Endeavors Bring Successes

Transcription

1 SHOUGANG CONCORD INTERNATIONAL ENTERPRISES COMPANY LIMITED Stock Code: 697 Endeavors Bring Successes ANNUAL REPORT 2006

2 Contents Page Corporate Information 2 Directors Biography 3 Financial Highlights 6 Main Operational Structure 8 Chairman s Statement 10 Management Discussion and Analysis 11 Corporate Governance Report 19 Report of the Directors 31 Independent Auditor s Report 48 Audited Financial Statements Consolidated Income Statement 50 Consolidated Balance Sheet 51 Balance Sheet 53 Consolidated Statement of Changes in Equity 54 Consolidated Cash Flow Statement Five Year Financial Summary 139 Summary of Investment Properties A n n u a l R e p o r t 01

3 Corporate Information BOARD OF DIRECTORS Wang Qinghai (Chairman) Cao Zhong (Managing Director) Chen Zhouping (Deputy Managing Director) Zhang Wenhui (Deputy Managing Director) Luo Zhenyu (Deputy Managing Director) Ip Tak Chuen, Edmond (Non-executive Director) Leung Shun Sang, Tony (Non-executive Director) Kan Lai Kuen, Alice (Independent Non-executive Director) Wong Kun Kim (Independent Non-executive Director) Leung Kai Cheung (Independent Non-executive Director) EXECUTIVE COMMITTEE Cao Zhong (Chairman) Chen Zhouping Zhang Wenhui Luo Zhenyu AUDIT COMMITTEE Wong Kun Kim (Chairman) Kan Lai Kuen, Alice Leung Kai Cheung NOMINATION COMMITTEE Cao Zhong (Chairman) Leung Shun Sang, Tony (Vice Chairman) Kan Lai Kuen, Alice Wong Kun Kim Leung Kai Cheung COMPANY SECRETARY Cheng Man Ching QUALIFIED ACCOUNTANT Wong Hon Ming AUDITORS Deloitte Touche Tohmatsu SHARE REGISTRARS Tengis Limited 26th Floor, Tesbury Centre 28 Queen s Road East Wanchai Hong Kong REGISTERED OFFICE 7th Floor Bank of East Asia Harbour View Centre 56 Gloucester Road Wanchai Hong Kong STOCK CODE 697 WEBSITE REMUNERATION COMMITTEE Leung Shun Sang, Tony (Chairman) Cao Zhong (Vice Chairman) Kan Lai Kuen, Alice Wong Kun Kim Leung Kai Cheung A n n u a l R e p o r t

4 Directors Biography Mr. Wang Qinghai, aged 48, senior engineer. Mr. Wang was appointed the Chairman of the Company, Shougang Holding (Hong Kong) Limited ( Shougang Holding ), the controlling shareholder of the Company, and Shougang Concord Grand (Group) Limited ( Shougang Grand ) in April He is the General Manager of Shougang Corporation, the ultimate holding company of Shougang Holding, and has extensive experience in management and operation. Mr. Cao Zhong, aged 47, graduated from Zhejiang University, the PRC and Graduate School, The Chinese Academy of Social Sciences with a bachelor degree in engineering and a master degree in economics. Mr. Cao was appointed the Managing Director of the Company, the Deputy Chairman and General Manager of Shougang Holding, the Chairman of each of Shougang Concord Technology Holdings Limited ( Shougang Technology ) and Shougang Concord Century Holdings Limited ( Shougang Century ) in November He was also appointed a Director of Shougang Grand in November 2001 and is currently the Vice Chairman and Managing Director of Shougang Grand. He was appointed the Joint Chairman of Global Digital Creations Holdings Limited ( GDC ), a nonwholly owned subsidiary of Shougang Grand, in February 2005 and was re-designated as Chairman of GDC in February He also acts as the Assistant General Manager of Shougang Corporation and the Chairman of China Shougang International Trade and Engineering Corporation. Mr. Cao has extensive experience in corporate management and operation. Mr. Chen Zhouping, aged 41, is a member of the Chinese Institute of Certified Public Accountants. Mr. Chen was appointed a Deputy Managing Director of Shougang Holding and the Company in November 2001 and November 2002 respectively. Mr. Chen has extensive experience in steel industry, engineering design, human resources and management. Mr. Zhang Wenhui, aged 51, graduated from the University of Science and Technology Beijing. Mr. Zhang was appointed a Deputy Managing Director of the Company in September Mr. Zhang joined Shougang Corporation in 1982 and had been working in various companies under Shougang Corporation during the period from 1990 to Mr. Zhang was appointed the General Manager of the Shipping Division of the Company in July 2001 and the Deputy Managing Director of Shougang Holding in June Mr. Zhang previously held directorship as Deputy Managing Director of the Company for the period from July 2002 to January He was a Director and the President of Shougang Technology during the period from July 2004 to July 2006, and was the Vice Chairman of Shougang Technology from July 2006 to September Mr. Zhang has extensive experience in management and company operations A n n u a l R e p o r t 03

5 Directors Biography Mr. Luo Zhenyu, aged 37, graduated from Tianjin University and Graduate School, the Chinese Academy of Social Sciences with a bachelor degree in technology and a doctor degree in economics respectively. Mr. Luo was appointed a Deputy Managing Director of the Company in January He has extensive experience in corporate investment. Mr. Ip Tak Chuen, Edmond, aged 54. Mr. Ip was appointed a Director of the Company in He is also a deputy managing director of Cheung Kong (Holdings) Limited, deputy chairman of Cheung Kong Infrastructure Holdings Limited, an executive director of CK Life Sciences Int l., (Holdings) Inc. and a non-executive director of TOM Group Limited. He holds a bachelor of arts degree in economics and a master of science degree in business administration. Mr. Leung Shun Sang, Tony, aged 64. Mr. Leung was appointed a Director of the Company in He is also a Director of each of Shougang Grand, Shougang Technology, Shougang Century and GDC. He holds a master degree in business administration from New York State University and has over 30 years of experience in finance, investment and corporate management. Mr. Leung is the managing director of CEF Group. Ms. Kan Lai Kuen, Alice, aged 52. Ms. Kan was appointed an Independent Non-executive Director of each of the Company and Shougang Technology in September She is a fellow member of The Association of Chartered Certified Accountants, a fellow member of the CPA Australia and an associate member of The Hong Kong Institute of Certified Public Accountants. She is also a fellow member of the Hong Kong Institute of Directors. She has over 15 years of experience in corporate finance and is well experienced in both the equity and debt markets. She held various senior positions in international and local banks and financial institutions and is currently a controlling shareholder and the managing director of each of Asia Investment Management Limited and Asia Investment Research Limited, both companies are licensed corporations under the Securities and Futures Ordinance (the SFO ). Ms. Kan is a licensed investment adviser under the SFO and a registered officer of Lotus Asset Management Ltd. Ms. Kan is also an independent non-executive director of each of Regal Hotels International Holdings Limited, G-Vision International (Holdings) Limited, Sunway International Holdings Limited and Shimao Property Holdings Limited, all of which are listed companies in Hong Kong A n n u a l R e p o r t

6 Directors Biography Mr. Wong Kun Kim, aged 62. Mr. Wong was appointed an Independent Non-executive Director of each of the Company and Shougang Technology in September He holds a bachelor degree in economics, a master degree in business administration and a doctorate of philosophy. Mr. Wong is a member of the Chartered Institute of Marketing and Chartered Management Institute and is a registered investment adviser under the SFO and an investment representative of Asia Investment Management Limited. Mr. Wong has over 30 years of experience working as senior executives for various multinational corporations engaged in trading, manufacturing, finance and real estates. He had served as consultants and directors for different listed companies in Mainland China, Hong Kong, Taiwan and United States of America and is currently an independent non-executive director of Sunway International Holdings Limited, a Hong Kong listed company. Mr. Leung Kai Cheung, aged 61. Mr. Leung was appointed an Independent Non-executive Director of each of the Company and Shougang Technology in June He graduated from the Chinese University of Hong Kong with a bachelor degree in business. He had been a senior executive of Citibank, N.A. and the general manager of Barclays Bank PLC in charge of Kowloon and New Territories district. He is currently the chairman of each of Star International Enterprises Limited and Shinon Technologies Limited. He is one of the founding shareholders of Prosticks International Holdings Limited whose shares are listed on the Growth Enterprise Market of The Stock Exchange of Hong Kong Limited. Mr. Leung has extensive financial knowledge and business management experience and is familiar with the business environment of both Hong Kong and Mainland China and the operation of listed companies A n n u a l R e p o r t 05

7 Financial Highlights Turnover by principal activity for the year % Steel manufacturing 3.54% Shipping operations 6.57% Electricity generation 18.80% Steel trading 1.33% Kitchen and laundry equipment 0.04% Others Turnover by geographical location for the year % The People s Republic of China: Hong Kong 78.96% The People s Republic of China: Elsewhere 16.72% Others A n n u a l R e p o r t

8 Financial Highlights Turnover Year ,000,000 2,000,000 3,000,000 4,000,000 5,000,000 6,000,000 7,000,000 HK$ 000 Profit attributable to shareholders Year , , , , , , ,000 HK$ 000 Total assets Year ,000,000 4,000,000 6,000,000 8,000,000 1,000,000 12,000,000 HK$ A n n u a l R e p o r t 07

9 Main Operational Structure As at 31 December % Manufacture and sale of steel products Qinhuangdao Shougang Plate Mill Co Ltd (PRC) 100% Electricity generation Firstlevel Holdings Ltd (Samoa) 100% Shipping and transportation *SC Shipping Holdings Ltd (BVI) # Shougang Concord International Enterprises Company Limited (Stock Code: 697) 100% Trading of steel products; kitchen and laundry equipment *SC Steel Holdings Ltd (BVI) Manufacture of steel cord for radial tyres; processing and trading of copper and brass products 22% * # SC Century Holdings Ltd (HK) (Stock Code: 103) 100% Others Shougang Concord Services Ltd (HK) A n n u a l R e p o r t

10 Main Operational Structure As at 31 December % Qinhuangdao Shouqin Metal Materials Co Ltd (PRC) 51% Beijing Shougang Firstlevel Power Co Ltd (PRC) 100% 100% 100% 100% *SC Int l Transport Ltd (BVI) *SC Shipping Services Ltd (HK) Ryegar Ltd (UK) SCIT (Chartering) Ltd (BVI) 70% 63% Centralink Int l Ltd (BVI) Zhoushan Shouhe Centra-link Co Ltd (PRC) 100% 100% 100% 100% *SC Steel Group Ltd (HK) *SC Godown Ltd (HK) *SC Management Co Ltd (HK) Radnor Limited (HK) 100% 100% *SC Steel (Int l) Co Ltd (BVI) *SC Steel Int l Trading Co Ltd (BVI) 3% 22% 6% Xinhua Metal Products Co Ltd (PRC) Jiaxing Eastern Steel Cord Co Ltd (PRC) Shanghai Shenjia Metal Products Co Ltd (PRC) 22% 22% Hing Cheong Metals (China & Hong Kong) Ltd (HK) Meta International Ltd (HK) 100% Notes: Good News Investment Ltd (HK) * SC is abbreviation for Shougang Concord # Listed company Attributable interest held by Shougang Concord International Enterprises Company Limited A n n u a l R e p o r t 09

11 Chairman s Statement Shougang Concord International continues to focus on its steel manufacturing and trading segments as its principal businesses. The Group has reached a historic high in production capability and sales volume in the current year, and boosted a 41.5% increase in turnover on a year-on-year basis to HK$6,467.5 million. Profit attributable to shareholders, unfortunately, suffered due to our leverage on expansions and decreased market prices, was HK$221.6 million, representing a drop of 27.1% from the strong 2005 results and basic earnings per share is HK3.9 cents. Given the healthy financial position of the Group, the Board proposed to pay a final dividend of HK2.1 cents per share, representing a rise of 250% from HK0.6 cent last year. Highlights of the year included: (a) robust expansion in production scale especially due to Phase II of Qinhuangdao Shouqin Metal Materials Co., Ltd. ( Shouqin ). The 4300mm width plate rolling system has officially been put into production on 20 October, commanding a leading technological position in the industry; (b) having Hyundai Heavy Industries Co., Ltd. as an important strategic partner of us having 20% equity interest in Shouqin; (c) the raising of approximately HK$1,660 million from share issue and consortium loan by the Company in the first quarter. We have a balanced and competent team, paving the way to take the Group to its next level. The team has accepted the challenges presented to them and performed really well throughout this year. I owe much gratitude to our shareholders, Board of Directors, management and all other staff members has begun well with the market sentiments improving; the future looks bright to me. I am certain that our team will continue to do its best to create value for all our shareholders from the opportunities ahead of us. Wang Qinghai Chairman 19 April A n n u a l R e p o r t

12 OVERVIEW Management Discussion and Analysis In 2006, the Group took much effort in expanding production scale and adjusting product mix, thus achieving a historic high production and sales volumes in its Steel manufacturing segment. This segment also enjoyed a breakthrough increase in export volume, exemplifying its competitiveness in the international market. For the year ended 31 December 2006, the Group recorded a consolidated turnover of HK$6,467.5 million, representing a sharp increase of 41.5%, equivalent to HK$1,897.5 million, when compared to that of last year. Despite higher finance expenses and raw material cost, net profit attributable to shareholders still amounted to HK$221.6 million, representing a decrease of 27.1% when comparing to HK$303.9 million last year (restated). Basic and diluted earnings per share for the year 2006 were HK3.9 cents and HK3.7 cents respectively. 1. Strengthened production scale of Steel manufacturing segment Commencement of Phase II of Qinhuangdao Shouqin Metal Materials Co., Ltd. ( Shouqin ) in the first half of the year has significantly expanded the Group s scale of production. During the year, the Group produced 829,000 mt of steel plates and 1.94 million mt of steel slabs, representing a rise of 13.4% and 74.8% respectively over that of last year. Such a production scale saw a historic record level for the Group. 2. Hyundai Heavy Industries as our Strategic partner Hyundai Heavy Industries Co., Ltd. ( Hyundai ) is a world leader in ship-building and a heavy user of steel plates. By partnering with Hyundai through its subscription with a significant minority position with Shouqin, our subsidiary can strengthen its shareholder base and also secure a fair amount of sales of its thick plates. The said transaction has already been completed on 7 February 2007, after which the Group still holds 76% effective interest in Shouqin. We are confident that it would be beneficial for all parties involved. 3. Secured equity and loan financing totaling HK$1.66 billion In the first quarter of the year, Carlo Tassara International S.A. has become one of the major shareholders of the Company, which subscribed for 929 million ordinary shares of the Company, the said subscription has provided net proceeds of approximately HK$492.0 million to the Company for working capital purposes. In addition, the Company has secured a US$150.0 million consortium loan financing. Part of the proceeds has already been applied to increase the capital base of Shouqin to progress on its business plan A n n u a l R e p o r t 11

13 Management Discussion and Analysis FINANCIAL REVIEW Year ended 31 December 2006 compared to year ended 31 December 2005 Turnover and Cost of Sales For the year under review, the Group recorded a consolidated turnover of HK$6,467.5 million as compared to HK$4,570.0 million last year, representing an increase of HK$1,897.5 million, or 41.5%. The increase is principally due to full consolidation of Shouqin s results in the year, whereby only 2 months results of November to December 2005 were included last year. Sales volume of steel products also rose significantly during the year. Cost of sales in the current year was HK$5,604.4 million as compared to HK$4,143.1 million last year, representing an increase of HK$1,461.3 million, or 35.3%. The resulting gross profit margin was 13.3% in the current year, improved from 9.3% last year, principally due to a change in revenue mix that the contribution by steel trading segment with an overall gross profit margin of about 2% is lower, making the overall figure still higher. Other income Other income increased from HK$61.6 million last year to HK$102.2 million this year, or 65.9%. The rise is mainly represented by tax refund on re-investment in China and increased bank interest income. Finance costs In the current year, finance costs increased to HK$260.8 million, comparing to HK$39.9 million last year, or 5.5 times. The increase is attributable to combination of higher leverage of Shouqin due to expansion and the interest expenses of the Company s newly-incepted consortium loans. REVIEW OF OPERATIONS Steel manufacturing The Group operates in this business segment through a wholly-owned subsidiary Qinhuangdao Shougang Plate Mill Co., Ltd. ( Qinhuangdao Plate Mill ) and 96%-owned Shouqin. This segment contributed to 70% of the Group s turnover (2005: 60%). China maintains its rapid economic expansion with GDP growth reaching 10.7% in 2006, such strong growth is expected to continue well into the foreseeable future. However, the development of the iron and steel industry did not fully match with the growth in demand, with apparent structural incompatibilities. Raw materials and energy prices have been increasing; global price of iron ore has increased by 19% in 2006, and will continue to increase by 9.5% in Consolidated price index for steel products rose from 93.3 in January, to in June and retreated to at the end of the year. The high fluctuation is a fair proof of a generally difficult business environment for the industry A n n u a l R e p o r t

14 Management Discussion and Analysis Qinhuangdao Plate Mill Turnover of Qinhuangdao Plate Mill was HK$2,922.3 million (before elimination of intersegment sales) for the year, representing an increase of HK$7.5 million from that of last year. Although the sales volume has increased from 689,000 mt to 761,000 mt this year, the average selling price per mt has decreased by approximately 6.4%. While the decrease in selling price cannot be offset by a corresponding decrease in cost of steel slabs, one of the major raw materials, and other manufacturing overheads, the gross profit margin has therefore deteriorated to 7.8%, against 9.3% last year. Net profit for the current year (excluding the share of 24% results in Shouqin) was HK$90.2 million, comparing to HK$152.1 million recorded in the last year. The decrease can be explained by the lower gross profit described above, and increased selling cost resulting from more export businesses. Shouqin Shouqin houses a production line commanding some of the most advanced technologies in the world. Since its inception in mid 2004, the scale of production has been expanding significantly. Phase II of the plant started production in the first quarter of 2006, initially with output of steel slabs only. Its 4300mm width plate rolling system commenced production since October this year. Phase I embraces a designed production capability of 1.2 million tonnes, while Phase II can well reach 1.6 million tonnes. Shouqin achieved good performance and recorded a turnover of HK$4,912.5 million for the current year, comparing to HK$3,136.3 million last year, representing a rise of 56.6%. Approximately 1,850,000 mt of steel slabs were sold in 2006, representing an increase of 68.3% on a year-to-year basis, in addition to 9,700 mt of thick plates. Despite the apparent decline in steel product price in the first quarter which caused a negative impact on sales revenue and earnings, Shouqin s full year operation in 2006 was deemed satisfactory. For the year ended 31 December 2006, net profit attributable to the Group from Shouqin amounted to HK$44.2 million, versus a profit contribution of HK$36.1 million last year, registering an increase of 22.4%. The higher profit contribution is owing to higher gross profit amount and by stringent cost containment measures, which were partially offset by increased finance cost from its leverage and negative change of tax rebate from export activities A n n u a l R e p o r t 13

15 Management Discussion and Analysis Shipping operations Shougang Concord Shipping Holdings Limited and its subsidiaries ( Shougang Shipping Group ) was mainly engaged in the time charter business. This segment has reported a satisfactory result. In the current year, its turnover was HK$229.1 million and realized HK$83.6 million in operating profit. When comparing to last year, turnover has decreased slightly by 1% while its operating profit has increased by 17.7%. Carriage tariff is steadier in the shipping market this year. The higher operating profit was a result of rent-free period during July to August from ship maintenance. For the year ended 31 December 2006, Shougang Shipping Group reported a net profit attributable to shareholders of HK$79.5 million, an increase of HK$10.0 million from that of Shougang Shipping Group has managed to maintain its expenses to a minimum level to partially reduce the adverse impact of fluctuating market rates. Electricity generation Our 51%-owned Beijing Shougang Firstlevel Power Co., Ltd. ( Beijing Power Plant ) reported total turnover of HK$424.6 million for the current year, representing an increase of 3.3% from last year. After deducting minority interests, the Group s share of profit of Beijing Power Plant for the current year amounted to HK$29.5 million, which showed a moderate increase of 2.4% as compared to HK$28.8 million for the last year. In the current year, Beijing Power Plant sold approximately 1,161 million kwh of electricity and generated sales revenue of HK$364.4 million, recording a slight decrease of 1.0% and an increase of 2.8% respectively when comparing to that of last year. Higher profitability for the current year is a result of increase in market tariff and successful cost savings in the company A n n u a l R e p o r t

16 Management Discussion and Analysis Manufacture of steel cord for radial tyres; processing and trading of copper and brass products Shougang Concord Century Holdings Limited and its subsidiaries ( Shougang Century Group ) performed well above expectation and reported a turnover of HK$678.9 million and net profit of HK$76.0 million for the current year, representing a growth of HK$86.0 million in turnover and HK$13.8 million in net profit over that of last year. If the deemed loss arising from share reform plan of one of its associates were excluded, its net profit would be further boosted by HK$6.9 million, recording a 33.2% increase in net profit on a year-to-year basis. With a slight drop in equity proportion from 27.9% to 22.5% due to share placement, the Group s share of its net profit still rose from HK$17.4 million to HK$21.0 million in the current year, representing an increase of 20.7%. Shougang Century Group enjoyed a marked increase in sales and profit of its processing and trading of copper and brass product segment. Turnover of this segment increased by 72.3% to HK$283.7 million and the corresponding gross profit grew by 261.7% to HK$45.1 million. The growth can be explained by the sharp increase in copper price by 72.0%. The LME Copper Futures once recorded 82.0% gain during the year and still commanded 43.9% growth on a year-to-year basis. The other operating segments of Shougang Century Group also performed satisfactorily and contributed to the overall success in the current year. Trading of steel products; manufacture and installation of kitchen and laundry equipment Shougang Concord Steel Holdings Limited and its subsidiaries ( Shougang Steel Group ) reported turnover of HK$1,302.2 million, representing a 11.9% growth in comparison with last year. In terms of turnover, trading of steel products has increased by 11.9% to HK$1,216.0 million, while that of the installation of kitchen and laundry equipment has increased by 11.7% to HK$86.2 million. However, with smaller spread in trade, Shougang Steel Group reported an overall lower net profit by 3.1% to HK$18.8 million in the current year, comparing to HK$19.4 million last year A n n u a l R e p o r t 15

17 Management Discussion and Analysis LIQUIDITY AND FINANCIAL RESOURCES We aim to diversify our funding sources through utilization of both banking and capital markets. To the extent possible, financing is arranged to match business characteristics and cash flows. 1. Leverage The financial leverage of the Group as at 31 December 2006, as compared to 31 December 2005, is summarized below: 31 December December 2005 Audited Audited Change HK$ million HK$ million Total Debt from banks 4,577 2, % from parent company 1, % from a related company % Sub-total 5,702 3, % Cash and bank deposits 1, % Net debt 3,847 2, % Total capital (Equity and debt) 8,645 5, % Financial leverage Net debt to total capital 44.5% 47.9% -7.1% Net debt to total assets 34.2% 36.3% -5.8% It can be observed that financial leverage has improved between 31 December 2006 and that of 31 December 2005, although the total debt level has increased, corresponding to the fact that Group debt financing is used in a controlled manner. 2. Currency and Interest Rate Risk The Group conducts its businesses mainly in Hong Kong and Mainland China, therefore it is subject to the foreign exchange fluctuations of HK Dollars, US Dollars and Renminbi. To minimize currency exposure, non Hong Kong Dollar assets are usually financed in the same currency as the asset or cash flow from it via borrowings. For the year ended 31 December 2006, approximately 76.4% of the Group s turnover was denominated in Renminbi. A mixture of fixed and floating rate borrowings are used in order to stabilize interest costs despite rate movements A n n u a l R e p o r t

18 CAPITAL STRUCTURE Management Discussion and Analysis At the beginning of the current year, the issued share capital of the Company was HK$986.8 million, represented by 4,934,057,214 ordinary shares at par value of HK$0.20 each. During the year, the Company entered into a share subscription agreement on 13 February 2006 with an independent investor, Carlo Tassara International S. A. ( the Subscriber ), pursuant to which the Subscriber subscribed for 929,000,000 new ordinary shares of the Company at HK$0.53 per share in March Moreover, a former director of the Company exercised the granted options, pursuant to which 1,000,000 new ordinary shares were issued at the exercise price of HK$0.295 per share. As a result of the aforesaid events, the issued share capital of the Company increased to HK$1,172.8 million, represented by 5,864,057,214 ordinary shares as at 31 December EMPLOYEES, REMUNERATION POLICIES AND TRAINING SCHEME The Group has a total of approximately 4,200 employees as at 31 December The remuneration policies of the Group are to ensure fairness and competitiveness of total remuneration in order to motivate and retain current employees as well as to attract potential ones. Remuneration packages are carefully structured to take into account local practices under various geographical locations in which the Group operates. The remuneration packages of employees in Hong Kong include salary, discretionary bonuses, medical subsidies and a hospitalization scheme. All of the subsidiaries of the Group in Hong Kong provide pension schemes to the employees. The remuneration packages of employees in the PRC include salary, discretionary bonuses, medical subsidies and a welfare fund contribution as part of their staff benefits A n n u a l R e p o r t 17

19 Management Discussion and Analysis PROSPECTS While Phase II of Shouqin has been operational since 2006, the Group has enhanced its world leading production lines. With a progressive development in high-end products, in addition to a more stable sales market and funding capability, the Group is considered extremely competitive in its forefront. Fixed asset investment in China is expected to grow 20% in 2007, with steel production increased by 11%. The steady growth in China s GDP has benefited the steel industry as a whole. As China s new Steel Industry Policy progressively gets implemented, small and obsolete production capacities will soon be eliminated, profitability in the industry is on the rise. We now have a higher production capability than ever in the steel manufacturing segment in a business where scale is a key to success, both in terms of serving our customers better and maximizing our earnings premium in the market. Shougang Concord International is well positioned to benefit in the year 2007 for the continued market cyclical uprising A n n u a l R e p o r t

20 Corporate Governance Report The Company is committed to maintaining good corporate governance standard and procedures to safeguard the interests of all shareholders and to enhance accountability and transparency. CORPORATE GOVERNANCE PRACTICES The Company has complied with the Code on Corporate Governance Practices (the Code ) as set out in Appendix 14 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the Listing Rules ) during the financial year ended 31 December 2006, except for the following deviations: Under code provision A.4.1 of the Code, non-executive directors should be appointed for a specific term and subject to re-election. None of the existing Non-executive Directors of the Company is appointed for a specific term. However, Non-executive Directors of the Company are subject to retirement by rotation and re-election at annual general meetings at least once every three years in accordance with the provisions of the articles of association of the Company (the Articles ). As such, the Company considers that sufficient measures have been taken to ensure that the Company s corporate governance practices are no less exacting than those in the Code. Under the first part of code provision E.1.2 of the Code, the chairman of the board should attend the annual general meeting and arrange for the chairman of the audit, remuneration and nomination committees (as appropriate) or in the absence of the chairman of such committees, another member of the committee or failing this his duly appointed delegate, to be available to answer questions at the annual general meeting. The Chairman of the Board of Directors of the Company had not attended the annual general meeting of the Company held on 26 May 2006 (the Meeting ) as he had another business engagement. The Managing Director of the Company, who took the chair of the Meeting, together with other members of the Board and the Audit, Remuneration and Nomination Committees attended the Meeting. The Company considers that the members of the Board and the Audit, Remuneration and Nomination Committees who attended the Meeting were already of sufficient calibre and number for answering questions at the Meeting A n n u a l R e p o r t 19

21 Corporate Governance Report BOARD OF DIRECTORS Composition 1. The Board currently comprises four Executive Directors, three Non-executive Directors and three Independent Non-executive Directors. The Board includes a balanced composition of executive and non-executive directors so that there is a strong independent element on the Board, which can effectively exercise independent judgement. Non-executive Directors are of sufficient calibre and number for their views to carry weight. The functions of Non-executive Directors include, but not limited to, (i) bringing an independent judgement at Board meetings; (ii) taking the lead where potential conflicts of interests arise; (iii) serving on Board committees if invited; and (iv) scrutinising the Company s performance. 2. The Executive Directors are Mr. Cao Zhong (Managing Director), Mr. Chen Zhouping (Deputy Managing Director), Mr. Zhang Wenhui (Deputy Managing Director) and Mr. Luo Zhenyu (Deputy Managing Director), the Non-executive Directors are Mr. Wang Qinghai (Chairman), Mr. Ip Tak Chuen, Edmond and Mr. Leung Shun Sang, Tony and the Independent Nonexecutive Directors are Ms. Kan Lai Kuen, Alice, Mr. Wong Kun Kim and Mr. Leung Kai Cheung. The Board members have no financial, business, family or other material/relevant relationships with each other. The Board has a balance of skills and experience appropriate for the requirements of the business of the Company. The Directors biographical information is set out in the section headed Directors Biography of this annual report. 3. Composition of the Board, including names of Independent Non-executive Directors of the Company, is disclosed in all corporate communications to shareholders. Role and function 1. The Board is responsible for overall strategic formulation and performance monitoring of the Company and its subsidiaries (the Group ). It delegates day-to-day operations of the Company to the Executive Committee and senior management within the control and authority framework set by the Board. In addition, the Board has also delegated various responsibilities to the Audit Committee, the Remuneration Committee and the Nomination Committee. Further details of these committees are set out in this report. 2. The Board has four scheduled meetings a year at approximately quarterly intervals. Additional meetings would be arranged, if and when required. The Directors can attend meetings in persons or through other means of electronic communication in accordance with the Articles. During the financial year ended 31 December 2006, the Directors have made active contribution to the affairs of the Group and five Board meetings were held to consider, among other things, reviewing and approving the interim results and annual results of the Group. Details of Directors attendance records in 2006 are as follows: A n n u a l R e p o r t

22 BOARD OF DIRECTORS (continued) Corporate Governance Report Role and function (continued) Meetings attended / Eligible to attend Chairman Wang Qinghai 0/5 Executive Directors Cao Zhong 5/5 Chen Zhouping 4/5 Zhang Wenhui (appointed on 22 September 2006) 2/2 Luo Zhenyu 2/5 Non-executive Directors Ip Tak Chuen, Edmond 4/5 Leung Shun Sang, Tony 5/5 Choy Hok Man, Constance (retired on 26 May 2006) 0/1 Independent Non-executive Directors Kan Lai Kuen, Alice 5/5 Wong Kun Kim 5/5 Leung Kai Cheung (appointed on 16 June 2006) 3/3 Kwan Bo Ren, Dick (resigned on 11 July 2006) 1/2 3. The Board is supplied with relevant information by the senior management pertaining to matters to be brought before the Board for decision as well as reports relating to operational and financial performance of the Group before each Board meeting. Where any Director requires more information than is volunteered by the management, each Director has the right to separately and independently access to the Company s senior management to make further enquiries if necessary. The Company Secretary assists the Chairman in drawing the agenda of each meeting and each Director may request inclusion of matters in the agenda. Generally, at least 14 days notice of a regular Board meeting is given and the Company aims at giving reasonable notice for all other Board meetings. The Company also aims at sending the agenda and the accompanying board papers, which are prepared in such form and quality as will enable the Board to make an informed decision on matters placed before it, to all Directors at least 3 days before the intended date of a Board meeting A n n u a l R e p o r t 21

23 Corporate Governance Report BOARD OF DIRECTORS (continued) Role and function (continued) 4. The Company Secretary is responsible for taking minutes of Board and Board committee meetings, drafts and final versions of which would be sent to Directors for comments and records respectively, in both cases within a reasonable time after each meeting. Minutes are recorded in sufficient detail the matters considered by the Board and decisions reached, including any concerns raised by Directors or dissenting views (if any) expressed. Minutes of Board meetings and meetings of Board committees are kept by the Company Secretary and are open for inspection by any Director/committee member. 5. All Directors have access to the Company Secretary who is responsible for ensuring that Board procedures are complied with and all applicable rules and regulations are followed. 6. The Directors may seek independent professional advice in appropriate circumstances, at the Company s expenses. The Company will, upon request, provide separate independent professional advice to Directors to assist the relevant Directors to discharge their duties to the Company. 7. If a substantial shareholder or a Director has a conflict of interest in a matter (including material transaction with connected persons) which the Board has determined to be material, a Board meeting will be held instead of by way of circulation. 8. Appropriate insurance cover on directors and officers liabilities has been in force to protect the Directors and officers of the Group from their risk exposure arising from the businesses of the Group. Independent Non-executive Directors 1. Pursuant to Rules 3.10(1) and 3.10(2) of the Listing Rules, the Company has appointed three Independent Non-executive Directors. One of the Independent Non-executive Directors has appropriate professional qualifications or accounting or related financial management expertise. 2. The Company has received from each of its Independent Non-executive Directors an annual confirmation of independence pursuant to Rule 3.13 of the Listing Rules and the Company considers that all of the Independent Non-executive Directors are independent A n n u a l R e p o r t

24 BOARD OF DIRECTORS (continued) Corporate Governance Report Appointments and re-election of Directors 1. Appointment of new Directors is a matter for consideration by the Nomination Committee. The Nomination Committee will review the profiles of the candidates and make recommendations to the Board on the appointment, re-nomination and retirement of Directors. 2. According to the Articles, any Director so appointed by the Board shall hold office, in the case of filling a casual vacancy, only until the next following general meeting of the Company or, in the case of an addition to their number, until the next following annual general meeting of the Company who shall then be eligible for re-election at such annual general meeting. Every Director, including those appointed for a specific term, is subject to retirement by rotation at least once every three years. 3. Every newly appointed Director will be given an introduction of regulatory requirements. The Directors are continually updated on the latest development of the Listing Rules and other applicable statutory requirements to ensure compliance and upkeep of good corporate governance practice. CHAIRMAN AND CHIEF EXECUTIVE OFFICER 1. The roles of Chairman and Managing Director are separate and are not performed by the same individual to reinforce their independence and accountability. Mr. Wang Qinghai assumes the role of the Chairman and Mr. Cao Zhong serves as the Managing Director of the Company. The Chairman provides leadership for the Board. The Managing Director has overall chief executive responsibility for the Group s business development and day-to-day management generally. The division of responsibilities between the Chairman and the Managing Director is clearly established and set out in writing. 2. With the support of Executive Directors and the Company Secretary, the Chairman seeks to ensure that all Directors are properly briefed on issues arising at Board meetings and receive adequate and reliable information in a timely manner. MODEL CODE FOR SECURITIES TRANSACTIONS 1. The Company has adopted the Model Code for Securities Transactions by Directors of Listed Issuers (the Model Code ) of the Listing Rules as a code of conduct of the Company for Directors securities transactions. 2. Having made specific enquiry of all Directors, the Directors have complied with the required standard set out in the Model Code and the Company s code of conduct regarding Directors securities transactions throughout the year ended 31 December A n n u a l R e p o r t 23

25 Corporate Governance Report MODEL CODE FOR SECURITIES TRANSACTIONS (continued) 3. Employees who are deemed to be in possession of unpublished price sensitive information in relation to the Company or its shares are required to prohibit from dealing in shares of the Company during the black-out period. BOARD COMMITTEE The Board has established the following committees to oversee particular aspects of the Company s affairs and to assist in the execution of the Board s responsibilities. All committees have their own terms of reference. All resolutions passed by the committees will be reported to the Board at the next Board meeting. Executive Committee 1. An Executive Committee of the Board was established in February 2005 and comprises all Executive Directors of the Company. As at 31 December 2006, the Chairman of the Executive Committee was Mr. Cao Zhong. Other members were Messrs. Chen Zhouping, Zhang Wenhui and Luo Zhenyu. 2. The Executive Committee has been conferred with the general powers of the Board (except those matters specifically reserved for the Board) to manage and oversee the operations of the Group. The Executive Committee meets as and when required. During the financial year ended 31 December 2006, twenty-five meetings of the Executive Committee were held. Audit Committee 1. The Company has an Audit Committee which was established with reference to A Guide for the Formation of an Audit Committee issued by the Hong Kong Institute of Certified Public Accountants in December In January 2006, the Board adopted new terms of reference as the terms of reference of the Audit Committee for compliance with the requirements of the Listing Rules. Its principal duties include, among other things, (i) to oversee the relationship with the Company s auditors; (ii) to review the interim and annual financial statements; and (iii) to review the Company s financial reporting system and internal control procedures. The terms of reference of the Audit Committee are available on request and are posted on the Company s website. 2. The Chairman of the Audit Committee is Mr. Wong Kun Kim, an Independent Non-executive Director of the Company. The other members comprise the other two Independent Nonexecutive Directors, namely Ms. Kan Lai Kuen, Alice and Mr. Leung Kai Cheung. None of the members of the Audit Committee are former partners of the auditors of the Company A n n u a l R e p o r t

26 BOARD COMMITTEE (continued) Corporate Governance Report Audit Committee (continued) 3. During the financial year ended 31 December 2006, two meetings of the Audit Committee were held for, amongst other things, reviewing the final results of the Group for the financial year ended 31 December 2005 and the interim results of the Group for the six months ended 30 June The attendance of each member is as follows: Meetings attended / Eligible to attend Wong Kun Kim (Chairman) 2/2 Kan Lai Kuen, Alice 2/2 Leung Kai Cheung (appointed on 16 June 2006) 1/1 Choy Hok Man, Constance (resigned on 26 May 2006) 0/1 Kwan Bo Ren, Dick (resigned on 11 July 2006) 0/1 4. The Audit Committee has explicit authority to investigate any activity within its terms of reference and the authority to obtain outside legal or other independent professional advice if it considers necessary. It is given access to and assistance from the employees and reasonable resources to discharge its duties properly. 5. During the financial year ended 31 December 2006, the Board had no disagreement with the Audit Committee s view on the selection, appointment, resignation or dismissal of the external auditors. Nomination Committee 1. The Company established the Nomination Committee in February 2005 with specific written terms of reference which deal clearly with its authority and duties. The principal duties of the Nomination Committee include (i) to review the structure, size and composition of the Board; (ii) to identify individuals suitably qualified to become Board members and select or make recommendations to the Board; (iii) to make recommendations to the Board on relevant matters relating to the appointment and re-appointment of Directors and succession planning for Directors; and (iv) to assess the independence of Independent Non-executive Directors. The terms of reference of the Nomination Committee are available on request and are posted on the Company s website. 2. The Chairman of the Nomination Committee is Mr. Cao Zhong, the Managing Director of the Company. The other members comprise Mr. Leung Shun Sang, Tony, a Non-executive Director of the Company and all the three Independent Non-executive Directors, namely Ms. Kan Lai Kuen, Alice, Mr. Wong Kun Kim and Mr. Leung Kai Cheung. The Independent Non-executive Directors of the Company constitute the majority of the committee A n n u a l R e p o r t 25

27 Corporate Governance Report BOARD COMMITTEE (continued) Nomination Committee (continued) 3. Where vacancies exist at the Board, candidates are proposed and put forward to the Nomination Committee for consideration. The recommendations of the Nomination Committee will then be tendered to the Board for approval. In considering the nomination of a new Director, the Nomination Committee will take into account the qualification, ability, working experience, leadership and professional ethics of the candidates. In determining the independence of Directors, the Board follows the requirements set out in the Listing Rules. 4. During the financial year ended 31 December 2006, two meetings of the Nomination Committee were held for considering the nomination of Mr. Zhang Wenhui and Mr. Leung Kai Cheung as Deputy Managing Director and Independent Non-executive Director of the Company respectively. The attendance of each member is as follows: Meetings attended / Eligible to attend Cao Zhong (Chairman) 2/2 Leung Shun Sang, Tony (Vice Chairman) 2/2 Kan Lai Kuen, Alice 2/2 Wong Kun Kim 2/2 Leung Kai Cheung (appointed on 16 June 2006) 1/1 Kwan Bo Ren, Dick (resigned on 11 July 2006) 1/1 5. The Nomination Committee has explicit authority to seek any necessary information from the employees within its scope of duties and the authority to obtain outside independent professional advice if it considers necessary. Remuneration Committee 1. The Company established the Remuneration Committee in February 2005 with specific written terms of reference which deal clearly with its authority and duties. The principal duties of the Remuneration Committee include (i) to make recommendations to the Board on the Company s policy and structure for all remuneration of Directors and senior management of the Group; (ii) to review and approve performance-based remuneration; (iii) to determine the specific remuneration packages of all Executive Directors and senior management and to make recommendation to the Board of the remuneration of Non-executive Directors; (iv) to review and approve the compensation payable to Executive Directors and senior management and the compensation arrangements relating to dismissal or removal of Directors for misconduct; and (v) to ensure that no Director or any of his associates is involved in deciding his own remuneration. The terms of reference of the Remuneration Committee are available on request and are posted on the Company s website A n n u a l R e p o r t

28 BOARD COMMITTEE (continued) Corporate Governance Report Remuneration Committee (continued) 2. The Chairman of the Remuneration Committee is Mr. Leung Shun Sang, Tony, a Non-executive Director of the Company. The other members comprise the Managing Director of the Company, Mr. Cao Zhong, and all the three Independent Non-executive Directors, namely Ms. Kan Lai Kuen, Alice, Mr. Wong Kun Kim and Mr. Leung Kai Cheung. The Independent Non-executive Directors of the Company constitute the majority of the committee. 3. During the financial year ended 31 December 2006, three meetings of the Remuneration Committee were held for, amongst other things, reviewing the remuneration policies of the Company and the remuneration and terms of employment contracts of the Executive Directors of the Company, determining the bonuses of the Executive Directors of the Company for the year 2005, and making recommendations to the Board on the directors fees of the Nonexecutive Directors of the Company for the years 2005 and The attendance of each member is as follows: Meetings attended / Eligible to attend Leung Shun Sang, Tony (Chairman) 3/3 Cao Zhong (Vice Chairman) 3/3 Kan Lai Kuen, Alice 3/3 Wong Kun Kim 3/3 Leung Kai Cheung (appointed on 16 June 2006) 1/1 Kwan Bo Ren, Dick (resigned on 11 July 2006) 1/1 4. The Remuneration Committee may consult the Chairman about their proposals relating to the remuneration of other Executive Directors. It has explicit authority to seek any necessary information from the employees within its scope of duties and the authority to obtain outside independent professional advice if it considers necessary. 5. The remuneration policies for the Company as well as the Directors are market alignment and reward for performance. The Company reviews the remuneration package annually taking into consideration of the market practice, competitive market position and individual performance. INTERNAL CONTROL The Board is of the opinion that sound internal control systems will contribute to the effectiveness and efficiency of operations of the Group and to the safeguard of the Group s assets as well as the shareholders investment A n n u a l R e p o r t 27