HANGZHOU STEAM TURBINE CO., LTD. ANNUAL REPORT 2002

Transcription

1 HANGZHOU STEAM TURBINE CO., LTD. ANNUAL REPORT 2002 Published on April 17, 2003 HANGZHOU STEAM TURBINE CO., LTD....1 ANNUAL REPORT Important Notification...3 Chapter 1. Company Profile...3 Chapter II. Financial And Business Data Summary Major business data (in RMB) Subsidiary form of the profit statement: Major accounting data and financial indices of past 3 years till the end of the report term Changes of shareholders equity and their causation Other business data and indices in the report term...8 Chapter III. Change of Share Capital and Shareholders...9 (I) Change of share capital...9 (II) Particulars about share placing and listing...9 (III) About the shareholders...10 Chapter IV. Particulars about the Directors, Supervisors, Managements and Employees...11 (I) Current directors, supervisors and senior managements...11 (II) Annual payroll of current directors, supervisors and senior managements (III) Leaving of directors, supervisors and senior managements...12 (IV) Engaging or dismissing of managers, vice managers, financial principal, secretary of the Board...12 (V) About the employees...13 Chapter V. Management Structure...13 (I) Situations of the management structure...13 (II) Major shortages existing in the practice of management and their cures in regarding of the relative regulations issued by China Securities Supervisory Committee...14 (III) Independent directors executing of duty...14 (IV) Particulars about the separation of business, personnel, assets, organization, and accounting with the controlling shareholder...15 (V) Motivating and inspection systems for the senior managements...15 Chapter VI. Introducing the Shareholders General Meeting...16 (I) Notification, calling and holding of shareholders general meeting...16 (II) Proposals that been passed or denied by the shareholders general meeting, information disclosing medias and dates...17 (III) Electing and changing of directors or supervisors...18 Chapter VII. Report of the Board of Directors...18 (I) Business situation of the report term

2 (II) Business highlights of the report term...19 (III) Investments in the report term...21 (IV) Analysis of the financial position and business performance for the report term...27 (V) Influences of the movement of business environment and macro policies on the business performance...28 (VI) The notes to the non-standard auditors report, the report with explanatory statements, reserved statements, refusing to express opinions, or negative statement issued by certified public accountants...29 (VII) Routine works of the Board of Directors...29 (VIII) Profit distribution preplan for year (IX) Other events...32 Chapter VIII. Report of the Supervisory Committee...32 (I) Business situation of the Supervisory Committee...32 (II) Independent statement of the Supervisory Committee...33 Chapter IX Important Events...36 (I) Material Lawsuits and Arbitration in the Report Period...36 (II) Summary of Acquisition and Sales of Assets, Absorption and Consolidation and the Progress...36 (III) Material Associated Transactions in the Report Period...37 (IV) Other Material Associated Transactions...38 (V) Important Contracts and Implementation...38 (VI) The commitments of the Company and its shareholders holding over 5% of the Company s total shares in the report year or extending to the report year from previous year(s) (VII) Engagement/Disengagement of Certified Public Accountants...39 (VIII) About the administrative punishment, circulating notice of criticism from China Securities Regulatory Commission or public blame from the Stock Exchange against the Company and the rectification and reform based on the opinions for improvement from China Securities Regulatory Commission or its representative office after inspection over the Company...40 (IX) Significant events as specified in Article 62 of the PRC Securities Law or Article 17 of the Rules for Information Disclosure by the Public Companies (for Trial Implementation)...40 (X) Material Events after the Report Period...41 Chapter X Financial Report...0 Chapter XI Documents Available for Inspection

3 Important Notification The Board of Directors of the Company guarantees that there are no significant omissions, fictitious or misleading statements in the Report and we will accept individual and joint responsibilities for the truthfulness, accuracy and completeness of the Report. The 9 th meeting of the 2 nd term Board of Directors examined the Annual Report directors who attended the meeting passed the report. Mr. Jiang Demu, the director, absent the meeting due to business duty. He doesn t vote on the Annual Report This Report is written in English and Chinese. If there is any conflict exists between the two versions, the Chinese version shall prevail. The Board of Directors of Hangzhou Steam Turbine Co., Ltd. April 17, 2003 Chapter I. Company Profile (I) Legal Name of the Company Name in Chinese: Name in English: HANGZHOU STEAM TURBINE CO., LTD Stock Abbreviation: Hangqilun B Stock Code: Abbreviation in English: HTC (II) Registered Address: 357 Shiqiao Rd., Hangzhou City, Zhejiang, China Office Address: 357 Shiqiao Rd., Hangzhou City, Zhejiang, China Post Code: Web site: he@htc.net.cn (III) (IV) (V) Legal Representative: Mr. Fang Wen The General Manager: Mr. Yan Jianhua Secretary of the Board: Mr. He Jianhang Tel: (0571) Fax: (0571) he@htc.net.cn Contact address: Securities Office, Hangzhou Steam Turbine Co., Ltd., 357 Shiqiao Rd., Hangzhou City, Zhejiang 3

4 Security Affair Representative: Mr. Bo Ronghua Tel:(0571) Fax:(0571) (VI) (VII) Shares Listed in: Shenzhen Stock Exchange Medias Assigned by National Security Supervisory Committee for Information Disclosure: Press media: Securities Times, Hong Kong Commercial Daily Website: (VIII) Report prepared and ready for inquire at: Securities Office, Hangzhou Steam Turbine Co., Ltd. (IX) (X) The primary business range of the Company is: designing, manufacturing, selling and service providing of steam turbine and its supplementary equipments, elements and accessories. Supplementary information: 1. Primary business registration of the company is on April 23, 1998 at Zhejiang Provincial Business Administration. With the authorization of the 1 st Provisional Shareholders General Meeting 1998 held on September 15, 1998, the company changed its property of business into Sino-foreign joint public company. (For details about this event please refer to the announcement on Sept. 16 th, 1998 issues of Security Times and Hong Kong Commercial Daily titled The Public Notice of the 1 st Provisional Shareholders General Meeting 1998 The date of business registration renewed was December 18 th, 1998 and at Zhejiang Provincial Business Administration. 2. Business license No. Qi-gu-ze-zong-fu-zi Tax registration No Consignee of the non-negotiable stocks: The 140,000,000 non-negotiable state-owned stocks of the company were consigned to: China Securities Registration and Clearing Co., Ltd. Shenzhen Branch. 5. Public accountants invited: Overseas public accountant: PriceWaterHouse Coopers CPA. Address: 12/F Shui On Plaza, 333 Huai Hai Zhong Road, Shanghai , PRC Telephone: (021) Fax: (021) Domestic public accountant: Zhejiang Orient CPA. Address: No. 563 Qingtai Street, Hangzhou. Telephone: Fax:

5 Chapter II. Financial And Business Data Summary 1. Major business data (in RMB) No. Subjects Amount 1 Total profit 43,307, Net profit 34,706, Net profit after deducting of irregular gain/loss 45,060, Major business profit 128,484, Other business profit 662, Operation profit 53,264, Investment gains -1,561, Allowance income 1,525, Net balance of non-business income/expense -9,921, Net cash flow from business operation 80,191, Net increase/decrease of cash and cash equivalents 2,763, Net profit on IAS 39,094, [Note 1] Subjects of net profit after deducting of irregular gain/loss and amount involved. (in RMB) Subjects Amount Non-business income 58, Non-business expenses 9,979, Over inventory of current assets 148, Short inventory of current assets 727, Less: income tax 145, Total 10,353, [Note 2] Non-business income was primarily come from selling of small amount materials. [Note 3] The investment gains was RMB-1,561, Among which, with equity-method, RMB117, of gains was from Hangzhou Steam Turbine Environment Engineering Co., Ltd. which invested by the company, in year 2002; RMB602, of loss was generated by Hangzhou Keximeng Technologies Co., Ltd.; Investment devalue reserves was drawn fully upon the loss amount to RMB1,585,548.99; Gains from stock investment amount to RMB509, was from Zhejiang Steam Turbine Technologies Development Co., Ltd. s investment in A share market with their own fund. [Note 4] Influence of the IAS and of other adjustments on the profit after tax and net assets. (in RMB thousand) According to China Accounting Standard Influence of adjustments: Deferred taxations (assets) Profit after tax Net assets Dec. 31, 2002 Dec. 31, 2001 Dec. 31, 2002 Dec. 31, ,707 27, , ,640 7, ,240 2,416 5

6 Deferred taxations (liabilities) (17,010) 9,164 Deducting of deferred assets 109 Share dividend announced after 22,000 22,000 the end of year Increasing of evaluation of houses and equipments 32,385 Discrepancy between the (2,906) (2,906) devalue reserves and increasing of evaluation of houses and equipments Discrepancy between the (1,248) (1,248) depreciation reserves and evaluation of houses and equipments Returning of income tax of affiliated companies Others 142 Recalculated according to the IAS 39,095 28, , , Subsidiary form of the profit statement: prepared in accordance with Information Disclosing Regulations No. 9, for Public Companies issued by China Securities Supervisory Committee. Profit for the report term Year 2002 Year 2001 Net income/asset ratio (%) Gains per share (RMB) Net income/asset ratio (%) Gains per share (RMB) Fully diluted Weighted average Fully diluted Weighted average Fully diluted Weighted average Fully diluted Weighted average Profit of major business Operation profit Net profit Net profit after deducting of irregular gains/losses 3. Major accounting data and financial indices of past 3 years till the end of the report term. (in RMB) 6

7 No. Indices December 31,2002 December 31,2001 December 31, Major business income 326,027, ,160, ,196, Net profit 34,706, ,388, ,262, Total assets 685,480, ,956, ,485, Shareholders equity (minority 454,783, ,640, ,871, shareholders excluded) 5 Gains per share (RMB/share) Net asset per share (RMB/share) Adjusted net asset per share (RMB/share) Net cash flow generated by business operation (RMB/share) Net income/asset ratio (%) Gains per share, weighted average (RMB/share) 11 Gains per share, deducting irregular gain/loss (RMB/share) [Note 1] Major business income increased by RMB36,867,400 that was 12.75% over that of the previous year. This was caused by the increasing of sales of the industrial steam turbine the major product of the company. [Note 2] Net profit increased by RMB7,317,900, that was 26.72% over that of the previous year. This is caused by the Company enlarged the market share of service products and the cost deducting measures of the company. [Note 3] Total assets increased by RMB58,523,900 that was 9.34% over that of at the beginning of year. That was caused by the increasing of accessories purchased for new orders, which increased the account payable and advances. (For details about this please refer to Financial Statements Notes to the Financial Statements, notes to the Consolidated Balance Sheet items no. 14, and 15.) [Note 4] Shareholders equity increased by RMB13,142,800 that was 2.98% over that of the previous year. This was caused by the increasing of net profit, surplus reserves, and capital reserves. 4. Changes of shareholders equity and their causation (in RMB) Subjects Capital share Capital reserves Surplus reserves Incl: Public welfare Profit not distributed Total of shareholders equity Initial 220,000, ,304, ,988, ,994, ,348, ,640, Increased this 0 436, ,161, ,580, ,545, ,142, term Decreased this term 0 22,000, ,000, At the end of term 220,000, ,740, ,149, ,574, ,893, ,783, Notes: Causations of the changes 1) The increasing of surplus reserves was caused by: according to the resolutions passed by the 9 th meeting of the 2 nd term board of directors, statutory public reserves and public welfares were drawn at rate of 10% from the net profit of year ) The change of profit not distributed changed because: according to the profit distribution preplan of 2002 passed by the 9 th meeting of the 2 nd term board of directors, upon the net profit of year RMB34,706,731.04, after drawing of surplus reserves RMB7,161,164.20, 7

8 RMB1.00 of cash dividend (tax included) will be delivered to each 10 shares. Totally RMB22,000,000 will be delivered. The balance of not-distributed profit will be amounted to RMB47,893, ) For the causation of the increasing of capital reserves, please refer to Financial Statements Notes to the Financial Statements, notes to the Consolidated Balance Sheet items No Other business data and indices in the report term. No. Indices Unit Year 2002 Year 2001 Change of 2002 over 2001 (%) 1 Overall industrial production value (on current price) RMB10 thousand Industrial value increased (on RMB current price) thousand 3 Exported USD thousand 4 Sales income of products RMB Incld: Industrial steam turbine for driving Industrial steam turbine for electricity generators Others thousand RMB10 thousand RMB10 thousand RMB10 thousand 19, , , , ,862.43, Circulation ratio of current fund % Liabilities/asset ratio % Profit ratio of product sales % Tax ratio of industrial fund % Industrial value increasing ratio % Sales ratio of industrial products % Market share of industrial driving % steam turbine 12 General industrial production ratio RMB/person Note: (1) Relative formulas - Circulation ratio of current fund = sales income / average balance of current assets - Liabilities/asset ratio = total of liabilities / total assets - Profit ratio of product sales = net profit after deducting of allowance / sales income - Tax ratio of industrial fund = total tax / average current assets + average net value of fixed assets - Industrial value increasing ratio = industrial value increasing on current price / total industrial output on current price - Sales ratio of industrial products = sales volume on current price / total industrial output on current price - General industrial production ratio = industrial value increasing / annual average number of employees (2) Data of market share of industrial driving steam turbine was sponsored by China Council of Electronic Industry Steam Turbine Sub-council. 8

9 Chapter III. Change of Share Capital and Shareholders (I) Change of share capital 1. Change of share capital (in shares) At Beginning of Year (I) Non-current shares 1 Promoter s shares Increase or decrease of the change(+ -) Share Bonus Capitalized Other Suballotted shares total At End of Year State-owned shares 140,000, ,000,000 Domestic legal person shares Overseas legal person holding shares Others 2 Legal person shares invited 3 Employees shares 4 Preference shares or others Total of non-current shares 140,000, ,000,000 (II) Current shares 1 Renminbi common shares listed domestically 2 Foreign capital shares listed domestically 80,000,000 80,000,000 3 Foreign capital shares listed abroad 4 Others Total of current shares 80,000,000 80,000,000 (III) Total shares 220,000, ,000,000 (II) Particulars about share placing and listing 1. The company didn t place any stock or derivative securities during the past 3 years till the end of the report term. 2. Particulars about the primary placing of stocks of the company Hangzhou Steam Turbine Co., Ltd. (the Company) was promoted solely by Hangzhou Steam Turbine Power Group Co., Ltd. (the Group), and established by the mean of foreign shares (B shares) placing in the domestic market as a shareholding company. The Group invested in the Company with net asset of RMB199,485,673 and takes 140,000,000 state-owned shares of the Company at RMB1 each. The Company primarily issued 80,000,000 of foreign shares (B shares) in the domestic market at HKD2.14 per share by means of close placing between March 31 and April 6, 1998 (equal to RMB2.29 / share at RMB:HKD=1:1.0691). On April 28, 1998, 80,000,000 B shares were approved to be listed in Shenzhen Stock Exchange. 3. The total share capital of the company in the report term was 220,000,000 shares, including 140,000,000 of state-owned shares takes 63.64% of the total share capital, 80,000,000 of B shares takes 36.36% of the total share capital. 4. None of bonus share distributing, capitalizing, share allotting, new share placing, acquisition/merging, transferring of transferable company bonds, capital reducing, listing of employee shares, that cause the changing of capital share and/or share structure. 9

10 5. The company issued no internal employees shares or company employees shares till the end of the report term. (III) About the shareholders 1. At the end of report term, the company has totally shareholders. Among which, 1 for state-owned share holders, and for B share holders. The number of shareholders increased by 10 over the number at September 30, Top ten shareholders at the end of report term. Shares Portio Mortgage Share Name of shareholders Shares held at increased n of or property the term end /decreased the freezing (shares) from that of total Sept. 30, 2002 capital (+ -) share 1 Hangzhou Steam Turbine 140,000,000 No No State-owne Power Group Co., Ltd. d 2 BIN LIANG 4,721,553 No 2.15 N/A Current B shares 3 LO STEVEN CHIHWA 4,642,464 No 2.11 N/A Current B shares 4 Song Youfu 1,890,000 No 0.86 N/A Current B shares 5 Huang Zhen 1,707,945 7, N/A Current B shares 6 EVER POINT 491,000 No 0.22 N/A Current B INVESTMENTS LIMITMD shares 7 Wu Haoyuan 471,700 No 0.21 N/A Current B shares 8 Zhen Lin 446,000 No 0.20 N/A Current B shares 9 Liu Pei 439,160 No 0.19 N/A Current B shares 10 He Yanfei 427,400 No 0.19 N/A Current B shares Rank Note: (1) Of top ten shareholders Hangzhou Turbine Group Co., Ltd. holds shares on behalf of the State and the others belong to B-Share shareholders. (2) No shareholders hold 5% of the Company s shares except for Hangzhou Turbine Power Group Co., Ltd. (4) Introduction to Hangzhou Turbine Power Group Co., Ltd. Hangzhou Turbine Power Group Co., Ltd. (the Group) was founded in June 1995, which is a state-owned and sole proprietorship company authorized by the Government. The Group is considered to be one of 520 leading state-owned enterprises. Registered Office of the Group: 357 Shiqiao Rd., Hangzhou City; Legal Representative: Mr. 10

11 Fang Wen; Owning-companies: 10 holding companies, 10 full-capital constituent companies and 5 partially hold companies; Major Business: textile machine, paper-making machine, pump, casting, changing speed gear, heat exchanging instrument, digital and display system and their manufacturing and processing. Original material, equipment and parts for groups purchasing and making, providing services of water, electricity and gas for their owning enterprises. (5) There is no change of the holding shareholders of the Company in the reporting period. (6) So far the Company has no strategic investor or common legal person share involved. Chapter IV. Particulars about the Directors, Supervisors, Managements and Employees (I) Current directors, supervisors and senior managements No. Name Sex Age Position in the Job Term Position in the Group Job Term Shareholding Company 1 Fang Wen M 62 Chairman of the ~ Chairman ~ No Board 2 Jin Fujuan F 49 Vice Chairman ~ Vice Chairman ~ No 3 Wang M 50 Vice Chairman ~ Vice Chairman, GM ~ No Hongkang 4 Jiang Demu M 59 Director ~ Director, Chairman of ~ No the Workers Union 5 Li Lie M 54 Director, ~ No - No Standing Vice GM 6 Bo Ronghua M 51 Director, Chief ~ No - No Accountant 7 Yan Jianhua M 44 Director, GM ~ Director ~ No 8 Ye Zhong M 34 Director, Chief ~ Director ~ No Engineer 9 Yao Fusheng M 70 Independent ~ No - No Director 10 Zhang M 64 Independent ~ No - No Mingguang Director 11 Zou Zhaoxue M 64 Independent ~ No - No Director 12 Chu Shuilong M 50 Chief Supervisor ~ Director, ~ No Vice GM 13 Shao Linna F 48 Supervisor ~ Chief of the - No Accounting Dept. 14 Zhang M 45 Supervisor ~ Chief of Auditing & - No Yougen Inspection Dept. 15 He Fengdi F 52 Staff Supervisor ~ Vice Chairman of the - No Workers Union 16 ZhaoYing F 46 Staff Supervisor ~ No - No 17 Yu M 45 Vice GM ~ No - No Changquan 18 Yan Jinghe M 48 Vice GM ~ No - No 19 He Jianhang M 45 Secretary of the Board ~ No - No Note: (1) None of the directors, supervisors or senior managements is holding the stocks of the 11

12 Company (2) During the report term, through the election of Shareholders General Meeting 2001, Mr. Zhang Mingguang and Mr. Zou Zhaoxue were elected the new independent directors of the Company. For details about their election and resume, please refer to The resolutions of the 4 th meeting of the 2 nd term Board of Directors published on the April 13, 2002 issue of Security Times, and The resolutions of the Shareholders General Meeting 2001 published on the May 27, 2002 issues of Security Times and Hong Kong Commercial Daily. (3) No changes been made on the positions of other directors, supervisors or senior managements during the report term. (II) Annual payroll of current directors, supervisors and senior managements. 1. Basis of deciding of the payrolls of directors, supervisors and senior managements The Company adopts Annual Salary Assessing System for the directors, supervisors and senior managements. The plan was first raised by the Supervisory Committee, and implemented upon the approval of the first provisional shareholders general meeting of It was modified twice after that and put into operation upon the approval of the shareholders general meeting of 2000 and At the establishing of the Salary Inspection Committee of the Board, the principles of keep the original foundation, properly adjust, optimizing the link with performance, enforce the motivation system were founded for the year Inspections on the directors, supervisors and senior managements for their virtue, capability, hardworking and performance were undertaken. 2. Particulars about the annual payrolls of directors, supervisors and senior managements (1) Currently the overall payroll for directors, supervisors and senior managements are amounted to RMB2.12 million for the year Among which, 7 person ranged between RMB210 thousand to RMB180 thousand; 5 person ranged between RMB150 thousand to RMB90 thousand; 4 person ranged between RMB50 thousand to RMB20 thousand. (2) The highest 3 directors salary are amounted to RMB620 thousand, while the highest 3 senior managements salary are amounted to RMB610 thousand. (3) The above figures of salaries have been including basic payrolls, bonus, welfares, allowances, housing allowance, and other allowances. (4) The annual allowances for the independent directors are RMB20 thousand / person / year. (5) 3 of the supervisors Shao Linna, Zhang Yougen, He Fengdi, don t accept salaries from the company. They take salaries from the Group, the controlling shareholder of the company. (III) Leaving of directors, supervisors and senior managements No directors, supervisors and senior managements left their position during the report term. (IV) Engaging or dismissing of managers, vice managers, financial principal, secretary of the Board No managers, vice managers, financial principal, secretary of the Board been newly engaged or dismissed during the report term. 12

13 (V) About the employees At the end of the year 2002, the employees of the Company were amounted to Among the employees, there are 1409 production workers, 108 sales people, 346 technicians, 25 accountants, and 92 administrative people. As for the education background, 507 are holding national diploma or above (take 25.21% of the total), 307 are holding intermediate technical certificates or above (take 15.27% of the total), 79 are holding higher technical certificates (take 11.19% of the professional employees) Overall employees at the end of year 2002 increased by 380 over year That was caused by the acquisition of the casting company, accessories company and part of the assets of energy supply department which were under the name of the Hangzhou Steam Turbine Group. At the beginning of share listing, the Company has engaged an agreement with the Group on the management of retirement. Therefore there are no retired employees that need to be undertaken by the company. (For details about the retirement administrative charge made to the Group during the report term, please refer to Significant associated transactions of Significant Events carried in this report.) Chapter V. Management Structure (I) Situations of the management structure 1. Construction of managing system During the report term, with the demand of The Managing Principles of Public Companies issued by China Securities Supervisory Committee, the Company completed the preparing of Company Managing Compendium and Principles for Shareholders General Meeting, and also the improving of The Article of Association, Principles for Board Meeting, Principles for Supervisory Committee s Meeting, Rules of General Manager, and The Administration of Information Disclosure The above basic systems have been put into operation upon the approval of the 4 th meeting of the 2 nd term Board of Directors, the 4 th meeting of the 2 nd term Supervisory Committee, as well as the Shareholders General Meeting of Relative department of the Company put the above documents along with the previously produced documents, Internal Management of Assets Devalue Reserves and Treatment of Loses, Management of Investments (Provisional), and Management of Shareholding / Share Controlling Companies, into The Collection of Basic Management Systems of the Company. The collection was distributed to the shareholders, directors, supervisors, management and functional departments for their references on their exercising of duties. 2. Operations under the instruction of superior inspection organizations During the report term, the Company was following with the overall arrangement of the Hangzhou Special Office of China Securities Supervisory Committee and participated in the undertaking of The Statement of Trustiness of Directors & Board Secretary of the Listed Companies in Zhejiang. All of the directors and the secretary of the Board signed the statement in undertaking the responsibilities of following the regulations and rules of the China Securities Supervisory Committee and Shenzhen Stock Exchange, keeping themselves with trustiness, and guarding the 13

14 benefits of mid-small shareholders. During the report term, the Company also was following with the overall arrangement of the National Economics & Trading Committee and China Securities Supervisory Committee and implemented self-inspection on the establishing of modern enterprise managing system for public companies and their controlling shareholders. For the problems discovered during the self-inspection, the Company undertook measurements to fix them. Under the instruction of China Securities Supervisory Committee, the Company undertook self-inspection on the using of company capital by the controlling shareholder. The result shown that except ordinary transactions occurred on trading of merchandises, the controlling shareholder used no big sum of fund of the Company. The Company also accepted the routine investigation of the Hangzhou Special Office of China Securities Supervisory Committee. No illegal behavior was found in the investigation. 3. Decision making system of the Board During the report period, in accordance with The instructions on setting of independent directors in public companies, the Company completed the procedures of setting independent directors. This made the number of independent directors takes around 30% of the board. The Board of Directors established 4 special committees, which are Strategy & Development, Nominating, Auditing, and Salary Assessment. The above measures are driving the decision-making system of the Board toward standardization, systematic, and scientific. (II) Major shortages existing in the practice of management and their cures in regarding of the relative regulations issued by China Securities Supervisory Committee For the Company was transformed from formal state-owned enterprise, shortages are hard to avoid in managing and operation system. The Company will further execute the regulations and standards of The Managing Principles of Public Companies issued by China Securities Supervisory Committee, and improve the management of the Company. (III) Independent directors executing of duty In the spirit of responsible for the shareholders of the Company, the independent directors executed their duties in defending of the mid-small shareholders benefit following with the laws and regulations stated by The Company Law, The Security Law, Management Rules of Public Companies, and The Instructions on Setting Independent Directors in Public Companies. They devote themselves in understanding of the company operation by taking part in the Board meeting and Shareholders General Meeting. They back the Board up in making fair and scientific decisions for the company. After the establishing of committees of Strategy & Development, Nominating, Auditing, and Salary Assessment, 3 of the independent directors were taken active roles in the works of the committees. They carefully studied the reports issued by the managements and relative departments such as The Developing Plan for the 3 Years After the 10 th 5-Year-Plan, Report on Implementing of Associated Transactions, Report of Changing of Accounting Evaluating, Statements on Profit Distribution Preplan 2002, Opinion on Implementing of Salary Inspection System of Year 2002, and issued detailed opinions on the reports in representing of the committees. The independent director of the Salary Assessment Committee conducted the implementing of salary inspection works on directors, supervisors and senior management for the year Their spirit of hardworking, respecting of duty, faithfulness, and practice becomes the 14

15 model of other directors. (IV) Particulars about the separation of business, personnel, assets, organization, and accounting with the controlling shareholder 1. Separation of business: The designing, manufacturing and marketing of industrial steam turbines were independent from that of the parent company (the Group). Some of the subsidiaries of the Group are running marketing businesses of industrial steam turbines. The purchasing of products and accessories from the Company was on ordinary prices offered to other dealers. Before June 1 st, 2002, the casting company of the Group was providing roughcasts to the Company, and the supplementary machinery company of the Group was providing supplementary equipments to the Company. For the details about the transactions of steam turbines, roughcasts and supplementary equipments during the report term please refer to the Significant Associated Transactions carried in the chapters of Significant Events and Financial Statements. 2. Separation of personnel: For the report term, the positions of Chairman and Vice Chairman of the Company were taken by the Chairman and Vice Chairman of the Group. None of the managements takes any job in the Group. The accounting staffs take no job in the Group or other associated companies. The Company was basically independent in personnel and salary management. 3. Integrity of assets: The properties of production systems, supplementary systems and equipments, industrial properties, and non-patent technologies are basically independent out of the Group. The using of trademark and staff transportation services are contracted to the Group with agreement of associated transactions. The Company has its own systems of production, supplying and sales with no competitive relationship with the Group. For the details about the transactions of trademark using and staff transportation services please refer to Significant Associated Transactions carried in the chapters of Significant Events and Financial Statements 4. Independency in organization: The Company is completely independent out of the Group in organization. It has its own managing and operation system. Mid-level managements were engaged by the managerial level and subject to the economical responsibility inspection. 5. Independency in accountancy: The Company was configured with its own accounting department and standardized accounting system. The Company opened its own bank account and undertook taxes according to the law. (V) Motivating and inspection systems for the senior managements The Company adopts Annual Salary Assessing System for the directors, supervisors and senior managements. The plan was first raised by the Supervisory Committee, and implemented upon the approval of the first provisional shareholders general meeting of It was modified twice after that and put into operation upon the approval of the shareholders general meeting of 2000 and The followings are the details. 1. Basis of assessment: realizes RMB30 million of total profit per year. 2. Award and penalty rules: the highest annual salary standard will change by RMB1000 upon each 1% of change of the basis. The other levels change correspondingly. 3. The assessment will base on the fiscal year stated by the Article of Association of the Company. 15

16 The salaries of the directors, supervisors and senior managements are subject to be drawn by 20% as risk guarantee fund and will be returned upon fulfilling of annual assessment. The Committee of Salary Assessment takes for the above system of assessment connected the profitability and the collective income of the management together, that was regarded as functioning motivation. On the other hand, for the lack of specific assessment goal system and assessment evaluating system, the connection between the personal income and the overall performance of individuals was not that close. For this reason, the committee suggests minor modifications on the original system and makes it closer between the annual income and performance of individuals. The Committee of Salary Assessment organized a team of assessment for the year The assessment was base on score levels of A-B-C-D-E. Individual whose score is under D and at the end of list is subject to penalty of 3% of his/her annual income. Individual whose score is below E is regarded as failed in performance, and is subject to penalty of 50% of annual income. For individual who violated the Company Law or other regulations, or violated the common ethic of honesties and respecting of duties, therefore punished by either of China Securities Supervisory Committee or Shenzhen Stock Exchange, will be subject to penalty of 50% of his/her annual income upon one vote. For the fairness of the assessment, the assessment forms will be sealed after collected, and forwarded to 2 of the independent directors of the Committee of Salary Assessment for their calculation of results. Through rigorous assessment, all of the managements achieved above D for year The assessment system was showing its effects in motivating and disciplining. Chapter VI. Introducing the Shareholders General Meeting (I) Notification, calling and holding of shareholders general meeting The Company held shareholders general meeting once during the report term the shareholders general meeting for year On April 10, 2002, the resolutions on holding of the shareholders general meeting 2001 was passed by the 4 th meeting of the 2 nd term Board of Directors. Notifications of holding shareholders general meeting 2001 were published on the April 13, 2002 issues of Security Times and Hong Kong Commercial Daily. At 9:00 AM, May 16, 2002, the shareholders general meeting 2001 was held in the meeting room No. 1 of the Group. Totally 6 shareholders or representatives attended the meeting, representing shares takes 63.80% of the total voting shares. Among them, 5 are B shareholders or representatives, representing shares and takes 0.47% of current B shares. The meeting also invited relative inspection authorities, press medias, and delegations from both of the domestic and overseas auditors to attend. All of the directors, supervisors and senior managements attended the meeting. The nominees of new independent directors also presented the meeting as non-voting delegations. Mr. Fang Wen the Chairman of the Board, hosted the meeting in examination of 12 proposals. 9 common proposals were passed with over half-votes. 1 proposal was subject to be passed with over 2/3 of the votes. 1 proposal was passed with over half-votes in condition of associated 16

17 controlling shareholders abandoned the voting. 1 proposal of electing of independent directors was passed with over half-votes of the overall shareholders attended the meeting. 1. The following common proposals were passed as resolutions by means of open ballot. (1) The Annual Report of the Board for Year shares pass, 0 shares abandon, 0 shares object. (2) The Annual Report of the Supervisory Committee for Year shares pass, 0 shares abandon, 0 shares object. (3) Financial Statements shares pass, 0 shares abandon, 0 shares object. (4) Profit Distribution Preplan shares pass, 0 shares abandon, 0 shares object. (5) The Proposal of Inviting Arthur Anderson CPA and Zhejiang Oriental CPA as the Overseas and Domestic Auditors Respectively shares pass, 0 shares abandon, 0 shares object. (6) The Proposal of Changing the Utilization of Fund Raised Previously shares pass, 0 shares abandon, 0 shares object. (7) The Proposal on Producing of Company Managing Compendium shares pass, 0 shares abandon, 0 shares object. (8) The Proposal on Producing of Rules of the Shareholders General Meeting shares pass, 0 shares abandon, 0 shares object. (9) The Proposal on Modifying of the Annual Salary System of Directors, Supervisors and Senior Managements shares pass, 0 shares abandon, 0 shares object. 2. The results of voting on special proposals (1) The Proposal on Modifying of The Article of Association of the Company shares pass, 0 shares abandon, 0 shares object. (2) The Proposal on Acquisition of the Casting Company, the Supplementary Machinery Company and Part of the Assets of the Energy Department. In condition of associated controlling shareholders abandoned the voting right, shares pass, 0 shares abandon, 0 shares object 3. The results of voting on electing of independent directors (1) Mr. Zhang Mingguang for the position of independent director of the 2 nd term Board of Directors shares pass, 0 shares abandon, 0 shares object. (2) Mr. Zou Zhaoxue for the position of independent director of the 2 nd term Board of Directors shares pass, 0 shares abandon, 0 shares object. 4. Legal opinions of the lawyer Li Genmei, and Huang Lianxi the lawyers from Zhejiang Zhejing Lawyers Office, notarized the meeting on-site. The lawyers issued a letter of opinions on the holding of this meeting. The followings are their conclusions. The lawyers consider the calling and holding procedures of the shareholders general meeting 2001 of the Company, qualifications of the attendants, and the voting procedures are in accordance with relative laws, regulations and the Article of Association of the Company. The resolutions that passed by the meeting are legal and valid. (II) Proposals that been passed or denied by the shareholders general meeting, information disclosing medias and dates None of the proposals of the Board or the Supervisory Committee was denied by the shareholders general meeting. The resolutions of the shareholders general meeting 2001 were published by May 17, 2002 issues of Security Times and Hong Kong Commercial Daily. 17

18 (III) Electing and changing of directors or supervisors In the report term, in accordance with The Instructions on Setting Independent Directors in Public Companies issued by China Securities Supervisory Committee and promoted by the 4 th meeting of the 2 nd term Board of Directors, Mr. Zhang Mingguang and Mr. Zou Zhaoxue were elected the independent directors of the 2 nd term Board of Directors by the shareholders general meeting of Their term of duty will from May 2002 till June Chapter VII. Report of the Board of Directors (I) Business situation of the report term In year 2002, the company realized RMB326,027,800 of sales volume, which increased by 12.75% over the previous year; RMB43,307,800 of profit, which increased by 35.38% over the previous year; new orders of steam turbines amounted to RMB484,775,000, increased by 77.05% over the corresponding period of previous year; USD1,166,600 of export, which increased by % over the previous year. The management of the company considers the significant growing in sales volume, profit, new orders, and export volume were in connecting with the following aspects. 1. Benefit from good macro economical environment. Since 2002, the macro economy of China was showing a trend of rapid growing. Overall investment on fixed assets increased by 16.1% over last year. Especially for the industries of power supplying, petrol-chemical, metallurgy, and civil energy, the investment was greatly enforced. These were bringing up the demand of industrial steam turbines and good business operation of the Company. 2. Benefit from practical operation of the management. With the core strategy of strengthening the overall competitive ability of the Company, various of measurement were adopted and working excellent. For instance, the simplifying of organizing structure increased the managing efficiency, and break out the bottleneck of productivities. The agreement of fully undertaking the sales expenses engaged with the sales department, and the agreement of salary contracting with Industrial Steam Turbine Institute effectively brings up the sales and developing of new products. Consolidated sales and purchasing strategies reduced the cost to a lowest level. 3. Benefit from the hard working and teamwork of the employees. The productivity of industrial steam turbine was in full speed for the year The employees of the Company was overcoming difficulties brought by heavy loading, high technical requirement and short delivery term. They accomplished the output of 96 units / 465,900kw / RMB266,611,000 of steam turbines. The output of number of units, kw, and value were increased by 18.52%, 14.16% and 1.29% respectively over the corresponding period of the previous year. The business and production goals of the year were successfully fulfilled. Though the Company achieved great operation result for the report term, the Board of Directors of the Company hope that the investors shall be aware of the following factors: Industrial steam turbine is as product of investment category. Its market requirement is sensitively linked with the national macro economical environment, especially the national investment strategy. Along with 18

19 the implementing of national strategies of 10 th 5-year-plan, grand western development, west to east electricity transmission plan, and west to east gas transmission, the requirement of steam turbine will be brought up for a period of time. The economical efficiency of the Company will be greatly influenced once the market environment changed. On the other hand, following with the increasing of raw materials prices and the giant investment on large technical reforming plan, it must influence the profitability of the company. Thus the Board of Directors hereby draws the investors great attention on investing of the Company s stocks. (II) Business highlights of the report term 1. Major business range and their operation status The Company s principal businesses are to design and manufacture of turbines, auxiliary equipment, and spares and parts, market the self-made products and offers the relevant after-sale services. The industrial turbines produced by the Company can be classified into industrial driving turbines and industrial power generation turbines subject to the objectives being driven. Industrial driving turbines are mainly used for driving rotating machines such as compressor, blower, pump, press, etc., therefore, they are widely applied in such industrial sectors as oil refining, chemical, fertilizer, metallurgy, electric power, light industry, environmental protection, etc. as the key power equipment in various heavy-duty industrial machines. Industrial power generation turbines are mainly used for driving generators and supplies thermal energy at the same time. therefore, they are widely applied in enterprises power stations for self-supply in different industrial sectors and regional joint heat-electricity production projects, as well as the power stations of fuel gas-steam turbine integrated circulation and urban garbage power station, etc. (1) The primary business income structure of the term classified in product and geographic categories are as followings: In product categories (in RMB 10 thousand) Categories Primary Primary Tax and Primary Gross profit ratio business business surcharges business % revenue cost profit Industrial driver steam turbine 19, , , Industrial generator steam turbine 8, , Others 4, , , Total 32, , , Note: The Others is referring to vending of spare parts and accessories, localization of imported equipment or technical upgrading for clients. 19

20 In geographic regions (in RMB 10 thousand) Regions Primary business revenue Primary business cost Tax and surcharges Primary business profit Gross profit ratio North-east 4, , , North China 3, , , East China 18, , , North-west 1, South-west 1, , Middle-south 3, , Export Total 32, , , (2) Market share of major products of the company in the report term. In accordance with the information provided by China Electronic Industry Association, the industrial driving steam turbine of the Company takes 80% of the share of domestic market, industrial electric generator steam turbine of the Company takes 15.70% of the domestic market. (3) There wasn t significant change of the profitability and business structure occurred comparing with that of the previous report term. 2. Status and business performance of major subsidiaries and partially held subsidiaries (in RMB10 thousand) Name of the subsidiary Business property Total assets Net assets Registered capital Share taken Net profit Zhejiang Steam Turbine Completion Technology Development Co., Ltd. Developing of auto-controlling technologies 4,114 3, % 116 Hangzhou Steam Turbine Environment Engineering Co., Ltd. Hangzhou Keximeng Technology Co., Ltd. Contracting of environment engineering Network technologies and operation of website 3,666 2, % % -175 [Note 1] None of the gains from the investments on above 3 companies exceeded 10% of the net profit. [Note 2] In the report term, the above subsidiaries business results are as the followings: (1) Zhejiang Steam Turbine Completion Technology Development Co., Ltd. is primarily involved in the developing of auto-controlling parts of steam turbines and completion engineering. It realized sales income of RMB20,047,400, total profit of RMB1,769,200 and net profit of RMB1,156,900 in the report term. (2) Hangzhou Steam Turbine Environment Engineering Co., Ltd. is primarily involved in the contracting of environment engineering and manufacturing of environmental protection equipments. It realized sales income of RMB14.69 million, total profit of RMB0.54 million and net profit of RMB0.26 million. (3) Hangzhou Keximeng Technology Co., Ltd. is primarily involved in the operation of Grand View of West Lake website, e-commerce, and public computer network terminals. Influenced by the stagnant of the overall IT industry, the company continues to loss money. It s net profit for the report term was RMB-1.75 million. 20