INDEPENDENT AUDITOR S REPORT TO THE SHAREHOLDERS OF CHANGCHAI COMPANY LIMITED (Incorporated in the People s Republic of China with limited liability)

Transcription

1 INDEPENDENT AUDITOR S REPORT TO THE SHAREHOLDERS OF CHANGCHAI COMPANY LIMITED (Incorporated in the People s Republic of China with limited liability) We have audited the consolidated financial statements of Changchai Company Limited set out on pages 3 to 39 which comprise the consolidated balance sheet as at 31 December 2006, and the consolidated income statement, consolidated statement of changes in equity and consolidated cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes. Directors responsibility for the financial statements The directors are responsible for the preparation and the true and fair presentation of these financial statements in accordance with International Financial Reporting Standards. This responsibility includes designing, implementing and maintaining internal control relevant to the preparation and the true and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditor s responsibility Our responsibility is to express an opinion on these financial statements based on our audit and to report our opinion solely to you, as a body and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report. Except as described in the basis for qualified opinion paragraph, we conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance as to whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and true and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Page 1

2 INDEPENDENT AUDITOR S REPORT TO THE SHAREHOLDERS OF CHANGCHAI COMPANY LIMITED (Incorporated in the People s Republic of China with limited liability) (Continued) Basis for qualified opinion As set out in more details in note 3 to the consolidated financial statements, two of the Company s subsidiaries (the Unconsolidated Subsidiaries ) ceased operations in 2002 and no reliable financial information of the Unconsolidated Subsidiaries is available. As of 31 December 2006, the Group accounted for its interests in the Unconsolidated Subsidiaries using the cost method of accounting. Provision for impairment loss has been made at 31 December 2006 to write down the Group s interests in the Unconsolidated Subsidiaries to their expected net realisable value of Nil. In our opinion, the financial statements of the Unconsolidated Subsidiaries should have been consolidated into the Group s consolidated financial statements in accordance with IAS 27 Consolidated and separate financial statements. However, there were no practical audit procedures that we could perform to obtain reliable financial information of the Unconsolidated Subsidiaries and report on the amounts which should have been consolidated. Qualified opinion arising from disagreement over accounting treatment and limitation of audit scope Except for the failure to consolidate the financial statements of the Unconsolidated Subsidiaries referred to above as required by IAS 27, in our opinion the financial statements give a true and fair view of the state of affairs of the Group as at 31 December 2006 and of its profit and cash flows for the year then ended in accordance with International Financial Reporting Standards. HORWATH HONG KONG CPA LIMITED Certified Public Accountants 18 March 2007 Chan Kam Wing, Clement Practising Certificate number P Central Plaza 18 Harbour Road Wanchai Hong Kong Page 2

3 CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2006 (Amounts expressed in thousands of RMB, except earnings per share) Note RMB 000 RMB 000 Turnover 6 1,842,643 1,854,931 Cost of sales (1,580,119) (1,602,464) Gross profit 262, ,467 Other revenue 7 63,820 20,552 Other gains and losses 7 3,254 14,900 Selling expenses (80,872) (58,218) General and administrative expenses (124,926) (168,155) Other expenses, net (13,736) (10,057) Profit from operations 8 110,064 51,489 Finance costs, net 9 (11,766) (15,375) Share of results of associates 3,113 1,186 Profit before taxation 101,411 37,300 Taxation 10 34,083 10,103 Profit for the year 135,494 47,403 Attributable to: Equity holders of the parent 135,954 48,545 Minority interests (460) (1,142) 135,494 47,403 Basic earnings per share 11 RMB0.36 RMB0.13 The accompanying notes form part of these financial statements. Page 3

4 CONSOLIDATED BALANCE SHEET AS AT 31 DECEMBER 2006 (Amounts expressed in thousands of RMB) Note RMB 000 RMB 000 ASSETS Non-current assets Property, plant and equipment , ,279 Land use rights , ,333 Construction in progress 14 19,247 17,326 Interests in associates 15 15,148 12,035 Available-for-sale investments , ,624 Deferred tax assets 10(b) 43,957 9, , ,497 Current assets Inventories , ,990 Value-added tax recoverable 7,115 21,155 Due from related parties 25(b) 1, ,397 Trade and other receivables 329, ,232 Prepayments 5,409 8,768 Pledged bank deposits 33,287 83,946 Cash and cash equivalents 419, ,788 1,087,217 1,148,276 Total assets 1,849,095 1,861,773 The accompanying notes form part of these financial statements. Page 4

5 CONSOLIDATED BALANCE SHEET (CONTINUED) AS AT 31 DECEMBER 2006 (Amounts expressed in thousands of RMB) EQUITY Note RMB 000 RMB 000 Capital and reserves Share capital , ,250 Reserves , ,545 Attributable to equity holders of the parent 1,018, ,795 Minority interests 6,299 6,759 Total equity 1,024, ,554 LIABILITIES Non-current liabilities Borrowings long term portion 18 29,325 8,500 Current liabilities Borrowings short term portion , ,825 Other payables, advances from customers and accruals 183, ,892 Tax payable 1,729 2,233 Dividend payable 3,261 3,040 Notes and trade payables 434, , , ,719 Total liabilities 824, ,219 Total equity and liabilities 1,849,095 1,861,773 These financial statements were approved and authorised for issue by the board of directors on 18 March Zhang Jun Yuan Chairman.. Xue Guo Jun Director & General Manager The accompanying notes form part of these financial statements. Page 5

6 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY FOR THE YEAR ENDED 31 DECEMBER 2006 (Amounts expressed in thousands of RMB) Reserves Statutory Statutory Retained Attributable surplus public earnings/ to equity Share Capital reserve welfare Proposed (accumulated holders of Minority Total capital reserve fund fund dividend losses) the parent interest equity RMB 000 RMB 000 RMB 000 RMB 000 RMB 000 RMB 000 RMB 000 RMB 000 RMB 000 (Note 19) (Note 20(b)) (Note 20(c)) (Note 20(d)) Balance at 1 January , ,865 93,502 95, , ,250 7, ,151 Profit for the year ,545 48,545 (1,142) 47,403 Proposed dividend ,713 (18,713) Profit appropriations - statutory surplus reserve fund - - 4, (4,123) statutory public welfare fund ,123 - (4,123) Balance at 31 December , ,865 97,625 99,284 18, , ,795 6, ,554 Profit for the year , ,954 (460) 135,494 Proposed dividend (note) ,069 (28,069) Dividend paid (18,713) - (18,713) - (18,713) Profit appropriations , (10,741) Balance at 31 December , , ,366 99,284 28, ,202 1,018,036 6,299 1,024,335 Note: The Directors proposed a final dividend of RMB per every share in issue. The accompanying notes form part of these financial statements. Page 6

7 CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2006 (Amounts expressed in thousands of RMB) RMB 000 RMB 000 Operating activities Operating profit before taxation 101,411 37,300 Adjustments for: Share of results of associates (3,113) (1,186) Interest income (4,229) (3,145) Interest expenses 14,678 17,768 Dividend income (65) (8,285) Depreciation and amortisation 41,303 44,400 Gain on disposal of interest in an associated companies (873) - Written back of impairment loss on available-for-sale investments (Gain)/loss on disposal of property, plant and equipment (3,254) 986 (Written back)/provision for bad and doubtful debts (43,189) 52,477 (Written back)/provision for inventories (7,371) 7,672 Addition/(written back) of impairment loss on property, plant and equipment and construction in progress 97 (15,886) Construction in progress written off 15,416 5,078 Cash flow before changes in working capital 111, ,179 Decrease/(increase) in inventories 54,825 (37,079) Net decrease/(increase) in trade and other receivables, amounts due from related parties, and prepayments 77,076 (45,633) Net (decrease)/increase in amounts due to related parties, notes and trade payables, tax payable, advances from customers, other payable and accruals (45,654) 13,015 Cash generated from operations 197,468 67,482 Interest paid (14,678) (17,768) Income tax refunded Net cash generated from operating activities 182,790 49,917 Page 7

8 CONSOLIDATED CASH FLOW STATEMENT (CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2006 (Amounts expressed in thousands of RMB) RMB 000 RMB 000 Investing activities Proceeds from disposal of interests in associated Companies 1,000 - Acquisitions of property, plant and equipment (363) (7,979) Expenditures on construction in progress (36,382) (13,728) Decrease in amounts due to associates - (51) (Decrease)/increase in pledged bank deposits 50,659 (34,299) Proceeds from disposal of property, plant, equipment and land use rights 4, Interest received 4,229 3,145 Dividend received 65 8,285 Net cash generated from/(used in) investing activities 23,916 (44,427) Financing activities Proceeds from bank loans 345, ,200 Repayment of bank loans (429,500) (428,200) Dividend paid (13,034) - Net cash used in financing activities (97,034) (66,000) Net increase/(decrease) in cash and cash equivalents 109,672 (60,510) Cash and cash equivalents, beginning of year 309, ,298 Cash and cash equivalents, end of year 419, ,788 The accompanying notes form part of these financial statements. Page 8

9 NOTES TO THE FINANCIAL STATEMENTS (Expressed in Renminbi thousands) 1. Organisation and principal activities Changchai Co., Ltd. (the Company ) was established as a joint stock limited company in the People s Republic of China (the PRC ) in The address of the Company s registered office is No.123 Huai De Zhong Rd., Changzhou, Jiangsu Province. The Company s domestic investment ordinary shares ( A shares ) and domestically listed foreign investment ordinary shares ( B shares ) have been listed on the Shenzhen Stock Exchange since 1994 and 1996 respectively. The Company is principally engaged in the manufacture and sale of small and medium diesel engines under the Changchai brand name for use in agricultural machinery such as tricycles, tractors and water pumps, and agricultural product processing machinery such as rice mills, oil presses and pulverising machinery. The principal activities of its subsidiaries are shown in Note 27. The Company together with its subsidiaries are listed in Note 27 and hereinafter collectively referred to as the Group. 2. Adoption of new and revised International Financial Reporting Standards In the current year, the Group has adopted all of the new and revised Standards and Interpretations issued by the International Accounting Standards Board (the IASB ) and the International Financial Reporting Interpretations Committee ( IFRIC ) of the IASB that are relevant to its operations and effective for accounting periods beginning on 1 January The adoption of these new and revised Standards and Interpretations has resulted in changes to the Group s accounting policies in the following areas: Investments classified as at fair value through profit or loss Following amendments to IAS 39 Financial Instruments: Recognition and Measurements in June 2005, the ability of entities to designate any financial asset or financial liability as at fair value through profit or loss (FVTPL) has been limited. Page 9

10 2. Adoption of new and revised International Financial Reporting Standards (continued) Financial assets that can no longer be designated as FVTPL are now classified as either loans and receivables, held-to-maturity or available-for-sale financial assets, as appropriate, and measured at amortised cost, or at fair value with changes in fair value recognised in equity, according to their classification. Financial liabilities that can no longer be designated as FVTPL are classified as other financial liabilities and measured at amortised cost. These changes have had no material effect on the financial statements of the Group. Accounting for financial guarantee contracts The IASB has also amended IAS 39 Financial Instruments: Recognition and Measurement to require certain financial guarantee contracts issued by the Group to be accounted for in accordance with that Standard. Financial guarantee contracts that are accounted for in accordance with IAS 39 are measured initially at their fair values, and subsequently measured at the higher of: - the amount of the obligation under the contract, as determined in accordance with IAS 37 Provision, Contingent Liabilities and Contingent Assets; and - the amount initially recognised less, where appropriate, cumulative amortisation recognised in accordance with IAS 18 Revenue. These changes have had no material impact on the financial statements of the Group. At the date of authorisation of these financial statements, the following Standards and Interpretations were in issue but not yet effective: Effective for annual periods beginning on or after IFRIC 8 Scope of IFRS 2 1 May 2006 IFRIC 10 Interim Financial Reporting and Impairment 1 November 2006 The directors anticipate that the adoption of these Standards and Interpretations in future periods will have no material impact on the financial statements of the Group. Page 10

11 3. Summary of significant accounting policies The financial statements of the Group have been prepared in accordance with International Financial Reporting Standards ( IFRS ). The Group also prepares financial statements which comply with accounting regulations in the People s Republic of China. A reconciliation of the Group s results and shareholders equity under IFRS and PRC accounting regulations is presented in Note 28. The principal accounting policies adopted are as follows: (a) Principles of consolidation The consolidated financial statements have been prepared based on the books and records maintained by the Company and its subsidiaries. Two of the Company s subsidiaries, Chengdu Changwan Diesel Engines Co., Ltd. ( CCDE ) and Chongqing Wanchou Changwan Diesel Engines Spare Parts Co., Ltd. ( CWCD ), did not have any operation during the year. They did not have any key management staff, accounting staff or reliable financial information of their results and financial position. As a result, certain account balances and transactions of CCDE and CWCD as reflected in their financial statements for the year ended 31 December 2006 could not be satisfactorily substantiated or supported. The financial statements of CCDE and CWCD have not been consolidated into the Group s consolidated financial statements. The acquisition method of accounting is used for acquired businesses. Results of subsidiaries and associates acquired or disposed of during the year are included in the consolidated financial statements from the date of acquisition or to the date of disposal. All significant intercompany balances and transactions, including intercompany profits and unrealised profits and losses are eliminated on consolidation. Consolidated financial statements are prepared using uniform accounting policies for like transactions and other events in similar circumstances. Minority interests in the net assets of consolidated subsidiaries are identified separately from the Group s equity therein. Minority interests consist of the amount of those interests at the date of the original business combination and the minority s share of changes in equity since the date of the combination. Losses applicable to the minority in excess of the minority s interest in the subsidiary s equity are allocated against the interests of the Group except to the extent that the minority has a binding obligation and is able to make an additional investment to cover the losses. Page 11

12 3. Summary of significant accounting policies (continued) (b) Business combinations The acquisition of subsidiaries is accounted for using the purchase method. The cost of the acquisition is measured at the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the Group in exchange for control of the acquire, plus any costs directly attributable to the business combination. The acquiree s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IRFS 3 are recognised at their fair values at the acquisition date. Goodwill arising on acquisition is recognised as an asset and initially measured at cost, being the excess of the cost of the business combination over the Group s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised. If, after reassessment, the Group s interest in the net fair value of the acquiree s identifiable assets, liabilities and contingent liabilities exceeds the cost of the business combination, the excess is recognised immediately in profit or loss. The interest of minority shareholders in the acquiree is intitially measured at the minority s proportion of the net fair value of the assets, liabilities and contingent liabilities recognised. (c) Subsidiary A subsidiary is a company, in which the Company has the power to govern the financial and operating policies of the subsidiary so as to obtain benefits from its activities. Details of the Company s subsidiaries as of 31 December 2006 are set out in Note 27 to the financial statements. (d) Associate An associate is a company, other than a subsidiary or a joint venture, in which the Company has a long term equity interest and over which the Company is in a position to exercise significant influence in management, including participation in financial and operating policy decisions. The results and assets and liabilities of associates are incorporated in these financial statements using the equity method of accounting. Under the equity method, investments in associates are carried in the consolidated balance sheet at cost as adjusted for post-acquisition changes in the Group s share of the net assets of the associate, less any impairment in the value of individual investments. Losses of an associate in excess of the Group s interest in that associate (which includes any long-term interests that, in substance, form part of the Group s net investment in the associate) are not recognised, unless the Group has incurred obligations or made payments on behalf of the associate. Page 12

13 3. Summary of significant accounting policies (continued) (e) Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Group s share of the net assets of the acquired subsidiary or associate at the date of acquisition. Goodwill is initially recognised as an asset at cost and is subsequently measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill is allocated to each of the Group s cash-generating units expected to benefit from the synergies of the combination. Cash-generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. An impairment loss recognised for goodwill is not reversed in a subsequent period. On disposal of a subsidiary, the attributable amount of goodwill is included in the determination of the profit or loss on disposal. (f) Land use rights Land use rights are stated at cost less accumulated amortisation and any impairment losses. Amortisation is provided using the straight-line basis over the period of the land use rights. Page 13

14 3. Summary of significant accounting policies (continued) (g) Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation and any impairment losses. The cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use. Expenditure incurred after the property, plant and equipment have been put into operation, such as repairs and maintenance and overhaul costs, is normally charged to the consolidated income statement in the year in which it is incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of the property, plant and equipment, the expenditure is capitalised as additional cost of the property, plant and equipment. Depreciation is provided using the straight line method to write off the cost of property, plant and equipment, over their estimated useful lives from the date on which they become fully operational and after taking into account their estimated residual values. The estimated useful lives of property, plant and equipment are as follows: Buildings Plant and machinery Motor vehicles Furniture, fixtures and equipment years 6-15 years 5-10 years 5-10 years When assets are sold or retired, their cost and accumulated depreciation are eliminated from the accounts and any gain or loss resulting from their disposal is included in the income statement. (h) Construction in progress Construction in progress comprises factory and office buildings, plant and machinery under construction or installation, including the related furniture, fixtures and office equipment, and is stated at cost less any impairment losses. Construction in progress is transferred to property, plant and equipment when it is ready for its intended use. No provision for depreciation is made on construction in progress. Page 14

15 3. Summary of significant accounting policies (continued) (i) Impairment of tangible and intangible assets (excluding goodwill) At each balance sheet date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease. Where an impairment loss subsequently reverses, the carrying amount of the asset (or cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (or cash-generating unit) in prior years. A reversal of an impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase. (j) Inventories Inventories comprise raw materials, work-in-progress and finished goods. Inventories are stated at the lower of cost and net realisable value. Cost includes direct materials, direct labour costs and overheads that have been incurred in bringing the inventories and work in progress to their present location and condition and is calculated using the weighted average method. Net realisable value is estimated by the management and is determined by reference to the selling price less all costs to completion and costs to be incurred in selling and distribution. Spare parts and consumables are stated at cost less any provision for obsolescence. Page 15

16 3. Summary of significant accounting policies (continued) (k) Financial instruments Financial assets and financial liabilities are recognised in the consolidated balance sheet when the Group becomes a party to the contractual provisions of the instrument. (i) Trade receivables Trade receivables are measured at initial recognition at fair value, and are subsequently measured at amortised cost using the effective interest rate method. Appropriate allowances for estimated irrecoverable amounts are recognised in profit or loss when there is objective evidence that the asset is impaired. The allowance recognised is measured as the difference between the asset s carrying amount and the present value of estimated future cash flows discounted at the effective interest rate computed at initial recognition. (ii) Investments Investments are recognised and derecognised on a trade date basis where the purchase or sale of an investment is under a contract whose terms require delivery of the investment within the timeframe established by the market concerned, and are initially measured at fair value, plus directly attributable transaction costs. At subsequent reporting dates, debt securities that the Group has the expressed intention and ability to hold to maturity (held-to-maturity debt securities) are measured at amortised cost using the effective interest rate method, less any impairment loss recognised to reflect irrecoverable amounts. An impairment loss is recognised in profit or loss when there is objective evidence that the asset is impaired, and is measured as the difference between the investment s carrying amount and the present value of estimated future cash flows discounted at the effective interest rate computed at initial recognition. Impairment losses are reversed in subsequent periods when an increase in the investment s recoverable amount can be related objectively to an event occurring after the impairment was recognised, subject to the restriction that the carrying amount of the investment at the date the impairment is reversed shall not exceed what the amortised cost would have been had the impairment not been recognised. Page 16

17 3. Summary of significant accounting policies (continued) (k) Financial instruments (continued) (ii) Investments (continued) Investments other than held-to-maturity debt securities are classified as either investments held for trading or as available-for-sale, and are measured at subsequent reporting dates at fair value. Where securities are held for trading purposes, gains and losses arising from changes in fair value are included in profit or loss for the period. For available-for-sale investments, gains and losses arising from changes in fair value are recognised directly in equity, until the security is disposed of or is determined to be impaired, at which time the cumulative gain or loss previously recognised in equity is included in the profit or loss for the period. For investment in an equity instrument that does not have a quoted market price in active market and for which other methods of reasonably estimating fair value are clearly inappropriate or unworkable, the instrument would be measured at cost, subject to review of impairment. Impairment losses recognised in profit or loss for equity investments classified as available-for-sale are not subsequently reversed through profit or loss. Impairment losses recognised in profit or loss for debt instruments classified as available-for-sale are subsequently reversed if an increase in the fair value of the instrument can be objectively related to an event occurring after the recognition of the impairment loss. (iii) Cash and cash equivalents Cash represents cash in hand and deposits with any banks or other financial institutions which are repayable on demand. Cash equivalents represent short term, highly liquid investments which are readily convertible into known amounts of cash with original maturities of three months or less and that are subject to an insignificant risk of change in value. (iv) Bank borrowings Interest-bearing bank loans and overdrafts are initially measured at fair value, and are subsequently measured at amortised cost, using the effective interest rate method. Any difference between the proceeds (net of transaction costs) and the settlement or redemption of borrowings is recognised over the term of the borrowings in accordance with the Group s accounting policy for borrowing costs (see below). (v) Trade payables Trade payables are initially measured at fair value, and are subsequently measured at amortised cost, using the effective interest rate method. Page 17

18 3. Summary of significant accounting policies (continued) (l) Provisions A provision is recognised when, and only when the Group has a present obligation (legal or constructive) as a result of a past event and it is probable (i.e. more likely than not) that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. Provisions are reviewed at each balance sheet date and adjusted to reflect the current best estimate. Where the effect of the time value of money is material, the amount of a provision is the present value of the expenditure expected to be required to settle the obligation. (m) Contingencies Contingent liabilities are not recognised in the consolidated financial statements. They are disclosed unless the possibility of an outflow of resources embodying economic benefits is remote. A contingent asset is not recognised in the consolidated financial statements but disclosed when an inflow of economic benefits is probable. (n) Pension obligations As a statutory requirement, the Company and its subsidiaries have to contribute 21% of total salaries as retirement benefits for employees to a government agency. All contributions are dealt with in the income statement. (o) Foreign currency translation The Group s maintains its books and records in RMB. Foreign currency transactions during the year are translated into RMB at the rates of exchange prevailing at the transaction dates as quoted by the People s Bank of China ( PBOC ). Monetary assets and liabilities denominated in foreign currencies are translated into RMB at the rates prevailing at the balance sheet date as quoted by the PBOC. Nonmonetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing on the date when the fair value was determined. Nonmonetary items that are measured in terms of historical cost in a foreign currency are not translated. Exchange differences, other than those capitalised as a component of borrowing costs, are recognised in the income statement in the period in which they arise. Page 18

19 3. Summary of significant accounting policies (continued) (p) Taxation tax. Income tax expense represents the sum of the tax currently payable and deferred The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the income statement because it excludes items of income or expenses that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax is recognised on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit. Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associated companies, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset realised. Deferred tax is charged or credited to profit or loss, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis. Page 19

20 3. Summary of significant accounting policies (continued) (q) Borrowing costs Borrowing costs include interest charges and other costs incurred in connection with borrowing of funds, including amortisation of discounts or premiums relating to the borrowing, amortisation of ancillary costs incurred in connection with arranging borrowings and exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs. Borrowing costs are expensed as incurred, except when they are directly attributable to the acquisition, construction or production of the property, plant and equipment, that necessarily takes a substantial period of time to get ready for its intended use in which case they are capitalised as part of the cost of that asset. Capitalisation of borrowing costs commences when expenditure for the asset and borrowing costs are being incurred and the activities to prepare the asset for its intended use are in progress. Borrowing costs are capitalised at the weighted average cost of the related borrowings until the asset is ready for its intended use. If the resulting carrying amount of the asset exceeds its recoverable amount, an impairment loss is recorded. (r) Related party Parties are considered to be related if one party has the ability, directly or indirectly, to control the other or exercise significant influence over the other party in making financial and operating decision. Related parties include the holding company, fellow subsidiaries, associates and joint ventures of the Company, or any persons or its close family members who are in a position to exercise significant influence over that related party. (s) Revenue recognition i) Sales are recognised upon delivery of products and customer acceptance. ii) iii) Service income is recognised upon delivery of services. Interest income is recognised on a time proportional basis, taking into account the principal amounts outstanding and the interest rates applicable. Page 20

21 3. Summary of significant accounting policies (continued) (t) Subsequent events Post year end events that provide additional information about the Group s position at the balance sheet date or those that indicate the going concern assumption is not appropriate (adjusting events) are reflected in the consolidated financial statements. Post year end events that are not adjusting events are disclosed in the notes when material. (u) Segment reporting A segment is a distinguishable component of the Group that is engaged either in providing products or services (business segment), or in providing products or services within a particular economic environment (geographical segment), which is subject to risks and rewards that are different from those of other segments. In accordance with the Group s internal financial reporting system, the Group has chosen business segment information as the primary reporting format and geographical segment information as the secondary reporting format for the purposes of these financial statements. Segment revenue, expenses, results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis to that segment. Segment revenue, expenses, assets, and liabilities are determined before intra-group balances and intra-group transactions are eliminated as part of the consolidation process, except to the extent that such intra-group balances and transactions are between group enterprises within a single segment. Inter-segment pricing is based on similar terms as those available to other external parties. Segment capital expenditure is the total cost incurred during the year to acquire segment assets (both tangible and intangible) that are expected to be used for more than one year. Unallocated items mainly comprise financial and corporate assets, interestbearing loans, borrowings, corporate and financing expenses and minority interests. Page 21

22 4. Critical accounting judgements and key sources of estimate uncertainty In the application of the Group s accounting policies, which are described in Note 3, management is required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other resources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. 5. Segment reporting No separate segment information is presented as the Group has only one business segment, which is the production and sale of small and medium diesel engines and related products. No geographical analysis is shown as the activities of the Group during the current and prior financial year were carried out entirely in the PRC. 6. Turnover Turnover represents the gross value of goods and services invoiced to customers, net of value-added tax, additional tax and allowances for discounts and returns. Page 22

23 7. Other revenue and gains and losses RMB 000 RMB 000 Other revenue Written back of provision for bad and doubtful debts 50,815 - Sale of materials 9,531 5,423 Insurance compensation Government grants Gain on disposal of interest in an associated company 873 1,000 Dividend received from available-for-sale investment - 8,285 Others 1,058 5,068 63,820 20,552 Other gains and losses Gain/(loss) on disposal of property, plant and equipment 3,254 (986) Release of impairment loss on property, plant and equipment and construction in progress - 15,886 67,074 35, Profit from operations Profit from operations is stated after charging/(crediting): RMB 000 RMB 000 Depreciation of property, plant and equipment 38,226 41,685 Amortisation of land use rights 3,074 2,715 (Written back)/provision for doubtful debts (43,189) 52,477 (Written back)/provision for inventory obsolescence (7,371) 7,672 Research and development expenses - 1,021 Staff costs - Salaries and welfare 104, ,353 - Contributions to statutory pension scheme 23,045 25, Finance costs RMB 000 RMB 000 Interest expenses on bank loans 14,678 17,768 Interest income from bank deposits (4,229) (3,145) Others 1, ,766 15,375 Page 23

24 10. Taxation (a) Taxation in the consolidated income statement represents: RMB 000 RMB 000 Current year taxation 46 - Over provision of current taxation in respect of Previous years (72) (203) Deferred taxation (Note 10(b)) (34,057) (9,900) (34,083) (10,103) The Company and its subsidiaries are subject to Enterprise Income Tax at a rate of 33% on taxable income determined according to the PRC tax laws. The Group s taxation credit for the year can be reconciled to the Group s accounting profit as follows:. RMB 000 RMB 000 Profit before taxation 101,411 37,300 Taxation calculated at the statutory tax rate of 33% 33,465 12,309 Net effect of non-deductible expenses / non-taxable income (23,060) - Tax exemptions according to the relevant tax rules and regulations in the PRC (524) - Deferred tax benefits arising from tax losses recognised (1,880) (9,900) Deferred tax benefits arising from investment losses recognised (21,772) - Deferred tax benefits arising from other temporary differences recognised (10,405) - Unrecognised tax losses - 2,177 Utilitisation of previously unrecognised tax losses of the Company and subsidiaries (9,835) (14,486) Over provision in respect of previous year (72) (203) Taxation credit (34,083) (10,103) Page 24

25 10. Taxation (continued) (b) Deferred taxation RMB 000 RMB 000 Balance at 1 January 9,900 - Credited to income statement 34,057 9,900 Balance at 31 December 43,957 9,900 The following are major deferred tax assets recognised by the Group: Investment losses incurred in prior year (note i) 21,772 - Impairment loss on plant and machinery 10,405 - Tax losses (note ii) 11,780 9,900 Note: 43,957 9,900 (i) (ii) It represented investment losses incurred by the Company as of 31 December 2006 which are available to offset against future investment income indefinitely. At 31 December 2006, the Group has unused tax losses of approximately RMB35,700,000 (2005: RMB64,560,000) available for offset against future profits. Such losses will expire within a period of five years from the year they were incurred. 11. Basic earnings per share Basic earnings per share is calculated based on the profit attributable to equity holders of the parent for the year of approximately RMB 135,954,000 (2005: RMB48,545,000) and the number of shares in issue during the year of 374,250,000 shares (2005 : 374,250,000 shares). Page 25

26 12. Property, plant and equipment Furniture, fixtures Plant and Motor and Buildings machinery vehicles equipment Total RMB 000 RMB 000 RMB 000 RMB 000 RMB 000 Cost: At 1 January , ,747 23,483 42, ,302 Addition 221 4,717 2, ,979 Transfer from construction in progress 4,999 5, ,484 Disposal (2,733) (4,532) (1,377) (1,427) (10,069) At 31 December , ,417 24,567 42, ,696 Additions 15, ,126 Transfer from construction in progress 2,040 13,557 2,139 1,309 19,045 Disposal (652) (8,992) (1,850) (2,703) (14,197) At 31 December , ,326 24,856 40, ,670 Accumulated depreciation and Impairment loss: At 1 January , ,237 16,684 23, ,501 Charge for the year 15,284 21,308 1,772 3,321 41,685 Impairment loss Written back on Disposal (1,422) (4,767) (1,337) (1,357) (8,883) At 31 December , ,892 17,119 25, ,417 Charge for the year 14,430 19,185 1,571 3,043 38,229 Impairment loss Written back on Disposal (304) (8,509) (1,632) (2,298) (12,743) At 31 December , ,665 17,058 25, ,000 Net book value: At 31 December ,361 93,661 7,798 14, ,670 At 31 December ,336 99,525 7,448 16, ,279 As of 31 December 2006, certain of the Group s property, plant and equipment had been pledged as detailed in Note 26. Page 26

27 13. Land use rights RMB 000 RMB 000 Cost: As at 1 January 140,777 73,369 Additions 17,510 - Transfer from construction in progress - 67,408 As at 31 December 158, ,777 Amortisation and impairment loss: As at 1 January 16,444 13,729 Provided during the year 3,074 2,715 As at 31 December 19,518 16,444 Net book value: At 31 December 138, ,333 All of the Group s land use rights are located in the PRC. As at 31 December 2006, certain of the Group s land use rights had been pledged as detailed in Note Construction in progress RMB 000 RMB 000 Cost: At 1 January 17,326 86,568 Additions 36,382 13,728 Other disposals (15,416) (5,078) Transfer to land use rights - (67,408) Transfer to property, plant and equipment (19,045) (10,484) At 31 December 19,247 17,326 Provision for impairment loss: At 1 January - 16,000 Written back - (16,000) At 31 December - - Net book value at 31 December 19,247 17,326 Page 27

28 15. Interests in associates RMB 000 RMB 000 Share of net assets of associates 15,148 12,035 The Group s associates which were incorporated and are operating in the PRC, are as follows: Name of associates Direct holding: Changzhou Fuji Changchai Robin Gasoline Engine Co., Ltd. Beijing Tsinghua Xing Ye Investment Management Co., Ltd. Shenzhen Gamma Web System Co., Ltd. Percentage holding % % Nature of business Manufacture and sale of gasoline engines and relevant components Project investment, business administration consulting and investment consulting Provision of internet service, development and sale of computer software and hardware The names of the above associates were directly translated from their Chinese names and may not represent their legal names. Summarised financial information in respect of the Group s associates is set out below: RMB 000 RMB 000 Total assets 72,959 66,838 Total liabilities (27,057) (30,369) Net assets 45,902 36,469 Group s share of associates net assets 15,148 12,035 Page 28

29 15. Interests in associates (continued) RMB 000 RMB 000 Revenue 139, ,644 Profit for the year 9,434 3,420 Group s share of associates profit for the year 3,113 1, Available-for-sale investments RMB 000 RMB 000 Unlisted investments, at cost 46, ,424 Less : Provision (1,210) (800) 45, ,624 Restrictive listed shares in the PRC*, at cost 86, , ,624 * The Company can only dispose of its restrictive listed equity investments on the stock exchange in the PRC after the lock up period of between one to two years. The investments are measured at cost less impairment at the balance sheet date because the range of reasonable fair value estimates is so significant that the directors of the Company are of the opinion that their fair values cannot be measured reliably. Page 29

30 17. Inventories RMB 000 RMB 000 Raw materials 162, ,860 Work in progress 56,444 58,416 Finished goods 83, , , ,244 Less : Provision for inventory obsolescence (11,884) (19,254) 290, ,990 At 31 December 2006, inventories carried at net realisable value amounted to RMB 2,342, Borrowings RMB 000 RMB 000 The bank loans are repayable as follows: Within one year 172, ,825 In the third to fifth years inclusive 29,325 8, , ,325 Less : amount due within one year shown under current liabilities (172,000) (276,825) Amount due for settlement after one year 29,325 8,500 Secured 106, ,600 Unsecured 95, , , ,325 Page 30

31 18. Borrowings (continued) Interest rates for bank loans are charged in the range of 4.770% % per annum (2005: 5.040% % per annum). The directors estimate the fair value of the Group s borrowings, by discounting their future cash flows at the market rate, to be RMB195,466,000 as at 31 December Share capital Registered, issued and fully paid shares of RMB1 each: Stateowned shares A share B share Total Domestic- Domestically Legal ally listed listed person ordinary foreign shares shares shares RMB 000 RMB 000 RMB 000 RMB 000 RMB 000 At 1 January 2005 and 31 December ,160 10, , , ,250 Restructure of shares (note) (35,528) - 35, At 31 December ,632 10, , , ,250 Note: Pursuant to a Share Restructure Proposal approved by holders of A shares at a meeting held on 9 June 2006, State-owned Assets Supervision and Administration Commission of Changzhou Municipal Government, the holder of the Company s State-owned shares, would transfer the shares it holds to all holders of domestically listed A shares at the rate of 3.2 Stateowned shares for every 10 domestically listed A shares held free of charge in exchange for the public trading right of all the non-publicly trading shares. The proposal was fully implemented on 19 June 2006 (the Effective Date ). Under the proposal, all holders of the non-publicly trading shares are not permitted to trade their shares publicly for 12 months from the Effective Date of the proposal. Holders of the State-owned shares holding more than 5% of the Company s total shares are not permitted to trade more than 5% and 10% of the shares they holds publicly within the subsequent 12 months and 24 months respectively. The B Shares rank pari passu in all respects with the A Shares. Page 31