents for reference

2 BENGANG STEEL PLATES CO., LTD. Annual Report 2003 (Upon International Accounting Standard) Important Statements The Board of Directors and the directors of the Company guarantee that there are no significant omissions, fictitious or misleading statements carried in the Report and will accept individual and joint responsibilities for the truthfulness, accuracy and completeness of the Report. I. Company Profile 1. Name of the Company in Chinese: In English: BENGANG STEEL PLATES CO., LTD. 2. Legal Representative: Mr. Li Mohua 3. Secretary of the Board: Mr. Liang Guangde Liaison of stock affair: Mr. Sun Zhongzheng Address: No.16, Renmin Road, Pingshan District, Benxi City, Liaoning Province Tel: Fax: Registered address: No.16, Renmin Road, Pingshan District, Benxi City, Liaoning Province Post Code: Information disclosure media stipulated by the company : China Security Daily, Security Times, Hong Kong Commercial Daily Annual reports also published online at: Place where the annual report is prepared and ready for reference: Stock Affair Department, No.16, Renmin Road, Pingshan District, Benxi City, Liaoning Province 6. Stock listed in: Shenzhen Stock Exchange (1) Short Form of B-Shares: BENGANGBAN-B Stock Code: (2) Short Form of the Stock of A-Share: BENGANGBANCAI Stock Code: Misc. information: Business registration renewed on: April 28, 1999 Business registration renewed with: Liaoning Provincial Commerce & Industry Administration Bureau -2-

3 Business license number: Taxation registration number: Public accountant invited by the Company: Beijing Tianhua CPA Address: 17th Floor, Zhonghua Building, Fuxingmenwai Street, Beijing Ho and Ho & Company CPAs Address: Room 304, Leunfa Business Center, No Queen s Road West, Hong Kong II. Financial Highlights 1. Gross profit and formation Gross profit Net profit In RMB thousand 728, , Net profit deducted non-recurring gain/loss 461, Major business profit Operation profit Non-operation gain/loss (net) Cash flow from business operation (net) Increasing of cash and cash equivalents (net) 914, , , , , Note: non-recurring gain/loss is including Gain/loss from disposal of fixed assets Other non-operation expenditures after deducted impairment provision Carry back from impairment provision Impact of income tax for the above item Total 2, , , , ,

4 2. Accounting indices and data of previous 3 years (in RMB) Items Adjusted Not adjusted Adjusted Not adjusted Major business turnover 11,210, ,750, ,750, ,242, ,242, Net profit 73, , , , , Gross assets 7,398, ,319, ,997, ,060, ,574, Shareholders equity (exclude minority shareholders equity) 4,646, ,172, ,172, ,026, ,026, Earnings per share (diluted) Net asset per share Net asset per share (adjusted) Cash flow from business operation (net) Net income / asset ratio (diluted) 10.19% 8.29% 8.29% 6.61% 6.61% Net income / asset ratio deducted non-recurring gain/loss (diluted) 9.93% 8.80% 8.80% 6.61% 6.61% 3. Supplementary form of income statement Net income / asset ratio % Profit of the term Earnings per share Net income / asset ratio % Earnings per share Fully diluted Weighted average Fully diluted Weighted average Fully diluted Weighted average Fully diluted Weighted average Major business profit 19.68% 20.74% % 18.67% Operation profit 17.31% 18.23% % 14.71% Net profit 10.19% 10.74% % 8.24% Net profit deducted non-recurring gain/loss 9.93% 10.47% % 8.75%

5 4. Movement of reserves Share premium Assets revaluation reserves Statutory reserves Retained profits Total RMB 000 RMB 000 RMB 000 RMB 000 RMB 000 At 1st January ,072, , , ,236 2,890,747 Payment of 2001 final dividends (199,993) (199,993) Eliminated on disposal of property, plant and equipment - (13,969) - 13,969 - Net profit for the year , ,120 Transfer ,737 (57,737) - At 31st December 2002 and 1 st January ,072, , ,166 1,042,595 3,036,874 Eliminated on disposal of property, plant and equipment - (24,498) - 24,498 - Net profit for the year , ,512 Transfer ,709 (78,709) - At 31st December ,072, , ,875 1,461,896 3,510,386-5-

6 III. Change of Share Capital and Shareholders (I) Change of share capital 1. Change of share capital (at Dec. 31, 2003, in Shares) Before Changed by (+,-) After Share alloting Share distributing Capitalizing of reserves New shares placed Others I. Non-current Shares 1. Promoters shares 616,000, ,000,000 Including: State-owned shares 616,000, ,000,000 Domestic corporate shares Foreign corporate shares Others 2. Raised corporate shares 3. Employees shares 30,000 30, Preferred Shares or others Total non-current shares 616,030, ,030,000 II. Current Shares 1. RMB common shares 119,970, ,970, Domestically listed foreign investment shares 400,000, ,000, Overseas listed foreign investment shares 4. Others Total current shares 519,960, ,960,000 III. Total Shares 1,136,000,000 1,136,000,000 Sub-total 2. Share placing and listing (1) Share placing and listing in the latest 3 years till the end of the report term The Company placed shares once in the period. At June 10 th to 12 th, 1997, the Company placed 400 million of foreign invested shares (B shares) at HKD2.38 each in Shenzhen Stock Exchange. The shares were listed at July 8 th, 1997 and approved to put into circulation 400 million shares. On November 3 rd, 1997, the Company placed another 120 million RMB common shares (A shares) at RMB5.40 each. The shares were listed on January 15 th, 1998, and approved to put into circulation 108 million shares. (2) Among the RMB common shares of 120 million shares offered to the public, there are 12 million of employees shares. These shares were placed on November 3 rd, 1997 at RMB5.40 each. It was on July 16 th, 1998, the employees shares were listed in the exchange. In the report year, million shares were approved to be listed in the market. There are still 30 thousand shares held by senior executives under frozen. -6-

7 (II) Particulars about the shareholders 1. At December 31, 2002, the Company has 108,277 shareholders. Including 1 state-owned shareholder, B-share holders, and A-share holders. 2. The top-ten shareholders Order Name of shareholders Shares held Portion in the total capital share % Share type Note: Benxi Steel (Group) Co., Ltd. DEUISCHE BANK AG LONDON DIAM CHINA OPEN MOTHER FUND Li Weiqin YULAN DANG DE FE Zhen Xinrong Zhang Zhukun Fang Yinjun Huang Liandi Zhang Yongqian 616,000,000 6,991,350 3,050,071 2,579,300 2,539,968 2,207,500 1,953,800 1,785,740 1,763,924 1,570, state-owned B share holder B share holder B share holder B share holder B share holder B share holder B share holder B share holder B share holder (1) Benxi Steel (Group) Co., Ltd. is the controlling shareholder of the Company. The shares held is not placed in the stock market. (2) Benxi Steel (Group) Co., Ltd., which is one of the top-ten shareholders, has no related relationship with any other shareholders in the list, nor acting in concert as stated in Regulations of information disclosing about changing of shareholdings for public companies. Related relationship is not found among other shareholders. None of the shareholders are regarded as acting in concert stated in Regulations of information disclosing about changing of shareholdings for public companies. (3) Benxi Steel (Group) Co., Ltd. is the only shareholder who is holding more than 5% of the share capital of the Company. The shares are not changed during the report term, nor been pledged or frozen. 3. Particulars about the controlling shareholders of the Company Name of shareholder: Benxi Steel (Group) Co., Ltd. Legal representative: Zhang Yingfu Incorporated on: July 10, 1996 Registered capital: RMB4.7 billion Business property: sole state-operated, authorized operation Business range: smelt of steel and iron, mining, steel plate rolling, make of oxygen, making of pipes, power plant, coal chemistry, specialized steel, heating, supplying of water/electricity/air/gas, process of metal, maintaining and building of machinery and equipment, construction and installation, railway and road transportation, cross board trading, tourism, construction materials, fire-resistance materials, electronic instruments, material supplying, real-estate developing, science research, design, information service 4. There was not any legal person shareholder other than Benxi Steel (Group) Co., Ltd. who was holding more than 10% of the share capital. 5. Particulars about the top-10 current share holders (ended December 31, 2003). -7-

8 Order Name of the shareholders Shares held Share type DEUISCHE BANK AG LONDON DIAM CHINA OPEN MOTHER FUND Li Weiqin YULAN DANG DE FE Zhen Xinrong Zhang Zhukun Fang Yinjun Huang Liandi Zhang Yongqian NTC/Municipal Employees Retirement System of Michigan Note: The relationship among the top 10 current share holders are unknown. 6,991,350 3,050,071 2,579,300 2,539,968 2,207,500 1,953,800 1,785,740 1,763,924 1,570,000 1,413,000 B share holder B share holder B share holder B share holder B share holder B share holder B share holder B share holder B share holder B share holder -8-

9 IV. Particulars about the Directors, Supervisors, Senior Managements and the Employees. (I) Brief of the directors, supervisors and senior managements Name Gender Age Position Term Li Mohua Yu Tiancheng Liang Guangde Li Yu Zhang Guiyu Guan Dianguo Zhong Tianli Xue Xiangxin Liu Junyou He Xusheng Sun Xiao Zhang Fuchen Wu Wei Male Male Male Male Male Male Female Male Male Male Male Male Male Chairman/GM Vice Chairman Director Vice GM, Secretary of the Board Director Director Employees Representative Director Independent director Independent director Chairman of the Supervisory Committee Vice Chairman of the Supervisory Committee Supervisor Employees Representative Supervisor Employees Representative Supervisor Shares held at the beginning of year Shares held at the end of year Notes Receive salary from the shareholder Receive salary from the shareholder Receive salary from the shareholder Receive salary from the shareholder

10 Particulars about the directors and supervisors who take jobs in the shareholding party. Name Position Job term Li Mohua Benxi Steel (Group) Co., Ltd. / director April 1996 till present Yu Benxi Steel (Group) Co., Ltd. / director, GM February 2001till present Tiancheng Li Yu Benxi Steel (Group) Co., Ltd. / chief of accounting department February 2000 till present Liu Benxi Steel (Group) Co., Ltd. / secretary of discipline committee August 2000 till present Junyou He Benxi Steel (Group) Co., Ltd. / chief of planning department January 1998 till present Xusheng Sun Xiao Benxi Steel (Group) Co., Ltd. / former chief of auditing department May 1999 till present (II) Annual payroll 1. In the report term, the directors, supervisors and senior managements that take salaries from the Company received their salaries monthly according to their levels respectively. 2. The annual payrolls of the directors, supervisors and senior managements are amounted to RMB (including basic salary, bonus, welfare, allowance, housing allowance, and other allowances). The payrolls of top 3 senior managements are amounted to RMB Allowance for independent directors: RMB 20 thousand / year / people. 4. Currently the Company has altogether 13 directors, supervisors and senior managements. 6 of them take salaries from the Company (independent directors excluded), 2 of them are ranged between RMB15 thousand ~ RMB40 thousand; 3 of them are ranged between RMB40 thousand ~ RMB60 thousand, and 1 of them is ranged between RMB50 thousand RMB100 thousand. (III) Change of directors, supervisors, and senior management Mr. Chen Jizhuang, Mr. Jie Houfu, Mr. Guo Yanchang, and Mr. Zhou Tianlai quit from the position of director due to change of job. (IV) Employees At December 31, 2003, the Company has 3680 employees in total. 1. Distribution on education levels Master % Bachelor % Associated Degree % Technical Certifications/high school % Other % 2. Distribution on professions Production % Sales & marketing % Engineering & technical 294 8% Financial % Executive % 3. There are 1755 retired workers who need the Company to undertake their expenses. -10-

11 V. Management Structure (I) Particulars about the management structure Under the requirement of the Company Law, Security Law, Public Company Management Regulations, and The instructional opinion on establishing of independent director system in public companies, the company kept optimizing the management structure and operate the company in a standardized mean to ensure its healthy development. The controlling shareholder, Benxi Steel Group, is completely separate from the Company in aspects of personnel, accounting, and asset. The Company has its independent organization and business operation. In the report term, the Company produced and adopted Investor Relationship Management System and Internal Control System, which will strengthen the connection with the investors and enforce the internal management of the Company. (II) Independent directors fulfilling of duties As empowered by the relative laws, regulations and the Article of Association of the Company, in the report term, the independent directors were doing their jobs by presented the board meetings and played important role in protecting the legal benefit of the whole company and shareholders as well. (III) Particulars about the separation of businesses, personnel, assets, organizations, and accounting from the controlling shareholder 1. In personnel: The labor management, personnel and salary management are operated independently out of the controlling shareholder. Tthe Chairman, GM, Vice GM, Secretary of the Board and other senior managements take salaries from the Company and none of them takes position other than director in the shareholding party. 2. In assets: The company owns the assets completely and runs its production, supplying and sales system independently. 3. In accounting: The company has its own independent accounting division, accounting system, bank account, and exercise its liability of taxation independently. 4. In organization: The company has a mature and independent organization structure, which completely separated from the controlling shareholder. 5. In the aspect of business: the company has its own purchasing, production and sales system with no connection with the controlling shareholder. VI. The Shareholders General Meeting The Shareholders General Meeting was held once during the year (I) Announcing, calling and holding of the Shareholder s General Meeting The Board of Directors published the Announcement on Holding 2001 Shareholders General Meeting on June 26, 2003 issues of China Security Daily, Security Times and Hong Kong Commercial Daily. On July 26th, 2003, the 2002 Shareholders General Meeting was held in Bengang Hotel, Benxi, Liaoning Province. 10 shareholders (or attorney) presented the meeting representing 618,354,136 shares, takes 54.43% of the capital share of the Company. Including 2 holders of B-shares representing 2,314,136 shares takes 0.58% of the total B-shares. -11-

12 (II) Publishing of the resolutions passed by the shareholders general meeting The following proposals were adopted as resolutions through voting Annual Report of the Board of Directors Annual Report and its Summary Version Annual Report of the Supervisory Committee Financial Settlement Report and Budget Report for Year Business Plan for the Year The proposal of electing Mr. Li Mohua, Yu Tiancheng, Liang Guangde, Li Yu, Zhang Guiyu, and Guan Dianguo the directors of the 3 rd term of Board 7. The proposal of electing Ms. Zhong Tianli, and Mr. Xue Xiangxin the independent directors of the 3 rd term of Board 8. The proposal of electing Mr. Liu Junyou, He Xusheng, Sun Xiao, Zhang Fuchen, and Wu Wei the supervisors of the 3 rd term of Supervisory Committee Profit Distribution Preplan 10. The proposal of inviting PricewaterhouseCoopers Zhongtian CPA as the auditors for year And the payment for the CPA. The above resolutions were published on the July 29 th, 2003 issues of China Securities Journal, Security Times, and Hong Kong Commercial Daily. (III) Electing and replacing of directors and supervisors As passed by the shareholders general meeting, Mr. Li Mohua, Yu Tiancheng, Liang Guangde, Li Yu, Zhang Guiyu, and Guan Dianguo were elected the directors of the 3 rd term of Board; Ms. Zhong Tianli, and Mr. Xue Xiangxin were elected the independent directors of the 3 rd term of Board; Mr. Liu Junyou, He Xusheng, Sun Xiao, Zhang Fuchen, and Wu Wei were elected the supervisors of the 3 rd term of Supervisory Committee. VII. Report of the Board of Directors (I) Analyzing business situations In year 2003, the national economy was showing a rapid developing trend. Under this background, the lower industries of iron and steel industry were growing steadily, and brought up the requirement for steel products. That led to dramatic increasing of sales price. In the meantime, as effected by the increasing of overall productivity of domestic steel industry, the upper supplying of resources became tight though. That naturally led to continuous climbing up of raw material prices. Anyhow, the Company reached its business target in 2003 and achieved good result. The Company realized output of hot-rolling plate of 4.02 million ton, which was 25.63% over that of the pervious year, sales volume of hot-rolling plate of 4.14 million ton, which was 39% over that of the pervious year, business turnover of RMB11,210,200,000 which was 44.64% over that of the previous year; major business -12-

13 profit of RMB957,720,000, which was 15.64% over that of the previous year; net profit of RMB525,280,000, which was 36.47% over that of the previous year. As proposed by the 16 th convention of the CCP, the old industrial bases of Northeast area will be supported to speed up their reforming and adjustment. The Company is standing upon the long-term development strategy and keeps following with the national arrangement, put its target on building the Company into a base of fine-quality steel plate products, and modern enterprise and international competitor. (II) Business operation in the report term 1. Major business and operation (1) The Company is primarily involved in the business of steel smelting, plate rolling, and selling of relative products. Its terminal products are primarily hot-rolled plates and continuous casting billet. (2) Business turnover and profit structure Products Turnover Portion in Major business Portion in major major turnover profit business profit Molten steel 193,769, % -4,873, % Steel billet 2,372, % -598, % Continuous casting billet 201,768, % 6,156, % Hot Plate 10,652,707, % 967,339, % Disposal of materials 67,919, % -10,738, % Others 91,658, % 429, % Total 11,210,196, ,715, Incl. Related transactions 5,491,403, ,874, Molten steel 193,769, % -4,873, % Hot plate 5,222,956, % 391,584, % Other 74,677, % -837, % (3) Geographic distribution of business turnover and profit structure Region Turnover Portion in Major business Portion in major major turnover profit business profit North 1,749,206, % 149,439, % North-east 5,505,906, % 470,383, % East 3,161,752, % 270,116, % Mid-south 579,745, % 49,529, % North-west 7,984, % 682, % South-west 595, % 50, % Exported 205,006, % 17,514, % Total 11,210,196, ,715,

14 (4) Products distribution of business turnover and increase/decrease over the previous year Region Turnover Increase /decrease North 1,749,206, % North-east 5,505,906, % East 3,161,752, % Mid-south 579,745, % North-west 7,984, % South-west 595, % Exported 205,006, % Total 11,210,196, (5) Major products takes over 10% of the business turnover Products Major business turnover Major business cost Gross profit ratio % Hot plate 10,652,707, ,667,947, % Incl. Related transactions 5,222,956, ,822,831, Hot plate 5,222,956, ,822,831, % Note: The gross profit rate decreased because of the increasing of raw material market price. 2. Major vendors and customers Total of the supply from top 5 vendors 8,627,422, Portion in overall purchasing 96.09% Total of the sales to top 5 buyers 4,646,903, Portion in overall sales 41.45% 3. Problems encountered in the operation and solutions Major problem encountered in the report term is that the dramatic increasing of cost due to increasing of raw materials. Facing to this difficulty, the Company will take the following measures: Enforce the production organization and increase the output significantly. Along with emphasizing on equipment operation and reconstruction, fully develop the potential of the equipment by enforcing of scientific management system. Adopt a serial of effective measurements to motivate the employees. The target is set at 4.02 million ton of hot-rolling plate and 25.63% of increasing over the previous corresponding period. Following with the changing market position, enlarge the territory of the market. The Company will keep following with the direction of the market, continue to adjust the structure of clients and products. Emphasis will be laid on major direct clients and developing of special product market. The double-high products will be enforced in their researching and developing. Turn the production of the Company from conventional products over to high-surplus value products. Deepen the implementing of cost-deducting strategy, improve the management standard. Fully -14-

15 develop the potential of the Company and enforce the tackling of key projects, to optimize the major technical economical indices. The targets are set at: combined energy consuming of 996kg / ton, decrease by 134 kg down from the previous corresponding period; rotate furnace energy consuming of kg, decrease by 5.3kg down from the previous corresponding period. (III) Investment Utilization of fund raised: The fund raised in share placing of year 2000 has already been used. The details have been disclosed in the interim report and annual report of Utilization of non-raised fund: In the report term, the Company has invested RMB96.94 million in the technical reforming projects with the fund of the Company itself. 1. 9#225 crane project: planned to invest RMB8.08 million, started in 2002, RMB0 occurred in 2003, accumulated to RMB7.17 million till the end of 2003, and will be completed in Rolling collector project: planned to invest RMB5.67 million, started in 1999, RMB2.43 million occurred in 2003, accumulated to RMB4.85 million till the end of 2003, and will be completed in Slurry transporting project: planned to invest RMB0.43 million, started in 2003, RMB0.42 million occurred in 2003, accumulated to RMB0.42 million till the end of 2003, and will be completed in Dock crane project: planned to invest RMB1.52 million, started in 2003, RMB1.52 million occurred in 2003, accumulated to RMB1.52 million till the end of 2003, and will be completed in Zero electric motor project: started in 2003, RMB0.34 million occurred in 2003, accumulated to RMB0.34 million till the end of 2003, and will be completed in Molten iron pre-process project: planned to invest RMB29.64 million, started in 2003, RMB15.80 million occurred in 2003, accumulated to RMB15.80 million till the end of 2003, and will be completed in sector project: planned to invest RMB13.60 million, started in 2003, RMB12.11 million occurred in 2003, accumulated to RMB12.11 million till the end of 2003, and will be completed in Roller polish workshop reconstruction project: planned to invest RMB60.31 million, started in 2003, RMB20.73 million occurred in 2003, accumulated to RMB20.73 million till the end of 2003, and will be completed in # heating furnace project: planned to invest RMB78.00 million, started in 2003, RMB3.01 million occurred in 2003, accumulated to RMB4.91 million till the end of 2003, this project is in preparation stage # converter project: planned to invest RMB million, started in 2003, RMB

16 million occurred in 2003, accumulated to RMB9.34 million till the end of 2003, this project will be completed in Furnace disassembling machine project: planned to invest RMB2.2 million, started in 2003, RMB1.66 million occurred in 2003, accumulated to RMB1.66 million till the end of 2003, this project is expected to be completed in # heating furnace project: planned to invest RMB91.46 million, started in 2003, RMB0.11 million occurred in 2003, accumulated to RMB0.11 million till the end of 2003, this project will be completed at the end of Supplementary reconstruction of continuous rolling project: planned to invest RMB million, started in 2002, RMB29.48 million occurred in 2003, accumulated to RMB29.49 million till the end of 2003, this project is in preparation stage. (IV) Financial situations Items Increase/decrease than previous year (%) Gross asset 7,398, ,319, % Long-term liability 325, , % Reserves 4,646, ,172, % Net cash flow per share from business operation % Note: causation of the movement 1. Increasing of gross asset good sales in the year and lead to increasing of monetary fund and notes receivable. 2. Decreasing of total liability returning of loans in the year. 3. Increasing of reserves increasing of net profit realized in the year. 4. Increasing of net cash flow the sales volume and price are higher than the previous year, leading to increasing of sales income and advances. Items Increase/decrease than previous year (%) Revenue 11,210, ,750, % Sales cost 10,295, ,966, % Gross profit 914, , % Periodic expenses 187, , % Other business income / expenses -3, , % Net profit 473, , % Note: causation of the movement -16-

17 1. Increasing of revenue increasing of sales volume and price over the previous year. 2. Increasing of sales cost increasing of sales volume and raw material price. 3. Increasing of gross profit - increasing of sales volume and price over the previous year. 4. Decreasing of periodic expenses decreasing of misc. port charge in export in the sales expenses. 5. Decreasing of other business income / expenses no fixed asset impairment provision was drawn in the year. 6. Increasing of net profit increasing of major business profit of the year over the previous year. (V) No great changes of the producing and operating environment, the macro policy, the laws and regulations, had affected, are affecting or will affect the company financial condition and its performance greatly. (VI) Major process of year will be an important year for the national government to implement the strategy of promoting the reborn of old industrial bases in northeast region of China. The Company will go for the leader of the wave. 1. Through upgrading of production management and fully developing of potentials, the Company sets its goal unhesitatingly at 5.2 million ton of steel and 4.07 million ton of hot-rolled plate. 2. With closer observing of the market, the marketing strategies will be tuned flexibly with stress laid on domestic market. Focuses will be put on the regions of northeast, north, Shandong province, and manufacturing industries of automobile, home appliance, tube, and container. Developing of certain key types of products will also be on the important place. Under the integrated marketing strategy of fully adopting the advantages of the clients, the Company will continue to co-operate with its clients on developing of new steel products. 3. Technological reforming and researching of new products are also the key points of the Company in the coming year. The Company will do great effort to ensure the product line to be following with the requirement of the market, and the overall strategy of the national government. Attention will be concentrated on those double-high products which are badly needed in the domestic market and will bring the Company new growth point of profitability. 4. Targeting at the advanced managing technologies of the world, the Company is also wishing to increasing the business efficiency through adopting of adopting of mature management standards. In the coming year, the ISO9001:2000 quality management system will be practiced in every aspects of the Company s business with viewing of greatly improve the quality control standard. Practices of assessment and control on process costs will be carried further into each process of production. The purpose is set at dramatically reducing the process costs in comparison with the previous year, and reaches the industrial average level in energy consuming. Facing with the severe condition of resource supplying market, the purchasing management will also be practically improved to reduce the costs in every possibility. In financial aspects, the Company will keep improving the capital structure and speed up the financial circle. Practically enforce the accounting management to reduce the controllable expenses by 10% at the basis of the previous year. -17-

18 (VII) Daily work of the Board of Directors 1. The Board of Directors held 5 meetings during the report term, the resolutions are as the followings: 1) On June 23 rd, 2002, the 2 nd term Board of Directors held its 13 th meeting in the 3 rd meeting room of the Bengang Hotel. The following resolutions were passed. (1) 2002 Annual Work Report of the Board; (2) Statement on the events that referred to by the auditors report with unable to form an opinion issue by PriceWaterHouseCoopers Zhongtian CPA; (3) 2002 Annual Report of the Company; (4) The 1 st Quarterly Report of year 2003; (5) 2002 Financial Settlement and 2003 Budget Report; (6) 2003 Production and Business Plan; (7) The proposal of nominating the members of the 3 rd term of Board; (8) The proposal of nominating the independent directors of the 3 rd term of Board; (9) The proposal of not requesting the shareholders general meeting to extend the expire date of the issuing of new A shares; (10) The Profit Distribution Preplan of year 2002; (11) The proposal of extending the engagement with PriceWaterHouseCoopers Zhongtian as the auditor of the Company for year 2002; (12) The proposal of holding the 2002 Shareholders General Meeting; The above resolutions were published on the June 26 th, 2003 issues of China Securities Journal, Security Times, and Hong Kong Commercial Daily. 2) The 1 st meeting of the 3 rd term Board of Directors was held on July 26 th, 2002 in the 1 st meeting room of the Group. Mr. Li Mohua and Mr. Yu Tiancheng were elected the Chairman and vice Chairman of the Board of Directors. The above resolutions were published on the July 29 th, 2003 issues of China Securities Journal, Security Times, and Hong Kong Commercial Daily. 3) The 2 nd meeting of the 3 rd term Board of Directors was held on August 22 nd, 2003 in the meeting room of the Company. The 2002 Semi-annual Report and its summary were examined and passed. The above resolution was published on the August 23 rd, 2003 issues of China Security Daily, Security Times, and Hong Kong Commercial Daily. 4) The 3 rd meeting of the 3rd term Board of Directors was held on October 26 th, 2003 in the meeting room of the Company. The 3 rd quarterly report of 2003 was examined and passed. The above resolution was published on the October 24 th t, 2003 issues of China Security Daily, Security Times, and Hong Kong Commercial Daily. 5) The 4 th meeting of the 3rd term Board of Directors was held on December 30 th, 2003 in the meeting room of the Company. The following resolutions were passed: (1) The proposal on the reforming in according with the tour inspection of the Shenyang Office of China Securities Regulatory Commission. (2) The proposal on establishing of investors relationship management. The above resolution was published on the December 31 st, 2003 issues of China Security Daily, Security Times, and Hong Kong Commercial Daily. 2. Executing of the resolutions of the Shareholders General Meeting (1) Upon the resolutions of the 2002 shareholders general meeting, the Company continue to -18-

19 invite PriceWaterHouseCoopers Zhengtian CPA as the auditor of the Company for year (2) As adopted by the 13 th meeting of the 2 nd term of Board, the resolution of not requesting the shareholders general meeting to extend the expire date of the issuing of new A shares (VIII) Profit distribution preplan or capitalization of reserves for current term As audited by Beijing Tianhua CPA, the Company has realized the net profit of RMB524,724, in year In accordance with the Article of Association of the Company, 10% of the net profit will be drawn as statutory surplus reserves, which is amounted to RMB52,472,446.66, and 5% of the net profit will be drawn as public welfare fund amounted to RMB26,236, After the drawing of the statutory surplus reserves and public welfare fund, the net profit distributable for year 2003 is amounted to RMB446,015,796.63, plus the distributable profit retained from the end of year 2002 amounted to RMB1,034,761,624.19, the total profit distributable for this time is amounted to RMB1,480,777, Therefore the profit distribution plan for year 2003 is as: upon the total capital share of 1,136,000,000 at December 31 st, 2003, cash dividend of RMB2.00 (tax included) will be distributed to each 10 shares. Namely RMB227,200, will be distributed as common share dividend in total. The retained of RMB1,253,577, will be carried over to the next year as distributable profit. (IX) Offering of external guarantee In accordance with The notification about the regulations of fund transaction with related parties and offering of external guarantee of listed companies (Zheng-Jian-Fa [2003]56), the CPA of the Company issued the special statement on the situation of controlling related party and other related parties adopting of the Company s fund as the following: (1) The related transactions with the controlling related parties and other related parties have been put through the statutory procedure, and disclosed in public medias. (2) The amount of the transactions has been disclosed in the 2003 Annual Report. (3) Fund adopted by or from the related parties are for purpose of business operation. There is no offering of external guarantee occurred in the report term. -19-

20 VIII. Report of the Supervisory Committee (I) Meetings of the Committee The Committee held 3 meetings in the report term. 1) On June 23rd, 2002, the 2nd term Committee held its 10th meeting in Bengang Hotel. The following resolutions were passed. (1) 2002 Annual Work Report of the Supervisory Committee; (2) Nominating of the members of the 3 rd term of Committee; (3) 2002 Annual Report and its summary of the Company; (4) The 1 st Quarterly Report of year 2003; (5) 2002 Financial Settlement and 2003 Budget Report; (6) 2003 Production and Business Plan; (7) The Profit Distribution Preplan of year 2002; (9) The proposal of not requesting the shareholders general meeting to extend the expire date of the issuing of new A shares; (10) The proposal of extending the engagement with PriceWaterHouseCoopers Zhongtian as the auditor of the Company for year 2002; (11) The proposal of holding the 2002 Shareholders General Meeting; 2) On July 26th, 2003, the 3rd term Committee held its 1st meeting in Bengang Hotel. Mr. Liu Junyou and Mr. He Xusheng were elected the Chairman and Vice Chairman of the 3rd term of Committee. 3) On August 22 nd, 2003, the 3 rd term Committee held its 2 nd meeting in the meeting room of the Company. The 2003 Semi-annual Report and its summary were adopted by the meeting. (II) Particulars about the duties of the Supervisory Committee 1. The directors, managers and senior executives were performing their duties in accordance with the relative regulations and the resolutions of the shareholders general meeting and the board of directors. They have being doing their job with spirit of hard working and responsible, therefore ensured the Company to fulfil its business targets and successfully build up its internal administrative system. None of the directors, managers and senior executives was found doing anything that is against the laws regulations and the Article of Association of the Company, or harming the benefit of the Company. 2. The Supervisory Committee performed serious inspection on the financial position of the Company, and thinks the financial report is frankly reflecting the financial position and business results of the year The supervisors thoughts the auditors report and the special statement on the changing of accounting policy and accounting estimation, as well as the correction of significant error issued by the CPA invited by the Company for year 2003 Beijing Tianhua CPA, are basing on the basis of truth and with compliance with the Enterprise Accounting Standard and the Enterprise Accounting System. 3. The Company conducts no acquisition or placing of assets. 4. The related transactions of the Company was basing on the contracts or agreements and on a fair basis. They harmed no benefit of the Company. 5. The proposed investment on the reforming of 1700mm hot continuous rolling machine was regarded as absolutely necessary. 6. The modifications on the Integrated Service Agreement are fully reflecting the principle of market price, and is fair and reasonable. -20-

21 IX. Significant Events (I) In the report period, the Company had no material lawsuits or arbitrations. (II) In the report period, the Company had conducted no such activities as assets acquisition, sales, absorption or consolidation. Particulars about the placing and interchanging of assets: The Company placed most of the equipment of primary rolling workshop and other scraped assets with purchase cost of RMB103,848, and net value of RMB26,669, These assets were sold at price of RMB12,878, For these part of assets were belong to the primary rolling workshop which are scraped. Since the continuous rolling system been built, the primary rolling technologies were out of date and these equipments are without value of use. After sold those which still usable, the rest are disassembled and disposed as scrap iron. (III) Significant related transactions 1. Related parties 1) Controlling related parties (ended December 31, 2003) Name of the party Registered address Major business Relationship with the Company Economic type Legal representative Bengang Group Benxi, Liaoning Steel iron and Parent company State-owned Zhang Yingfu 2) Registered capital of the controlling related party, and its movement Name of the party Increased this Decreased this term term Bengang Group RMB4.7 billion RMB4.7 billion 3) Shares held by the controlling related party, and its movement Name of the party Changed this term Amount % Amount % Amount % Bengang Group RMB million 54 RMB million 54 4) Related parties without controlling relationship Name of the party Bengang Group Machinery Factory Co., Ltd. Relationship with the Company -21-

22 Bengang Group Truck Co., Ltd. Bengang Group Tengda Holdings Co., Ltd. Bengang Group Limestone Mine Bengang Group International Trading Co., Ltd. (International Trading Co.,) Bengang No. 2 Steel Factory Labour Service Team Bengang No. 2 Furnace Construction Team Bengang No. 2 Construction and Labour Service Team Benxi Steel Company Steel Rolling Equipment Plant Bengang Gongyou Industrial Co. Benxi Economic Development District Bengang Jufeng Development Co., Ltd. (Jufeng Co.) Bengang Group Iron Co., Ltd. Bengang Group Special Steel Co., Ltd. Tianjin Benchu Materials Trading Co., Ltd. Guangzhou Free Trading Zone Bengang Sales Co., Ltd. Nanjing Bengang Iron and Steel Sales Co., Ltd. Shanghai Bengang Iron and Steel Sales Co., Ltd. Dalian Boluolue Steel Tube Co., Ltd. Bengang Group Special Steel Electronic Installation Co., Ltd. (Installation Co.) Haerbin Bengang Trading Co., Ltd. Bengang Xi an Materials Trading Co., Ltd. Tianjin Bengang Iron & Steel Trading Co., Ltd. Wuxi Bengang Iron & Steel Trading Co., Ltd. Yantai Bengang Iron & Steel Trading Co., Ltd. Xiamen Bengang Iron & Steel Trading Co., Ltd. Shenyang North Bengang Iron & Steel Trading Co., Ltd. Changchun Bengang Iron & Steel Trading Co., Ltd. Bengang Group Steel Processing and Logistics Co., Ltd. Bengang Group Co., Ltd. Haerbin Branch Bengang Construction Co. Bengang Fire Resistance Co. Bengang Metallurgy Residue Co. Bengang Metallurgy Senior Technical School Bengang Industrial & Development Co. Bengang Construction Co. Bengang International Trading Co., Shenyang Branch 2. Related transaction agreements 1) It was on April 14 th, 1997, the Company entered with Bengang Group the Integrated Service Agreement. The agreement became effective since the date when the Company was incorporated -22-

23 and last for 5 years. It s including purchasing of raw materials, energy power, supplementary materials, spare parts and logistics services from Bengang Group. In accordance with the agreement, the molten iron is priced upon the market price of casting iron less the casting costs. The market price of casting iron refers to the weighted average of the prices on which the Group sold to its independent customers for the past 3 months. The casting cost refer to the processing cost of casting the molten iron into casting iron; The prices for energy power, supplementary materials, repairing and spare parts are on the entire cost plus national surplus tax, or the market price, or the purchase cost plus purchase expenses; The prices for trucking service are on market prices; Rail transportation prices are on the price stipulated by the national government and transportation department; In the meantime, according to the agreement, the Company shall pay the Group for trade-mark using right. It was on November 15, 2001, the Company entered with Bengang Group the supplementary agreement of the Integrated Service Agreement, which extended the expiration date to December 31 st, ) In accordance with the land price confirming document Liao-Tu-Pi-Zi (1997)No.6 issued by Liaoning Provincial Land Administrative Bureau on March 5 th, 1997, the approving letter of land treatment, and the land using contract entered with Bengang Group on April 7 th, 1997, the Company is authorized to lease the land where the buildings and plants are located on. The leasing contract will expire upon 50 years. By this mean, the Company shall pay Bengang Group RMB2,673,000 each year as the rent of the land. The rent is subject to adjustment upon 5 years since the beginning of leasing, and will be adjusted for each 3 years. The Company has entered with the Group the supplementary agreement on the land leasing contract, both of the parties consented that the rent will be kept on the same level until April 7 th, Related Transactions Pricing policy: All of the transactions with the related parties of the Company are on the basis of relative agreements or normal market price. 1) Selling of products A. Selling of products to controlling related parties in RMB Name of the party Amount Portion in the Amount Portion in the turnover turnover Bengang Group 3,072,372,550 27% 2,617,347, % B. Selling of products to non-controlling related parties in RMB Name of the party Amount Portion in the turnover Amount Portion in the turnover Bengang International Trading 90,068, % 59,843, % Tianjin Benchu Materials Trading Co., Ltd. 23,415, % 223,897, % Tianjing Bengang Steel & Iron Trading Co., Ltd. 603,162, % 115,200, % -23-

24 Haerbin Bengang Trading Co., Ltd. 119,403, % 14,918, % Shanghai Bengang Sales Co., Ltd. 147,689, % 24,760, % Nanjing Bengang Sales Co., Ltd. 273, % 9,784, % Wuxi Bengang Sales Co., Ltd. 309,397, % 43,756, % Guang Zhou Free Trade Zone Sales Co., Ltd. 151,592, % 83,429, % Bengang Xi an Materials Trading Co., Ltd. 7,984, % 484, % Yantai Bengang Sales Co., Ltd. 440,542, % 3,012, % Bengang Group Special Steel Co., Ltd. 159,638, % 153,981, % Bengang Group Tengda Holdings Co., Ltd. 40,589, % 8,849, % Shanghai Bengang Sales Co., Ltd. 26,306, % Xiamen Bengang Sales Co., Ltd. 111,940, % Shenyang North Bengang Sales Co., Ltd. 62,598, % Changchun Bengang Sales Co., Ltd. 4,292, % Dalian Boluole Steel Tube Co., Ltd. 94,281, % Bengang Group Steel Processing and ,433, % 0.00 Logistics Co., Ltd. Total 2,464,311, ,920, % 2) Purchasing of raw materials, supplementary materials and spare parts A. Purchasing of raw materials, supplementary materials and spare parts from the controlling related parties In RMB Name of the party Amount Portion in the cost % Amount Portion in the cost % Bengang Group(raw materials) 6,086,959, % 3,715,812, % Bengang Group(supplementary materials and spare parts) 915,875, % 1,174,970, % Total 7,002,835, % 4,890,782, % B. Purchasing of goods from non-controlling related parties in RMB Name of the party Amount Portion in the cost % Amount Portion in the cost % Bengang Group Iron Co., Ltd. 1,321,043, % 671,789, % Bengang Group Machinery Plant Co., Ltd. 73,713, % 13,710, % Bengang Group Limestone Mine 88,878, % 72,852, % Total 1,483,635, % 758,352, % 3) Other related transactions in RMB -24-

25 Items With Bengang Group Energy power 749,890, ,981,196 Logistics 65,047,397 91,124,189 Repairing 181,642, ,972,821 Trademark 25,200 25,200 Land rent 2,673, ,673,192 With Bengang Group Trucking Co., Ltd. Logistics 16,550,138 14,176,684 Bengang Group International Trading Co., Ltd. Export agent 3,111, Import agent 1,304, With Installation Co. Repairing 1,383,916 3,764,315 With Yingkou Bengang International Logistics Co., Ltd. Port fee 2,745, With Bengang Real-estate Co., Ltd. Property management 209, With Jufeng Co. Packaging 5,340, ,970,461 The pricing policy of the above transactions are on the same basis as the transactions with Bengang Group. (for details please refer to Note 6, 2(1)) 4) Balances of account receivable and account payable due to related parties in RMB Items Dec. 31, 2003 Dec. 31, 2002 Notes receivable Bengang International Trading ,000 Bengang Group Special Steel Co., Ltd. 7,000,000 7,000,000 Yantai Bengang Sales Co., Ltd. 13,500, Wuxi Bengang Sales Co., Ltd. 62,270, Bengang Group Steel Processing and Logistics Co., Ltd. 4,500, Tianjin Bengang Trading Co., Ltd. 16,260, Dalian Boluole Steel Tube Co., Ltd. 1,400, Total 104,930,000 7,950,000 Account receivable Bengang Group Special Steel Co., Ltd. 53,494,842 40,084,382 Tianjin Benchu Materials Trading Co., Ltd. 24,436, Guangzhou Free Trade Zone Bengang Sales Co., Ltd. 6,711, Wuxi Bengang Sales Co., Ltd. 6,406, Xiamen Bengang Sales Co., Ltd. 6,367, Shanghai Bengang Steel Material Co., Ltd. 2,725, Total 100,142,544 40,084,