Transcription

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3 HUAXIN CEMENT CO., LTD. HUAXINCEM [email protected] [email protected] http// [email protected] 5 http// 6 A A A B B B B X 8 C

4 : 81,377, ,073, ,348, ,360, ,829, ,622, ,239, ,882, ,111, ,134, ,022, ,073 1,213,617 : 261 (1,861) 101 (1,192) 1,447 (9,125) -- 1,060 1,060 6,296 6, ,269 28,106 79,158 1,236,552 : 3,707, , , ,725,

5 : (%) 2,639,380, ,188,101, ,188,827, ,377, ,160, ,841, ,073, ,550, ,244, ,348, ,802, ,741, % % % ,134, ,510, ,856, (%) 6,108,292, ,955,799, ,017,709, ,213,617, ,166,712, ,816, : 328,400, ,391, ,620, ,906, ,300, ,166,712, ,535, ,517, ,258, ,555, ,608, ,704, ,704, ,400, ,926, ,137, ,165, ,152, ,213,617,

6 1 : (%) (%) 1 91,526, ,276,232 79,250, ,873, ,123,768 22,749, ,400, ,400, ,000, ,000, ,400,000 62,400, ,000, ,000, ,000, ,400, ,400, ,400, ,879,120 89,120, ,279,120 13,832,764 75,288, ,111,884 : 3,962, ,925,065 67,363, ,036, ,363, ,400,000 2 (1) (2) (3) 4

7 1 : 36,626 (%) HOLCHIN B.V ,761,300 8,761,300 ( ) ,250,648-12,276,232 79,250,648 36,000, ,870,232-2,123,768 9,870,232 MEINLBANK AKTIENGESELLSCHAFT 1.6 5,199, , ,100,000 4,100, ,349,442 3,349, ,643,339 2,643, ,520,000 2,520, ,953,621 1,953,621 NAITO SECURITIES CO., LTD ,695, ,279 HOLCHIN B.V. 85,761,300 MEINL BANK AKTIENGESELLSCHAFT 5,199,735 3,349,442 2,643,339 1,953,621 NAITO SECURITIES CO., LTD. 1,695,779 TOYO SECURITIES ASIA LTD. A/C CLIENT 1,609,589 1,263,228 1,155,286 ( ) 955, : ,962, ,925,065 ( 79,250,648 5% ,363,051 9 / ) 10% 9 / 5

8 9,870, ,870,232 4,100, ,100,000 2,520, ,520,000 1,200, ,200, , , , , , , , , , , ,000, % 27.1% 4 6

9 : ( ) ,900 97,900 83, ,300 54,042 29, Tom Clough / Daniel Bach / Paul Thaler / ,300 35,160 19, ,100 30,900 15, ,000 32,500 17, ,900 33,100 17, ,300 31,260 15, ,500 20,800 14, ,500 21,100 14, / / / / / 128,80 356, ,962 / 420 Tom Clough Daniel Bach Paul Thaler 2005 USD5,910 7

10 5 (1) 57, (2) 42, (3)Tom Clough 59 University of Leeds( ) 1997, Holcim PT Semen Makmur( ) Alsons Cement Corporation( )CEO PT Semen Cibinong Tbk( ) Holcim (4)Daniel Bach 43 ETH 1989 ~ 1994 ETH 1994, Holcim HOLDERBANK "Holderbank"/Holcim (BRM) Holcim Holcim (5)Paul Thaler (6) 52, (7) 43, (8) (9)

11 (10) 52, (11) (12) (13) (14) (15) MBA , (16) (17) (18)

12 (19) Tom Clough Daniel Bach Paul Thaler Gerard Letellier 6, , , ,654 10

13 ) 2) 3) 4) 5) EBITDA 50% 60% 40% 70% 30% A

14 1 (1) % 2, % % ~ IT 6000 / 2500 / /

15 ,639,380, ,134, % 3% 81,377, ,073, % 58% (2) <1> : % (%) 2,574,343, ,076,888, ,036, ,868, ,639,380, ,117,757, ,434,385, ,115,995, ,056,933, ,656, ,023, ,237, ,036, ,868, ,639,380, ,117,757, <2> : ( ) 1,297,375, ,580, ,076, ,431, ,927, ,375, ,417, ,803, ,121,220 / 143,269,740 / 2,639,380, <3>

16 21.6% 44% % % 8 4.6% % <4> 504,289, ,981, (3) : 150,000, ,061,000 48,509, ,000, ,869,000 62,064,911 60,000, ,717,000 35,273,345 50,000, ,938,000 5,216,337 23,900,000 37,163, ,863 10,000,000 42,937,739 2,195,927 ( ) USD,136,000,000 1,450,953,000-48,952,805 40,000, ,648,000 8,381, ,000, ,282,000-6,910,476 8,000,000 42,252,000 3,419,773 1,000,000 60,604,47 915,519 25,000,000 97,422,000-3,092,017 75,000, ,189,514 / 60,000, ,810,888 / 14

17 2 (1) GDP 2006 GDP % % %

18 (2) % , 2000, , ,341 88, ,879 23, ,487 2, ,434 13, ,511 25, ,037 9, ,993 15,398 32,871 14, ,871 3, ,000 11,000 6,126 6, ,166 2, ,166 2, ,794 1, , ,269 16

19 ,123, , (1) / 55,671 47, / 15,004 14, ,700 6, / 8,413 5, / 19,808 17, ,058 3, (2) / 37, / 34, ,

20 / 32, ) ) ) ) ) ) ) ,587, ,073, % 6,258, % 6,258, ,152, , ( ) 19,704, [2003] %

21 2005,

22 1 (1) : ( ) (2) : ( ) Holcim : 155,000, ,540, ,540, (%)

23 A %( 1.21%) 9 / 4 10%( 2.41%) 9 / 5 1% , ,150, A 21

24 XYZH/2005A C

25 : ,316, ,339, ,523, ,790, ,574, ,045, ,038, ,826, , ,388, ,581, ,082, ,087, ,937, ,521, ,157, ,709, ,112, ,448, ,289, ,197, ,836, ,613, ,314, ,474, ,123, ,266, , , ,011,288, ,121, ,233, ,981, ,711, ,950, ,482,498, ,709, , , , , ,770, ,009, ,482,557, ,768, ,003, ,251, ,635,949, ,550,430, ,408,334, ,339,725, ,596,682, ,378,073, ,023, ,364, ,039,266, ,172,357, ,553,311, ,583,361, ,456, ,879, ,047, ,047, ,973,810, ,069,478, ,549,264, ,579,313, ,090, ,190, ,347, ,111, ,083, ,659, ,530,248, ,590,779, ,737,348, ,848,973, ,819, ,695, ,724, ,078, ,164, ,192, ,198, ,179, ,984, ,888, ,922, ,257, ,108,292, ,955,799, ,949,062, ,407,980,

26 ,300, ,380, ,700, ,200, ,396, ,430, ,201, ,685, ,526, ,040, ,351, ,115, ,799, ,688, ,945, ,179, ,617, ,436, ,582, ,295, ,341, ,639, ,248, ,699, , , , , ,406, ,716, ,646, ,607, ,038, ,889, ,838, ,650, ,607, ,347, ,896, ,697, ,544, ,990, ,809, ,281, ,155, ,338, ,155, ,338, ,996,127, ,569,601, ,183,769, ,454, ,050,484, ,546,464, ,532,444, ,229,924, ,831, ,568, ,305, ,273, ,795, ,000, ,795, ,000, ,183,111, ,614,032, ,548,545, ,251,197, ,179,238, ,183,634, ,732,315, ,238,651, ,436, ,452, ,400, ,400, ,400, ,400, ,400, ,400, ,400, ,400, ,926, ,391, ,388, ,852, ,137, ,620, ,137, ,620, ,165, ,906, ,165, ,906, ,152, ,300, ,821, ,455, ,704, ,704, ,213,617, ,166,712, ,216,747, ,169,328, ,108,292, ,955,799, ,949,062, ,407,980,

27 : -33 2,639,380, ,188,101, ,407,992, ,240,150, ,117,757, ,604,559, ,219,514, ,909, ,262, ,233, ,000, ,596, ,360, ,308, ,478, ,643, ,829, ,522, ,454, , : 187,353, ,005, ,902, ,493, ,102, ,148, ,587, ,261, ,112, ,863, ,846, ,103, ,622, ,813, ,403, ,339, ,239, , ,483, ,634, ,882, ,477, ,381, ,879, ,808, ,514, , ,328, ,696, ,820, , , ,377, ,160, ,782, ,356, ,707, ,295, ,804, ,006, ,596, ,314, ,073, ,550, ,587, ,350, ,300, ,524, ,455, ,878, ,374, ,074, ,042, ,229, ,258, ,035, ,258, ,035, ,258, ,035, ,258, ,035, ,856, ,004, ,525, ,159, ,704, ,704, ,704, ,704, ,152, ,300, ,821, ,455, ,704, ,704, ,

28 : 3,140,685, ,706,762, ,175, ,630, ,286, ,043, ,218,147, ,824,435, ,170,863, ,340,148, ,782, ,523, ,931, ,636, ,436, ,575, ,715,013, ,645,884, ,134, ,551, ,230, ,975, ,499, ,000, ,975, ,729, ,070,713, ,018, ,000, ,900, ,070,713, ,918, ,053,738, ,188, ,680,600, ,075,700, ,922, , ,682,522, ,076,238, ,921, ,911, ,085, ,052, ,378, , ,160,385, ,327, ,137, ,911, , , ,022, ,267,

29 1 62,073, ,587, ( - ) 8,596, ,447, ,621, ,962, ,419, ,300, ,280, ,229, ,702, , , ,934, ,647, ( : -3,707, , ) 114,896, ,732, ,239, ,483, ,450, ,830, ( ) -18,008, ,855, ( ) 96,240, ,909, ( ) 503,134, ,551, ,316, ,523, ,339, ,790, ,022, ,267,

30 : 32,527, / / 12,409, ,117, ,842, / / 12,695, ,146, ,685, / / 286, ,971, ,417, , ,987, ,417, ,417, , , ,955, ,180, ,775, ,955, ,180, ,775, ,879, ,423, ,456, ,674, ,760, ,913, ,829, ,662, , , , , , ,

31 : 1 24,381, / / 6,980, ,401, ,946, / / 6,900, ,046, ,435, / / 79, ,355, ,342, ,342, ,342, ,342, ,775, ,775, ,775, ,775, ,047, ,047, ,142, ,142, ,904, ,904, , ,

32 ( ) , ,400 (B )164, A 1 ( ) 79, , ,000 1 A 62,400 2 B 164, , ,

33 (1) 3 (2), 1-2 5% % % % 3 40% 100% 31

34 8 (1) (2) (3) 9 (1) 1) 20% 20% 20% 20% 20% 20% 50% 2) 10 (2) (3) 32

35 10 (1) 2,000 (2) (3) (4) % (%) 4% % 4% 6-12% 4% % 4% 8-12% (5) (6) 33

36 1) 2) 3) 4) 5) 6) 11 (1) (2) (3) 1) 3 2) 3) 34

37 12 (1) 1) 2) 3) (2) (3) 13 (1) (2) (3) 35

38 1) 2) 3) 4) (1) 1) 2) 3) (2) 36

39 17 (1) (2) (1) (2) 10% 50% (3) 10% (4) (5), 20 (1) 50% 50% (2) 37

40 1 33% 24% [2005] , ,807 [2003]41 15% [2006]1 [94] [94]

41 2 17% 13% % 3 5% 3% 4 7% 1% 3% 2% *1 23,900 14,658 80% *2 108,000 89,680 85% *3 8,000 7, % *4 40,000 20,000 50% *5 150, ,000 70% *6 60,000 40, % 39

42 *7 1, % ( ) *8 136,000 28,390 51% *9 50,000 30,000 60% *10 75,000 45,000 88% *11 25,000 22,500 97% *12 500, ,000 80% *13 60,000 42,000 94% *14 10,000 7,000 94% * ,900 80% 4,462 20% * , ,000 34% % RDC RDC 26% % % RDC RDC , ( ) RDC 51% * , , % 1.62% , % % 40

43 * ,000 50% 40,000 * , ,000 70% * ,200 60,000 67% 33% % 19, * ,000 99% 1% * ( ) ( ) 27, ,784 50% 1% 51% 27, , [2003] * ,000 30,000 41

44 60% 6,000 8,000 6,000 40% * ,000 45,000 60% 30,000 40% , * ,000 22,500 90% 2,500 10% * , ,000 80% 100,000 20% * ,000 42,000 70% 18,000 30% * ,000 7,000 70% 3,000 30% , ,829 20,994 16, , ,340 42

45 ( ) , ,046 6, , , , , , , , , ,607 28, , , ,147 95, , , % 5% ,358 [2006]11 2, , ,

46 1 2 1, , , , , ,971 8, ,290 85, ,971 70, ,685 56, % 5% 78 44, , , , , , % ,366 13, ,164 17,418 60,291 48, ,017 82, ,149 4,809 1, ,823 17, ,031 17, ,123 1,266 44

47 8 (1) ,487 29,906 2,776 5,956 22,711 23, ,770 24,009 2 (%) (7) , , , , , ,000 2,000 2, * 64 3,180 (3,180) (3,180) 0 0 3,180 12,473 (1,247) (4,469) 8, ,143 (4,419) (7,656) 25,487 2,776 5,956 * * 12, ,247 4,469 8,004 45

48 * ( ) RDC 51% (4)

49 ,713,933 2,395, , ,405 4,550,430 : 455, , ,912 45,351 1,187,017 : 417, ,757 28,866 25,543 1,131, , , , ,603 86, , , ,165,513 3,170, , ,682 5,635, , ,983 23,035 80,481 1,378,073 65, , , , ,107-9, ,141 41, ,076 51, ,667 1,083,416 22,681 86,918 1,596, ,374,359 1,460, ,792 82,924 3,172, ,761,846 2,086,587 80, ,764 4,039, , ,761 25,914 74, ,662 39, ,879 37,423 65, , ,090 1,000 65, ,090 73,190 47

50 , , , % 10% ,040 27, , , , , , , , ,143 3,198 95% 95% 13,066 97% 95% , ,654 14, , % 50% 80 85,500 31,351 53,761 85, % 100% 65 23,014 15, , % 100% , , , ,312 1,583 88% 90% ,000 5,686 89, , % 40% ,000 14, , , % 70% ,620 10,449 69, , ,000 8,746 80,164 88, ,000 51,241 18,016 69, ,500 50% 50% % 100% % 100% 5,520 4,916 1, , % 99% 4,000 2,778 1,316 4, % 100% , % 1% 45,000 16,732 16,886 11, , % 70% * 40,893 37,168 34,795 43, ,675 1,123,090 1,131, ,347 20,630 * 5000T/D 48

51 ,923 55,200 5, , ,124 27, , ,001 5, , ,453 2, ,300 6,249 6,249 63,251 30, , ,423 24,778 5, , ,267 7,800 19,259 23,223 59, ,587 3,900 16,543 5,163 33, ,202 9,202 : ,241 8,736 11,230 2,076 4,757 3,957 17,594 28, ,191 3,043 15,302 5,629 31,

52 , % 301,300 15, % 22, , % 121, , ,380 15,000 25,000 28,337 20,000 8,625 7,000 10, , ,865 8,000 21, ,396 77, ,396 77,431 5% 5% ,527 ( ,040 ) 2,209 5% 50

53 ,799 ( ,688 ) 1 3,374 5% % 13% 23,776 15,705 7% 1% 3, % 919 1,760 1, / % 5% / 5,958 3,911 15% 24% 33% 20,708 32,287 5%-45% 1,446 1,615 1, ,406 57, % 1, % 9,807 8, ,038 8,890 51

54 ,607 ( ,347 ), 5% 5% 3 12, ,190 14,140 10,057 33,190 43,358 12,986 46,002 48, , , ,659 3, , ,177 2,364 3,535 Holcim 0 2,998 2,225 2,969 6,545 23, (1) , % 5.76% 198, , % 52,032 80,439 LIBOR+1%-5.99% 131, , ,068 1,716 50,000 47,000 18,000 ( ) 50% 52

55 30,000 58,179 2,018 5,046 10,373 48, , ,944 (2) ( ) 6, ,421 1, , ,018 52,155 (3) , ,271 3, (1) , %-6.12% 310, , % 375,038 1,232, %-6.12% 861,426 2,050,484 1,546,464 24, ,540 22,000 ( ) 50% 110,000 60% 53

56 5,046 2,018 11, ,018 48, , , , , , , ,072 80,000, 52,469 65, ,330 14,500 28, ,000 (2) ( ) 28, ,018 19, , , ,947 (3) 820, %-5.85% ,880 0% , % , % , % , % , % , %-6.12% , % , % , % , % , % , % , % ,050,484 54

57 ,255 46,285 74, ,136 15, ,831 61, *1 3,296 6, ,796 6, ,000 2,704 [2005] % 444, ,822 30% 77,956 61,608 40% 22,167 20,000 20% 112,413 - RDC 15% 15,574 16,611 ( ) 50% 36,202 31,820 20% 5,288 5, % % , ,453 55

58 28 (1) 1 ( ) 2004 / * , , , , , , , , ,251 79, ,251 79, ,749 22, , , , , , , , , , , ,400 * A A A ,400, A A

59 5%( 1.21%) 9 / 10%( 2.41%) 9 / 1% (2) ( ) 79, , , ,994 4,100 4,100 2,520 2,520 1,200 1, A 62,400 48,000 B 164, , , ,400 57

60 , ,334 4,332 4,332 27,659 27, ,051 4, ,585 11,016 11, ,392 4, ,926 4,534 [2005]97 [2004]31 [2004]34 5, ,715 6, ,974 53, ,998 36,907 6, , ,620 12, , ,301 54,524 62, ,551 6,259 15,035 6,259 15, ,704 19, , ,

61 ,704 19,704 19,704 19, , ,331,086 1,003, , ,997 1,160,234 1,002,875 1,278, ,186 83,024 70,237 36,814 28,431 65,036 40,868 43,348 23,946 2,639,380 2,117,757 2,188,101 1,604, , % % 1% 8,888 6,178 3% 4,875 3,194 2% 2,052 1,958 3% 5% 1,665 1, ,262 13, , ,926 3,767 16,567 13,586 2,981 5,273 5, ,791 8,592 (801) 14,771 14, ,975 3,334 (359) 862 1,145 (283) 572, ,903 2,829 33,858 29,335 4,523 59

62 ,678 82,815 3,785 3, ,868 14, ,801 2, ,112 85, (15) (1,247) (1,247) (1,239) (825) (15) 8 (15) 60

63 ,883 35, ,279 30,883 38,478 [2004]563 [2004] s , ,883 4,706 [2003]411 [2003] ,992 [2005]489 [2005] ,910 [2005]489 [2005] ,

64 2005 3,443 [2003]199 [2003] , ,041 2, , , ,808 39, , ,491 8,312 2,767 6,680 3,785 10,251 36, ,990 17,531 6,094 62

65 6,725 5,157 6,875 6,172 30, , ,000 2, ,923 1, ,379 1, , , , , , ,595 21, ,691 65, ,046 51, ,946 10, % 5% 63

66 , , , , , ,355 1, , , , , , , % 5% ,485, ,485 2,776 2,776 1,482, , ,482, ,768 (2) (%) ( ) ,810 (24,966) (1,818) 462, ,000 38,145 76, , ,200 23,633 23,633 63, , , ,000 3,250 3,250 33,

67 80 400,000 49,652 49, , ,680 (7,121) 6,579 96, ,000 4,383 16,202 36, ,658 1,003 3,037 17, ,500 (2,783) (2,783) 19, ( ) 70 42, , ,000 1,537 1,537 8, , , ,488 2, (7) ,724 11, ,000 2, ,000 2,000 2,000 2, ,307,198 88, ,076 1,485,274 2,776 2,776 (3) * 12, ,247 4,469 8,004 ** (4,462) 20 (223) (1,004) (3,458) 8,011 1,024 3,465 4,546 * ( ) RDC 51% ** (4)

68 , , , , , , , , , , , , , ,585 66,992 49,774 1,407,993 1,219,514 1,240, , , % ,507 76,221 (1,024) (1,024) ,483 75, (24,966) 23,082 33,957 35,385 23, , ,652 0 (5,874) 7,657 66

69 4,191 6, ,565 (2,783) 0 ( ) 0 0 1, (21) 8 (15) 84,507 76,

70 , , % 31.52% 8,000 8, % 98.38% 1,500 1, % 59.33% 23,900 23,900 80% 80% 40,000 40,000 50% 50% 108, ,000 85% 85% 150, ,000 70% 70% 1,000 1,000 99% 99% 60,000 60, % 90.1% 136,000 ( ) 136,000 ( ) 51% 51% 75,000 20,000 88% 88% 25,000 25,000 97% 97% 50,000 50,000 60% 60% 68

71 500,000 80% 60,000 94% 10,000 94% 3 Holcim ( ) ( ) a) ,356 3,357 b) *1 4,800 4,800 Holcim*2 2,421 2,483 *1 4,800 *2 Holcim Group Support (Jona) Ltd., Holcim Holcim ,421 69

72 c) 1, ,840 74, , ,887 74, , , ,580 * 74,260 0 * ( 2,000,046.1, 177, ( ) (2004)( ) 0181 ) , 100,000 20% 48 (12 1 ) 1, ,580 74, , % 70

73 , , ,712 95, , , , , ,894 88,869 23, ,684 14,775 47, ,546 64,009 4, , , , ,540 11% 66,000 5% 20,000 2% 15,000 1% 40,000 3% 100,000 8% 377,540 31%

74 , (%) ( / ) ,707 4,580 36,993 24,786 3,279 2,197 (801) (855) (2,299) (1,541) 3,442 2,306 2,906 3,725 41,415 27,748 62, ,551 58, ,803 72

75 ( ) ( ) ( ) 2 37 [ ] 73

76 ( ) 5 2,695,976 2,188,101 (2,303,530) (1,684,664) 392, , ,181 75,241 (113,990) (74,596) (120,546) (144,621) 194, ,461 9 (103,807) (82,973) /( ) 15 8 (15) 90, , (3,167) (49,087) 87, ,386-79, ,340-7,967 48,046 87, ,386 ( ) , , ,492,736 3,539, ,549 (158,422) ,480 14, ,774 20,930 5,082,210 3,789, , , , , , , ,728 15,963 76

77 20 295, ,377 1,011, ,122 6,093,498 4,767, , , , , , ,224 1,236, , , ,764 1,950,578 1,573, ,041,479 1,546, ,666 16, ,690 64, ,303-2,146,138 1,627, , , , , ,008, ,448 20,708 32,285 1,996,782 1,566,510 4,142,920 3,194,286 6,093,498 4,767,941 ( ( 21) 22(a),(b)) - 328, ,120 72, , , , , ,120 72, , , ,000 20, , , (19,800) (19,800) ( 22(d)) - - (19,704) (4,292) (23,996) - 179,340 48, ,386-26,077 (26,077) ,070 (30,070) , , , ,764 1,573,655 75

78 - 328, , , , , ,764 ( 14) , ,207 ( 14) - 210,207 (210, , , ,2 606,764 1,783, , ,000 ( 22(d)) - - (19,704) (705) (20,409) ,158 7,967 87,125-1,637 (1,637) ,518 (12,518) , , , ,026 1,950, , ,848 (150,070) (97,915) (22,285) (55,363) 382, , (110,014) - - (19,800) - 50,000 14,975 10,825 (1,153,637) (767,452) (5,213) (26,805) (195) (2,406) (2,850) (41,390) 6, ,785 3,054 (1,137,094) (903,551) 1,680,600 1,122,370 (984,799) (523,171) (4,123) (6,614) (3,271) ,000 (19,311) (19,704) (705) (4,292) 668, ,589 (85,788) (29,392) 381, , , ,377 76

79 ( ) ( ) ( ) 897 ( ) ( ) 2 ( ) 8 ( ) 10 ( ) 16 ( ) 17 ( ) 21 ( ) 24 ( ) 27 ( ) 28 ( ) 32 ( ) 76

80 33 ( ) 39 ( ) ( ) 1 ( ) ( ) 21 ( ) (a) 50% 2.8 (b) 20% 50% ( ) 1

81 (a) ( ) (b) (a) % 6-12% % 8-12% (b) 2

82 3 (c) ( 2.9) (d) (e) 2.8 (a) (i) (ii) (iii) (b) (c) (d) (e) 2.9

83 ( ) 2.10 (a) (b) ( )

84 , 2.16 ( )

85 2.20 ( ) (a) (b) ( ) (c) 2.21 ( ) 2.22 (a) (i) (ii) (iii) 6

86 (iv) (b) (a) 2.8(a) (b) (c) 5. 10% 7

87 2,695,976 2,188, ( a) 31,467 38,478-36,650 3,387-1, ,181 75,241 (a) 7. 11,172 8, , ,484 4,431 (13,952) 9,000 (59,642) 1,433,170 1,007,822 (3,801) (3,381) , , ,841 (4,028) (1,324) - 2, , ,530 17,453 21,949 10,675 12, , , ,785 3,054 /( ) 13,759 (3,649) (121,351) (82,815) - (149,435) (96,213) - - (1,702) 28,084 15,100 (103,807) (82,973) 8

88 10. 10,708 60,296 ( 27) (7,541) (11,209) 3,167 49,087 90, ,473 33% (2004: 33%) 29,796 91,236 * (13,796) (16,554) ** (31,731) (19,457) 17,951 - (561) (8,221) 2,619 2,083 (1,111) - 3,167 49,087 * [2005]69 8,201,000 ( 6,225,000 ) ( ) 5,595,000 ( : 10,329,000 ) ** [1994]001 ( ) ( ) ( ) , ,340 ( ) 328, ,400 ( )

89 ,288 (16,518) 208, ,770 26, ,474 (8,013) (14,085) 372, ,753 (14,802) 372, , ,605 (11,172) 491, ,358 (25,974) 491, ,286,000 ( : 138,346,000 ) ( 23) ,271 1,493,471 24, , ,616 2,839,128 (2,143) (1,904) (4,047) (170,173) (502,778) (13,464) (53,233) - (739,648) 740, ,789 10,841 63, ,616 2,095, , ,789 10,841 63, ,616 2,095,433 10

90 364, ,081 2,127 11,134 13, ,321 13,644 19,357 6,264 9, , , , ,662-12,263 (701,898) - (14,283) (2,257) (441) (1,431) - (18,412) (50,208) (146,550) (3,557) (12,169) - (212,484) 1,328,046 1,622,082 15,234 82, ,027 3,539,601 1,544,560 2,266,537 31, , ,027 4,463,842 (2,143) (1,904) (4,047) (214,371) (642,551) (15,989) (47,283) - (920,194) 1,328,046 1,622,082 15,234 82, ,027 3,539,601 1,328,046 1,622,082 15,234 82, ,027 3,539,601 4,971 3,337 5,618 18,446 1,205,447 1,237,819 (1,132,74 417, ,721 32,903 26,905 2) - (2,062) (9,846) (20) (2,999) - (14,927) (64,567) (183,384) (7,292) (14,514) - (269,757) 1,683,60 1 2,087,910 46, , ,732 4,492,736 1,963,69 9 2,912,827 69, , ,732 5,680,251 (2,143) (1,904) (4,047) (277,955) (823,013) (23,138) (59,362) - (1,183,468 1,683,60 1 2,087,910 46, , ,732 4,492, ( ) 243, ,293 15,239 10,040 11,216 8, , , ,457,000 ( 788,696,000 ) 1,513,008,000 ( 543,526,000 ) ( 12) 1,512,503,000 ( 1,114,043,000 )( 23) 11

91 28,084,000 ( 15,100,000 ) 5.465%( 5.083% ) ,473 9,268 7,800-5,369 34,910 (1,975) (1,427) (3,250) - (2,644) (9,296) 10,498 7,841 4,550-2,725 25,614 10,498 7,841 4,550-2,725 25,614 (229,466) ,917 1,155 (200,394) - 2, ,406 18,231 (329) (650) (2,500) (800) 13,952 (200,737) 9,525 3,900 25,417 3,473 (158,422) (216,993) 11,281 7,800 27,917 6,917 (163,078) 16,256 (1,756) (3,900) (2,500) (3,444) 4,656 (200,737) 9,525 3,900 25,417 3,473 (158,422) - (200,737) 9,525 3,900 25,417 3,473 (158,422) 210, ,207-9,470 9,525 3,900 25,417 3,473 51, (557) (650) (2,500) (724) (4,431) 9,470 8,968 3,250 22,917 2,944 47,549 9,470 11,281 7,800 27,917 7,112 63,580 - (2,313) (4,550) (5,000) (4,168) (16,031) 9,470 8,968 3,250 22,917 2,944 47,549 1% 50% 210,207,

92 /( ) ( ) : 49% ,480 14, % ( 3.9%) 11,724,000 ( 11,724,000 ) ,448 78,041 50,744 40,689 71,329 90,384 85,315 76, , ,613 2,317,101,000 ( : 1,750,028,000 ) 569,000 ( : 14,141,000 ) 13

93 , ,470 - ( 29) 73,046 26, , ,632 (17,147) (29,843) 213, , ,112 43,449 - ( 29) 9,053 20,914-7,059 22,535 84,060 69,093 - ( 29) 18,562-65, , ,542 44,240,000 ( 41,390,000 ) , ,340 64,941 96, , ,340 (72,728) (15,963) 295, , %( 1.62%) ,728,000 ( 15,963,093 ) ( a b) 79,251 91,527 ( a b) 22,749 24,873

94 A ( b) 62,400 48, , ,400 B ( b) 164, , , ,400 (a) (b) [2005]313 12,276,232 2,123,768 A A B 22. ( a) ( b) ( b) ( b) 295,569 34,680 21,871 54, ,120 26, ,077-15,035 15,035-30, ,646 49,715 36,906 54, , ,646 49,715 36,906 54, ,267 ( 14) 210, , ,853 49,715 36,906 54, ,474 1, ,637-6,259 6,259-12, ,490 55,974 43,165 54, ,629 (a) 292,898,000 ( 292,898,000 ) 1,637,000 ( 26,077,000 ) (b) (i) 15 (1) ( ) (2) 10% / 50% (3) 10% (4) (5)

95 (ii) / 25% (iii) (c) 183,153,000 ( 153,301,000 ) (d) ,704,000 [ ] [ ] [ ] 23. (a) 1,232, ,427 (b) 793, ,540 (c) 15,875 31,497 2,041,479 1,546,464 (a) 280, ,616 (b) 726, ,800 (c) 1,691 2,032 1,008, ,448 3,049,909 2,372,912 (a) 1,505,439 7,064 1,512,503 (b) 1,519,840-1,519,840 (c) - 17,566 17,566

96 3,025,279 24,630 3,049,909 (a) 1,103,348 10,695 1,114,043 (b) 1,225,340-1,225,340 (c) - 33,529 33,529 2,328,688 44,224 2,372,912 (a) (b) (c) (1) 4.65% 6.138%( 5.31% to 6.12%) 1,225,000,000 ( 786,081,000 ) 308,970,000 1,184,889, ,286,000 ( 12 13) (2) LIBOR+1%( 5.99%) 34,750,000 ( 40,750,000 ) 124,487, ,456,000 ( 13) (3) 5.99%( 5.99%) 737,392 ( 948,077 ) 11,663,000 ( 13) 1,519,840,000 ( 1,225,340,000 ) 3.78% 6.12% ( 3.60% 6.03% ) 6.1% 67,000,000 33,500,000 33,500, , ,500 1, , , , ,040 4,239 1,371, , ,333-10, , ,006 1,232, ,540 15,875 2,041,479 1,546, ,653 17,977 6,041 - (4,028) (1,324) 18,666 16, ,271

97 ( a) 42,255 46,285 ( b) 12,136 15,103 24,299-78,690 64,659 (a) (b) 4,030,000 ( 3,700,000 ) ( ) , ,531 - ( 29) 35,278 47, , ,337 85,799 49,688 - ( 29) 50,934 21,374-34,865 28,314 15,959 32,685 51,737 34,321 6,545 23,991 70,401 58,367 - ( 29) 8,017 33,746-62,384 24, , , (398) (398) - (35,376) (20,532) (35,774) (20,930) - 1, ,853-7,303-18

98 (20,930) (9,721) ( 10) (7,541) (11,209) (28,471) (20,930) (398) - (398) (4,295) 3,069 (1,226) (3,207) (1,532) (4,739) (4,440) - (4,440) (7,879) 4,494 (3,385) (711) (170) (881) - (20,561) (20,561) - (144) (144) (20,930) (14,844) (35,774) - 7,303 7,303 54,397,000 17,951,000 62,306, , ,386 : 19 3,167 49, , ,484 11,172 8,013 ( )/ (3,387) 2,320 - (36,650) - (437) (3,785) (3,054) 121,351 82,815 4,431 (13,952) (4,028) (1,324)

99 ( )/ (8) 15 ( )/ (13,759) 3,649 (43,223) (102,759) (13,304) (9,043) (56,765) (7,816) 196,526 42, , , % ( 31.6%) (a) - ( (i)) 814 3,357 - ( (i)) 37, ( (i)) 640, , , ,559 - ( (ii)) 4,800 4,800 - ( (iii)) 2,421 2,483 - ( (iv)) 108, ,386 - ( (i)) 370, , , ,794-3,982 3, ,099 3,669 (i) 20

100 (ii) (iii) (iv) (v) (vi) 47,000,000 ( 59,500,000 ) (b) 25-70,507 23,484-2,539 3,354 73,046 26,838, ,963 40,615-3, ,615 40,945-52,243 28,547-19,549 36,786-15,729 10,408 35,278 47,194-10,557 21,374-40,377-50,934 21, ,873-7,945 28, ,194 8,017 33,746 21

101 30. % % ( ) ( ) ( (a)) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) (a) (b) (c) ( ) 400,000, ,000,000 80% 20% ( ) 42,000,000 22

102 18,000,000 70% 30% (d) ( ) 7,000,000 3,000,000 70% 30% (e) RDC ("RDC ") RDC 26% RDC RDC 27,224,000 RDC 28,263,000 27,224,000 1,039, , , [ ] 62,073 1,213, (1,861) (1,192) - 1,447 (9,125) - 1,060 1,060-6,296 6,296 - (349) (349) - 8,269 28,106 79,158 1,236,552 23

103 ( ) ( ) 2005 ( )

104 Tom Clough Daniel Bach Paul Thaler

105 2005 HUAXIN CEMENT CO., LTD. Chapter 1 Important Notice 1 Chapter 2 General 2 Chapter 3 Financial Highlights 4 Chapter 4 Changes in Share Capital and Shareholders 6 Chapter 5 Directors, Supervisors and Senior Management 11 Chapter 6 Corporate Governing 17 Chapter 7 Shareholders General Meeting 19 Chapter 8 Directors' Report 20 Chapter 9 Supervisors' Report 29 Chapter 10 Major Events 30 Chapter 11 Accounts and Auditors' Reports 33 PRC Auditors' Report 34 International Auditors' Report 89 Chapter 12 Documents for Inspection G -426 K5 AR EN.doc

106 2005 Chapter 1 Important Notice Chapter 1 Important Notice 1. The Board of Directors of the Company and its members, Supervisory Committee of the Company and its members and members of senior management guarantee that there is no false or misleading statement or material omission in this report and shall be severally and jointly liable for the truthfulness, accuracy and completeness of its contents. 2. Independent Director Mr. Lin Zongshou did not attend this board meeting due to other commitments and authorized director Mr. Zhang Tianwu to attend and exercise voting rights on his behalf. 3. Chairman of the Company Mr Chen Musen, CEO Mr Li Yeqing, CFO Mdm Kong Lingling, and chief of financial department Mdm He Fengping declare and guarantee that this annual report is true and complete G -426 K5 AR EN.doc 1

107 2005 Chapter 2 General Chapter 2 General 1. Legal Name of the Company: Legal Abbreviation in Chinese: Name in English: Abbreviation in English: HUAXINCEM 2. Legal Person Representative: Mr. Chen Musen 3. Secretary to the Board: Mr. Wang Ximing Liaison Address: 897 Huangshi Avenue, Huangshi City, Hubei Province Tel: (0714) Fax: (0714) [email protected] Contact person for Information Disclosure of the Company: Ms. Wang Lu Liaison Address: 897 Huangshi Avenue, Huangshi City, Hubei Province Tel: (0714) Fax: (0714) [email protected] 4. Registered location of the Company: 897 Huangshi Avenue, Huangshi City, Hubei Province Administrative location of the Company: 897 Huangshi Avenue, Huangshi City, Hubei Province Post code: Web site: [email protected] 5. Press for Information Disclosure: China Securities Journal, Shanghai Securities News, Hong Kong Commercial Daily Annual Report available on the Internet website appointed by CSRC: The Place available: the Securities Office of the Company 6. Place of listing for A share: Shanghai Stock Exchange Abbreviation of A share: Huaxin Cement Stock Code: Place of listing for B share: Shanghai Stock Exchange Abbreviation of B share: Huaxin B share Stock Code: G -426 K5 AR EN.doc 2

108 2005 Chapter 2 General 7. Other information: Date of first registration: November 30, 1993 First registered location of the Company: 897 Huangshi Avenue, Huangshi City, Hubei Province Date of Alternation: January 11, 2000 Registered Number of the Representative Business License: Registered Number for Taxation: X Domestic Accountant Offices appointed by the Company: ShineWing CPAs Address: 12/C, Fuhua Building, North Street, Chaoyang Gate, Dongcheng District, Beingjing International Accountant Offices appointed by the Company: PricewaterhouseCoopers (China) Co., Ltd. Address: Room 1808, Yi an Square, No. 33, Jianshe Sixth Road, Guangzhou G -426 K5 AR EN.doc 3

109 2005 Chapter 3 Financial Highlights Chapter 3 Financial Highlights 1. Financial Highlights for the Report Year Unit: RMB Total profit 81,377, Net profit 62,073, Net profit after elimination of extra-ordinary items 58,348, Profit from major operations 503,360, Profit from other operations 2,829, Operating profit 46,622, Investment income -1,239, Subsidy income 30,882, Net amount of non-operating income/expenditure 5,111, Net cash flows from operating activities 503,134, Net increase of cash and cash equivalents -29,022, Difference between national and international accounting standards Unit: 000 RMB profit net assets attributable attributable to shareholders to shareholders As per the PRC accounts 62,073 1,213,617 Impact of IFRS and other adjustments: Reversal of amortisation of goodwill having been written off in prior years. 261 (1,861) Recognition of pre-operating expenses in income statement when they are incurred 101 (1,192)- Government grants recognised as deferred income and subsidy income 1,447 (9,125) Reversal of amortisation of positive goodwill 1,060 1,060 Interest capitalised in property, plant and equipment 6,296 6,296 Difference arising from restatement of long-term payables to their current value (349) (349) Deferred tax assets 8,269 28,106 As restated after IFRS and other adjustments 79,158 1,236, Extra-ordinary items and amount Unit: RMB Extra-ordinary items Amount Gains from disposal of assets except for products 3,707, Other non-operating incomes less provisions for impairment -800, Impact for income tax 818, Total 3,725, Financial Statements summary and Financial Indicators of the last three years Unit: RMB G -426 K5 AR EN.doc 4

110 2005 Chapter 3 Financial Highlights Item Change over last period (%) 2003 Income from major operations 2,639,380, ,188,101, ,188,827, Total profit 81,377, ,160, ,841, Net profit 62,073, ,550, ,244, Net profit after extraordinary items 58,348, ,802, ,741, Earnings per share Return on net assets, % Return on net assets after extra-ordinary items, % Return on net assets after extra-ordinary items, weighted average, % Net cash flow from Operating Activities Net cash flow per share from Operating Activities percentage points percentage points percentage points ,134, ,510, ,856, end 2004 end Change over last period (%) 2003 end Total assets 6,108,292, ,955,799, ,017,709, Shareholders equity (excluding the minority) 1,213,617, ,166,712, ,816, Net assets per share Net assets per share after adjustment Changes of shareholders equity in the report period and reasons Item At year beginning Increase in the year Decrease in the year Share capital Capital reserves Surplus reserves Statutory common reserves Undistributed profit Unit: RMB Total shareholders equity 328,400, ,391, ,620, ,906, ,300, ,166,712, ,535, ,517, ,258, ,555, ,608, ,704, ,704, At year end 328,400, ,926, ,137, ,165, ,152, ,213,617, The reasons for changes of shareholders equity are profit earning and profit distribution of the Company G -426 K5 AR EN.doc 5

111 2005 Chapter 4 Changes in Share Capital and Shareholders Chapter 4 Changes in Share Capital and Shareholders (I). Changes in Share Capital 1. Changes in the capital structure Unit: share Before the change Change during the period +/- After the change Shares % Capital Placement Bonus reserves others Sub-total issue issue to share Shares % 1. shares subject to conditional sales 1. State-owned shares 91,526, ,276, Shares held by State legal person 3. Shares held by other domestic investors Including: Shares held by domestic legal persons 24,873, ,123,7 68 Shares held by domestic natural persons 4. Shares held by foreign investor Including: Shares held by foreign legal persons Shares held by foreign natural persons Sub-total 116,400, shares not subject to conditional sales 1.RMB ordinary shares 48,000, ,400, ,400, ,250, ,749, ,000, ,400, Domestic listed foreign 164,000,000 investment shares ,000, Overseas listed foreign investment shares 4. Others Sub-total 212,000, ,400, Total 328,400, ,400,000 Tradable time of shares subject to conditional sales Time Increment of listed shares upon expiry of locking period Number of outstanding shares subject to conditional sales Number of outstanding shares not subject to conditional sales ,879,120 89,120, ,279, ,832,764 75,288, ,111,884 Remarks Unit: share 3,962,532 state shares which are tradable in SSE at not less than 9 yuan ,925,065 67,363, ,036,949 Tradable in SSE at not less than 9 yuan ,363, ,400, Share issuing and listing G -426 K5 AR EN.doc 6

112 2005 Chapter 4 Changes in Share Capital and Shareholders 1). Share issuing in prior three years There is no new issuing or placement issuing of shares in previous three year from end of report period. 2). Changes of total shares and share structure of the Company There are no changes on total shares and share structure of the Company occurred for bonus issue or placement issue etc. 3). Existing internal employee shares There are no internal employee shares in the report period (II). General Information about the Shareholders 1. Number of shareholders and listed-share holders Total numbers of shareholders at the end of 36,626 report period Top ten shareholders and listed-share holders Names of Shareholders Share holder type In % HOLCHIN B.V. Foreign 26.1 State-owned Shares (held by Huaxin Group Co., Ltd.) State 24.1 Huaxin Group Co., Ltd. Other 3.0 Total Shares hold 85,761, ,250,6 48 9,870,23 2 Change in shares 8,761, ,276, 232-2,123,7 68 Shares subject to conditional sales 79,250,64 8 9,870,232 Unit: share Mortgage or frozen 36,000,00 0 mortgaged MEINL BANK AKTIENGESELLSCHAFT Foreign 1.6 5,199, ,000 Jingzhou Shalong Financial Consultant Co., Ltd Other 1.2 4,100,00 0 4,100,000 ICBC Shenwan balishengli Securities Investment Fund Other 1.0 3,349,44 2 3,349,4 42 Pension Fund Project 109 Other 0.8 2,643,33 9 2,643,3 39 Huangshi Railway Joint Operating Company Other 0.8 2,520,00 0 2,520,000 Taikang Life Insurance Co., Ltd. Other 0.6 1,953,62 1 1,953,6 21 NATIO SECURITIES CO., LTD. Foreign 0.5 1,695, , G -426 K5 AR EN.doc 7

113 2005 Chapter 4 Changes in Share Capital and Shareholders Top ten holders of shares not subject to conditional sales Names of Shareholders Number of Shares Type of share HOLCHIN B.V. Domestic listed foreign 85,761,300 investment shares Domestic listed foreign MEINL BANK AKTIENGESELLSCHAFT 5,199,735 investment shares ICBC Shenwan balishengli Securities Investment Fund 3,349,442 RMB ordinary shares Pension Fund Project 109 2,643,339 RMB ordinary shares Taikang Life Insurance Co., Ltd. 1,953,621 RMB ordinary shares NATIO SECURITIES CO., LTD. 1,695,779 Domestic listed foreign investment shares TOYO SECURITIES ASIA LTD. A/C CLIENT Domestic listed foreign 1,609,589 investment shares Pension Fund Project 601 1,263,228 RMB ordinary shares Nanjing Haodun energy efficiency S&T Co., Ltd. Bank of China Yinhua Advanced Enterprise (Balanced) Securities Investment Fund 1,155, ,773 RMB ordinary shares RMB ordinary shares Remark on related partnerships and concert-action ships of the above shareholders None of the top ten shareholders are co-related parties, or concert-actors referred to in the Administrating Measures of Disclosing Changes in Shareholding for Listed Companies. except that state shares held by Huaxin Group Co., Ltd. on behalf of the State. It is unknown to the Company whether or not there exists any related party relationship or concert-action relationship between any of the top ten holders of listed shares subject to conditional sales. It is unknown to Company whether or not there exists any related party relationship or concert-action relationship between any of the top ten shareholders and top ten holders of listed shares subject to conditional sales. 2. Top ten holders of shares subject to conditional sales Names of Shareholders State-owned Shares (held by Huaxin Group Co., Ltd.) Huaxin Group Co., Ltd. Jingzhou Shalong Financial Consultant Co., Ltd Huangshi Railway Joint Operating Company Number of shares 79,250,648 Trading of shares Tradable Time Increment of tradable shares ,962, ,925, ,363,051 9,870, ,870,232 4,100, ,100,000 2,520, ,520,000 Conditions * Unit: share None of the shares shall be listed, traded or transferred 12 months after the Share Partition Reform Plan is successfully implemented, none of the shares shall be listed, traded or sold in the SSE during the period from the thirteenth month to the thirty sixth month after the Share Partition Reform Plan is successfully implemented. None of the shares shall be listed, traded or transferred 12 months after the Share Partition Reform Plan is successfully implemented. None of the shares shall be listed, traded or transferred 12 months after the Share Partition Reform Plan is successfully implemented G -426 K5 AR EN.doc 8

114 2005 Chapter 4 Changes in Share Capital and Shareholders Wuhan Petrifaction Penghe Materials Company 1,200, ,200,000 None of the shares shall be listed, traded or transferred 12 months after the Share Partition Reform Plan is successfully implemented. Hubei Zonglian Assets Evaluation Co., Ltd. Hubei Dongya Industries CoWuhan Petrifaction Penghe Materials Company Co., Ltd. ICBC Hubei Branch central sub-branch Shenzhen CITIC Industries Investments 768, , , , , , , ,000 Xinda Assets Entrustment 768, ,000 None of the shares shall be listed, traded or transferred 12 months after the Share Partition Reform Plan is successfully implemented. None of the shares shall be listed, traded or transferred 12 months after the Share Partition Reform Plan is successfully implemented. None of the shares shall be listed, traded or transferred 12 months after the Share Partition Reform Plan is successfully implemented. None of the shares shall be listed, traded or transferred 12 months after the Share Partition Reform Plan is successfully implemented. None of the shares shall be listed, traded or transferred 12 months after the Share Partition Reform Plan is successfully implemented. * None of the shares shall be listed, traded or transferred 12 months after the Share Partition Reform Plan is successfully implemented, none of the shares shall be listed, traded or sold in the SSE during the period from the thirteenth month to the thirty sixth month after the Share Partition Reform Plan is successfully implemented; the number of the shares listed, traded or sold in the SSE from the thirty seventh month to the forty eighth month shall not exceed 5% of the state shares that Huaxin Group Co., Ltd. holds after the Share Partition Reform, and the transaction price shall not be lower than 9 yuan/share; the number of the shares listed, traded or sold in the SSE from the forty ninth month to the sixtieth month shall not exceed 10% of the state shares that Huaxin Group Co., Ltd. holds after the Share Partition Reform, and the transaction price shall not be lower than 9 yuan/share. 3. General information of controlling shareholder and actual controller 1). Legal person controlling shareholder Name of controlling shareholder: Huaxin Group Co., Ltd. Legal Representative: Mr. Chen Musen Registered capital: RMB 370,000,000 Date of incorporation: November 14, 1996 Business range: manufacture and sales of cement product, parts of machines, development of real estate, commerce, service and so on. 2). Legal person actual controller Name of actual controller: Huangshi Municipal State Assets Administration 3). Change of controlling shareholder and actual controller There is no change on controlling shareholder and actual controller of the Company in the report period G -426 K5 AR EN.doc 9

115 2005 Chapter 4 Changes in Share Capital and Shareholders 4). Ownership and controlling relationship between the Company and actual controller Huangshi Municipal State Assets Administration 100% Huaxin Group Co., Ltd 27.1% (in total) 4. Other Legal person shareholders holding over 10% shares There were no other legal person shareholders holding over 10% shares in the report period G -426 K5 AR EN.doc 10

116 2005 Chapter 5 Directors, Supervisors and Senior Management Chapter 5 Directors, Supervisors and Senior Management (I). Directors, supervisor and senior management situation 1. General Name Chen Mushen Position S e x Age Chairman M 57 Li Yeqing Director/CEO M 42 Tom Clough Daniel Bach Paul Thaler Ji Changhua Zhang Tianwu Xie Huobao Lin Zongshou Zhou Jiaming Yang Chunhua Ruan Hanwen Zhan Weiguo Fan Tongtao Wang Ximing Peng Qingyu Kong Lingling Feng Dongguan Ke Youliang Director M 58 Director M 43 Director M 40 Director M 52 Independent director Independent director Independent director Chairman of the Supervisory Committee M 43 M 39 M 49 M 52 Supervisor M 55 Supervisor M 48 Supervisor M 33 Supervisor M 37 VP, secretary to the board M 47 VP M 46 VP F 42 VP M 39 VP M 41 Term ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ Share s held at year begin ning Share s held at year end Change 14,900 97,900 83,000 24,300 54,042 29,742 15,300 35,160 19,860 15,100 30,900 15,800 15,000 32,500 17,500 15,900 33,100 17,200 15,300 31,260 15,960 6,500 20,800 14,300 6,500 21,100 14,600 Reason for changes Purchased shares, grant shares from Share Partition Reform or shares bought with part of annual pay Grant shares from Share Partition Ref orm or shares bou ght with part of an nual pay Grant shares from Share Partition Ref orm or shares bou ght with part of an nual pay Grant shares from Share Partition Ref orm or shares bou ght with part of an nual pay Grant shares from Share Partition Ref orm or shares bou ght with part of an nual pay Grant shares from Share Partition Ref orm or shares bou ght with part of an nual pay Grant shares from Share Partition Ref orm or shares bou ght with part of an nual pay Grant shares from Share Partition Ref orm or shares bou ght with part of an nual pay Grant shares from Share Partition Ref orm or shares bou Unit: share Payment from the Company (10 k yuan) / / / G -426 K5 AR EN.doc 11

117 2005 Chapter 5 Directors, Supervisors and Senior Management Toatl / / / / 128, ,76 2 ght with part of an nual pay 227,962 / 420 Note: Directors Mr. Tom Clough, Mr. Daniel Bach and Mr. Paul Thaler voluntarily waived their director allowances for 2005, amounting in total to USD5,910. Major careers of Directors, supervisors and senior management during the last 5 years: 1). Mr. Chen Musen, 57 years old, university graduate, senior economist. Mr. Chen Musen entered the Company at November 1999 as Chariman of the Company all along. Mr. Chen Musen is also the Chairman of Huaxin Group Co., Ltd., controlling company of the Company. 2). Mr. Li Yeqing: 42 years old, Doctor, senior engineer. Mr. Li Yeqing graduated from Portland Major of Wuhan Building Material Institute (now Wuhan University of Technology and Science) as Bachelor of Science in 1984; in 1992 graduated from Industrial Management Major of Wuhan University of Technology as Master of Science; and graduated from Management Science and Engineer Major of Central China University of Science as Doctor of Business Administration at June Mr. Li Yeqing entered Huaxin Cement Plant (former name of the Company) at November 1987, taking position of quality control engineer of Central Lab, vice manager of Limestone Quarry, vice director of Extension Office and manager of production technology, and became vice manager of Huaxin Cement Plant at January 1993, he became Deputy General Manager of the Company at June 1994, General Manager of the Company at December 1999 and CEO of the Company at March He has taken the position of director of the Company from ). Mr. Tom Clough, 59 years old, British, Bachelor of Mining engineering of University of Leeds. From 1997 to now, he has taken position of Executive Director of PT Semen Makmur Of Holcim, CEO of Alsons Cement Corporation, Executive Director of PT Semen Cibinong Tbk and member of EXCO of Holcim Group. He became director of the Company from October ). Mr. Daniel Bach, 43 years old, Swiss. Diploma and PhD in Mechanical Engineering at the Swiss Federal Institute of Technology (ETH); 1989 ~ 1994, Research Assistant and Chief Assistant at the Institute of Mechanics of ETH; 1994 till present, Assistant to Head and Project Manager at "Holderbank" Engineering Switzerland (HES); Deputy of Head of Business Risk Management (BRM) of the "Holderbank"/Holcim Group, Assistant Vice President; Technical Director of PT Semen Cibinong Tbk (member of the Holcim Group) in Indonesia; Assistant to the Member of the Holcim Executive Committee. He became director of the Company from April ). Mr. Paul Thaler, 40 years old, lawyer, Swiss. He is Master of Law and Doctor of Law of Zurich University and research scholar of Beijing University. He was foreign lawyer of Beijing Haiwen Lawyer Firm from 1997 to 1998; from 2000 to today he has been resident partner of Wenger Vieli Belser Beijing Office. He became director of the Company from April ). Mr. Ji Changhua, 52 years old, university graduate, senior political engineer. Mr. Ji Changhua entered Huaxin Cement Plant (former name of the Company) at February 1972 and took position of vice secretary, vice director, director and secretary of Mechanic Workshop; he became Deputy general Manager of Huaxin Group Co., Ltd. from He became director and vice Secretary of Party Committee of the Company from February ). Mr. Zhang Tianwu, 43 years old, Master of Law, lawyer ~ 2005, vice director of Hubei Junshangjun Law Firm. From 2005, executive partner of Hubei Deweijunshang Law firm. He is now council member of Wuhan Lawyer Association, arbitrator of Wuhan Arbitration Committee, G -426 K5 AR EN.doc 12

118 2005 Chapter 5 Directors, Supervisors and Senior Management member of Wuhan Political Consulting Committee. He became independent director of the Company from April ). Mr. Xie Huobao, 39 years old, Doctor of Enterprise Management of Wuhan University, Post-Doctor of Accounting of Zhongnan University of Finance and Law. From 1993 to today he has been assistant professor, instructor, deputy professor, professor and vice director of Accounting Department of Business School of Wuhan University. He became independent director of the Company from April ). Mr. Lin Zongshou, 49 years old, Master in Non-metal Material Department of Wuhan University of Technology, Doctor tutor in Wuhan University of technology and Science. He has been teacher, professor and doctor tutor of Wuhan University of technology and Science from 1985 to today. He is representative of Ninth and tenth People s Congress of China. He became independent director of the Company from April ). Mr. Zhou Jiaming, 52 years old, university graduate, engineer, senior economist. Mr. Zhou Jiiming entered Huaxin Cement Plant at November 1971, he use to take position of vice director and director of Central Lab and was DGM of the Company from April 1997 to February From February 2000 he has been Secretary of Discipline Committee, Chairman of Labor Union and Chairman of Supervisory Committee. 11). Mr. Yang Chunhua, 55 years old, university graduate, senior economist. Mr. Yang Chunhua entered Huaxin Cement Plant at July 1970, and use to be chief in Organization Department, vice manager of Organization Department, vice manager of Personnel Department and manager of Labor and Personnel Department. He became DGM of Huangshi Branch, manager of Political Work department, Vice Secretary of Discipline Committee. He became vice Chairman of Labor Union and Supervisor at April ). Mr. Ruan Hanwen, 48 years old, Master of Economy, economist. Mr. Ruan Hanwen entered Huaxin Cement Plant in 1981 and used to be financial chief of Investment Department, Section chief of Financial Department, and assistant manager of Investment Department. He became Manager of Auditing Department, director of Supervisory Office and Supervisor at April ). Mr. Zhan Weiguo, 32 years old, university graduate, cement process engineer. Mr. Zhan Weiguo entered Huaxin Cement Plant in 1993, used to be shift chief and vice director of CCR in No. 2 Manufacture Plant; became manager of Production and Quality Department of Yangxin Branch from He became employee supervisor of the Company at April ). Mr. Fan Tongtao, 37 years old, university graduate, mechanical engineer. Mr. Fan Tongtao entered Huaxin Cement Plant in 1990 and used to be mechanical technician and vice secretary of the Youth League Committee of Mill Department, from May 2000 to June 2003 he was vice director and mechanical chief of Mill Department of No. 1 Plant; he has been in charge of mechanical equipment in No. 2 Plant of the Company from He became employee supervisor of the Company at April ). Mr. Wang Ximing, 47 years old, MBA, senior economist. He graduate from Chemistry Major of Wuhan Steel Institute (Wuhan University of Science) and got Bachelor of Science at February 1982; and he graduate Business and Administration Major of Renming University of China and got MBA degree. Mr. Wang Ximing entered Huaxin Cement Plant in 1982 and used to be teacher in Huaxin Technique School, vice secretary of Youth League Committee of Huaxin Cement Co., Ltd., carders of Organization Department of CPC Huangshi Committee, Vice manager of Labor and Personnel Department of Huaxin Cement Plant, Vice Manager of Planning Department, Vice Manager, Manager of Securities Department of the Company, Secretary to the Board. He took position of DGM and Secretary to the Board of the Company from April 2000 and became Vice G -426 K5 AR EN.doc 13

119 2005 Chapter 5 Directors, Supervisors and Senior Management Present of the Company at March ). Mr. Peng Qingyu, 46 years old, Master, senior economist. He graduated from Western Economics Major of Central China University of Science and got Master degree of Economics at April Mr. Peng Qingyu entered Huaxin Cement Plant at January 1979 and used to be Chief in Sales Department, Vice manager and manager of Huaxin Nantong Trading Company, Director of Shanghai Office, Manager of Sales Department of the Company and vice manager of Sales Company. He took position of DGM of the Company and manager of Sales Company from April He became Vice Present of the Company at March ). Mdm Kong Lingling, 42 years old, Master of Economics, senior economist. She graduated from Wuhan University of Technology and got Bachelor degree of Science in 1985; and graduated from Enterprise Administration Major of Fudan University and got Master degree of Economic in Mdm Kong Lingling entered Huaxin Cement Plant at July 1985 and used to be engineer in Research Firm of Huaxin Cement Plant, vice secretary of Youth League Committee, Vice Manager of Financial Department, Vice Manager of Planning Department and Manager of Financial Department. He became DGM of the Company from April 2000 and Vice President of the Company at March ). Mr. Feng Dongguang, 39 years old, Master, engineer. He graduated from Portland Major of Wuhan University of Technology and got Bachelor degree of Science in 1989 and graduated from Business Administration Major of Central China University of Science and got MBA degree. Mr. Feng Dongguang entered Huaxin Cement Plant in 1989 and used to be assistant manager and manager of Dry Process Plant. He became assistant GM of the Company at November 2001 and DGM from April He took position of Vice President of the Company at March ). Mr. Ke Youliang, 41 years old, Master of Economics, senior economist. He graduated from Economics Major of Wuhan University of Technology and Science and got Master Degree of Economics in Mr. Ke Youliang entered Huaxin Cement Plant in 1985 and used to be assistant manager of Investment Department, manager of Engineering Administration Department, vice manager of Comprehensive Administration Department of Engineering Division and manager of Planning and Development Department. He was appointed Assistant GM and Manager of Planning and Development Department at November 2001 and DGM of the Company from April He was appointed Vice President of the Company at March Position at controlling Company Name Mr. Chen Musen Mr. Li Yeqing Mr. Ji Chanhghua Mr. Zhou Jiaming Name of Controlling Company Position Starting Ending Huaxin Group Co., Ltd. Chairman No Huaxin Group Co., Ltd. Party Secretary No Huaxin Group Co., Ltd. DGM No Huaxin Group Co., Ltd. Chairman of Labour Union, Secretary of Disciplinary Committee Has remuneration or allowance No Position at other companies G -426 K5 AR EN.doc 14

120 2005 Chapter 5 Directors, Supervisors and Senior Management Directors, supervisors and senior management have no position in other companies in the report period, excluding three independent directors, director Mr. Tom Clough, director Mr. Daniel Bach, and director Mr. Paul Thaler. (see the above details about their career experiences) (III). Remuneration for directors, supervisors and senior management 1. Decision procedures of remuneration for directors, supervisors and senior management a). Proposal by the Remuneration and Assessment Committee of the Board of Directors; b). payment for senior management is discussed and decided by the Board of Directors; c). approval by the shareholders' general meeting in case of position allowance for directors and supervisors. 2. Basis for deciding remunerations for directors, supervisors and senior management 1). Basis for directors and supervisors: the Proposal in Respect of Adjusting Duty Allowance for Directors and Supervisors adopted by the Annual Shareholders General Meeting of the Company for 2003 convened on April 28, ). Basis for senior management: the Proposal in respect of Remuneration for Senior Management adopted by the Annual Shareholders General Meeting of the Company for 2003 convened on April 28, 2004 and the Proposal in Respect of 2005 KPI's for the Management adopted by the Twentieth Meeting of the Fourth Board of Directors convened on April 26, 2005, (IV). Changes of Directors, supervisor and senior management Name Position Reason for leaving Gerard Letellier Director Change in position No management member was employed or unemployed during the report period. (V). Employees By the end of the report period, the Company possess of 6,695 employees and the Company is responsible for paying for pension for 721 employees. Employee structure 1. Major structure Type Number Production staff 5,233 Sales staff 323 Technique staff 450 Financial staff 140 Administrative staff G -426 K5 AR EN.doc 15

121 2005 Chapter 5 Directors, Supervisors and Senior Management 2. Education level Education level Number Doctor, Master graduate 37 University graduate 351 Institute graduate 1,026 Technique school graduate 627 Others 4, G -426 K5 AR EN.doc 16

122 2005 Chapter 6 Corporate Governing Chapter 6 Corporate Governing (I). Company Governance The operations of the Company during the report period were in strict compliance with provisions contained in the Company Law, Security Law and the relevant laws and rules of CSRC. Other regulations, such as the Rules of Governing of Listed Companies, the Articles of Association of the Company, the Rules of Procedures of Shareholders' General Meetings, the Rules of Procedures of the Board of Directors, the Rules of Procedures of the Supervisory Committee and the Rules of Procedures of Manager, to further enhance the honesty, self-disciplining, due diligence and legal compliance of directors, supervisors and senior management members. During the report period, investor relationship management was promoted due to the successful implemented Share Partition Reform, while the Company governance level was future improved. (II). Performance of Functions by Independent Directors 1. Independent directors present at Board Meeting Name Meeting number shall attend Present in person Xie Huobao 7 7 Zhang Tianwu 7 7 Lin Zongshou Present in proxy Absent Remarks During the report period, the three independent directors worked diligently, strictly abide by provisions contained in the states laws, rules and regulations, and in the Articles of Association of the Company, participated in seven board meetings and two shareholders' general meetings with an attitude of responsibility for all shareholders, expressed independent and objective opinions from legal, financial and technical perspectives on the strategic development, investments and guarantees, and remuneration assessment of the senior management. This helps positively in major decisions for a healthy and fast development of the Company. 2. Objection from independent directors to issues of the Company There is no objection from independent directors of the Company to proposals of board meetings of this year and other non-board meeting proposals in the report period. (III). Business, employee, assets, structure and finance separations between the Company and the Controlling Shareholders of the Company 1) Business: independent 2) Employee: independent 3) Assets: independent 4) Structure: independent 5) Finance: independent (IV). Senior Management Personnel Assessment and Incentive Mechanism The Board of Directors made valuation of the senior management performance and payments were made, in accordance with the Proposal in Respect of Report on Remuneration for Senior Management of Huaxin by Hewitt adopted in the Seventh Meeting of the Fourth Board of G -426 K5 AR EN.doc 17

123 2005 Chapter 6 Corporate Governing Directors on October 27, 2003, the Proposal in Respect of Remuneration for Senior Management adopted in the 2003 Annual Shareholders' General Meeting on April 28, 2004, the Proposal in Respect of 2005 KPI's for the Management adopted in the Twentieth Meeting of the Fourth Board of Directors on April 20, 2005, on the basis of proposals of the Remuneration and Assessment Committee of the Board of Directors and resolutions of the Board of Directors, and in combination of fulfilments of EBITDA and net operating cash flows. The annual remuneration of the management members consists of fixed pay and short term incentive pay. The fixed pay and the short term incentive pay covers 50% each for chairman of the board and CEO, and 60% and 40% respectively for the other members of the senior management. 70% of the short term incentive pay for all the management members is paid in cash, while the rest 30% is used to purchase shares of the Company G -426 K5 AR EN.doc 18

124 2005 Chapter 7 Shareholders General Meeting Chapter 7 (I). Shareholders General Meeting Annual Shareholders General Meeting The Annual Shareholders' General Meeting For 2004 of the Company was convened on April 26, The announcement of resolutions of the Meeting was published on China Securities Journal, Shanghai Securities News and Hong Kong Commercial Daily on April 27, (II). Extraordinary Shareholders General Meeting The Meeting of Relevant holders of A Shares for the Share Partition Reform was convened on December 16, The announcement of resolutions of the Meeting was published on China Securities Journal, Shanghai Securities News and Securities Times on December 19, G -426 K5 AR EN.doc 19

125 2005 Chapter 8 Directors' Report Chapter 8 Directors' Report (I) Discussion and analysis of the Management 1. Review of the Company s operation in the report period (1) Overall operation in the report period 2005 was the toughest year for the operation of the cement industry. With the gradual occurrence of effect of the state macro control policy, the growth rate of the fixed assets investment decreased, the real estate business was cooling and the production and sales of cement slowed down, so that the cement was becoming more and more oversupplied. Capacity redundancy led to the falling of prices, meanwhile due to dual pressure from the price escalation of coal and power, the profit of the whole industry decreased substantially. According to the statistic results of China cements, in 2005, the cement output in China reached billion tons, and yearly growth was 11.7%; the sales revenue of the cement was billion yuan, with an increase of 16.2% compared with the same period of last year; the total cement profit was only billion yuan, a decrease of 38.0% compared with the same period last year. In 2005, the Company also faced austere external marketing environment. On one hand, the release of the capacity in 2004~05 from the overheated investment in last few years led to the over surplus of cement production capacity, causing a decrease in the prices, so that the Company s annual average sales price fell to the lowest point in 10 years; on the other hand, the price of coal and power which accounts for 60% of the cost of the product was rising sharply as compared to 2004, thus the cost took away the profit. So the profitability failed to improve with the expansion of the capacity, and the production capacity was not brought into play, the production and operation of the Company went to low level. Facing with challenges and difficulties, the Company adopted effective measures. The Company not only made good operation achievements, but also enlarged the capacity, increased the market share and enhanced the competitiveness. At present, the Company has the capacity of a yearly output of 12 million tons of clinker or 22 million tons of cement, making the Company the influential leader in the industry. The main measures are: In production, the Company further refined the management. With the IT as the basis, and flat, matrix, coordination, benefit, efficiency, and innovation as principle, the operating efficiency of the equipment system as breakthrough point, the Company optimized the operating index and efficiency to control the operating cost. Discarded the out-of-date process, adjusted the operating plans of 3 wet-process kiln and 6 dry-process kiln production lines that consume high energy, and replaced the production with new dry-process production lines, so as to guarantee the overall balance of the Group. In marketing, the Company emphasized the rationality, act or not according the situation. The Company timely decreased the sales in Shanghai, and made more sales effort in Hubei, to raise market share, while seeking for new sales channel, and restarting export. The priority was still given to the benefit. Participated in price competition, but did not initiate the price competition. In the development, the Company took strategic management as a method, to make overall planning, and standardize the management. Project planning, construction, capital, staffing, project operation, product sales were carried out in due order, the newly built projects had already become the main profit sources of the Company. In 2005, the Company has already built G -426 K5 AR EN.doc 20

126 2005 Chapter 8 Directors' Report and put into operation Wuxue 6,000 tpd clinker production line, Yidu 2,500 tpd clinker production line, phase II, Suzhou Golden Cat 3,500 tpd clinker production line, Tibet Shannan 1,000 tpd clinker production line, Yueyang 800,000 tpy cement grinding station, Wuhan Wugang Huaxin 600,000 tpy cement grinding line, phase II, Huaxin Nantong 650,000 tpy cement grinding lines phase II, Wuhan 1200 km 3 py RMC station project, so the added capability was 7.5 million tons of cement and 1200 km 3 of concrete. At present, the strategic layout of the Company in Hubei had been basically completed. In 2005, the total sales of cement and clinker of the Group was million tons (internal statistics, the same below), in which, the sales of cement was million tons, and the clinker was 1.78 million tons. The amount of production and sales took the lead in China, and the main operating income was 2,639,380, yuan, the net cash flow from the operating activities was 503,134, yuan, which increases by 21%, and 3% respectively compared with that of The total profit was 81,377, yuan, and net profit was 62,073, yuan, which dropped by 68%, and 58% respectively, compared with 2004, yet 2005 is still one of the good years since listing. (2) Major operations 1) The classification of major operation according to industry and product Industry or Product Industry Income from major operations Operating cost Operating profit % Income change over the previous year % Cost change over the previous year % Cement 2,574,343, ,076,888, Others 65,036, ,868, Total 2,639,380, ,117,757, Product Cement 32.5 Cement 42.5 and above 1,434,385, ,115,995, ,056,933, ,656, Clinker 83,023, ,237, Others 65,036, ,868, Total 2,639,380, ,117,757, Unit RMB Operating Profit change over the last year % percentage points percentage points percentage points percentage points percentage points percentage points percentage points percentage points G -426 K5 AR EN.doc 21

127 2005 Chapter 8 Directors' Report 2) The classification of major operation according to regions Unit: RMB Region Income from major operations Income change over the last year % Hubei 1,297,375, Jiangsu 599,580, Shanghai 111,076, Chongqing 126,431, Anhui, Jiangxi 108,927, Henan 106,375, Hunan 68,417, Zhejiang, Fujian 44,803, Tibet 33,121,220 / Export 143,269,740 / Total 2,639,380, ) Main products and market share The main products produced and operated by the Group were cement and clinker. In 2005, the Company sold cement 7.36 million tons In Hubei, and market share was 21.6%, an increase of 44% compared with the same period of last year; sold cement 3.05 million tons In Jiangsu, market share was 4.2%; sold cement 0.57 million tons in Shanghai, market share was 2.7%; sold cement 0.08 million tons in Tibet, market share was 4.6%; sold cement 0.51 million tons in Chongqing, market share was 2.3%; sold cement 0.59 million tons in Anhui and Jiangxi; sold cement 0.58 million tons in Henan; sold cement 0.44 million tons in Hunan; sold cement 0.22 million tons in Zhejiang and Fujian (Internal statistics). 4) Main supplier and clients Unit: RMB Total of top 5 suppliers 504,289, % of total amount Total of top 5 clients 309,981, % of total amount (3) Operation and achievement of major subsidiaries Unit: RMB.Name Type Products or service Registered capital Assets scale Net profit Huaxin Cement Limited Production and sales (Yichang) Co., liabilities of cement Ltd. 150,000, ,061,000 48,509,978 Huaxin Cement (Yangxin) Co., Ltd. Huaxin Cement (Enshi) Co., Ltd. Huaxin Cement (Tibet) Co., Ltd. Huaxin Cement (Xiantao) Co., Ltd. Huaxin Concrete (Wuhan) Co., Ltd. Limited liabilities Limited liabilities Limited liabilities Limited liabilities Limited liabilities Production and sales of cement Production and sales of cement Production and sales of cement Production and sales of cement Production and sales of concrete 500,000, ,869,000 62,064,911 60,000, ,717,000 35,273,345 50,000, ,938,000 5,216,337 23,900,000 37,163, ,863 10,000,000 42,937,739 2,195, G -426 K5 AR EN.doc 22

128 2005 Chapter 8 Directors' Report Huaxin Golden Cat Cement (Suzhou) Co., Ltd. Wuhan Wugang Huaxin Cement Co., Ltd. Huaxin Nantong Cement Co., Ltd. Huangshi Huaxin Packaging Co. Ltd. Huangshi Huaxin Cement Research and Designing Co., Ltd. Huaxin Cement (Yueyang) Co., Ltd. Huaxin Cement (Zhaotong) Co., Ltd. Huaxin Cement (Wuhan) Co., Ltd. Sino-Joint venture Limited liabilities Sino-joint venture Limited liabilities Limited liabilities Limited liabilities Limited liabilities Limited liabilities Production and sales of cement Production and sales of cement Production and sales of cement Production and sales of cement bag Building material, building engineering designing Production and sales of cement Production and sales of cement Production and sales of cement USD,136,000,000 1,450,953,000-48,952,805 40,000, ,648,000 8,381, ,000, ,282,000-6,910,476 8,000,000 42,252,000 3,419,773 1,000,000 60,604,47 915,519 25,000,000 97,422,000-3,092,017 75,000, ,189,514 / 60,000, ,810,888 / 2. Outlook of the future development of the Company (1) Development and Competition 2006 is the beginning year of the eleventh five year plan period. As the major industry in cycling economy cement industry will step into a new development phase. The growth rate of China s GDP and the fixed asset investment are expected to remain at high level in the eleventh five year period. The increase of the investment in the industrialization, urbanization and the infrastructural construction will lead to the further development of the cement industry. There will be more new type dry process lines, considering that the Chinese cement industry is not intensified, and that the backward capacities cover over half of the total national capacity. The further upgrading of the cement industrial structure, scaled production, and intensive operation will be the general trend of the cement industrial development; large enterprises will still keep the competitive advantage by means of the acquisitions and mergers in order to gain the opportunity of quickening the development. But in 2006, the cement industry is in the down cycle of the development, so the growth ratio may be lower than the GDP s. With the gradual putting into production of the capacity from the investment in previous years, it is predicated that the whole production output of the cement will be up to about 1.13 billion tons, the output still increases as compared with that of last year. However, the investment of the cement will continue to fall, due to the state macro control, decrease in the cement demand growth and the over rapid increase in the cement capacity in the previous years. China Cement Association predicts that there will be 50 new dry process cement production lines and the new increased capacity will reach 40 million tons in In the end of year 2006, the China s cement capacity will be up to 1.37 billion tons, the percentage of the output from the new dry process will be about 45% in 2006 from 40% in 2005, and then the structure will be further optimized. The effects of energy saving, environmental protection and developing cycling economy will gradually appear. In 2006, the cement price will continue to keep in a low level with little fluctuation, but in some areas there may be a slight rebound. Supply exceeding demand, obvious surplus capacity of lagged process and slow demand are the main reasons which makes it difficult for the cement price to rise. Although the cement price still keeps at the low level, it shall be prospective for the G -426 K5 AR EN.doc 23

129 2005 Chapter 8 Directors' Report cement enterprises to recover to the general level profitability in The Company is a big influential group in Chinese cement industry, and is the biggest cement manufacturer in the mid-south China area, with its capacity in the lead in the country. At present, the company has carried out the strategy arrangement in each area in Hubei preceding any rival, and the capacity will be up to 30 million tons in one or two years; the marketing share will exceed 40% in Hubei, it is easy to see that the area competitive advantage is obvious. As the midland, Hubei will keep the growth ratio of the fixed asset investment at a level above the national average a lot, which will create the conditions for the Company to lead the regulated and ordered competition of the cement market in this area. Looking forward to another target market east China, it is predicated that the cement market will still continue the status of the year 2005, the supply will exceed the demand seriously, the competition will be bitter, the price will also be at a low level, so it is difficult to foresee a big change in the market. In 2006, with the acceleration of the investment for construction in coal industry, the tension in the coal supply will be relieved effectively. The State Development and Reform Commission predicts that the total output of the coal in the year will be up to 2.2 billion tons, and the demand 2.16 billion tons, the supply can balance the demand. It is predicted that the coal shortage which limited production once a while will not occur in With the drive of levying regulating fund of the coal price which was started in the second half year of 2005, adjustment in the coal resource tax, coal and power linkage policy, it is predicted that the ex-mine price of the coal will still be at high level with little fluctuation. Compared with the year of 2005, although the procurement price of the coal will still keep the high market level, the quality of the coal will improve, so the procurement price of the coal which is calculated according to the specific heat value will decrease accordingly. Additionally, another big energy which influences the cost of the company power, without the shortage in 2006, the price will continue to keep at high level, but if the state implements the coal and power linkage policy, the situation which the rising price of the coal drives the rising price of the power may occur. In December 2005, the State Council issued Provisional Regulations on Promoting Industrial Restructuring and the Table of Contents of Guidelines for Industrial Restructuring. The industrial restructuring policy and the new environmental protection standard which will be implemented as from July 1, 2006 will restrain the production of the small cement companies, which is a new opportunity for large cement enterprises. But the actual impact in 2006 is to be observed. (2) Future development opportunity and operation plan for the new year The new industrial restructuring policy and environmental protection standard will further the step to use the new dry process cement production line to replace the lagged cement production lines, such as shaft kiln, wet process kiln and so on; to save the energy, develop cycling economy; build new socialist country side, reduce the gap between the city and the village; the leading market Hubei will keep the growth rate of the fixed asset investment at around 30% in 2006, and it will be the main strategy point to promote the uprising of the middle China. The above will become the future development opportunity for the Company. Operation plan of the new year in 2006, produce 13 million tons clinker, 20 million tons cement, and RMC 600,000m 3 ; the total output of equipment 10 k tons, sales revenue 4.3 billion yuan. (3) Capital expenditure plan In 2006, the Company shall continue to increase the cement production lines according to strategic planning and layout. The total investment of the project is billion yuan. The sources of the fund: a. cash flow from the operation activities billion yuan, b. net increase of the bank loan billion yuan, c. the rest fund from equity financing G -426 K5 AR EN.doc 24

130 2005 Chapter 8 Directors' Report New projects and CIPs in the Capital Expenditures Plan are as follows: Unit: 10 k yuan Names of the Projects Capacity Total investment Planned investment in 2006 Clinker production line 214,341 88,769 Yangxin Phase II 2000ktpy cement 32,879 23,015 Wuxue Phase II 2500ktpy cement 35,487 2,000 Xiangfan Phase I 1500ktpy cement 34,434 13,619 Xianning Phase I 1500ktpy cement 37,511 25,258 Zhaotong, Yunnan 1500ktpy cement 37,037 9,479 Guangshan, Henan 1500ktpy cement 36,993 15,398 Grinding station 32,871 14,374 Wuhan Phase I 2000ktpy cement 16,871 3,374 Xianggang, Hunan 3000ktpy cement 16,000 11,000 RMC station 6,126 6,126 Hankou 1,200,000 m 3 py 2,166 2,166 Hanyang 1,200,000 m 3 py 2,166 2,166 Huangshi 600,000 m 3 py 1,794 1,794 Total 253, ,269 (4) Analysis of the risk for the Company In 2006, the biggest risk for the Company is whether or not the new projects and CIPs will be put into operation as scheduled. Additionally, other risks are the shortage of the Company s own capital and different cash availabilities at different times due to the continuous and rapid development of the Company. In face of such risks, the company will enhance project supervision, push ahead progresses of the construction for the new projects and CIPs, properly arrange allocations of capital and seek new financing channels in order to ease the cash pressure for the Company. This year, the company shall try to make it possible to realize the equity financing plan. (II). Investments Total investment of the Company in the report period is 1,123,090 k yuan, increased by 246,577 k yuan or 28.13% over the previous year. 1. Application of proceeds No capital was raised in the report period. No capital that had been raised previously was used in the report period. 2. Funds of other sources G -426 K5 AR EN.doc 25

131 2005 Chapter 8 Directors' Report (1). Project completed in ). Wuxue 6000tpd clinker production line. Total planned investment of the project was million yuan, while the actual investment was 473,490 k yuan. The project was put into operation on April 26, The production volume was clinker 1200 k tons and cement 540 k tons in the year. 2). Tibet Shannan 1000tpd clinker production line. Total planned investment of the project was 150,04 million yuan, while the actual investment was million yuan. The project was put into operation on June 28, The production volume was clinker 100 k tons and cement 90 k tons in the year. 3). Technical renovation of Suzhou Golden Cat 1300 k tpy cement grinding station. Total planned investment of the project was 87 million yuan, while the actual investment was 64.2 million yuan. The first cement mill system was completed on October 18, 2004 and the second was completed and put into operation on April 26, The production volume was cement k tons in the year. 4). Technical renovation of Suzhou Golden Cat 3500tpd clinker production line. Total planned investment of the project was million yuan, while the actual investment was million yuan. The project was put into operation on August 28, The production volume was clinker 250 k tons in the year. 5). Yidu 2500tpd clinker production line project, phase II. Total planned investment of the project was million yuan, while the actual investment was million yuan. Cement mill system was put into operation on August 30, 2005, and the kiln system was put into operation on September 25, The production volume was clinker 140 k tons and cement 360 k tons in the year. 6). Wuhan 1,200 KM 3 py RMC station project. Total planned investment of the project was million yuan, while the actual investment was 32.5 million yuan. The project was put into operation in June, The production volume was RMC 54 KM 3 in the year. (2). CIPs in ). Yunnan 4000tpd clinker production line project. Total planned investment of the project is million yuan, site preparation was started in October 2004, civil construction was basically completed and the project entered period of equipment instalment. It is estimated to be completed and put into operation within June ). Xiangfan 4000tpd clinker production line project. Total planned investment of the project is million yuan, it was started on March 30, 2005 and main body of the kiln line was basically completed. It is estimated to be completed and put into operation within July ). Wuhan 2000 k tpy cement grinding station. Total planned investment of the project is million yuan, it was started on November 30, 2004 and main body of the project was basically completed. It is estimated to be completed and put into operation within April ). Huaxin Cement (Yangxin) Co., Ltd. 4800tpd clinker production line project, phase II. Total planned investment of the project is million yuan, it was started on September 29, 2005, civil construction was basically completed and the project entered period of main body construction. It is estimated to be completed and put into operation within October G -426 K5 AR EN.doc 26

132 2005 Chapter 8 Directors' Report (III). Work of the Board of Directors 1. Board meetings and contents 1). The Nineteenth Meeting of the Fourth Board of Directors of the Company was convened on March 22, 2005, where the Annual Report of the Company for 2004, and its abstract, the Final Financial Report of the Company for 2004, the Profit Distribution Proposal for 2004, the Proposal in Respect of Deciding the Risk Income for the Management for 2004, the Proposal in Respect of Replacement of Directors, the Proposal in Respect of Setting Up Huaxin Cement (Wuhan) Co., Ltd., the Proposal in Respect of Setting Up Huaxin RMC (Wuhan) Co., Ltd., the Proposal in Respect of Appointing Accounting Firms, and the Proposal in Respect of Convening the Annual Shareholders General Meeting for 2004 were reviewed and adopted. The announcement of resolutions of the meeting was published on China Securities Journal, Shanghai Securities News and Hong Kong Commercial Daily on March 24, ). The Twentieth Meeting of the Fourth Board of Directors of the Company was convened on April 26, 2005, where the First Quarter Report for 2005, the Proposal in Respect of 2005 KPI's for the Management, the Proposal in Respect of Setting Up Wuxue Branch, and the Proposal in Respect of Preannouncement of the Operating Results of the Company During the First Half of 2005 were reviewed and adopted. The announcement of resolutions of the meeting was published on China Securities Journal, Shanghai Securities News and Hong Kong Commercial Daily on April 27, ). The Twenty First Meeting of the Fourth Board of Directors of the Company was convened on August 10, The announcement of resolutions of the meeting was published on China Securities Journal, Shanghai Securities News and Hong Kong Commercial Daily on August 12, ). The Twenty Second Meeting of the Fourth Board of Directors of the Company was convened on August 29, 2005, where the Report in Respect of Budget Assumption and Target Proposal for 2006 was reviewed and adopted. 5). The Twenty Third Meeting of the Fourth Board of Directors of the Company was convened on October 28, The announcement of resolutions of the meeting was published on China Securities Journal, Shanghai Securities News and Hong Kong Commercial Daily on October 31, ). The Twenty Fourth Meeting of the Fourth Board of Directors of the Company was convened on November 7, 2005, where the Financial Budget Report of the Company for 2006 and the CAPEX of the Company for 2006 were reviewed and adopted. 7). The Twenty Fifth Meeting of the Fourth Board of Directors of the Company was convened on November 25, 2005, where the Proposal in Respect of Applying to the CBC For a 1.5 Billion Yuan Credit Limit and the Proposal in Respect of Applying for an Issue of Short Term Financial Bonds were reviewed and adopted. 2. Execution of resolutions of the shareholders general meeting In the year, the board, pursuant to the Company Law, did the duties stipulated for the Board of Directors in the Articles of Association of the Company; strictly executed resolutions adopted by the Shareholders General Meeting, and functioned fully as a board G -426 K5 AR EN.doc 27

133 2005 Chapter 8 Directors' Report (IV). Profit Distribution Proposal for 2005 According to the results of audits by ShineWing CPAs, the net profit of the Company for 2005 was 62,587, yuan (parent company) or 62,073, yuan after consolidation. Pursuant to the provisions contained in the Company Law and the Articles of Association of the Company, 10%, i.e. 6,258, yuan will be appropriated to statutory surplus common reserve fund; 10%, i.e. 6,258, yuan, to statutory public welfare fund. The consolidated allocable profit (consolidated) is 183,152, yuan by the end of December The board reviewed and adopted the following profit distribution proposal: on the basis of the million shares as at the year end, a cash dividend of 0.06 yuan per share (incl. tax) shall be distributed to all shareholders, hence 19,704,000 yuan shall be distributed, and the whole of the remaining shall be booked as unallocated profit. No capital reserve shall be converted into share capital for The above profit distribution proposal shall be subject to the approval by shareholders' general meeting before implementation. (V). Remarks of independent directors on external guarantees Pursuant to requirements contained in Notice on Regulating Cash Transactions Between Listed Companies and Their Parties and External Guarantees by Listed Companies and Other Related Issues (Document no.: Zheng Jian Fa [2003] 56), the Articles of Association of the Company and other relevant documents, we made careful verification of the Company in terms of external guarantees. The Company did not provide any guarantee in the year or in accumulation to any of controlling shareholder or its subsidiaries, other related parties where the Company had not more than 50% equity, non-legal-person organizations or individuals. The Company had an effective control of external guarantee risks. In our opinion, external guarantees of the Company were reasonable and legitimate in terms of deciding procedures, and did not harm the interests of the Company or shareholders, especially medium and small shareholders G -426 K5 AR EN.doc 28

134 2005 Chapter 9 Supervisors' Report Chapter 9 Supervisors' Report (I). Work of the Supervisory Committee 1. In 2005, two meetings were convened by the Supervisory Committee. The first meeting: a). reviewed and adopted the Annual Report for 2004 and its abstract, Final Financial Report for 2004, and Profit Distribution Proposal for 2004; and b). reviewed and adopted the Work Report of Supervisory Committee for The second meeting: a). reviewed and adopted the Half Year Report for (II). Operation of the Company According to Law In the report period, members of the board and the management did not have conducts, when implementing their duties that violated laws, rules and regulations and the Articles of Association of the Company or harmed the benefits of the Company. The senior management worked diligently for the benefits of all shareholders and employees, seized the opportunities, made decisions in a scientific manner, so that strategic plans were implemented steadily, production scale was continuously enlarged, and the new projects had good profits. (III). Financial Supervision In the report period, the Company strictly abided by relevant laws and regulations, as well as the accounting policies of the Company, so that the finance functioned properly. The Supervisory Committee reviewed the auditing opinions by Shinewing CPAs and PricewaterhouseCoopers China Limited and related issues, and believed that the financial reports fairly reflected the financial positions and operating results of the Company. The members involved in compiling Annual Report and auditing acted with strict confidentiality. (IV). Application of last proceeds There was no application of pervious proceeds in the report period. (V). Assets acquisition and disposal There was no assets acquisition and disposal in the report period. (VI). Related transactions In the report period, the related transactions of the Company were equal, fair and open, and did not harm the interests of the Company G -426 K5 AR EN.doc 29

135 2005 Chapter 10 Major Events Chapter 10 Major Events (I). The Company did not get involved in any new material lawsuit or arbitration in the report period. (II). There is no assets acquisition, disposal and merging in the report period. (III). Important related transaction in the report period 1. The related transaction in connection with the daily operation (1) Related transaction of purchasing goods or accepting services Related party Huaxin Cement Fabric Product Co., Ltd. Content Purchase cement of the Company Pricing principle Amount % in same transaction type payment Market price Cash Unit: 10 k yuan Influence to profit of the Company (2) Related transaction of selling goods or providing services Related party Huaxin Group Co., Ltd. Holcim Content Provide labour service to the Company Provide technique service to the Company Pricing principle Amount % in same transaction type payment Negotiation Cash Negotiation Cash Unit: 10 k yuan Influence to profit of the Company (IV). No trust occurred in the report period. (V). No contracting occurred in the report period. (VI). No renting or leasing occurred in the report period. (VII). Guarantee in the report period. Unit: yuan Guarantee from the Company to subsidiaries Guarantee amount for subsidiaries occurred in the report period 155,000, Guarantee amount from subsidiaries left at the report period end 377,540, Total guarantee amount (including guarantee for subsidiaries) Total guarantee amount 377,540, % in net asset of the Company (VIII). No entrustment occurred in the report period. (IX). There is no other important contract in the report period. (X). Executive of commitment G -426 K5 AR EN.doc 30

136 2005 Chapter 10 Major Events The Proposal of Share Partition Reform of the Company was reviewed and adopted by the Meeting of relevant holders of A shares for the Share Partition Reform on December 16, 2005 and was implemented on December 26. The controlling shareholder Huaxin Group Co., Ltd. committed the following in the Proposal of Share Partition Reform of : 1. None of the shares shall be listed, traded or transferred 12 months after the Share Partition Reform Plan is successfully implemented. 2. None of the state shares held on behalf of the state and the domestic legal person shares shall be listed, traded or sold in the SSE during the period from the thirteenth month to the thirty sixth month after the Share Partition Reform Plan is successfully implemented. 3. The number of the state shares held on behalf of the state that would be listed, traded or sold in the SSE from the thirty seventh month to the forty eighth month shall not exceed 5% (equivalent to 1.21% of the current total shares of the Company) of the state shares that Huaxin Group Co., Ltd. holds after the Share Partition Reform, and the transaction price shall not be lower than 9 yuan/share (subject to conversions in case of dividends distribution, bonus issue, capital reserve conversion during the period from the implementing date of Share Partition Reform to sales of the shares by Huaxin Group, if any). 4. The number of the state shares held on behalf of the state that would be listed, traded or sold in the SSE from the forty ninth month to the sixtieth month shall not exceed 10% (equivalent to 2.41% of the current total shares of the Company) of the state shares that Huaxin Group Co., Ltd. holds after the Share Partition Reform, and the transaction price shall not be lower than 9 yuan/share (subject to conversions in case of dividends distribution, bonus issue, capital reserve conversion during the period from the implementing date of Share Partition Reform to sales of the shares by Huaxin Group, if any). 5. For each 1% of the total shares of Huaxin Cement that are held on behalf of the state and sold through the listing system of the SSE, an announcement will be made within 2 working days after such transaction, during which 2 days the transactions do not have to be suspended. The above commitments are being implemented. (XI). Appointment of Certified Public Accountants In the report period, the Company continued to employ ShineWing CPAs as domestic auditor for 2005 and pay about 550,000 yuan for its auditing service in previous year. By the end of the report period, the CPA has provided auditing service to the Company for 11 years. The Company continued to employ PriceWaterHouseCoopers (China) Co., Ltd. as international auditor for 2005 and pay about 1,150,000 yuan for its auditing service in previous year. By the end of the report period, the CPA has provided auditing service to the Company for 12 years. For the year 2005, besides payment for above-mentioned service, the Company paid for the transport and lodging expenditures in the auditing period. (XII). Punishment and improvement for the Company, directors or senior management Neither the Company nor any director or senior management member was involved in any punishment or improvement by regulatory authorities G -426 K5 AR EN.doc 31

137 2005 Chapter 10 Major Events (XIII). Other major events. The Company successfully completed the Share Partition Reform for A shares on December 29, G -426 K5 AR EN.doc 32

138 2005 Chapter 11 Accounts and Auditors' Reports Chapter 11 Accounts and Auditors' Reports PRC Auditors' Report PRC Auditors' Report Balance Sheet Income and Income Appropriation Statement Supplement information Cash Flow Statement Statement of Provision for Assets Notes to the Financial Statements International Auditors' Report International Auditors' Report Consolidated Income Statement Consolidated Balance Sheet Consolidated Statement Of Changes In Equity Consolidated Cash Flow Statement Notes to the Accounts to 128 Supplementary Information G -426 K5 AR EN.doc 33

139 2005 Chapter 11 Accounts and Auditors' Reports PRC Auditors' Report PRC Auditors' Report 8 : +86(010) A 9 telephone: +86(010) ShineWing certified public accountants 9th Floor, Block A, Fu Hua Mansion No.8, Chao Yang Men Bei Da Jie, Dong Cheng District, Beijing, , P.R.China : +86(010) facsimile: +86(010) REPORT OF THE AUDITORS XYZH/2005A3019 To HUAXIN CEMENT COMPANY LIMITED We have audited the accompanying balance sheet (consolidated and company)of the Huaxin Cement Company Limited hereafter the Company as of December 31, 2005, and the related income statement, cash flows statement ( consolidated and company ) for the year then ended. These financial statements are the responsibility of the Company s management. Our responsibility is to express an opinion on these statements based on our audit. We conducted our audit in accordance with Standards for Independent Audits of PRC Certified Public Accountants. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as, evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, these financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2005, and the results of its operations and its cash flows for the year then ended in accordance with Accounting Standards of PRC and Accounting Regulations for Enterprises. ShineWing Certified Public Accountants [CPA signature] Zhang Kedong Li Suping March 3, G -426 K5 AR EN.doc 34

140 2005 Chapter 11 Accounts and Auditors' Reports PRC Auditors' Report Balance Sheet In RMB Yuan Assets Notes Consolidated The company Current assets Cash 5(1) 368,316, ,339, ,523, ,790, Short term investment Notes receivable 5(2) 104,574, ,045, ,038, ,826, Dividends receivable Interest receivable - 304, Accounts receivable 5(3) 109,388, ,581, ,082, ,087, Other receivables 5(4) 82,937, ,521, ,157, ,709, Prepayments 5(5) 16,112, ,448, ,289, ,197, Subsidiary receivable Inventories 5(6) 328,836, ,613, ,314, ,474, Deferred and prepaid expenses 5(7) 1,123, ,266, , , Long term bonds investment within one year Other current assets Total current assets 1,011,288, ,121, ,233, ,981, Long term investments Long-term equity investments 5(8) 22,711, ,950, ,482,498, ,709, Long-term debts investments 5(8) 59, , , , Total Long term Investment 22,770, ,009, ,482,557, ,768, Consolidation difference 5(8) 8,003, ,251, Fixed assets Fixed assets - cost 5(9) 5,635,949, ,550,430, ,408,334, ,339,725, Less: Accumulated depreciation 5(9) 1,596,682, ,378,073, ,023, ,364, Fixed assets - net book value 5(9) 4,039,266, ,172,357, ,553,311, ,583,361, Less:provision for fixed assets 5(9) 65,456, ,879, ,047, ,047, Fixed assets-net value 5(9) 3,973,810, ,069,478, ,549,264, ,579,313, Construction materials 5(10) 116,090, ,190, Construction in progress 5(11) 440,347, ,111, ,083, ,659, Fixed assets pending for disposal Total fixed assets 4,530,248, ,590,779, ,737,348, ,848,973, Intangible and other assets Intangible assets 5(12) 512,819, ,695, ,724, ,078, Long term deferred expenses 5(13) 31,164, ,192, ,198, ,179, Other long-term assets Total intangible and other assets 543,984, ,888, ,922, ,257, Deferred tax charges: Deferred tax charges Total assets 6,108,292, ,955,799, ,949,062, ,407,980, The accompanying notes form an integral part of the financial statements G -426 K5 AR EN.doc 35

141 2005 Chapter 11 Accounts and Auditors' Reports PRC Auditors' Report Balance Sheet (Continued) In RMB yuan LIABILITIES AND OWNERS' EQUITY Notes Consolidated The Company Current liabilities Short term loans 5(14) 581,300, ,380, ,700, ,200, Notes payable 5(15) 195,396, ,430, ,201, ,685, Accounts payable 5(16) 481,526, ,040, ,351, ,115, Advances from customers 5(17) 85,799, ,688, ,945, ,179, Accrued payroll 8,617, ,436, ,582, ,295, Staff and workers' bonus and welfare fund 7,341, ,639, ,248, ,699, Dividends payable 5(18) 393, , , , Taxes payable 5(19) 60,406, ,716, ,646, ,607, Other statutory payables 5(20) 12,038, ,889, ,838, ,650, Other payables 5(21) 129,607, ,347, ,896, ,697, Accrued expenses 5(22) 6,544, ,990, ,809, ,281, Accrued payables Long term liabilities due within 427,155, ,338, ,155, ,338, one year 5(23) Other current liabilities Total current liabilities 1,996,127, ,569,601, ,183,769, ,454, Long term liabilities Long term loans 5(24) 2,050,484, ,546,464, ,532,444, ,229,924, Debentures payables Long term payables 5(25) 128,831, ,568, ,305, ,273, Special payables 5(26) 3,795, ,000, ,795, ,000, Other long term liabilities Total long term liabilities 2,183,111, ,614,032, ,548,545, ,251,197, Deferred tax charge: Deferred taxes liabilities Total liabilities 4,179,238, ,183,634, ,732,315, ,238,651, Minority interests Minority interests 5(27) 715,436, ,452, Owner' equity Share capital 5(28) 328,400, ,400, ,400, ,400, Capital reserve 5(29) 548,926, ,391, ,388, ,852, Surplus reserve 5(30) 153,137, ,620, ,137, ,620, Including: Welfare reserves 43,165, ,906, ,165, ,906, Undistributed profits 5(31) 183,152, ,300, ,821, ,455, Including: Cash dividends 5(32) 19,704, ,704, Total owners' equity 1,213,617, ,166,712, ,216,747, ,169,328, Total liablities and owners' equity 6,108,292, ,955,799, ,949,062, ,407,980, The accompanying notes form an integral part of the financial statements G -426 K5 AR EN.doc 36

142 2005 Chapter 11 Accounts and Auditors' Reports PRC Auditors' Report Income and Income Appropriation Statement In RMB yuan Item Notes Consolidated The Company Operating income 5(33) 2,639,380, ,188,101, ,407,992, ,240,150, Less: Operating cost 5(33) 2,117,757, ,604,559, ,219,514, ,909, Operating tax and surcharge 5(34) 18,262, ,233, ,000, ,596, Gross profit 503,360, ,308, ,478, ,643, Add: Other operating profit 5(35) 2,829, ,522, ,454, , Less: Operating expenses 187,353, ,005, ,902, ,493, General and administrative 161,102, ,148, ,587, ,261, expenses Financial expenses 5(36) 111,112, ,863, ,846, ,103, Operating profit / (loss) 46,622, ,813, ,403, ,339, Add: Income from investments 5(37) -1,239, , ,483, ,634, Subsidiary income 5(38) 30,882, ,477, ,381, ,879, Non-operating income 5(39) 10,808, ,514, , ,328, Less: Non-operating expenses 5,696, ,820, , , Total profit 81,377, ,160, ,782, ,356, Less: Income tax 10,707, ,295, ,804, ,006, Minority interests 8,596, ,314, Net profit/(loss) afiter tax 62,073, ,550, ,587, ,350, Add: Undistribution profit 153,300, ,524, ,455, ,878, Add: surplus reserve Profit available to distribution 215,374, ,074, ,042, ,229, Less: Mandatory appropriation to surplus 6,258, ,035, ,258, ,035, reserves Mandatory appropriation to welfare 6,258, ,035, ,258, ,035, reserves Profit available to distribution to shareholder 202,856, ,004, ,525, ,159, Less: Preferred dividend payable Discretionary appropriation to surplus reserves Dividends payable 19,704, ,704, ,704, ,704, Dividends transferred to share Undistribution profit 183,152, ,300, ,821, ,455, Including: Cash dividends - 19,704, ,704, Supplement information Item Notes Consolidated The Company Gain on sale and disposal of a department or an invested 849, enterprise Losses arising from natural diasters Increase/decrease in income before tax due to a change in accounting policy Increase/decrease in income before tax due to a change in accounting estimate Losses arising from debt retructurings Others The accompanying notes form an integral part of the financial statements G -426 K5 AR EN.doc 37

143 2005 Chapter 11 Accounts and Auditors' Reports PRC Auditors' Report Cash Flow Statement In RMB yuan Item Notes Consolidated 2005 The Company Cash flows from operating activities Cash received from sales of goods or rendering of services 3,140,685, ,706,762, Refund of tax 41,175, ,630, Other cash received relating to operating activities 5(40) 36,286, ,043, Sub-total of cash inflows 3,218,147, ,824,435, Cash paid for goods and services 2,170,863, ,340,148, Cash paid to and on behalf of employees 181,782, ,523, Various kinds of tax paid 242,931, ,636, Other cash paid relating to operating activities 5(41) 119,436, ,575, Sub-total of cash outflows 2,715,013, ,645,884, Net cash from operating activities 503,134, ,551, Cash flows from investing activities: Cash received from return of investments - - Cash received from distribution of dividends or profits - 2,230, Net cash received from disposal of fixed assets, intangible assets and other long-term assets 14,975, ,499, Other cash received relating to investing activities 5(42) 2,000, Sub-total of cash inflows 16,975, ,729, Cash paid to acquire fixed assets, intangible assets and other long-term assets 1,070,713, ,018, Cash paid to acquire equity investments ,000, Other cash paid relating to investing activities - 39,900, Sub-total of cash outflows 1,070,713, ,918, Net cash from investing activities -1,053,738, ,188, Cash flows from financing activities Proceeds form issuing shares - - Including: cash from minority interests - - Proceeds from issue of bonds - - Proceeds from borrowings 1,680,600, ,075,700, Other proceeds relating to financing activities 5(43) 1,922, , Sub-total of cash inflows 1,682,522, ,076,238, Cash repayments of amounts borrowed 988,921, ,911, Cash payments for distribution of dividends or profits 170,085, ,052, Other cash payments relating to financing activities 5(44) 1,378, , Sub-total of cash outflows 1,160,385, ,327, Net cash from financing activities 522,137, ,911, Effect of foreign exchange rate changes on cash -556, , Net increase in cash and cash equivalents -29,022, ,267, The accompanying notes form an integral part of the financial statements G -426 K5 AR EN.doc 38

144 2005 Chapter 11 Accounts and Auditors' Reports PRC Auditors' Report CASH FLOW STATEMENT (Continued) 1. Reconciliation of net profit to cash flows from operating activities In RMB yuan ITEM Notes Consolidated 2005 The Company 2005 Net profit 62,073, ,587, Add: Minority Interest 8,596, Add: Provision for loss on assets -5,447, ,621, Depreciation of fixed assets 269,962, ,419, Amortization of intangible assets 13,300, ,280, Depreciation of long-term deferred expenses 11,229, ,702, Deferred Expenses 143, , Accrued expenses -17,934, ,647, Losses on disposal of fixed assets, intangible assets and other long-term gains) increase) decrease) -3,707, , Losses on scrapping of fixed assets Financial expenses 114,896, ,732, Losses arising from investments (or deduct: 1,239, ,483, Deferred tax credit (or deduct : debit) - - Decrease in inventories (or deduct: increase) -29,450, ,830, Decrease in operating receivables (or deduct: Increase in operating payables (or deduct: Other -18,008, ,855, ,240, ,909, Net cash flows from operating activities 503,134, ,551, Investing and financing activities that do not involve in cash receipts and payments Capital by the transfer of debts - - Convertible bonds within one year - - Fixed assets by financial lease Net increase in cash and cash equivalents period cash at the end of the period 368,316, ,523, Less: cash at the beginning of the period 397,339, ,790, Add: cash equivalents at the ending of the period - - Less: cash equivalents at the beginning of the - - Net increase in cash and cash equivalents -29,022, ,267, The accompanying notes form an integral part of the financial statements G -426 K5 AR EN.doc 39

145 2005 Chapter 11 Accounts and Auditors' Reports PRC Auditors' Report Statement of Provision for Assets (consolidated) Item 1.Provison for bad debts Including: accounts receivable Other receivables 2.Provision for loss on realization of short-term investments Including: equity investments Investments in bonds 3.Provision for loss on realization of inventories Including: Raw materials Work in progress finished goods Increase In RMB yuan Addition from acquisition Decrease Write off ,527, ,811, ,598, ,117, ,842, ,097, ,598, ,146, ,685, , ,971, ,417, , ,987, ,417, ,417, Low value and perishable articles 4.Provision for loss on realization of long-term investments Including: long-term equity investments Long-term investments in bonds 5.Provision for loss on realization of fixed assets Including: buildings Machinery Motor Vehicles Office equipment, furniture and fixtures 6.Provision for loss on realization of intangible assets Including: land-use Right Patent Trade mark 7.Provision for loss on realization of construction in process 8.Provision for loss on realization of commison loan , , ,955, ,180, ,775, ,955, ,180, ,775, ,879, ,204, ,218, ,456, ,674, ,760, ,913, ,829, ,204, ,457, ,167, , , , , , , G -426 K5 AR EN.doc 40

146 2005 Chapter 11 Accounts and Auditors' Reports PRC Auditors' Report Statement of Provision for Assets (the Company) In RMB yuan Item Increase Addition from acquisition Decrease Write off Provison for bad debts 24,381, ,621, ,358, ,401, Including: accounts receivable 21,946, ,541, ,358, ,046, Other receivables 2.Provision for loss on realization of short-term investments Including: equity investments Investments in bonds 3.Provision for loss on realization of inventories Including: Raw materials Work in progress finished goods Low value and perishable articles 4.Provision for loss on realization of long-term investments Including: long-term equity investments 2,435, , ,355, ,342, ,342, ,342, ,342, ,775, ,775, ,775, ,775, Long-term investments in bonds 5.Provision for loss on realization of fixed assets Including: buildings Machinery Motor Vehicles Office equipment, furniture and fixtures 6.Provision for loss on realization of intangible assets Including: land-use Right Patent Trade mark 7.Provision for loss on realization of construction in process 8.Provision for loss on realization of commison loan ,047, ,047, ,142, ,142, ,904, ,904, , , G -426 K5 AR EN.doc 41

147 2005 Chapter 11 Accounts and Auditors' Reports PRC Auditors' Report Notes to the Financial Statements Notes to the Financial Statements 31 December 2005 (Unless otherwise indicated, all figures are stated in RMB 000) 1 General Huaxin Cement Company Limited (the "Company") is a joint stock limited company restructured from the previous state-owned enterprises Huaxin Cement Plant. The Company was registered on 30 November As at 31 December 2005, the total share capital was RMB million including: million RMB common shares issued domestically, and 164 million RMB special shares (B shares). The Company is located in Huangshi City, Hubei province and its principal activities are the production and sale of cement, cement clinker and paper-cloth bags. On 29 December 2005, reform of non-tradeable shares has been accomplished, after that the share capital is as follows: Shares in thousands 1 Listed shares with certain criteria and conditions (1) State-owned shares 79,251 (2) Legal entity shares 22,749 Sub- total 102,000 2 Listed shares (1) A shares 62,400 (2) B shares 164,000 Sub- total 226,400 Total 328,400 2 Principal accounting policies and basis of consolidation (1) Basis of presentation of the financial statements The financial statements have been prepared in conformity with Accounting Standards for Enterprises and Accounting Regulations for Enterprises. (2) Accounting period The accounting period of the Company is the calendar year. (3) Reporting currency The Company uses RMB as its reporting currency. (4) Basis of Accounting G -426 K5 AR EN.doc 42

148 2005 Chapter 11 Accounts and Auditors' Reports PRC Auditors' Report Notes to the Financial Statements The Company adopts the accrual basis and historical costing principle as its accounting basis. (5) Foreign currency translation Foreign currency transactions are translated into RMB at the rates of exchange quoted by the People's Bank of China prevailing at the transaction date. Foreign currency monetary assets and liabilities are translated into RMB at the rates of exchange prevailing at the balance sheet date. Exchange gains and losses arising from foreign currency translation are all included in operating results. Exchange gains and losses occurred during pre-operating period are included in deferred asset while exchange gains and losses related to CIP are capitalised as the cost of CIP. (6) Cash equivalents Cash equivalents are short-term, highly liquid investments (normally less than three months from date of purchase to due date) that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. (7) Provision for bad debts The Company accounts for bad debts using provision method. Unrecoverable accounts receivable due to bankruptcy or death of debtor and relevant conclusive evidence are affirmed as bad debt loss. Provision for bad debts is made based on appraising the collectible of accounts receivable. No all provision is provided against related party balances. For other balances, general provisions are provided as the following scheme. 1-2 year (liquid) 5% 1-2 year (idle) 15% 2-3 year (liquid) 10% 2-3 year (idle) 30% More than 3 year 40% Unrecoverable 100% The accounts receivable within one year mainly represents the receivables associated with significant projects invested by the State. Based on the analysis, no provision is necessary because of quick settlement. (8) Inventories Inventories comprising mainly raw materials, work-in-progress, finished goods and low value and perishable articles, are valued at the lower of cost and its realizable value. Costs of raw materials include purchase price and expenditures on transportation, loading and unloading and insurance. Cost of work in progress and finished goods include direct materials, direct labor and an appropriate proportion of production overheads G -426 K5 AR EN.doc 43

149 2005 Chapter 11 Accounts and Auditors' Reports PRC Auditors' Report Notes to the Financial Statements Cost of inventory is determined on a weighted average basis. Cost of low value and perishable articles is charged to profit and loss accounts at the time it is put into use. Because of inventory loss, out-dated production, lower-than-cost sales price and other reasons, reserve against price decline had been withdrawn at the end of period. Reserve against price decline for inventory had been withdrawn according to the balance between the unit inventory cost and its discountable net value by inventory categories. (9) Long-term investments Long-term investments include investments in bonds and equity investments. Investments in bonds are stated at cost. For equity investments, cost method is adopted when the possessed equity interest is less than 20% of the total registered capital of the invested company; Equity method is adopted when the possessed equity interest therein is 20% to 50%; and when the equity interest is more than 50%, or unless the Company exerts controlling power essentially, the equity method is adopted and being consolidated. If the recoverable amount of any investment is less than the carrying amount of that investment as a result of a continuing decline in market value or change in operating condition of the invested enterprises, and such decline can not be recovered in an estimated future period, the difference between the recoverable amount and the carrying amount of the investment should be provided against investment. The acquisition difference between equity investment and possessed equity interest are amortized within 20 years. (10) Fixed assets 1) Fixed assets definition Fixed assets are assets with a useful life over one year, such as buildings and constructions, major equipment, and non-major equipment used in the operations whose unit value is over RMB 2,000 Yuan and with a useful life of over 2 years. 2) Fixed assets classification Fixed assets consist of buildings and constructions, machinery and equipment, vehicles and office equipment, furniture and fixtures, motor vehicles. 3) Fixed assets valuation Fixed assets contributed by Huaxin Cement Plant as the state-owned shares' contribution are stated at valuation. Fixed assets purchased or constructed by the Company are stated at cost. 4) Depreciation method G -426 K5 AR EN.doc 44

150 2005 Chapter 11 Accounts and Auditors' Reports PRC Auditors' Report Notes to the Financial Statements The Company withdraw the depreciation for all its assets except for some fully withdrawn. Depreciation of fixed assets is calculated to write off their cost on the straight line basis over their expected useful lives. The principal residual value rate and depreciation rate are as follows: Item Residual value rate Annual depreciation rate Buildings 4% % Machinery and equipment 4% 6-12% Office equipment, furniture and fixtures 4% % Motor Vehicles 4% 8-12% 5) The criterion and method of provision for impairment of fixed assets Provision for impairment of fixed assets is recorded as amount of the devaluation of certain items after reviewing the value of fixed assets at the end of the period. A continuing decline in market value which is abnormal and can not be recovered in an estimated future period. Being damaged or out-dated. Use of the FA is changed such as business reorganization, enterprise ending and disposal ahead of schedule. Operating conditions of the company are worsened. Because of interest rate increasing greatly the recoverable amount reduces. Other conditions that prove the impairment of FA. (11) Construction in progress 1) Valuation of CIP Construction in progress represents the plant and machinery under construction and installation. It is stated at cost, which includes the acquisition cost of the equipment and machinery, construction expenditures and interest charges arising from borrowings used to finance the construction during the construction period. 2) Provision for the impairment of CIP Provision for impairment of CIP is made, if evidence exists to approve that there is significant impairment on the realizable value of CIP G -426 K5 AR EN.doc 45

151 2005 Chapter 11 Accounts and Auditors' Reports PRC Auditors' Report Notes to the Financial Statements Long-term ceasing and non-reconstructing within future 3 years CIP. Both function and technique of CIP have been out of date while their benefit is uncertain. Other conditions that prove the impairment of CIP. (12) Borrowing cost 1) Capitalization on borrowing cost Borrowing costs include interest resulting from borrowing amortization of discount or premium on bond or debtors issued and supplementary expenses, as well as the exchange gains & losses arising from foreign currency borrowing. Except these borrowings cost particularly for purchase and construction of fixed assets, other borrowing costs are charged to financial expense when it occurs. When the following three conditions are met, the specialized borrowing cost for purchase and construction of fixed assets begin to be capitalized: The expenditure for asset has occurred. The borrowing cost has occurred. The activities of purchase and construction of fixed asset has begun. 2) Cease of capitalizing borrowing cost When constructed fixed asset is ready for use, capitalization of borrowing cost ceased, after that, it was expensed as it occurs. (13) Intangible assets (i) The actual cost should be determined as followed: The amount of an intangible asset purchased should be recorded at the amount actually. The amount of an intangible asset contributed by an investor should be determined at an amount agreed upon by all the investors. However, if an intangible asset is contributed in an initial public offering by an investor in exchange for shares of an enterprise, the intangible asset should be recorded at the book value originally recorded in the books of the investors except the ownership of land. The amount of an intangible asset that is developed by enterprise itself and a legal right to the asset has been obtained should include the amount of expenditures such as registration fees and legal fees incurred on acquisition of the asset according to law. Expenses incurred during the process of research and development such as materials, wages and welfare for employees and other fees directly engaged in the R&D programme should be recorded as expenses of the period in which they are incurred G -426 K5 AR EN.doc 46

152 2005 Chapter 11 Accounts and Auditors' Reports PRC Auditors' Report Notes to the Financial Statements (ii) The amortization period of an intangible asset should be determined in accordance with the following rules: The cost of an intangible asset should be amortized evenly over its expected useful life, starting from the month in which it is acquired. The period is up to the shortest one among the contract, laws and the beneficial term. If neither the relevant contract nor the law stipulates the effective period, the amortization period should not exceed 10 years. The Company s intangible assets include trademark, land use right, limestone mine use right etc. The trademark right is stated at appraised value and is amortized on a straight-line basis over 20 years. Other than the land use rights injected into the Company as capital contribution, which are stated at appraised value, land use rights are stated at cost and are amortized on a straight-line basis over 50 years or the granted beneficiary period. Limestone mine use rights are stated at cost and are amortized on a straight-line basis in granted beneficiary period. Provision is made, if evidences exist to approve that there is significant impairment on the realizable value of intangible assets. (14) Long-term deferred expenses Long-term deferred expenses represent overhaul expenses, development expenses, specific railway expansion and improvement expenses and other deferred expenses. Land development expenses are the improvement expenses for mine sites and are amortized over the beneficiary period of 39 years on a straight-line basis. Specific railway expansion and improvement expenses are expenses used to increase transportation capacity and they are amortized over 12 years on a straight-line basis. Other deferred expenses are amortized on a straight-line basis in granted beneficiary period. (15) Retirement benefits The payments of staff retirement benefit incurred are charged to the income statement when incurred. (16) Estimated liability Liabilities are recognized when activities involve guaranty for others discounting of commercial acceptable notes unsettled litigation or arbitration meet the following conditions: The obligation is current obligation of the company. Fulfill of the obligation will probably result in outflow of economic resource of the company. Amount of the obligation could be measured properly. (17) Revenue recognition Revenue represents sales of cement and cement clinker. It is recognized when the risk and G -426 K5 AR EN.doc 47

153 2005 Chapter 11 Accounts and Auditors' Reports PRC Auditors' Report Notes to the Financial Statements benefit associated with the ownership of products have been transferred and the resources on sales that could flow into the Company, the related sales revenue, and cost of sales could be measured properly. (18) Income tax Income tax is calculated based on the tax rates applicable to the Company and its subsidiaries and their taxable income. The Company accounts for corporate income tax using the tax payable method. (19) Profit distribution According to relevant PRC laws and regulations for joint stock limited companies and the Articles of Association of the Company, profit after tax is utilized in the following order: To cover accumulated losses. Appropriation of 10% of the statutory surplus reserve. When the balance of the statutory surplus reserve reaches 50% of the share capital, no further appropriation to the reserve is required. Appropriation of 10% of the statutory public welfare fund. Appropriation of the discretionary surplus reserve. Distribute dividends to shareholders. In accordance with relevant PRC regulations, the basis to profit distribution to shareholders is the lower the retained profits after appropriation of reserves as mentioned above, as shown in the PRC statutory accounts and the accounts prepared under International Accounting Standards. (20) Basis of consolidation When the equity is more than 50% or unless the Company exerts controlling power essentially, the equity method is adopted and being consolidated. Consolidated financial statements have been prepared in conformity with the Provisional Regulations on Consolidated Financial Statement and the relevant requirements promulgated by the MOF. All significant inter-company transactions and balances have been eliminated upon consolidation. The subsidiaries which throw little effects to The Company are not consolidated. 3 Principal Taxation (1) Enterprise income tax The Company is subject to 33% income tax except for the subsidiary companies Nantong and Suzhou Golden Cat, as they are Sino-foreign joint ventures that enjoy preferential income tax policy. The income tax rate of Nantong Company and Golden Cat Company is 24%. According to G -426 K5 AR EN.doc 48

154 2005 Chapter 11 Accounts and Auditors' Reports PRC Auditors' Report Notes to the Financial Statements Circular (2004) No. 002 issued by State Tax Bureau in Suzhou City, Golden Cat Company was approved to pay the income tax freely from 2003 to 2004 and half of it from 2005 to According to approval of State Tax Bureau in Nantong City, Nantong Company would enjoy the preference of joint venture income tax policy from 2004 to According to Circular (2005) No. 69 issued by State Tax Bureau in Huangshi City, Huaxin Company Co. Ltd. was approved to be free of income tax RMB 8,200 thousand. State Tax Bureau in Yidu City confirmed that Yichang Cement Company could take this tax advantage because of purchasing domestic equipment. The company was approved to be free charge of the income tax RMB 6,807 thousand on February 28, Tibet Cement Company is located in the West Region of China. According to the encouraging policies of the State, the income tax rate of Tibet Company is 15%. According to Circular (2006) No. 1 issued by State Tax Bureau in En shi Area, Huaxin En shi Cement Company located in Minority Region and was approved to pay the income tax freely from 2005 to According to the approval issued by State Tax Bureau in Yangxin county, Yangxin Cement Company located in Poverty Region and was approved to pay the income tax freely from (2) Value added tax The Company is subject to value added tax (VAT). The output VAT rate of cement, cement clinker and power, etc is 17%, and the input VAT rate of stones, coal etc. is 13%. Input VAT from purchase of raw material could be netted off against output VAT. VAT payable is the net difference between output VAT and input VAT. The Company s export income is applicable to preferential VAT policy of manufacture enterprise from January to September in At the beginning of October the Company was affirmed to commodity circulation enterprise by State Tax Bureau in Huangshi City and its drawback rate is 13%. (3) Business tax Storage and transportation income is subject to business tax; the tax rate is 3%. Trademark use right, consultation and land rental income is subject to business tax, the tax rate is 5%. (4) City construction tax, education surtax and flood embankment improvement surcharge. City construction tax, education surtax and flood embankment improvement surcharge are calculated at 7%, 3% and 2% of the turn over tax payable respectively. (5) Natural resource tax Natural resource tax is calculated at RMB 2 per ton based on quantities of exploiting limestone. (6) Individual Income Tax G -426 K5 AR EN.doc 49

155 2005 Chapter 11 Accounts and Auditors' Reports PRC Auditors' Report Notes to the Financial Statements Individual income tax is borne by the individual employees. The Company withholds individual income tax from employees for payment to the tax authorities. 4 Subsidiaries (1) General At December , the Company owns subsidiaries as follows: Name subsidiaries of Registered capital (RMB Thousand) Huaxin Xiantao 23,900 14,658 Cement Co., Ltd.*1 Huaxin Nantong 108,000 89,680 Cement Co., Ltd.*2 Huangshi Huaxin 8,000 7,870 Packging Co. Ltd.*3 Wuhan Wugang-Huaxin Cement Co., Ltd.*4 Huaxin Yichang Cement Co., Ltd.*5 40,000 20, , ,000 Huaxin En shi 60,000 40,200 Cement Co., Ltd.*6 Huaxin Cement 1, scientific research and design Co. Ltd.*7 Huaxin Golden Cat 136,000(KUSD) Cement (Suzhou) Co. Ltd.*8 Huaxin Tibet Cement Co. Ltd. *9 Huaxin Zhao tong Cement Co. Ltd. *10 50,000 30,000 75,000 45,000 Huaxin Yueyang 25,000 22,500 Cement Co. Ltd. *11 Investment (RMB thousand) 28,390(KUSD) Equity proportio n Business scope G -426 K5 AR EN.doc 50 80% 85% 98.38% 50% 70% 90.1% 99% 51% 60% 88% 97% Produce and sale slag cement Produce and sale cement and its product Produce and sale packaging materials Produce and sale slag cement Produce and sale cement, products for construction. Package and cement technology service Produce and sale Portland cement and its product Construction engineering, cement produce technology service Produce and sale cement and its product Produce and sale Portland cement and its product, cement technology service Produce and sale cement and its product Construction engineering, t d

156 2005 Chapter 11 Accounts and Auditors' Reports PRC Auditors' Report Notes to the Financial Statements cement produce technology service Huaxin Yangxin Cement Co. Ltd. *12 500, ,000 80% Produce and sale cement, products for construction. Package and cement technology service Huaxin Wuhan Co. Ltd. *13 60,000 42,000 94% Produce and sale cement and its product Huaxin Wuhan Concrete Co. Ltd. *14 10,000 7,000 94% Produce and sale concrete *1 The Company invested physical assets of a cement production line and intangible assets of the trademark right Huaxin to jointly establish Huaxin Xiantao Cement Co., Ltd ( Xiantao Company ) with Xiantao Cement Plant. The registered capital of Xiantao Company is RMB 23,900 thousand, and the Company holds 80% of its share interests, credit investment difference of RMB 4,462 thousand raised due to the excess of appraised value against net book value of the physical assets. The other shareholder - Xiantao Cement Plant holds 20% of its share interests. Xiantao Company is located in Xiantao City, Hubei Province, and is in normal operation. The financial statements were consolidated. *2 The Company jointly established Huanxin Nantong Cement Co., Ltd. ( The Nantong Company ) with Huaneng International Power Development Co., ( The Huaneng Company ) and other companies in The Nantong Company is a Sino-foreign Joint Venture with registered capital of RMB108,000 thousand. The Company originally owned its shares of 34%. In March 2002, the Company established an agreement with Nanshan development Co., Ltd of China ( Nanshan Company ) for acquisition of 25% share interests of Nantong Company. The Company established another agreement with RDC International Individual Corporation of Singapore (RDC) on entrusting the share interests and contracting future acquisition of 26% share interests of Nantong Company held by RDC. During April and May 2002, Nantong Company revised its JV Contract and obtained approval from the Ministry of China Foreign Economic & Trade Relationship. According to above two agreements, the Company paid RMB 40,000 thousand to Nanshan Company and RDC in June 2002, which accounts for 50% of the acquisition price. Therefore the equity accounting was adopted for the investment of Nantong Company at 85% interests since June 2002 and its financial statements were consolidated. On 5 August 2004, the Company reached a supplemental agreement with RDC to extend the effective period of the Agreement on Shares Entrust Management and Pre-contract Share Transfer to 20 March On 8 June 2005, the Company and RDC had reached the Agreement on Shares Transfer.Up to 31 December 2005, because no approval from authorities of the Huaneng company was obtained,the Agreement on Shares Transfer had not been carried out.the Huaneng company expressed approval on the Shares Transfer in a meeting summary on 6 Feb,2006. Nantong Company is located in Nantong City, Jiangsu Province, and is in normal operation. *3 The Company invested net assets of RMB 7,870 thousand to jointly establish Huaxin Huangshi Packaging Co., Ltd. ( Packaging Company ) with Mr. Xu Wenshu and another 4 natural persons. The registered capital of Packaging Company is RMB 8,000 thousand, and the Company holds 98.38% of its share interests, and the other shareholders hold 1.62%. Packaging Company is located in Huangshi City, Hubei Province. The financial statements were consolidated G -426 K5 AR EN.doc 51

157 2005 Chapter 11 Accounts and Auditors' Reports PRC Auditors' Report Notes to the Financial Statements Huaxin Group Co., Ltd. jointly established Huaxin Yidu Packaging Co., Ltd. ( Yidu Packaging Company ) with Huaxin Huangshi Packaging Co., Ltd. on June 19, The registered capital of Yidu Packaging Company is RMB 1,500 thousand. According to the contract, Huaxin Group s labour union holds 41% of its share interests with money capital amounted to RMB 610 thousand, while Huaxin Huangshi Packaging Company holds 59% with money capital amounted to RMB890 thousand. It is located in Zhichengzhen, Yidu City and the financial statements were consolidated. *4 The Company invested RMB 20,000 thousand to jointly establish Wuhan Wugang Huaxin Cement Co., Ltd. ( Wugang Company ) with Wuhan Steel Group Co.. Each of the shareholders holds 50% of its share interests. The registered capital of Wugang Company is RMB 40,000 thousand. Wugang Company is located in Wuhan City, Hubei Province. Since the Company exerts the essential control on Wugang Company, its financial statements were consolidated. *5 The Company invested RMB 105,000 thousand to jointly establish Huaxin Yichang Cement Co., Ltd.( Yichang Company ) with Yidu Fangde Investing Co., Ltd. during April to December The registered capital of Yichang Company is RMB 150,000 thousand. It is located in Yidu City, Hubei Province, and initiated its operation on July 1, The financial statements were consolidated. *6 The Company invested RMB 40,200 thousand to jointly establish Huaxin En shi Cement Co., Ltd. ( En shi Company ) with En shi Lianzhu Cement Co., Ltd.. The registered capital of En shi Company is RMB 60,000 thousand, and the Company holds 67% of its share interests, and En shi Lianzhu Co.Ltd holds 33% according to the contract. En shi Company is located in En shi City, Hubei Province. The expected date of operation was September of 2004 and it has been running steadily from January of 2005, its financial statements were consolidated. *7 The Company invested physical assets amounted to RMB 990 thousand to jointly establish Huaxin Cement Scientific Research & Design Co., Ltd. ( SRD Company ) with Huangshi Huaxin Engineering Supervision Co., Ltd.. The registered capital of SRD Company is RMB 1,000 thousand, The Company holds 99% of its share interests, and the other shareholder holds 1%. It is located in Huangshi City, Hubei Province and the financial statements were consolidated. *8 The Company had signed an agreement with Dongfang Maobang Cement Pte. Ltd. ( Dongfang Maobang ) and Suzhou Wuzhong Muduzhen Economic Development Company ( Mudujingfa ) for the acquisition of 51% shares of Suzhou Golden Cat Cement Co., Ltd. ( Suzhou Golden Cat ). The acquisition price was USD 27,451 thousand and USD thousand (RMB 7,784) thousand. China Securities Regulatory Commission on November 26, 2003 as well as the shareholders conference had approved this acquisition on December 29, The Company has made the entire acquisition payment from January 9 to January 13, According to the approved document Suyuanguanfuzi (2003) No. 510 issued by Suzhou Industry Zone Regulatory Committee on Approval of the change of name, share equity and business scope to Suzhou Golden Cat Cement Co., Ltd., Suzhou Golden Cat altered its business license on January 2, According to the constitution of Huaxin Suzhou Golden Cat, the Company occupies 6 out of 11 members of the Board of Directors. The Company assigns the chairman of the Board. Therefore the management of the Company considered that the Company exerts the essential control of Suzhou Golden Cat after the acquisition payment made. It is located in Suzhou City, Jiangsu Province and its financial statements were consolidated. *9 The Company jointly established Huanxin Tibet Cement Co., Ltd. ( Tibet Company ) with Xingye Cement Plant in South of Tibet ( Xingye Plant ) on December 22, The registered capital of Tibet Company is RMB50, 000 thousand. According to the contract, the company holds 60% of its share interests with money capital amounted to RMB30, 000 thousand, while Xingye Plant holds 40% with physical capital amounted to RMB20, 000 thousand including 10,000 tons G -426 K5 AR EN.doc 52

158 2005 Chapter 11 Accounts and Auditors' Reports PRC Auditors' Report Notes to the Financial Statements PC32.5 cement. It is located in Zedangzhen, South of Mountains area, Tibet Province and the financial statements were consolidated. *10 The Company invested RMB 45,000 thousand to jointly establish Huaxin Zhaotong Cement Co., Ltd. ( Zhaotong Company ) with Huaxin Yichang Cement Co., Ltd.. The registered capital of Zhaotong Company is RMB 75,000 thousand, and the Company holds 60% of its share interests, and the other shareholder holds 40% with money capital amounted to RMB 30,000 thousand. The capital should be paid within one year by installment and the investment was amounted to RMB 45,000 thousand at October of It is located in Zhaotong City, Yunnan Province and its financial statements were consolidated. *11 The Company jointly established Huaxin Yueyang Cement Co., Ltd. ( Yueyang Company ) with Huaxin Yichang Cement Co., Ltd. The registered capital of Yueyang Company is RMB25, 000 thousand. According to the contract, the company holds 90% of its share interests with physical capital amounted to RMB22, 500 thousand, and Yichang Company holds 10% with physical capital amounted to RMB2, 500 thousand. It is located in Yueyang City, Hunan Province and the financial statements were consolidated. *12 The Company jointly established Huaxin Yangxin Cement Co., Ltd. ( Yangxin Company ) with Huangshi Yiruida Investment Co., Ltd. The registered capital of Yangxin Company is RMB500, 000 thousand. According to the contract, the company holds 80% of its share interests with physical capital amounted to RMB400, 000 thousand, and Yiruida Company holds 20% with intangible assets amounted to RMB100,000 thousand. It is located in Yangxin County, Hunan Province and the financial statements were consolidated. *13 The Company jointly established Huaxin Wuhan Cement Co., Ltd. ( Wuhan Company ) with Huaxin Yangxin Cement Co., Ltd. The registered capital of Wuhan Company is RMB60, 000 thousand. According to the contract, the company holds 70% of its share interests with physical capital amounted to RMB42, 000 thousand, and Yangxin Company holds 30% with physical capital amounted to RMB18, 000 thousand. It is located in Wuhan City, Hunan Province and the financial statements were consolidated. *14 The Company jointly established Huaxin Wuhan Concrete Co., Ltd. ( Concrete Company ) with Huaxin Yangxin Cement Co., Ltd. The registered capital of Concrete Company is RMB10, 000 thousand. According to the contract, the company holds 70% of its share interests with money capital amounted to RMB7, 000 thousand, and Yangxin Company holds 30% with money capital amounted to RMB3, 000 thousand. It is located in Wuhan City, Hunan Province and the financial statements were consolidated. 5 Notes to consolidated financial statements (1) Cash Item Cash on hand Cash in bank 346, ,829 Others 20,994 16,075 Total 368, ,340 The cash balance include the following foreign currencies G -426 K5 AR EN.doc 53

159 2005 Chapter 11 Accounts and Auditors' Reports PRC Auditors' Report Notes to the Financial Statements Currency Foreign currency (thousand) Exchange rate Amount USD HKD SGD CHF EUR Total 980 (2) Notes receivable Item Bank acceptance 104, ,046 Trade acceptance 0 6,000 Total 104, ,046 (3) Accounts receivable Age accounts of Amount % Bad debt provision Amount % Bad debt provisio n Within 1 year 100, , years 8, , years , More than 3 years 16, ,607 28, ,612 Total 126, ,147 95, ,843 Total amount of the five biggest debtors was 23,466 thousand, which was about 18.55% of the total amount of accounts receivable. There was no receivable due from companies held with more than 5% shares of the Company. The addition in 2005 was mainly due to the increase of sales by newly established subsidiaries. An amount of unrecoverable accounts receivable RMB 3,358 thousand was written off in 2005 and RMB 2,945 thousand could be deduct before calculation of income tax according to the Circular (2006) No.11 approved by State Tax Bureau in Huangshi city. (4) Other receivables Age accounts of Amount % Bad debt provision Amount % Bad debt provision G -426 K5 AR EN.doc 54

160 2005 Chapter 11 Accounts and Auditors' Reports PRC Auditors' Report Notes to the Financial Statements Within 1 year 75, , years 1, , years 2, , More than 3 years 6, ,971 8, ,290 Total 85, ,971 70, ,685 Total amount of the five biggest debtors was RMB 56, 112 thousand, which was about 65.32% of the total amount of other receivables. The addition in 2005 was mainly due to the increase of money advanced for other companies. There was RMB 44,240 thousand receivable between Jinxiong International Company and Golden Cat Company. There was RMB 78 thousand receivable due from companies held with more than 5% shares of the Company. (5) Prepayments Age of accounts Amount % Amount % Within 1 year 12, , years 3, years More than 3 years Total 16, , Prepayment of age over one year was unsettled equipment payment. There was no prepayment due from companies held with more than 5% shares of the Company. (6) Inventories Item Amount Provision for impairment Amount Provision for impairmen t G -426 K5 AR EN.doc 55

161 2005 Chapter 11 Accounts and Auditors' Reports PRC Auditors' Report Notes to the Financial Statements Raw materials 176,366 13, ,164 17,418 Work in progress 60, ,454 0 Finished goods 61, ,913 0 Low value and perishable articles 49,149 4,809 1,500 0 Total 346,823 17, ,031 17,418 The addition in 2005 was mainly due to the increase of newly established subsidiaries. (7) Deferred and prepaid expenses Item Description Property insurance Beneficial period is year Auto insurance Beneficial period is year Ship insurance Beneficial period is year Others Beneficial period is year Total 1,123 1,266 (8) Long-term investments 1) Long-term investment Item Equity investments 25,487 29,906 Less: Provision for long- term investment 2,776 5,956 Net equity investments 22,711 23,950 Investments in bonds Total 22,770 24,009 2) Equity investment Names of invested companies Equity proporti on% Origina l investe d Amoun t Equity adjust ment Accumu lated equity adjustm ent Balanc e at period end Provisio n for impairm ent 2005 Provisio n for impairme nt G -426 K5 AR EN.doc 56

162 2005 Chapter 11 Accounts and Auditors' Reports PRC Auditors' Report Notes to the Financial Statements Huangshi Huaxin Hotel Co., Ltd (7) Huaxin Group Yidu Co., Ltd Hubei Huangshi Power Development Company , , Bank of Communicati on , , China Pacific Insurance Company Zhengzhou Xinxing Group Co., Ltd , ,000 2,000 2,000 Changjiang Development Company Hubei Province Construction Materials Trading Company Pingdingshan Zhongnan Coal Company Shanghai Golden Cat Cement Co., Ltd.* 64 3,180 Consolidated difference 12,473 Sub-total 33,143 (3,180 ) (3,180) 0 0 3,180 (1,247 ) (4,469) 8, (4,419 ) (7,656) 25,487 2,776 5,956 * Huaxin Cement Company (Golden Cat) agreed with Shanghai Construction Material Co., Ltd. to cease operating of Shanghai Golden Cat Cement Co., Ltd. 3) Equity Investment Difference Name Invested C of Original Investme t Reason of f ti Amortizati on Period Amortizati on A t Accumulat ed A ti ti Balanc e G -426 K5 AR EN.doc 57

163 2005 Chapter 11 Accounts and Auditors' Reports PRC Auditors' Report Notes to the Financial Statements Company nt Amount formatio n Amount Amortizati on Amount Huaxin Nantong Cement Ltd.* Co., 12,473 Equity acquisitio n 10 years 1,247 4,469 8,004 * The difference was resulted from the acquisition 51% share interests of Huaxin Nantong Cement Co., Ltd from Nanshan Development Co., Ltd. and RDC InterState Individual Corporation of Singapore. 4) Investments in bonds Item E huang Bridge construction bond Total (9) Fixed Assets 1) Fixed assets and Depreciation Buildings Machiner y & equipmen t Office equipment and furniture Motor vehicle s Total Cost / valuation At 1 Jan, ,713,933 2,395, , ,405 4,550,430 Additions 455, , ,912 45,351 1,187,017 Including: Transfer from CIP 417, ,757 28,866 25,543 1,131,378 Addition from acquisition Reclassification 25, , , Disposals 3,603 86, , ,498 At 31 Dec, ,165,513 3,170, , ,682 5,635,949 Accumulated depreciation At 1 Jan, , ,983 23,035 80,481 1,378,073 Additions 65, , , ,962 Including: Addition from acquisition Reclassification 0 9,107-9, Disposals 1,141 41, ,076 51, G -426 K5 AR EN.doc 58

164 2005 Chapter 11 Accounts and Auditors' Reports PRC Auditors' Report Notes to the Financial Statements At 31 Dec, ,667 1,083,416 22,681 86,918 1,596,682 Net book value at Jan, 1,374,359 1,460, ,792 82,924 3,172,357 Net book value at 31 Dec, ,761,846 2,086,587 80, ,764 4,039,267 2) Provision for fixed assets Item 2004 Addition Disposal 2005 Building 27, ,761 25,914 Machinery and equipment 74, ,662 39,168 Motor vehicles Others Total 102, ,423 65,456 The decrease in 2005 was caused by equipment disposal by Suzhou Golden Cat Cement Co., Ltd. (10) Engineering Materials Item Special Materials 0 7,058 Special Equipments 116,090 1,000 Unsettled equipment payment 0 65,132 Total 116,090 73,190 The construction of Xiangfan Company, Zhaotong Company and Yangxin Company caused the increase in (11) Construction in progress 1) Construction in progress Name of project Project budget 2004 Addition Transferred Other 2005 Source of Including: to Fixed decrease fund interest Assets capitalised Input Cons vs. progr Budget Yangxin 4800T cement production line phase II 328, , ,675 self-financing 0 5% 10% Tibet 1000T cement production line 160,040 27, , , ,446 bank loan and self-financing 3,198 95% 95% G -426 K5 AR EN.doc 59

165 2005 Chapter 11 Accounts and Auditors' Reports PRC Auditors' Report Notes to the Financial Statements Wuxue 6000T bank loan cement production and line 556, , , , ,143 self-financing 13,066 97% 95% Wuhan concrete production line 30, ,654 14, ,390 self-financing 0 50% 50% Yueyang cement grinding project 85,500 31,351 53,761 85, self-financing 0 100% 100% Nantong cement grinding project 23,014 15, , self-financing 0 68% 100% Yichang 2500T production line (phase II) 198, , , ,312 bank loan and self-financing 1,583 88% 90% Zhaotong 2000T cement production line 268,000 5,686 89, ,997 self-financing 0 35% 40% Xiangfan 4000T cement production line 186,000 14, , ,426 self-financing 0 60% 70% Wuhan cement grinding project 156,620 10,449 69, ,732 Golden Cat renovation of 3500T cement production line 70,000 8,746 80,164 88, Golden Cat renovation of cement grinding project 68,000 51,241 18,016 69, bank loan and self-financing 2,500 50% 50% bank loan and self-financing % 100% bank loan and self-financing % 100% Chuyun renovation of water-transportation system 5,520 4,916 1, ,642 self-financing 0 120% 99% Constraction of warehouse for cement in bulk 4,000 2,778 1,316 4, self-financing 0 100% 100% Xianning 4000T cement production line 357, self-financing 0 1% 1% En shi limestone mine construction 45,000 16,732 16,886 11, ,112 self-financing 0 75% 70% Others 40,893 37,168 34, ,266 0 Total 448,675 1,123,090 1,131, ,347 20,630 2) Provision for construction in progress G -426 K5 AR EN.doc 60

166 2005 Chapter 11 Accounts and Auditors' Reports PRC Auditors' Report Notes to the Financial Statements Item 2004 Addition Decrease MT pulverizing station Total (12) Intangible assets Item Land use right Trade-mark right Others Total Acquisition method Invested or Invested by purchased shareholders Cost / Valuation 551,923 55,200 5, ,828 Balance at 31 Dec ,124 27, ,695 Additions 197, , ,674 Including: Addition from acquisition Amortization 10,453 2, ,300 Other decrease 6, ,249 Accumulated amortization 63,251 30, ,759 Balance at 31 Dec ,423 24,778 5, ,820 Residual period (year) amortization years 7-9 years 4-29years The increase of intangible assets was mainly due to the purchase of usufruct for limestone mine and land by Wuxue Company. No provision on Intangible assets was required at the end of (13) Long-term deferred assets Item Land develop ment expendit ure Specific railway line expansion & improveme nt expenditure Mine transfer expenditur e Other deferred expenditure Total Cost / Valuation 9,267 7,800 19,259 23,223 59,549 Balance at 31 Dec. 7,587 3,900 16,543 5,163 33, Additions ,202 9,202 Amortization Accumulated amortization ,241 8,736 11,230 Balance at 31 Dec. 2,076 4,757 3,957 17,594 28, G -426 K5 AR EN.doc 61

167 2005 Chapter 11 Accounts and Auditors' Reports PRC Auditors' Report Notes to the Financial Statements 2005 Residual amortization period (year) 7,191 3,043 15,302 5,629 31,165 Cost / Valuation 12-32year s 1-7years 12-16years 1-24years (14) Short-term loans Item 2005 Annual rate(%) 2004 Unsecured and without guarantee 366, %-5.859% 301,300 Secured loan 15, % 22,500 Mortgaged loan 200, % 121,580 Pledged loan 0 0 Total 581, ,380 Included in short-term loans, RMB 15,000 thousand was guaranteed by Huaxin Group Co., Ltd.,. RMB 25,000 thousand was secured by the equipment of Huaxin Yichang Cement Co., Ltd (net value: RMB 28,337 thousand), RMB 20,000 thousand by the land of Huaxin Nantong Cement Co., Ltd. (net value: RMB 8,625 thousand), RMB 7,000 thousand by the land & buildings of Huanxin Xiantao Cement Co. Ltd. (net value: RMB 10,797 thousand), RMB 140,000 thousand by the land & equipment of Huaxin Golden Cat Cement Co., Ltd. (net value: RMB 203,865 thousand) and RMB 8,000 by the equipment of Wuhan Wugang- (net value: RMB 21,957 thousand) The increase of short-term loans was mainly due to the requirement of cash flow by Golden Cat Company and Yichang Company. (15) Notes payable Item Bank accepted notes 195,396 77,431 Total 195,396 77,431 The increase of notes payable was mainly due to requirement of purchasing raw materials. There was no prepayment due from companies held with more than 5% shares of the Company. (16) Accounts payable The accounts payable balance was RMB 481,527 thousand at December (2004: RMB 384,040 thousand). The increase of accounts payable was mainly due to purchasing equipment of Xiangfan Company and Zhaotong Company. The 3-year-old accounts payable is RMB 2,209 thousand which are unsettlement of materials. There was no account payable due to companies held with more than 5% shares of the G -426 K5 AR EN.doc 62

168 2005 Chapter 11 Accounts and Auditors' Reports PRC Auditors' Report Notes to the Financial Statements Company. (17) Advance from customers The advance from customers was RMB 85,799 thousand at December (2004: RMB 49,688 thousand). There is RMB 3,374 thousand aged over one year because of unsettlement of sales.there was no account from companies held with more than 5% shares of the Company. (18) Dividends payable Item Social corporate shares Total (19) Taxes payable Item Tax rate (%) VAT 17% or 13% 23,776 15,705 City construction tax 7% or 1% 3, Property tax 1.2% 919 1,760 Stamp duty Certain amount or rate 1, Land-use tax 1-8yuan/M Business tax 3% or 5% Natural resource tax 2yuan /Ton 5,958 3,911 Income tax on enterprises 15%, 24%, 33% 20,708 32,287 Income tax on persons 5-45% 1,446 1,615 Others 1, Total 60,406 57,717 (20) Other statutory payables Item Computation standard Educational surcharges 3% 1, Dike fees 2% 9,807 8,169 Irrigation works Fund Price control Fund Local education development fees Total 12,038 8, G -426 K5 AR EN.doc 63

169 2005 Chapter 11 Accounts and Auditors' Reports PRC Auditors' Report Notes to the Financial Statements (21) Other payables Other payables balance was RMB 129,607 thousand at December 31, 2005 (2004: RMB 108,347 thousand). The amount of other payables aged more than 3 years was RMB 12,596 thousand including unsettled payment of construction, caution money on quality. There was no account from companies held with more than 5% shares of the Company. Item Advanced freight expense 30,190 14,140 Construction work outstanding 10,057 33,190 Caution money 43,358 12,986 Other 46,002 48,031 Total 129, ,347 (22) Accrued expenses Item 2005 Loan interest Electricity expense Annual wages to sales ,659 3, , ,177 Bulk cement freight expense 2,364 3,535 Consultant fee to Holcim 0 2,998 Descriptio n Outstandin g Outstandin g Outstandin g Outstandin g Others 2,225 2,969 Outstandin g Total 6,545 23,991 (23) Long-term liabilities due within one year 1) Long-term liabilities due within one year Item 2005 Annual rate (%) 2004 Unsecured without guarantee 230, % 5.76% 198,000 Secured loan 116, % 52,032 Mortgaged loan 80,439 LIBOR+1%-5.99% 131,036 Total 427, ,068 Among the long-term loans within one year above, RMB 1,716 thousand was guaranteed by the Construction Bank of China of Hubei province and the Plan Committee of Hubei province. RMB G -426 K5 AR EN.doc 64

170 2005 Chapter 11 Accounts and Auditors' Reports PRC Auditors' Report Notes to the Financial Statements 50,000 thousand was guaranteed by the Company for Yichang Company. RMB 47,000 thousand was guaranteed by Huaxin Group. Moreover, RMB 18,000 was guaranteed for Wugang-Huaxin Company by its shareholders the Company and Wuhan Steel (Group) Co., Ltd., with half of it respectively. RMB 30,000 thousand was pledged by En shi Company with the equipment (net value: RMB 58,179 thousand). RMB 2,018 thousand and the following stated long-term loan of RMB 5,046 thousand was pledged with imported ship-unloading equipments plus the domestic transportation ship under corresponding business contract (net value: RMB 10,373 thousand). RMB 48,421 thousand and the following stated long term loan of RMB 232,018 thousand was pledged by the Company with the land, building and equipment (net value: RMB 440,944 thousand). 2) Long-term loan due within one year include the following foreign currencies Currency Foreign currency Exchange rate Amount USD 6, ,421 DKK 1, ,716 EUR ,018 Total 52,155 3) Long-term payables within one year Item Payables for acquisition of 0 3,271 Hongqi Company Total 0 3,271 According to the contract of acquisitiong on Hongqi Cement Company, acquisition money should be paid off in (24) Long-term loans 1) Long-term loans Item 2005 Annual rate(%) 2004 Unsecured without guarantee 435, % ,000 % Guaranteed loan 383, % 375,038 Mortgaged loan 1,232, % ,426 % Total 2,050,484 1,546,464 Among the long-term loans included above, RMB 24,880 thousand was guaranteed by the Construction Bank of China of Hubei province and the Plan Committee of Hubei province. RMB 226,540 thousand was guaranteed by the Company for its subsidiaries. RMB22,000 thousand was borrowed by Wugang Company and guaranteed by its shareholders the Company and Wuhan Steel (Group) Co., Ltd., with half of it respectively. RMB 110,000 thousand was G -426 K5 AR EN.doc 65

171 2005 Chapter 11 Accounts and Auditors' Reports PRC Auditors' Report Notes to the Financial Statements guaranteed by the Company at 60 percentage for Tibet Company. RMB 5,046 thousand and long-term loan due within one year of RMB 2,018 thousand was pledged with imported ship-unloading equipments plus the domestic transportation ship under corresponding business contract (net value: RMB 11,661 thousand). RMB 232,018 thousand and long-term loan due within one year of RMB 48,421 thousand was pledged by the Company with land, equipment and real estate (net value: RMB 440,944 thousand). RMB 255,500 thousand was pledged by the Company with equipment (net value: RMB 440,944 thousand). RMB 350,000 thousand was Project Loan borrowed from the Bank of China for the construction of Wuxue Project (at 31 December of 2005 net value of it s fixed assets is RMB 502,072 thousand ) whose credit limit is RMB 360,000 thousand and the pledge was in processing. RMB 80,000 thousand was pledged by Yichang Company with land (net value: RMB 52,469 thousand). RMB 65,000 thousand was pledged by Yichang Company with equipment (net value: RMB 202,330 thousand). RMB 14,500 thousand was pledged by Wugang-Huaxin Company with equipment (net value: RMB 28,455 thousand). RMB 230,000 thousand pledge was in process. 2) Long-term loans include the following foreign currencies Currency Foreign currency Exchange rate Amount USD 28, ,018 DKK 19, ,880 EUR ,049 Total 261,947 3) The breakdown of long-term loans Name of lender Amount Annual interest Term rates Construction Bank of China, Shengyanggang Branch 820, %-5.85% Demark Government Loans 24,880 0% Holland Government Loans Bank of China, Huangshi Branch 5, % 232, % Agriculture Bank of China, Yidu Branch 115, % Agriculture Bank of China, Zhaotong Branch 100, % Bank of China, Huangshi, Shengyanggang Branch 20, % Bank of China, Wuxue Branch 330, %-6.12% Construction Bank of China, Gangcheng Branch in Wuhan City 14, % Bank of China, Yidu Branch 86, % G -426 K5 AR EN.doc 66

172 2005 Chapter 11 Accounts and Auditors' Reports PRC Auditors' Report Notes to the Financial Statements China Minsheng Banking Corporation, Wuhan Branch 100, % Construction Bank of China, Yunxi Branch in Yueyang City 40, % Construction Bank of China, Qingjiang Branch 30, % Bank of China, Tibet Branch 110, % China Merchants Bank 22, % Total 2,050, (25) Long-term payables Item Yidu Fangde Investing Co., Ltd 42,255 46,285 Huangshi Yiruida Investment Co., Ltd. 74,260 0 Aftercare expense for Hongqi employees 12,136 15,103 Others Total 128,831 61,568 (26) Special Payables Lender Economic and trade Committee of Hubei Province, Finance Bureau of Hubei Province* 3,296 6,000 Technology Committee of Hubei Province, Finance Bureau of Hubei Province** Total 3,796 6,000 * According to the document of (2003) No. 462 issued by the Economic and Trade Committee of Hubei and Finance Bureau of Hubei, the Company received a fund of RMB 6,000 thousand to the construction of Tibet Cement Plant and expended RMB 2,704 thousand in ** According to the document of (2005) No. 81 issued by the Technology Committee of Hubei and Finance Bureau of Hubei, the Company received R&D fund of RMB 500 thousand. (27) Minority interests Minority names Equity proportion G -426 K5 AR EN.doc 67

173 2005 Chapter 11 Accounts and Auditors' Reports PRC Auditors' Report Notes to the Financial Statements Jinxiong International Company 45.11% 409, ,603 China CINDA Asset Management Corporation 3.89% 35,314 37,219 Yidu Fangde Investment Co., Ltd. 30% 77,956 61,608 Xingye Cement Plant in South of Tibet 40% 22,167 20,000 Huangshi Yiruida Investment Co., Ltd. 20% 112, RDC International Individual Corporation of Singapore 15% 15,574 16,611 Wuhan Steel Group Co. 50% 36,202 31,820 Xiantao Cement Plant 20% 5,288 5,651 Natural persons 1.62% Huangshi Huaxin Project Supervising Co., Ltd. 1% Huaxin Group s labour union , ,453 (28) Share capital 1) The par value is RMB1 yuan, the structure of share capital is as followed (thousand shares): G -426 K5 AR EN.doc 68

174 2005 Chapter 11 Accounts and Auditors' Reports PRC Auditors' Report Notes to the Financial Statements Right Item Bonu Reform of s Transfe Non-trada issue r from ble Othe 2004 d reserve shares* r Unlisted shares (1) Initiator shares 91, , Including State shares 91, , (2) Legal entity shares 24, , Sub- total 116, , Listed shares with certain criteria and conditions (1) Initiator member ,251 79,251 shares State-owned shares ,251 79,251 (2) Legal entity shares ,749 22,749 Sub- total 3 Listed shares , ,00 0 (1) A shares 48, , ,400 (2) B shares 164, ,00 0 Sub- total 212, , ,40 0 Total 328, ,40 0 At 16 December, 2005 Huaxin shareholders held a meeting and passed Scheme of Reform on Non-tradable Shares. According to the scheme, unlisted shares which were held by Huaxin Group Co., Ltd. (Huaxin Group), China CINDA Asset Management Corporation, ICBC branch of Hubei, Hubei United Assets Appraisal Corporation, Shenzhen ZhongNongXin Industry Company and Hubei DongYa Industry Company should be paid partially to A shares listed. The considerration is that every ten listed shares can get three unlisted shares and the total paid shares are amounted to 14,400 thousand. At the same time, Huaxin Group agreed to pay on behalf of the other five unlisted share holders amounted to thousand. The registration day of A-share holders was 27 December of 2005 and two days later the shares can be bargained in security market. In twelve months, the unlisted shares cannot be bargained in market or transferred to others. Further more, Huaxin Group made commitments as followed: (i) Unlisted shares belonged to Huaxin Group would not be exchanged in the shanghai security exchange market in three years after the scheme coming into effect G -426 K5 AR EN.doc 69

175 2005 Chapter 11 Accounts and Auditors' Reports PRC Auditors' Report Notes to the Financial Statements (ii) Maximum 5 percent of State-owned shares could be exchanged in shanghai security exchange market among four years. The sales price would exceed RMB 9 yuan per share. (iii) Maximum 10 percent of State-owned shares could be exchanged in shanghai security exchange market among five years. The sales price would exceed RMB 9 yuan per share. (iv) If the sales amount came to 1 percent of total shares, it must be claimed to public in two working days without exchange ceasing. 2) The shareholders and the shares they owned are as followed: Shareholders Character of the shares State shares(held by Huaxin Group) State shares owned 79, , Huaxin Group Co., Ltd. Legal shares entity 9, ,994 Jingzhou Shao longda Finance Consultant Co., Ltd. Legal shares entity 4,100 4,100 Huangshi Railway Station Co., Ltd. Legal shares entity 2,520 2,520 Wuhan Co., Ltd. petrochemicalpenghe Legal shares entity 1,200 1,200 China CINDA Asset Management Corporation Legal shares entity ICBC branch of Hubei Province Legal shares entity Hubei United Assets Appraisal Corporation Legal shares entity Shenzhen ZhongNongXin Industry Company Legal shares entity Hubei DongYa Industry Company Legal shares entity Wuhan Technology Consultant Service Centure Legal shares entity Wuhan Construction Materials Co., Ltd. Legal shares entity Hubei Metallurgy Material Co., Ltd. Legal shares entity Beijing Changcheng Cement Equipment Co., Ltd. Legal shares entity WUhan Ruyi Culture Co., Ltd. Legal shares entity Huangshi Changjiang River Shipping Service Co., Ltd. Legal shares entity Shanghai Chutian Hotel Legal shares entity G -426 K5 AR EN.doc 70

176 2005 Chapter 11 Accounts and Auditors' Reports PRC Auditors' Report Notes to the Financial Statements Huangshi Shen sanyang Legal entity Ironware Factory shares Changjiang Securities Co., Ltd. Legal entity shares Shares exchanged with RMB A shares listed domestically 62,400 48,000 Shares exchanged with USD B shares listed domestically 164, ,000 Shares exchanged outside the State Total 328, ,400 (29) Capital surplus Item 2004 Addition Disposal 2005 Share premium 270, ,334 Donations 4, ,332 Revaluation surplus 27, ,659 Provision for Equity investments 231,051 4, ,585 Other 11, ,016 Total 544,392 4, ,926 The increase was due to the subsidiaries. According to Circular (2005) No. 97 issued by Financial Bureau of Yidu, Yichang Company received special allotment amounted to RMB 5,983 thousand which led to increase of capital surplus amounted to RMB 4,187 thousand. (30) Surplus reserves Item 2004 Addition Disposal 2005 Statutory surplus reserve 49,715 6, ,974 Discretionary surplus reserve 53, ,998 Welfare reserve 36,907 6, ,166 Total 140,620 12, ,138 (31) Undistributed Profit Item Balance at 1 Jan ,301 54, G -426 K5 AR EN.doc 71

177 2005 Chapter 11 Accounts and Auditors' Reports PRC Auditors' Report Notes to the Financial Statements Add: Net profit for year , ,551 Less: Mandatory appropriation to surplus reserve 6,259 15,035 Less: Mandatory appropriation to welfare reserve 6,259 15,035 Less: Discretionary appropriation to surplus reserve 0 0 Less: Dividends distributed for ,704 19,704 Balance at 31 Dec , ,301 Upon the resolution of the nineteenth conference of the Fourth Board of Directors, the Company distributed 0.06 yuan per share (pretax), the profit after distribution is to be retained as undistributed profit. The resolution has to be approved by the Shareholders conference on April 28 th, (32) Cash Dividend Item Cash dividend payable 19,704 19,704 Total 19,704 19,704 Upon the resolution of the twenty-sixth conference of the Fourth Board of Directors, the Company planned to distribute 0.06 yuan per share (pretax), the profit after distribution is to be retained as undistributed profit. The resolution has to be approved by the Shareholders conference. (33) Operating income and operating cost Item Operating income Operating cost Operating income Operating cost Packaged 1,331,086 1,003, , ,997 cement Bulk cement 1,160,234 1,002,875 1,278, ,186 Clinker 83,024 70,237 36,814 28,431 Other 65,036 40,868 43,348 23,946 Total 2,639,380 2,117,757 2,188,101 1,604,560 The enormous increase of operation income was due to the rapid expansion of the Company s production capacity. The total sales from the top 5 major customers amounted to RMB 309,981 thousand, which was about 11.74% of total sales. (34) Operating tax and surcharge Item Tax rate City construction tax 7% or 1% 8,888 6, G -426 K5 AR EN.doc 72

178 2005 Chapter 11 Accounts and Auditors' Reports PRC Auditors' Report Notes to the Financial Statements Educational fees and 3% surcharge 4,875 3,194 Dike fees 2% 2,052 1,958 Sales tax 3% 1,665 1,388 Others Total 18,262 13,233 (35) Other operating profit Item Other operatin g income Other operatin g expense s Other operatin g profit Other operatin g income Other operatin g expense s Other operati ng profit Sales of material 556, ,926 3,767 16,567 13,586 2,981 Freight and transportation 5,273 5, Use of trade mark Electricity expense 7,791 8,592 (801) 14,771 14, Others 2,975 3,334 (359) 862 1, Total 572, ,903 2,829 33,858 29,335 4,523 (36) Financial expenses Item Interest expenses 125,678 82,815 Less: Interest income 3,785 3,054 Exchange losses 545 3,868 Less: Exchange gains* 14, Discount interests 481 1,801 Others 2, Total 111,112 85,864 * The increase of exchange gains was due to rising of RMB Exchange Rate, which led the Company s foreign loan reduced much. (37) Investment income 1) Income from equity investments Item Income from stock investments G -426 K5 AR EN.doc 73

179 2005 Chapter 11 Accounts and Auditors' Reports PRC Auditors' Report Notes to the Financial Statements Income from debt investments 0 0 Including : Bonds investments 0 0 Income from intrusting loans 0 0 Other bonds income 0 0 Income from equity in the companies invested on cost method Adjustment of equity in the companies invested on equity method 8 (15) Amortization of equity investment difference (1,247) (1,247) Income from intrusting loans equity transfer 0 0 Provision for short-term investment 0 0 Provision for long-term investment 0 0 Provision for intrusting loans 0 0 Total (1,239) (825) 2) Adjustment of equity in the companies invested at balance sheet day as followed: Companies invested Huangshi Huaxin Hotel Co., Ltd. 8 (15) Total 8 (15) (38) Subsidy income Item VAT refund 30,883 35,199 Government subsidy 0 3,279 Total 30,883 38,478 According to Circular (2004) No. 563 jointly issued by the Economy and Trade Committee of Hubei province, State Tax Bureau and Local Tax Bureau of Hubei Province, Huangshi Branch was qualified as a Resource Comprehensive Utilization Enterprise. The Portland cement produced by utilized coal powder was regarded as Resource Comprehensive Utilization Product, and was granted for a VAT refund; as a result, Huangshi Branch got RMB 8,382 thousand for the year According to the written approval (2004) No. 002 concerning the Suzhou State Tax Bureau on the preference of VAT, Huaxin Golden Cat Company with its compound cement was granted for a VAT refund amounting to RMB 5,883 thousand for the year RMB 4,706 thousand of the VAT refund was accounted to subsidy income. According to Hubei Province Circular (2003) No.411 jointly issued by the Economy and Trade Committee of Hubei province, State Tax Bureau, Local Tax Bureau and Electric Power Bureau of G -426 K5 AR EN.doc 74

180 2005 Chapter 11 Accounts and Auditors' Reports PRC Auditors' Report Notes to the Financial Statements Hubei Province, Yichang Company was qualified as a Resource Comprehensive Utilization Enterprise. Portland cement produced by Yichang Company with coal powder and ash from 2003 to 2005 was regarded as Resource Comprehensive Utilization Product and the company was granted for a VAT refund amounting to RMB 7, 992 thousand. According to Hubei Province Circular (2005) No.489 jointly issued by the Economy and Trade Committee of Hubei province, State Tax Bureau, Local Tax Bureau of Hubei Province, En shi Company with its 32.5 Slag cement was granted for a VAT refund amounting to RMB1, 910 thousand for the year According to Hubei Province Circular (2005), No.489 jointly issued by the Economy and Trade Committee of Hubei province, State Tax Bureau, Local Tax Bureau and Electric Power Bureau of Hubei Province, Yangxin Company was qualified as a Resource Comprehensive Utilization Enterprise. Its 32.5 Slag cement produced by coal powder and ash from 2005 to 2007 was regarded as Resource Comprehensive Utilization Product and the company was granted for a VAT refund amounting to RMB 1, 212 thousand for the year According to the written approval (2004) No & concerning the Nantong State Tax Bureau on the refund of VAT on Resource Comprehensive Utilization Product, Huaxin Nantong Company with its 32.5 Slag cement was granted for a VAT refund amounting to RMB 3,443 thousand in According to Hubei Province Circular (2003) No.199 concerning the qualification of Resource Comprehensive Utilization Enterprise, Portland cement produced by Huaxin Xiantao Cement Co., Ltd with coal powder and ash from 2003 to 2005 was regarded as Resource Comprehensive Utilization Product. In addition, the company was granted for a VAT refund amounting to RMB 3,237 thousand from Xiaotao State Tax Bureau in (39) Non-operating income Item Net income from disposal of FA 9,041 2,291 Net income from disposal of sandstone mine 0 36,650 Income from sale of intangible assets Net income from penalty 5 81 Others 1, Total 10,808 39,515 The increase against 2004 was mainly due to the disposal of outdate equipment in Golden Cat Company amounted to RMB 8,877 thousand. (40) Other cash received relating to operating activities Item 2005 Received Bulk cement fund 4,491 Received deposit 8, G -426 K5 AR EN.doc 75

181 2005 Chapter 11 Accounts and Auditors' Reports PRC Auditors' Report Notes to the Financial Statements Received pretty cash 2,767 Received internal deal 6,680 Interest income 3,785 Others 10,251 Total 36,286 (41) Other cash paid relating operating activities Item 2005 Administration expense 39,990 Operating expense 17,531 Advanced freight fee 6,094 Paid pretty cash 6,725 Paid deposit 5,157 Internal payment 6,875 Paid bulk cement fund 6,172 Others 30,892 Total 119,436 (42) Other cash received relating to investing activities Item 2005 Technology reforming subsidy from Yunnan province 2,000 Total 2,000 (43) Other proceeds relating to financing activities Item 2005 Grant-in-aid fund from government 1,923 Total 1,923 (44) Other cash paid relating financing activities Item 2005 Bank fees 1,379 Total 1,379 6 Notes to the company's financial statements (1) Accounts receivable G -426 K5 AR EN.doc 76

182 2005 Chapter 11 Accounts and Auditors' Reports PRC Auditors' Report Notes to the Financial Statements Age of accounts Amount % Bad debt Bad debt Amount % provision provision Within 1 year 42, , years , years , More than 3 years ,672 14,595 21,836 21,691 Total ,128 15,046 51,034 21,946 Total amount of the major five biggest debtors was RMB 10,442 thousand, which was about 16.03% of total A/R balances as of Dec 31, There was no account due from companies held with more than 5% shares of the Company. (2) Other receivables Age of Amount % Bad debt Amount % Bad debt accounts provisio provisio n n Within 1 year 260, , years , years , More than 3 years 2, ,355 1, ,040 Total 264, , , ,435 Total amount of the major five biggest debtors was RMB 100,041 thousand, which was about 37.82% of total balance as of Dec 31, The enormous increase was mainly due to internal deal with new subsidiaries such as En shi Company Wuhan Company and Yichang Company. There was RMB 78 thousand due from companies held with more than 5% shares of the Company. (3) Long-term investments 1) Long-term equity investments Item Equity investments 1,485, ,485 Less: Provision for long-term investments 2,776 2, G -426 K5 AR EN.doc 77

183 2005 Chapter 11 Accounts and Auditors' Reports PRC Auditors' Report Notes to the Financial Statements Net equity investments 1,482, ,709 Bonds investments Total 1,482, ,768 2) Equity investment Names invested companies of Equity Original Equity Accumulated Balance Provision Provision proportion invested adjustment Equity at period for for % amount adjustment end impairment impairment Huaxin Golden Cat Cement (Suzhou) Co. Ltd ,810 (24,966) (1,818) 462, Huaxin Cement (Yichang) Co., Ltd ,000 38,145 76, , Huaxin Cement (En shi)co., Ltd ,200 23,633 23,633 63, Huaxin Cement (Zhao tong) Co. Ltd , , Huaxin Cement (Tibet) Co. Ltd ,000 3,250 3,250 33, Huaxin Cement (Yangxin) Co. Ltd ,000 49,652 49, , Huaxin Cement (Nantong) Co., Ltd ,680 (7,121) 6,579 96, Wuhan Wugang-Huaxin Cement Co., Ltd ,000 4,383 16,202 36, Huaxin Cement (Xiantao)Co., Ltd ,658 1,003 3,037 17, Huaxin Cement (Yueyang)Co. Ltd ,500 (2,783) (2,783) 19, Huaxin Cement (Wuhan)Co. Ltd , , G -426 K5 AR EN.doc 78

184 2005 Chapter 11 Accounts and Auditors' Reports PRC Auditors' Report Notes to the Financial Statements Huaxin Concrete (Wuhan)Co. Ltd. 70 7,000 1,537 1,537 8, Huangshi Huaxin Packaging Co., Ltd , , Huaxin Cement Scientific Research and Design Co., Ltd ,488 2, Huangshi Huaxin Hotel Co., Ltd (7) Huaxin Group Yidu Company Hubei Huangshi Power Development Company , , Bank of Communication , , China Pacific Insurance Company Zhengzhou Xinxing Industrial Group Co., Ltd , ,000 2,000 2,000 Changjiang River Company Of Economic Development Hubei Province Construction Materials Trading Company Pingdingshan Zhongnan Coal Company Total 1,307,198 88, ,076 1,485,274 2,776 2,776 3) Equity investment difference G -426 K5 AR EN.doc 79

185 2005 Chapter 11 Accounts and Auditors' Reports PRC Auditors' Report Notes to the Financial Statements Name invested company of Original investme nt amount Huaxin Nantong Cement Co., Ltd.* 12,473 Huaxin Xiantao Cement Co., Ltd.** Reason of formatio n Amortizati on period Amortizati on amount Accumulat ed amortizatio n amount Balanc e Equity acquisiti on 10 years 1,247 4,469 8,004 The differenc e from the price on invested assets and its (4,462) net-book - value 20 years (223) (1,004) (3,458) Sub-total 8,011 1,024 3,465 4,546 * The difference was resulted from the acquisition 51% share interests of Huaxin Nantong Cement Co., Ltd from Nanshan Development Co., Ltd. and RDC InterState Individual Corporation of Singapore on June 1 st, ** The difference was resulted from the price on invested assets and its net book value when the Company jointly established Huaxin Xiaotao Co., Ltd. with Xiantao Cement Factory on May 31, ) Bonds investments Item E huang Bridge construction bond Total (4) Operating income and operating cost Item Operating income Operating cost Operating income Operating cost Packaged 559, , , ,590 cement Bulk cement 433, , , ,499 Clinker 270, , , ,046 Others 144, ,585 66,992 49,774 Total 1,407,993 1,219,514 1,240, , G -426 K5 AR EN.doc 80

186 2005 Chapter 11 Accounts and Auditors' Reports PRC Auditors' Report Notes to the Financial Statements The total sale from top 5 major customers was RMB 201,128 thousand, which was about 14.28% of total operating income. (5) Investment income 1) Income from equity investments Item Income from stock investments 0 0 Income from debt investments 0 0 Including : Bonds investments 0 0 Income from intrusting loans 0 0 Other bonds income 0 0 Income from equity in the companies invested on cost method Adjustment of equity in the companies invested on equity method 84,507 76,221 Amortization of equity investment difference (1,024) (1,024) Income from intrusting loans equity transfer 0 0 Provision for short-term investment 0 0 Provision for long-term investment 0 0 Provision for intrusting loans 0 0 Total 83,483 75,634 2) Adjustment of equity in the companies invested at balance sheet day as followed: Companies invested Huaxin Golden Cat Cement (Suzhou) Co. Ltd. (24,966) 23,082 Huaxin Cement (Yichang) Co., Ltd. 33,957 35,385 Huaxin Cement (En shi)co., Ltd. 23,633 0 Huaxin Cement (Yunnan) Co. Ltd. 0 0 Huaxin Cement (Tibet) Co. Ltd. 3,130 0 Huaxin Cement (Yangxin) Co. Ltd. 49,652 0 Huaxin Cement (Nantong) Co., Ltd. (5,874) 7,657 Wuhan Wugang-Huaxin Cement Co., Ltd. 4,191 6,545 Huaxin Cement (Xiantao)Co., Ltd ,565 Huaxin Cement (Yueyang)Co. Ltd. (2,783) 0 Huaxin Cement (Wuhan)Co. Ltd G -426 K5 AR EN.doc 81

187 2005 Chapter 11 Accounts and Auditors' Reports PRC Auditors' Report Notes to the Financial Statements Huaxin Concrete (Wuhan)Co. Ltd. 1,537 0 Huangshi Huaxin Packaging Co., Ltd Huaxin Cement Scientific Research and Design Co., Ltd. 906 (21) Huangshi Huaxin Hotel Co., Ltd. 8 (15) Total 84,507 76,221 7 Related party transactions (1) Relationship of related party 1) The Company has the following holding company and related parties with controlling interests: Name Company Huaxin Group Co., Ltd. Huangshi Packaging Ltd. Huaxin Co., Huaxin Yidu Packaging Co., Ltd Huaxin Cement (Xiantao)Co., Ltd. Wuhan Wugang-Huaxin Cement Co., Ltd. Huaxin Cement (Nantong) Co., Ltd. Huaxin Cement (Yichang) Co., Ltd. of Place of registratio n China Business scope Relationship Legal Status Production and sale of cement production, fittings machine; real estate; business, service etc. China Produce and sale packaging materials China Produce and sale packaging materials China Produce and sale cement China Produce and sale slag cement China Produce and sale cement and its product Holding company Subsidiary Subsidiary Subsidiary Subsidiary Subsidiary China Produce and sale Subsidiary cement, products for construction. Package and cement technology service Huaxin cement China Engineering design, Subsidiary Scientific cement technology Research and service Design Co., Ltd. Huaxin Cement (En shi)co., Ltd. China Produce and sale Subsidiary Portland cement and its product Huaxin Golden Cat China Produce and sale Subsidiary C t (S h ) t d it d t Legal representativ e G -426 K5 AR EN.doc 82 SOE Compan y Compan y Compan y Compan y Joint Venture Compan y Compan y Compan y Joint V t Chen Musen Kong Lingling Xu Wenshu Li Yeqing Li Fushan Chen Musen Li Yeqing Cheng Yamin Li Yeqing Li Yeqing

188 2005 Chapter 11 Accounts and Auditors' Reports PRC Auditors' Report Notes to the Financial Statements Cement (Suzhou) Co. Ltd. cement and its product Venture Huaxin Cement (Zhao tong) Co. Ltd. China Produce and sale cement and its product Subsidiary Compan y Li Yeqing Huaxin Cement (Yueyang)Co. Ltd. China Construction engineering, cement produce technology service Subsidiary Compan y Li Yeqing Huaxin Cement (Tibet) Co. Ltd. China Produce and sale Portland cement and its product, cement technology service Subsidiary Compan y Ji Changhua Huaxin Cement (Yangxin) Co. Ltd. China Produce and sale Subsidiary cement, products for construction. Package and cement technology service Compan y Li Yeqing Huaxin Cement (Wuhan)Co. Ltd. China Produce and sale Portland cement Subsidiary Compan y Li Yeqing Huaxin Concrete (Wuhan)Co. Ltd. China Produce and sale concrete Subsidiary Compan y Peng Qingyu 2) Changes of registered capital for the parties that have controlling interest with the Company are as bellow: G -426 K5 AR EN.doc 83

189 2005 Chapter 11 Accounts and Auditors' Reports PRC Auditors' Report Notes to the Financial Statements Registered capital Holding shares (%) Name of related parties Huaxin Group Co., Ltd. 510, , % 31.52% Huangshi Huaxin Packaging Co., Ltd. 8,000 8, % 98.38% Huaxin Yidu Packaging Co., Ltd 1,500 1, % 59.33% Huaxin Cement (Xiantao)Co., Ltd. 23,900 23,900 80% 80% Wuhan Wugang-Huaxin Cement Co., Ltd. 40,000 40,000 50% 50% Huaxin Cement (Nantong) Co., Ltd. 108, ,000 85% 85% Huaxin Cement (Yichang) Co., Ltd. 150, ,000 70% 70% Huaxin cement Scientific Research and Design Co., Ltd. 1,000 1,000 99% 99% Huaxin Cement (En shi)co., Ltd. Huaxin Golden Cat Cement (Suzhou) Co. Ltd. Huaxin Cement (Zhao tong) Co. Ltd. Huaxin Cement (Yueyang)Co. Ltd. Huaxin Cement (Tibet) Co. Ltd. Huaxin Cement (Yangxin) Co. Ltd. Huaxin Cement (Wuhan)Co. Ltd. Huaxin Concrete (Wuhan)Co. Ltd. 60,000 60, % 90.1% 136,000 (KUSD) 136,000 (KUSD) 51% 51% 75,000 20,000 88% 88% 25,000 25,000 97% 97% 50,000 50,000 60% 60% 500, % 0 60, % 0 10, % 0 3) Related parties that have no controlling interest with the Company Name of related party Relationship Description of related party transaction WuHan Fiber Product Co., Ltd. Subsidiary of Huaxin Group Co., Ltd. Holcim Related Party of shareholder Huangshi Yiruida Investment Co., Ltd. Subsidiary of Huaxin Group Co., Ltd. Purchase products of the Company Providing consulting service Jointly establishing Huaxin Yangxin Cement Co., Ltd G -426 K5 AR EN.doc 84

190 2005 Chapter 11 Accounts and Auditors' Reports PRC Auditors' Report Notes to the Financial Statements Huaxin Hotel Co., Ltd. Subsidiary of Huaxin Group Co., Ltd. Providing charges advanced for hotel and getting back later (2) Pricing policy Prices of related party transactions are based on market prices. (3) Related parties transaction 1) Sales Name of related party Huaxin Fiber Product Co., Ltd. 3,356 3,357 2) Services Name of related party Huaxin Group Co., Ltd.* 4,800 4,800 Holcim** 2,421 2,483 * According to the service contract signed by the Company and the Huaxin Group Co., Ltd. (Huaxin Group), Huaxin Group provide such services as labor protection, Huaxin Group charges RMB 4,800 thousand annually for such services and the Company should pay it on a monthly basis. ** According to the service contract signed by the Company and the Holcim Group Support (Jona) Ltd., ( Holcim ), Holcim shall provide the Company with services on management consultant and Human Resources training. Holcim charges USD 300 thousand annually for such services, translated to RMB 2,421 thousand for ) Current account with related parties To related party From related party Current year End. blance Current year End. blance Name of related party cumulative cumulative Huaxin Fiber Product Co., Ltd. 1, Huaxin Group Co., Ltd Huangshi Yiruida Investment Co., Ltd ,840 74,260 Huaxin Hotel Co., Ltd Total 1, ,887 74,289 (4) Outstanding balance with related parties G -426 K5 AR EN.doc 85

191 2005 Chapter 11 Accounts and Auditors' Reports PRC Auditors' Report Notes to the Financial Statements Name of related party Account Huaxin Group Co., Ltd. Other receivables Huaxin Group Co., Ltd. Other payables 0 1,792 Huaxin Group Co., Ltd. Long-term payables in one year 0 3,271 Huaxin Group Co., Ltd. Long-term payables 0 0 Huaxin Fiber Product Co., Ltd. Other receivables Huaxin Fiber Product Co., Ltd. Accounts receivable 36 0 Huaxin Fiber Product Co., Ltd. Prepayments 0 8 Huaxin Hotel Co., Ltd. Other receivables Huaxin Hotel Co., Ltd. Other payables 29 0 Huangshi Yiruida Investment Co., Ltd. Other payables 0 1,580 Huangshi Yiruida Investment Co., Ltd.* Long-term payables 74,260 0 * According to the contract signed by the Company and Huangshi Yiruida Investment Co., Ltd. ( Yiruida Company ), Yiruida Company would invest use of the nine parcels of land (total area 2,000,046.1 M 2, evaluated value RMB 177, thousand confirmed by Hubei Yongye Consultant Co.,Ltd.) to exchange for money capital RMB 100,000 thousand which covered 20% of the registered capital of Yangxin Company. In compensation for usage value of Yiruida s land, Yangxin Company would pay RMB 1,580 thousand to Yiruida annually (before December) for 48 years from the company s setting-up. The ownership of land has been transferred to Yangxin Company and Yangxin Company has paid RMB 1,580 thousand to Yiruida in Up to banlance sheet day, there is RMB 74,260 thousand to be paid. (5) Collaterals As at December 31, 2005, the Company guaranteed borrowings for its subsidiaries amounted to RMB 337,540 thousand. The total amount of the collaterals accounted for 31.11% of its net assets. 8 Capital Commitments 1) At the balance sheet date, the Company had the following capital commitments amounted to RMB 316,180 thousand (2004: RMB 369,808 thousand): Name of Project Total amount Paid amount Unpaid amount project period Xiangfan project 208,712 95, , Zhaotong project 251, , , Yichang project (phase II) 111,894 88,869 23, Yangxin project (phase II) 62,684 14,775 47, Yueyang project 68,546 64,009 4, G -426 K5 AR EN.doc 86

192 2005 Chapter 11 Accounts and Auditors' Reports PRC Auditors' Report Notes to the Financial Statements Total 703, , ,180 2) There are no other capital commitments on December 31, Contingent liabilities 1) At December , the Company guaranteed borrowings for its subsidiaries which led to contingent liabilities, details as followed: Subsidiaries name Guarantee content Amount Ratio on net asset Huaxin Cement (Yichang) Co., Ltd. Loans 136,540 11% Huaxin Cement (Tibet) Co., Ltd. Loans 66,000 5% Wuhan Wugang-Huaxin Cement Co., Ltd. Loans 20,000 2% Huaxin Cement (En shi)co., Ltd. Loans 15,000 1% Huaxin Cement (Yueyang) Co., Ltd. Loans 40,000 3% Huaxin Cement (Yunnan) Co., Ltd. Loans 100,000 8% Total 377,540 31% 2) The Company has no other material contingent liabilities as at 31 Dec that should be disclosed. 10 Events after report day The Company has no significant events after 31 Dec that should be disclosed. 11 Other Significant events (1) In 2005, the Company wrote off an amount of unrecoverable accounts receivable of RMB 3,358 thousand, please refer to Note 5(3). (2) On the twenty fifth meeting of the fourth Board of Directors, the directors had reviewed and approved in principle the Proposal in Respect of applying for an Issue of Short Term Financial Bonds. In addition, the meeting authorized the Board of Directors with full power to handle matters in connection with the Issue G -426 K5 AR EN.doc 87

193 2005 Chapter 11 Accounts and Auditors' Reports PRC Auditors' Report Notes to the Financial Statements Supplement Information According to the document Rule No.9 of Information Disclosure Preparation for Listing Companies the Calculation and Disclosure of Profit Ration on Net Asset and Earning per Share which issued by China Securities Regulatory Commission. The amounts are as follows: Profit during the Profit ratio on net asset (%) Earning per share(yuan/share) accounting period Average Overall diluted Average Overall diluted weighted weighted Gross profit on sales Operating profit Net profit Net profit after elimination of extra-ordinary items Nonrecurring profit & loss: Item Amount Amount after deduction of income tax Amount Amount after deduction of income tax Balance from disposal of Equity investment, FA, CIP, IA and other long-term assets 3,707 4,580 36,993 24,786 Government subsidy 0 0 3,279 2,197 Non-operating income & expense after deduction of provision for assets (801) (855) (2,299) (1,541) Reversal provision 0 0 3,442 2,306 Total 2,906 3,725 41,415 27,748 Net profit 62, ,551 Net profit after deduction of nonrecurring profit & loss 58, ,803 Nonrecurring profit & loss is the business which is not directly relevant to main operation of the company, but it can affect the impartiality and reality of financial report G -426 K5 AR EN.doc 88

194 2005 Chapter 11 Accounts and Auditors' Reports International Auditors' Report International Auditors' Report Telephone +1 (212) Mailing Address: P.O. Box 1448 New York, NY United States of America AUDITORS' REPORT TO THE SHAREHOLDERS OF HUAXIN CEMENT CO., LTD. (Incorporated as a joint stock limited company in the People's Republic of China) We have audited the accompanying consolidated balance sheet of (the Company ) and its subsidiaries (the Group ) as of 31 December 2005, and the related consolidated statements of income, cash flows and changes in equity for the year then ended. These financial statements set out on pages 90 to 94 are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion the accompanying consolidated financial statements give a true and fair view of the financial position of the Group as of 31 December 2005, and of the results of its operations and cash flows for the year then ended in accordance with International Financial Reporting Standards. PricewaterhouseCoopers 3 March G -426 K5 AR EN.doc 89

195 2005 Chapter 11 Accounts and Auditors' Reports International Auditors' Report (All amounts in Rmb thousands unless otherwise stated) HUAXIN CEMENT CO., LTD. CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2005 Note Sales 5 2,695,976 2,188,101 Cost of goods sold (2,303,530) (1,684,664) Gross profit 392, ,437 Other operating income - net 6 36,181 75,241 Selling and marketing costs (113,990) (74,596) Administrative expenses (120,546) (144,621) Operating profit 194, ,461 Finance costs - net 9 (103,807) (82,973) Share of profit/(loss) of an associate 15 8 (15) Profit before income tax 90, ,473 Income tax expense 10 (3,167) (49,087) Profit for the year 87, ,386 Attributable to: Equity holders of the Company 79, ,340 Minority interest 7,967 48,046 87, ,386 Earnings per share for profit attributable to the equity holders of the Company during the year (basic and diluted) 11 RMB0.241 RMB0.546 The notes on pages 95 to 128 form an integral part of these consolidated accounts G -426 K5 AR EN.doc 90

196 2005 Chapter 11 Accounts and Auditors' Reports International Auditors' Report (All amounts in Rmb thousands unless otherwise stated) HUAXIN CEMENT CO., LTD. CONSOLIDATED BALANCE SHEET AS OF 31 DECEMBER 2005 Note ASSETS Non-current assets Prepaid lease , ,951 Property, plant and equipment 13 4,492,736 3,539,601 Intangible assets 14 47,549 (158,422) Investment in an associate Available-for-sale investments 16 14,480 14,480 Deferred tax assets 27 35,774 20,930 5,082,210 3,789,819 Current assets Inventories , ,613 Trade receivables , ,627 Other receivables, prepayments and deposits , ,542 Restricted cash 20 72,728 15,963 Cash and cash equivalents , ,377 1,011, ,122 Total assets 6,093,498 4,767,941 EQUITY Capital and reserves attributable the Company s equity holders Share capital , ,400 Other reserves , ,267 Retained earnings 221, ,224 1,236, ,891 Minority interests 714, ,764 Total equity 1,950,578 1,573,655 LIABILITIES Non-current liabilities Borrowings 23 2,041,479 1,546,464 Deferred income 24 18,666 16,653 Other non-current liabilities 25 78,690 64,659 Deferred tax liabilities 27 7,303-2,146,138 1,627,776 Current liabilities Trade payables 468, ,194 Construction costs payable, accrued charges and deposits received , ,583 Borrowings 23 1,008, ,448 Current income tax liabilities 20,708 32,285 1,996,782 1,566,510 Total liabilities 4,142,920 3,194,286 Total equity and liabilities 6,093,498 4,767,941 The notes on pages 95 to 128 form an integral part of these consolidated accounts G -426 K5 AR EN.doc 91

197 2005 Chapter 11 Accounts and Auditors' Reports International Auditors' Report (All amounts in Rmb thousands unless otherwise stated) HUAXIN CEMENT CO., LTD. CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2005 Attributable to equity holders of the Company Share Other Retained capital reserves earnings (note 21) (note 22 (a),(b)) Minority interest Total equity Balance at 1 January 2004, as previously reported as equity 328, ,120 72, ,255 Balance at 1 January 2004, as previously separately reported as minority interest , ,228 Balance at 1 January 2004, as restated 328, ,120 72, , ,483 Capital contribution for establishment of a subsidiary ,000 20,000 Acquisition of a subsidiary , ,582 Acquisition of equity interest from a minority shareholder in a subsidiary (19,800) (19,800) Dividend relating to 2003 (note 22 (d)) - - (19,704) (4,292) (23,996) Profit for the year ,340 48, ,386 Transfer from retained earnings to other reserves - 26,077 (26,077) - - Appropriation - 30,070 (30,070) - - Balance at 31 December , , , ,764 1,573,655 Balance at 1 January 2005, as previously reported as equity 328, , , ,891 Balance at 1 January 2005, as previously separately reported as minority interest , ,764 Derecognition of negative goodwill with corresponding adjustment to the opening balance of retained earnings (note 14) , ,207 Transfer from retained earnings to other reserves (note 14) - 210,207 (210,207) - - The notes on pages 95 to 128 form an integral part of these consolidated accounts G -426 K5 AR EN.doc 92

198 2005 Chapter 11 Accounts and Auditors' Reports International Auditors' Report (All amounts in Rmb thousands unless otherwise stated) Balance at 1 January 2005, as restated 328, , , ,764 1,783,862 Capital injection from minority shareholders for establishment of a subsidiary , ,000 Dividend relating to 2004 (note 22 (d)) - - (19,704) (705) (20,409) Profit for the year ,158 7,967 87,125 Transfer from retained earnings to other reserves - 1,637 (1,637) - - Appropriation - 12,518 (12,518) - - Balance at 31 December , , , ,026 1,950,578 The notes on pages 95 to 128 form an integral part of these consolidated accounts G -426 K5 AR EN.doc 93

199 2005 Chapter 11 Accounts and Auditors' Reports International Auditors' Report (All amounts in Rmb thousands unless otherwise stated) HUAXIN CEMENT CO., LTD. CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2005 Cash flows from operating activities Note Cash generated from operations , ,848 Interest paid (150,070) (97,915) Income tax paid (22,285) (55,363) Net cash generated from operating activities 382, ,570 Cash flows from investing activities Acquisition of a subsidiary, net of cash acquired - (110,014) Acquisition of equity interest from a minority shareholder in a subsidiary - (19,800) Proceeds from disposal of mine usage right - 50,000 Proceeds from disposal of property, plant and equipment 14,975 10,825 Purchases of property, plant and equipment (1,153,637) (767,452) Payments for prepaid lease (5,213) (26,805) Purchase of intangible assets (195) (2,406) Cash advance to a minority shareholder of a subsidiary (2,850) (41,390) Government grants received 6,041 - Dividends received Interest received 3,785 3,054 Net cash used in investing activities (1,137,094) (903,551) Cash flows from financing activities Proceeds from borrowings 1,680,600 1,122,370 Repayment of borrowings (984,799) (523,171) Repayment of other non-current liabilities (4,123) (6,614) Repayment of long-term payables to the controlling shareholder (3,271) - Capital contribution from minority shareholders - 6,000 Dividends paid to the equity holders of the Company (19,311) (19,704) Dividends paid to minority interests (705) (4,292) Net cash generated from financing activities 668, ,589 Net decrease in cash and cash equivalents (85,788) (29,392) Cash and cash equivalents at beginning of the year 381, ,769 Cash and cash equivalents at end of the year , ,377 The notes on pages 95 to 128 form an integral part of these consolidated accounts G -426 K5 AR EN.doc 94

200 2005 Chapter 11 Accounts and Auditors' Reports International Auditors' Report (All amounts in Rmb thousands unless otherwise stated) Notes to the Accounts 1. General information (the Company ) is a joint stock limited company incorporated and domiciled in the People's Republic of China (the PRC ). The Company is listed on the Shanghai Stock Exchange. The address of its registered office is 897 Huangshi Avenue, Huangshi City, Hubei Province. The Company and its subsidiaries (the "Group") are principally engaged in manufacturing and sales of cement. The majority of the sales are made in the PRC. 2. Summary of significant accounting policies The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. 2.1 Basis of preparation The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") including International Accounting Standard and Interpretation issued by the International Accounting Standards Board. This basis of accounting differs from that used in the preparation of the statutory financial statements in the PRC ("the statutory financial statements"). The statutory financial statements of the Company and its subsidiaries comprising the Group have been prepared in accordance with the accounting principles and regulations as applicable in the PRC. Appropriate adjustments have been made to these financial statements to conform to IFRS but such adjustments are not incorporated in the Group's statutory accounting records. The consolidated financial statements have been prepared under the historical cost convention. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Company s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements, are disclosed in Note Changing in accounting policies At 1 January 2005, the Group adopted the revised IFRS below, which are relevant to its operations. The 2004 comparatives have been amended as required, in accordance with the relevant requirements. IAS 1 (revised 2003) Presentation of Financial Statements IAS 2 (revised 2003) Inventories IAS 8 (revised 2003) Accounting Policies, Changes in Accounting Estimates and Errors IAS 10 (revised 2003) Events after the Balance Sheet Date IAS 16 (revised 2003) Property, Plant and Equipment IAS 17 (revised 2003) Leases G -426 K5 AR EN.doc 95

201 2005 Chapter 11 Accounts and Auditors' Reports International Auditors' Report (All amounts in Rmb thousands unless otherwise stated) IAS 21 (revised 2003) The Effects of Changes in Foreign Exchange Rates IAS 24 (revised 2003) Related Party Disclosures IAS 27 (revised 2003) Consolidated and Separate Financial Statements IAS 28 (revised 2003) Investments in Associates IAS 32 (revised 2003) Financial Instruments: Disclosure and Presentation IAS 33 (revised 2003) Earnings per Share IAS 39 (revised 2003) Financial Instruments: Recognition and Measurement The adoption of IAS 1, 2, 8, 10, 16, 17, 21, 24, 27, 28, 32, 33 and 39 (all revised 2003) did not result in substantial changes to the Group s accounting policies. In summary: IAS 1 (revised 2003) has affected the presentation of minority interest and other disclosures. IAS 2, 8, 10, 16, 17, 27, 28, 32, 33 and 39 (all revised in 2003) had no material effect on the Group s policies. IAS 21 (revised 2003) had no material effect on the Group s policy. The functional currency of each of the consolidated entities has been re-evaluated based on the guidance to the revised standard. All the Group entities have the same functional currency as their measurement currency. IAS 24 has affected the identification of related parties and certain related party disclosures. 2.3 Consolidation (a) Subsidiaries Subsidiaries are all entities over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases. The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the income statement (see Note 2.8). Inter-company transactions, balances and unrealised gains on transactions between Group s entities are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group G -426 K5 AR EN.doc 96

202 2005 Chapter 11 Accounts and Auditors' Reports International Auditors' Report (All amounts in Rmb thousands unless otherwise stated) Minority interest is that part of the net results of operations and of net assets of a subsidiary attributable to interests which are not owned directly or indirectly by the Group. (b) Associates Associates are all entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for by the equity method of accounting and are initially recognised at cost. The Group s share of its associates post-acquisition profits or losses is recognised in the income statement, and its share of post-acquisition movements in reserves is recognised in reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the Group s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate. Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group s interest in the associates. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the Group. 2.4 Segment reporting A business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different from those of other business segments. A geographical segment is engaged in providing products or services within a particular economic environment that are subject to risks and returns that are different from those of segments operating in other economic environments. 2.5 Foreign currency translation (a) Functional and presentation currency Items included in the accounts of each of the Group s entities are measured using the currency of the primary economic environment in which the entity operates ( the functional currency ). The consolidated financial statements are presented in Renminbi ( RMB ), which is the functional currency of all the entities comprising the Group and the presentation currency of the Company. (b) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement. 2.6 Prepaid lease G -426 K5 AR EN.doc 97

203 2005 Chapter 11 Accounts and Auditors' Reports International Auditors' Report (All amounts in Rmb thousands unless otherwise stated) Cost of acquiring rights to use certain land or mine for the Group s operations over a certain period is recorded as prepaid lease. Cost of prepaid lease with specific term is recognised as an expense on a straight-line basis over the unexpired period of the rights. Cost of prepaid lease with unspecific term is recognised as an expense on a straight-line basis over the expected useful lives of 50 years. 2.7 Property, plant and equipment (a) All property, plant and equipment are stated at historical cost less accumulated depreciation and accumulated impairment losses. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Depreciation of property, plant and equipment is calculated to write off their cost on the straight-line basis over their expected useful lives to the group, taking into account the estimated residual value of the assets concerned. The principle annual depreciation rates used are: Item Annual depreciation rate Buildings 2.4% % Plant and machinery 6% - 12% Furniture, fixtures and office equipment 5.33% - 12% Motor vehicles 8-12% The assets residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. (b) Construction in progress represents factory premises under construction, and production plants and machinery and other related fixed assets under installation. Construction in progress is stated at cost, which includes the cost of construction, purchase cost of plant and machinery, as well as interest charges arising from borrowings used to finance the construction during the period of time that is required to complete and prepare the asset for its intended use. Construction in progress for production plants and machinery is transferred to fixed assets on the commissioning date. Plant and machinery are considered to be commissioned when they are capable of producing saleable quality output in commercial quantities on an ongoing basis. (c) (d) (e) An asset s carrying amount is written down immediately to its recoverable amount if the asset s carrying amount is greater than its estimated recoverable amount (Note 2.9). Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in the income statement. Subsequent costs are included in the asset s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All G -426 K5 AR EN.doc 98

204 2005 Chapter 11 Accounts and Auditors' Reports International Auditors' Report (All amounts in Rmb thousands unless otherwise stated) other repairs and maintenance are charged to the income statement during the financial period in which they are incurred. 2.8 Intangible assets (a) (i) Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Group s share of the net identifiable assets of the acquired subsidiary at the date of acquisition. Negative goodwill represents the excess of the fair value of the Group s share of the net assets acquired over the cost of acquisition. Goodwill on acquisitions of subsidiaries is included in intangible assets. (ii) Goodwill arising from business combinations of which the agreement date is before 31 March 2004 was previously amortised on a straight line basis over its useful life, which will not exceed 20 years from initial recognition. As at 1 January 2005, amortisation of goodwill was ceased and the carrying amount of related accumulated amortisation was eliminated with a corresponding decrease in goodwill. Goodwill arising from business combinations of which the agreement date is on and after 31 March 2004, as well as goodwill arising from business combinations of which the agreement date is before 31 March 2004 after elimination of accumulated amortisation at 1 January 2005, are tested annually for impairment and carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Goodwill is allocated to cash-generating units for the purpose of impairment testing (note 2.9). (iii) Negative goodwill arising from business combinations of which the agreement date is before 31 March 2004 was previously amortised on a straight line basis over the remaining weighted average useful life of non-monetary assets acquired. At 1 January 2005, the carrying amount of negative goodwill has been derecognised with a corresponding adjustment to the opening balance of retained earnings. Negative goodwill arising from business combinations of which the agreement date is on and after 31 March 2004 is recognised in the income statement immediately on the date of acquisition. (b) Mine development cost Cost incurred for the preparation of mine sites are capitalised and amortised on a straight-line basis over the estimated useful lives of the mine sites. (c) Railway improvement cost Cost incurred for railway improvement is capitalised and amortised on a straight-line basis over the estimated useful lives of the railway of 12 years. (d) Trademarks G -426 K5 AR EN.doc 99

205 2005 Chapter 11 Accounts and Auditors' Reports International Auditors' Report (All amounts in Rmb thousands unless otherwise stated) Trademarks are shown at historical cost. Trademarks have a definite useful life and are carried at cost less accumulated amortisation. Amortisation is calculated using the straight-line method to allocate the cost of trademarks over their estimated useful lives. (e) Other intangible assets Other intangible assets mainly represent the electricity usage fees paid to the local electricity bureau and are amortised on a straight-line basis over the estimated beneficial period of 10 years. 2.9 Impairment of assets Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units) Investments The Group classifies its investments in the following categories: loans and receivables and available-for-sale investments. The classification depends on the purpose for which the investments were acquired. Management determines the classification of its investments at initial recognition and re-evaluates this designation at every reporting date. (a) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Group provides money, goods or services directly to a debtor with no intention of trading the receivable. They are included in current assets, except for maturities greater than 12 months after the balance sheet date. These are classified as non-current assets. Loans and receivables are included in trade receivables, other receivables, prepayments and deposits in the balance sheet. Loans and receivables are carried at amortised cost using the effective interest method. (b) Available-for-sale investments Investments other than those in subsidiaries and associates, intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, are classified as available-for-sale investments. They are included in non-current assets unless management intends to dispose of the investment for within 12 months of the balance sheet date or unless they will need to be sold to raise operating capital, in which case they are included in current assets. Purchases and sales of investments are recognised on trade-date, the date that the Group commits to purchase or sell the asset. Available-for-sale investments are carried at fair value which is initially measured at fair value of consideration given for them plus G -426 K5 AR EN.doc 100

206 2005 Chapter 11 Accounts and Auditors' Reports International Auditors' Report (All amounts in Rmb thousands unless otherwise stated) transaction costs and are subsequently subject to impairment review. Investments are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and the Group has transferred substantially all risks and rewards of ownership. The Group assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of equity securities classified as available for sale, a significant or prolonged decline in the fair value of the security below its cost is considered in determining whether the securities are impaired. If any such evidence exists for available-for-sale investments, the cumulative loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss is removed from equity and recognised in the income statement. Impairment losses recognised in the income statement on equity instruments are not reversed through the income statement Inventories Inventories are stated at the lower of cost and net realisable value. Cost of raw materials, spare parts and consumables represents invoiced price calculated using the weighted average costing method. Cost of work in progress and finished goods includes direct materials, direct labour and an appropriate proportion of production overheads (based on normal operating capacity). It excludes borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business, less the costs of completion and selling expenses Trade receivables Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method less provision for impairment. A provision for impairment of trade receivables is established when there is an objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. The amount of the provision is the difference between the asset s carrying amount and present value of estimated future cash flows, discounted at the effective interest rate. The amount of the provision is recognised in the income statement Cash and cash equivalents Cash and cash equivalents includes cash in hand and deposits held at call with banks Share capital Ordinary shares are classified as equity Borrowings Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between the proceeds net of transaction costs and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest method G -426 K5 AR EN.doc 101

207 2005 Chapter 11 Accounts and Auditors' Reports International Auditors' Report (All amounts in Rmb thousands unless otherwise stated) Borrowing costs that are directly attributable to the acquisition, construction or production of assets that necessarily take a substantial period of time to be ready for their intended use or sale are capitalised as part of the costs of the assets. All other borrowing costs are expensed. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date Taxation PRC income taxes are provided for based on the taxable assessable profits and the applicable tax rates for the Group s entities. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, if the deferred income tax arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss, it is not accounted for. Deferred income tax is determined using tax rates that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred income tax is provided on temporary differences arising on investments in subsidiaries and associates, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future Retirement scheme Pension obligations The Group participates in a defined contribution retirement scheme (the Scheme ) operated by the local government. The Group's obligations include contributions to the Scheme determined at a certain percentage of the salaries of the employees. The regular contributions, which are charged to the income statement on an accrual basis, constitute net periodic costs for the year in which they are due and as such are included in staff costs. Once the contributions have been paid, the Group has no further payment obligations Provision Provisions are recognised when: the Group has a present legal or constructive obligation as a result of past events; it is more likely than not that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. Provisions are not recognised for future operating losses. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item G -426 K5 AR EN.doc 102

208 2005 Chapter 11 Accounts and Auditors' Reports International Auditors' Report (All amounts in Rmb thousands unless otherwise stated) included in the same class of obligations may be small Government grants Grants from the government are recognised at their fair value where there is a reasonable assurance that the grant will be received and the Group will comply with all attached conditions. Government grants relating to costs are deferred and recognised in the income statement over the period necessary to match them with the costs that they are intended to compensate. Government grants relating to the purchase of property, plant and equipment are included in non-current liabilities as deferred income and are credited to the income statement on a straight-line basis over the expected lives of the related assets Revenue recognition Revenue comprises the fair value for the sale of goods and services, net of value-added tax, rebates and discounts and after eliminated sales within the Group. Revenue is recognised as follows: (a) Sales of goods Revenue from sales of goods is recognised when significant risks and rewards of ownership of the goods are transferred to the buyers, which generally coincides with the time when delivery is made and collectibility of the related receivables is reasonably assured. (b) Interest income Interest income is recognised on a time-proportion basis using the effective interest method. When a receivable is impaired, the Group reduces the carrying amount to its recoverable amount, being the estimated future cashflow discounted at original effective interest rate of the instrument, and continues unwinding the discount as interest income. (c) Dividend income 2.21 Leases Dividend income is recognised when the right to receive payment is established. Leases where a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases net of any incentives received from the lessor are charged to the income statement on a straight-line basis over the period of relevant leases Dividend distribution G -426 K5 AR EN.doc 103

209 2005 Chapter 11 Accounts and Auditors' Reports International Auditors' Report (All amounts in Rmb thousands unless otherwise stated) Dividend distribution to the Company s shareholders is recognised as a liability in the Group s consolidated financial statements in the period in which the dividends are approved by the Company s shareholders. 3. Financial risk management (a) Financial risk factors The Group s activities expose it to a variety of financial risks: foreign exchange risk, credit risk, liquidity risk and cash flow interest-rate risk. (i) Foreign exchange risk The Group s entities operate in the PRC with most of the transactions denominated in Renminbi. The Group is exposed to foreign exchange risk arising from the exposure of Renminbi against USD, Euro and Danish Krona. The Group has not hedged its foreign exchange rate risk. In addition, the conversion of Renminbi into foreign currencies is subject to the rules and regulations of the foreign exchange control promulgated by the PRC government. (ii) Credit risk The Group has no significant concentrations of credit risks. The carrying amount of the trade receivables included in the consolidated balance sheet represent the Group s maximum exposure to credit risk in relation to its financial assets. (iii) Liquidity risk The Group ensures that it maintains sufficient cash and credit lines to meet its liquidity requirements. (iv) Cash flow and fair value interest rate risk As the Group has no significant interest-bearing assets, the Group s income and operating cash flows are substantially independent of changes in market interest rates. The Group s interest rate risk arises from long-term borrowings. Borrowings issued at variable rates expose the Group to cash flow interest rate risk. Borrowings issued at fixed rates expose the Group to fair value interest rate risk. The Group has not hedged its cash flow and fair value interest rate risk. (b) Fair value estimation The carrying amounts of the following financial instruments approximate to their fair values. Cash and cash equivalents, trade receivables, other receivables, prepayments and deposits, trade payables, construction costs payable, accrued charged and deposits received, other non-current liabilities and borrowings G -426 K5 AR EN.doc 104

210 2005 Chapter 11 Accounts and Auditors' Reports International Auditors' Report (All amounts in Rmb thousands unless otherwise stated) 4. Critical accounting estimates and assumptions Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. (a) Estimated impairment of goodwill The Group tests annually whether goodwill has suffered any impairment, in accordance with the accounting policy stated in Note 2.8(a). The recoverable amounts of cash-generating units have been determined based on value-in-use calculations. These calculations require the use of estimates. (b) Estimated impairment of property, plant and equipment and available-for-sale investments Property, plant and equipment and available-for-sales investments are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The recoverable amounts of property, plant and equipment and available-for-sale investments have been determined based on value-in-use calculations. These calculation and valuations require the use of judgement and estimates. (c) Current taxation and deferred taxation The Group is subject to taxation in the PRC. Significant judgement is required in determining the amount of the provision for taxation and the timing of payment of the related taxations. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such difference will impact the income tax and deferred tax provisions in the periods in which such determination are made. Segment information No business segment information of the Group is presented as the Group s sales, expenses, assets and liabilities are primarily attributable to manufacturing and sales of cement and related products. No geographical segment information has been prepared as products of the Group are all manufactured in the PRC and less than 10% of the Group s sales and results are attributable to the market outside the PRC Sales of goods 2,695,976 2,188, G -426 K5 AR EN.doc 105

211 2005 Chapter 11 Accounts and Auditors' Reports International Auditors' Report (All amounts in Rmb thousands unless otherwise stated) Revenue arising from interest income is disclosed in note Other operating income net Tax refund (note a) 31,467 38,478 Net income of disposal of the mine usage right and relevant equipment - 36,650 Net income of disposal of property, plant and equipment 3,387 - Others 1, ,181 75,241 (a) Included in other operating income is a tax refund of value-added-tax ( VAT ) for sales of goods having utilised wasted natural materials. 7. Expenses by nature Cost of prepaid lease recognised as an expense 11,172 8,013 Depreciation of property, plant and equipment 269, ,484 Amortisation of intangible assets 4,431 (13,952) Changes in finished goods and work in progress 9,000 (59,642) Raw materials and consumables used 1,433,170 1,007,822 Reversal of provisions for bad and doubtful debts (3,801) (3,381) Write-down of carrying amounts of inventories ,141 Staff costs 150, ,841 Amortisation of deferred income offset against expenses (4,028) (1,324) Loss on disposal of property, plant and equipment - 2, Staff costs Wages and salaries 122, ,530 Pension costs defined contribution plan 17,453 21,949 Other social security costs 10,675 12, , ,841 The companies comprising the Group participate in defined contribution retirement scheme (the Scheme ) operated by the relevant local government. Contributions to the Scheme G -426 K5 AR EN.doc 106

212 2005 Chapter 11 Accounts and Auditors' Reports International Auditors' Report (All amounts in Rmb thousands unless otherwise stated) were made based on a percentage of the aggregate payroll of the staff on monthly basis. 9. Finance costs net Gain from unlisted investments Interest income 3,785 3,054 Net foreign exchange gain/(loss) 13,759 (3,649) Interest expenses (121,351) (82,815) - bank borrowings (149,435) (96,213) - other borrowings - (1,702) Less: interest capitalised 28,084 15,100 (103,807) (82,973) 10. Income tax expense Current tax 10,708 60,296 Deferred tax (note 27) (7,541) (11,209) 3,167 49,087 The tax on the Group s profit before tax differs from the theoretical amount that would arise using the effective tax rate of the Company is analysed as follows: Profit before tax 90, ,473 Tax calculated at the rate of 33% (2004: 33%) 29,796 91,236 Tax refund * (13,796) (16,554) Net profit and loss of subsidiaries not subject to tax ** (31,731) (19,457) Loss in a subsidiary not recognised for deferred tax assets 17,951 - Income not subject to tax (561) (8,221) Expenses not deductible for tax purposes 2,619 2,083 Effect of lower tax rate in a subsidiary (1,111) - Tax charge 3,167 49, G -426 K5 AR EN.doc 107

213 2005 Chapter 11 Accounts and Auditors' Reports International Auditors' Report (All amounts in Rmb thousands unless otherwise stated) * Pursuant to an approval Huang Guo Shui Han Fa [2005] No. 69 issued by Hubei Province Huangshi City State Taxation Bureau on 30 June 2005, the Company is entitled to an exemption from income tax of RMB8,201,000 (2004: RMB6,225,000) as the Company have utilised wasted natural materials for production of cement. Pursuant to a document issued by Hubei Pronvince Yidu City State Taxation Bureau on 28 February 2005, Huaxin Cement (Yichang) Co., Ltd. is entitled an exemption from income tax of RMB5,595,000 (2004: RMB10,329,000) for the purpose of using domestically manufactured equipment in special projects. ** Pursuant to the circular Cai Shui Zi [1994] No. 001 jointly issued by Ministry of Finance and National State Taxation Bureau of the PRC on 29 March 1994, Huaxin Cement (Yangxin) Co., Ltd. ( Yangxin Cement ) and Huaxin Cement (Enshi) Co., Ltd., ( Enshi Cement ) which were set up in the destitute and remote area determined by the State Council of the RPC can be entitled to an exemption from income tax for the first three years from the company commencing its full commercial operation. Yangxin Cement and Enshi Cement commenced their full commercial operations in the year. 11. Earnings per share Profit attributable to equity holders of the Company 79, ,340 Weighted average number of ordinary shares in issue 328, ,400 (th d ) Basic and diluted earnings per share (RMB per share) The diluted earnings per share is equivalent to the basic earnings per share as there were no potential ordinary shares outstanding during the years ended 31 December 2005 and Prepaid lease At 1 January 2004 Cost 225,288 Accumulated amortisation (16,518) Net book amount 208,770 Year ended 31 December 2004 Opening net book amount 208,770 Additions 26,805 Acquisition of a subsidiary 159,474 Amortisation charge (8,013) Transfer out (14,085) Closing net book amount 372,951 At 31 December G -426 K5 AR EN.doc 108

214 2005 Chapter 11 Accounts and Auditors' Reports International Auditors' Report (All amounts in Rmb thousands unless otherwise stated) Cost 387,753 Accumulated amortisation (14,802) Net book amount 372,951 Year ended 31 December 2005 Opening net book amount 372,951 Additions 129,605 Amortisation charge (11,172) Closing net book amount 491,384 At 31 December 2005 Cost 517,358 Accumulated amortisation (25,974) Net book amount 491,384 Included in prepaid lease are certain land use rights with a total net book value of RMB142,286,000 (2004: RMB138,346,000) which have been pledged to secure certain bank borrowings (note 23). 13. Property, plant and equipment Furnitur e, fixtures Plant and and office Motor Constructi on Buildings machiner y equipm ent vehicles in progress Total At 1 January 2004 Cost 913,271 1,493,471 24, , ,616 2,839,128 Impairment (2,143) (1,904) (4,047) Accumulated depreciation (170,173) (502,778) (13,464) (53,233) - (739,648) Net book amount 740, ,789 10,841 63, ,616 2,095,433 Year ended 31 December 2004 Opening net book amount 740, ,789 10,841 63, ,616 2,095,433 Acquisition of subsidiary 364, ,081 2,127 11,134 13, ,321 Additions 13,644 19,357 6,264 9, , , G -426 K5 AR EN.doc 109

215 2005 Chapter 11 Accounts and Auditors' Reports International Auditors' Report (All amounts in Rmb thousands unless otherwise stated) Transfer 272, ,662-12,263 (701,898) - Disposals (14,283) (2,257) (441) (1,431) - (18,412) Depreciation charge (50,208) (146,550) (3,557) (12,169) - (212,484) Closing net book amount 1,328,046 1,622,082 15,234 82, ,027 3,539,601 At 31 December 2004 Cost 1,544,560 2,266,537 31, , ,027 4,463,842 Impairment (2,143) (1,904) (4,047) Accumulated depreciation (214,371) (642,551) (15,989) (47,283) - (920,194) Net book amount 1,328,046 1,622,082 15,234 82, ,027 3,539,601 Year ended 31 December 2005 Opening net book 82,212 amount 1,328,046 1,622,082 15, ,027 3,539,601 Additions 4,971 3,337 5,618 18,446 1,205,447 1,237,819 Transfer 417, ,721 32,903 26,905 (1,132,742) - Disposals (2,062) (9,846) (20) (2,999) - (14,927) Depreciation charge (64,567) (183,384) (7,292) (14,514) - (269,757) Closing net book amount 1,683,601 2,087,910 46, , ,732 4,492,736 At 31 December 2005 Cost 1,963,699 2,912,827 69, , ,732 5,680,251 Impairment (2,143) (1,904) (4,047) Accumulated depreciation (277,955) (823,013) (23,138) (59,362) - (1,183,468 ) Net book amount 1,683,601 2,087,910 46, , ,732 4,492,736 Depreciation charges for the years ended 31 December 2005 and 2004 were expensed in the following category in the income statements: Cost of goods sold 243, ,293 Selling and marketing costs 15,239 10, G -426 K5 AR EN.doc 110

216 2005 Chapter 11 Accounts and Auditors' Reports International Auditors' Report (All amounts in Rmb thousands unless otherwise stated) Administrative expenses 11,216 8, , ,484 Buildings and plant and machinery with a net book value of RMB433,457,000 (2004: RMB788,696,000) and RMB1,513,008,000 (2004: RMB543,526,000), respectively, together with certain land use rights (note 12) have been pledged to certain banks for securing borrowings totalling RMB1,512,503,000 (2004: RMB1,114,043,000) (note 23). Borrowing costs of RMB28,084,000 (2004: RMB15,100,000), arising on financing the construction were capitalised during the year. Capitalisation rate of 5.465% (2004: 5.083%) per annum was used, representing the borrowing cost of the loan used to finance the construction project. 14. Intangible assets Mine Railway developme nt improvement Goodwill Trademar cost cost k Others Total At 1 January 2004 Cost 12,473 9,268 7,800-5,369 34,910 Accumulated amortisation (1,975) (1,427) (3,250) - (2,644) (9,296) Net book amount 10,498 7,841 4,550-2,725 25,614 Year ended 31 December 2004 Opening net book amount 10,498 7,841 4,550-2,725 25,614 Acquisition of subsidiary (229,466) ,917 (200,394 1,155 ) Additions - 2, ,406 Amortisation charge 18,231 (329) (650) (2,500) (800) 13,952 Closing net book amount (200,737) 9,525 3,900 25,417 (158,422 3,473 ) At 31 December 2004 Cost (216,993) 11,281 7,800 27,917 6,917 (163,078 ) Accumulated amortisation 16,256 (1,756) (3,900) (2,500) (3,444) 4,656 Net book amount (200,737) 9,525 3,900 25,417 3,473 (158,422 ) Year ended 31 December 2005 Goodwill Mine Railway developme nt improvement cost G -426 K5 AR EN.doc 111 cost Trademar k Others Total Opening net book amount, (200,737) 9,525 3,900 25,417 3,473 (158,422

217 2005 Chapter 11 Accounts and Auditors' Reports International Auditors' Report (All amounts in Rmb thousands unless otherwise stated) as previously reported ) Derecognition of negative goodwill 210, ,207 Opening net book amount, as restated 9,470 9,525 3,900 25,417 3,473 51,785 Additions Amortisation charge - (557) (650) (2,500) (724) (4,431) Closing net book amount 9,470 8,968 3,250 22,917 2,944 47,549 At 31 December 2005 Cost 9,470 11,281 7,800 27,917 7,112 63,580 Accumulated amortisation - (2,313) (4,550) (5,000) (4,168) (16,031) Net book amount 9,470 8,968 3,250 22,917 2,944 47,549 Pursuant to an agreement entered into between the Company and Suzhou City Wuzhong District Mudu Town Economic Development General Corporation on 16 May 2003 and an agreement entered into between the Company and Yangtze Cement Holding PTE Ltd. on 10 June 2003, the Company acquired 1% and 50% equity interests in Suzhou Golden Cat Cement Co., Ltd. from the aforementioned two companies. As at 31 December 2004, the negative goodwill arising from this acquisition net of the accumulated amortisation amounted to RMB210,207,000. As at 1 January 2005, the balance of negative goodwill was derecognised with the corresponding adjustment to opening balance of retained earnings in accordance with International Financial Reporting Standard 3 Business Combination ( IFRS 3 ), and was simultaneously transferred to other reserves as it is not distributable to the shareholders of the Company in accordance with relevant PRC regulations. 15 Investment in an associate Opening net book amount Share of profit/(loss) in an associate 8 (15) Closing net book amount The principal unlisted associated undertaking was as follows: Country of incorporatio n % of interest held Principal activities Huangshi Huaxin Hotel Co., Ltd. PRC 49% Hotel operation 16. Available-for-sale investments Net book amount 14,480 14, G -426 K5 AR EN.doc 112

218 2005 Chapter 11 Accounts and Auditors' Reports International Auditors' Report (All amounts in Rmb thousands unless otherwise stated) There was no addition, disposal or impairment provision on available-for-sale investments during the years ended 31 December 2005 and Available-for-sale investments of the Group have neither a quoted market price in an active market nor a fixed maturity, and are measured at cost less provision for impairment. As at 31 December 2005 and 2004, available-for-sale investments are all unlisted investments, included in which was an amount of approximately RMB11,724,000 (2004: RMB11,724,000) representing the cost of an investment of 3.9% (2004: 3.9%) equity interest in a local power supply enterprise which is controlled by the Hubei Electricity Bureau. 17. Inventories Raw materials 121,448 78,041 Work in progress 50,744 40,689 Finished goods 71,329 90,384 Spare parts and consumables 85,315 76, , ,613 The cost of inventories recognised as expenses and included in cost of goods sold amounted to RMB2,317,101,000 (2004: RMB1,750,028,000). During the year, write-down of carrying amounts of obsolete raw materials and spare parts to their net realisable value amounted to RMB569,000 (2004: RMB14,141,000), which was included in administrative expenses. 18. Trade receivables Trade receivables 231, ,470 - Related parties (note 29) 73,046 26,838 - Third parties 158, ,632 Less: Provision for bad and doubtful debts (17,147) (29,843) 213, , Other receivables, prepayments, and deposits G -426 K5 AR EN.doc 113

219 2005 Chapter 11 Accounts and Auditors' Reports International Auditors' Report (All amounts in Rmb thousands unless otherwise stated) Prepayments for purchase of raw material and equipment 16,112 43,449 - Related parties (note 29) 9,053 20,914 - Third parties 7,059 22,535 Other receivables and deposits: 84,060 69,093 - Related parties (note 29) 18,562 20,031 - Third parties 65,498 49, , ,542 Other receivables include advances to a minority shareholder of a subsidiary of the Company of RMB44,240,000 (2004: RMB41,390,000). The amounts are unsecured, interest free and have no fixed terms of repayment. 20. Cash and bank balances Cash at bank and in hand 303, ,340 Short-term bank deposits 64,941 96,000 Cash and bank balances 368, ,340 Less: Restricted cash (72,728) (15,963) Cash and cash equivalents 295, ,377 The effective interest rate on short-term bank deposits was 2.00% (2004: 1.62%); these deposits have an average maturity of 149 days. Cash and bank balances include time deposits totalling RMB72,728,000 (2004: RMB15,963,093) which have been used as collateral for issuance of bills. The amounts were classified as restricted cash. 21. Share capital Registered, issued and fully paid of RMB1 each Shares held by the State (note a, b) 79,251 91,527 Shares held by entities (note a, b) 22,749 24,873 A shares, listed (note b) 62,400 48, , ,400 B shares, listed (note b) 164, , , , G -426 K5 AR EN.doc 114

220 2005 Chapter 11 Accounts and Auditors' Reports International Auditors' Report (All amounts in Rmb thousands unless otherwise stated) (a) (b) Pursuant to a resolution of General Meeting held on 16 December 2005 and an approval E Guo Zi Chan Quan [2005] No. 313 obtained from State-owned Assets Supervision and Administration Commision of Hubei Province, 12,276,232 shares held by the State and 2,123,768 shares held by entities were transferred to A shares owners. In return, subject to certain criteria and conditions, shares held by the State and entities will be traded and transferable on the Shanghai Stock Exchange. Pursuant to Article 8 of the Company s Articles of Association, shares held by the State and entities, A and B shares are registered ordinary shares and carry equal rights. 22. Other reserves Capital reserves Reserve fund Statutor y surplus reserves Statutory public welfare fund Discretiona ry surplus reserves (note a) (note b) (note b) (note b) Total other reserve s Balance at 1 January ,569 34,680 21,871 54, ,120 Transfer from earnings retained 26, ,077 Appropriation - 15,035 15,035-30,070 Balance at 31 December ,646 49,715 36,906 54, ,267 Balance at 1 January 2005, as previous reported 321,646 49,715 36,906 54, ,267 Transfer from retained earnings (note 14) 210, ,207 Balance at 1 January 2005, as restated 531,853 49,715 36,906 54, ,474 Transfer from retained earnings 1, ,637 Appropriation - 6,259 6,259-12,518 Balance at 31 December ,490 55,974 43,165 54, ,629 (a) Capital reserves Included in capital reserves as of 31 December 2005 is share premium of RMB292,898,000 (2004: RMB292,898,000). According to the relevant PRC regulations, capital reserves can only be used to increase share capital. The amounts transferred from retained earnings to capital reserves comprise government G -426 K5 AR EN.doc 115

221 2005 Chapter 11 Accounts and Auditors' Reports International Auditors' Report (All amounts in Rmb thousands unless otherwise stated) grants recognised in income statement totalling RMB1,637,000 (2004: RMB26,077,000). In accordance with the relevant PRC regulations, these incomes are not distributable to shareholders. (b) The balance of the reserve funds represents: (i) Pursuant to the relevant PRC regulations and the Articles of Association of the Company, profit after the taxation shall be appropriated in the following sequence: (1) off set accumulated losses, if any; (2) transfer 10% of the profit after tax to the statutory surplus reserve. When the balance of the statutory surplus reserves reaches 50% of the share capital, such transfer need not be made; (3) transfer 10% of the profit after tax to the statutory public welfare fund; (4) transfer to the discretionary surplus reserves with an amount approved by the shareholders at general meeting; (5) distribute dividends to shareholders. The amounts transfer to the reserve funds shall be based on the profit after tax of the Group s statutory financial statements. (ii) Statutory surplus reserves and discretionary surplus reserves According to the relevant PRC regulations, statutory surplus reserves and discretionary surplus reserves can be used to make up losses or to increase share capital. Except for the reduction of the reserves due to losses incurred, any other usage should not result in the reserves falling below 25% of the share capital. (iii) Statutory public welfare fund According to relevant PRC regulations, the use of statutory public welfare fund is restricted to capital expenditures for collective employee welfare facilities. The statutory public welfare fund is not available for distribution to shareholders except in liquidation. According to a document issued by the Ministry of Finance, when the statutory public welfare fund is utilised, an amount equal to the lower of cost of the assets and the balance of the statutory public welfare fund is transferred from the statutory public welfare fund to the discretionary surplus reserve. On disposal of the relevant assets, the original transfers from the statutory public welfare fund are reversed. (c) Profit available for distribution to shareholders Pursuant to the relevant PRC regulations, profit available for distribution to shareholders shall be the lower of the retained earnings determined according to PRC accounting standards and regulations as appeared in the statutory financial statements and the retained earnings adjusted according to IFRS. According to the Company s PRC statutory financial statements as of 31 December 2005, RMB183,153,000 is available for distribution to shareholders (2004: RMB153,301,000) G -426 K5 AR EN.doc 116

222 2005 Chapter 11 Accounts and Auditors' Reports International Auditors' Report (All amounts in Rmb thousands unless otherwise stated) (d) Dividend Pursuant to a resolution of the board of directors on 22 March 2005, a final cash dividend in respect of 2004 of RMB0.06 per share totalling RMB19,704,000 was declared. Pursuant to a resolution of the board of directors on 3 March 2006, a final cash dividend in respect of 2005 of RMB0.06 per share totalling RMB19,704,000 was declared. These financial statements do not reflect this dividend payable, which will be accounted for in shareholders equity as an appropriation of retained earnings in the year ending 31 December Borrowings Notes Non-current portion Secured bank borrowings (a) 1,232, ,427 Unsecured bank borrowings (b) 793, ,540 Other unsecured borrowings (c) 15,875 31,497 2,041,479 1,546,464 Current portion Secured bank borrowings (a) 280, ,616 Unsecured bank borrowings (b) 726, ,800 Other unsecured borrowings (c) 1,691 2,032 1,008, ,448 Total borrowings 3,049,909 2,372,912 The exposure of the Group s borrowings to interest-rate changes and the contractual repricing dates are as follows: Notes Within 1 year Over 5 years Total At 31 December 2005 Secured bank borrowings (a) Unsecured bank (b) borrowings Other unsecured (c) borrowings Total borrowing 1,512,503 1,505,439 7,064-1,519,840 1,519,840 17,566 17,566-24,630 3,025,279 3,049, G -426 K5 AR EN.doc 117

223 2005 Chapter 11 Accounts and Auditors' Reports International Auditors' Report (All amounts in Rmb thousands unless otherwise stated) At 31 December 2004 Secured bank borrowings (a) Unsecured bank (b) borrowings Other unsecured (c) borrowings Total borrowing 1,103,348 1,225, ,328,688 10,695 1,114,043 1,225,340 33,529 33,529 44,224 2,372,912 (a) The secured bank borrowings include the following: (1) borrowings of RMB1,225,000,000 (2004: RMB786,081,000) with annual interest ranging from 4.65% to 6.138% (2004: 5.31% to 6.12%), which are secured by buildings, plant and machinery and land use rights with a net book value of RMB308,970,000, RMB1,184,889,000 and RMB142,286,000 respectively (note 12, 13). (2) borrowings of USD34,750,000 (2004: USD40,750,000) with interest rate of LIBOR+1% (2004: 5.99%) per annum and are secured by buildings and plant and machinery with net book value of RMB124,487,000 and RMB316,456,000, respectively (note 13); (3) borrowings of EURO737,392 (2004: EURO948,077) with interest rate of 5.99% (2004: 5.99%) per annum and are secured by plant and machinery with net book value of RMB11,663,000 (notes 13). (b) Included in unsecured bank borrowings are loans of RMB1,519,840,000 (2004: RMB1,225,340,000) with annual interest rate ranging from 3.78% to 6.12% (2004: 3.60% to 6.03%). (c) The other unsecured borrowing represents a Danish Krona loan borrowed via the China National Technical Import and Export Corporation for the purchase of production equipment, which was stated at amortised cost with an effective interest rate of 6.1%. This loan with an original principal of DKK67,000,000 is guaranteed by a stated-owned bank and repayable in two tranches. The first tranche of DKK33,500,000 was fully repaid in 2002 and the other tranche amounting to DKK33,500,000 is interest-free and repayable by fifty semi-annual instalments commencing from April The carrying amounts of short-term borrowings and long-term borrowings approximate their fair value. The maturity of non-current borrowings is as follows: Secured Unsecured Other bank bank unsecured borrowings borrowings borrowing s Total Total Between 1 and 2 years 275, ,500 1, , , G -426 K5 AR EN.doc 118

224 2005 Chapter 11 Accounts and Auditors' Reports International Auditors' Report (All amounts in Rmb thousands unless otherwise stated) Between 3 and 5 years 703, ,040 4,239 1,371, ,818 Over 5 years 253,333-10, , ,006 1,232, ,540 15,875 2,041,47 9 1,546, Deferred income At beginning of year 16,653 17,977 Additions 6,041 - Amortisation (4,028) (1,324) At end of year 18,666 16,653 Deferred income represents subsidies granted by government for the construction and purchase of property, plant and equipment. 25. Other non-current liabilities Controlling shareholder of the Company - 3,271 Yidu Fang De Investment Co., Ltd. ( Yidu Fang De ) (note (a)) 42,255 46,285 Redundant staff of the Company (note (b)) 12,136 15,103 Long term payable for land use right 24,299-78,690 64,659 (a) (b) Amount represents payable for purchase of land usage right from Yidu Fang De, which is interest free and repayable in During the year, the Company has paid RMB4,030,000 (2004: RMB3,700,000). Amount represents the compensation payable to the redundant staff in Huaxin Hongqi Cement Co., Ltd. ( Hongqi ). As required by local administration regulations, the Company is obligate to make monthly payments to the redundant staff based on their present basic salary plus the minimum staff pension, medical and other welfare payments until they reach their retirement age. The payables are discounted using the discount rate determined by reference to market yields at the balance sheet date on high quality investments. 26. Construction costs payable, accrued charges and deposits received G -426 K5 AR EN.doc 119

225 2005 Chapter 11 Accounts and Auditors' Reports International Auditors' Report (All amounts in Rmb thousands unless otherwise stated) Construction costs payable 268, ,531 - Related parties (note 29) 35,278 47,194 - Third parties 232, ,337 Advance from customers 85,799 49,688 - Related parties (note 29) 50,934 21,374 - Third parties 34,865 28,314 Accrued payroll and staff welfare 15,959 32,685 Payable of VAT and other tax 51,737 34,321 Accrued charges 6,545 23,991 Other payables 70,401 58,367 - Related parties (note 29) 8,017 33,746 - Third parties 62,384 24,621 Dividend payable , , Deferred income tax As at 31 December 2005, no deferred income tax assets and liabilities were offset and the gross amounts of deferred income tax assets and liabilities are as follows: Deferred tax assets: - to be recovered after more than 12 months (398) (398) - to be recovered within 12 months (35,376) (20,532) (35,774) (20,930) Deferred tax liabilities: - to be recovered after more than 12 months 1, to be recovered within 12 months 5,853-7,303 - The gross movements on the deferred income tax were as follows: G -426 K5 AR EN.doc 120

226 2005 Chapter 11 Accounts and Auditors' Reports International Auditors' Report (All amounts in Rmb thousands unless otherwise stated) At beginning of the year (20,930) (9,721) Income statement credit (note 10) (7,541) (11,209) At end of the year (28,471) (20,930) The movements in deferred tax assets and liabilities during the year were as follows: 2004 Debited/(credite d) to the income statement 2005 Deferred income tax assets: Provision for available-for-sale investments (398) - (398) Provision for bad and doubtful debts (4,295) 3,069 (1,226) Write-off of pre-operating expenses in subsidiaries (3,207) (1,532) (4,739) Write-down of inventories (4,440) - (4,440) Temporary difference in recognition of expenses (7,879) 4,494 (3,385) Unrealised profit arising in elimination of inter-company transactions (711) (170) (881) Tax loss - (20,561) (20,561) Restatement of long-term payable to their current value - (144) (144) (20,930) (14,844) (35,774) 2004 Debited to the income statement 2005 Deferred income tax liabilities: Difference in initial recognition of property, plant and equipment - 7,303 7,303 Deferred income tax assets are recognised for tax loss carry-forward to the extent that the realisation of the related tax benefit through the future taxable profits is probable. The Group did not recognised deferred income tax asses of approximately G -426 K5 AR EN.doc 121

227 2005 Chapter 11 Accounts and Auditors' Reports International Auditors' Report (All amounts in Rmb thousands unless otherwise stated) RMB17,951,000 (2004: nil) in respect of the losses amounting to approximately RMB54,397,000 (2004: nil) that can be carried forward against future taxable income. Loss of approximately RMB62,306,000 (2004: nil), for which deferred tax asset has been recognised, expire in Cash generated from operations Profit for the year 87, ,386 Adjustments for: Income tax expense 3,167 49,087 Depreciation of property, plant and equipment 269, ,484 Cost of prepaid lease recognised as expenses 11,172 8,013 Net (gain)/loss of disposal of property, plant and equipment (3,387) 2,320 Net income of disposal of the mine usage right and relevant equipment - (36,650) Gain from unlisted investment - (437) Interest income (3,785) (3,054) Interest expenses 121,351 82,815 Amortisation of intangible assets 4,431 (13,952) Amortisation of deferred income (4,028) (1,324) Share of (gain)/loss of an associate (8) 15 Exchange (gain)/loss (13,759) 3,649 Changes in working capital: Inventories (43,223) (102,759) Trade receivables, other receivables, prepayments and deposits (13,304) (9,043) Changes in restricted cash (56,765) (7,816) Trade payables, accrued charges and deposits received 196,526 42,114 Cash generated from operations 555, , Related party transactions The directors are of the view that the controlling shareholder of the Company is Huaxin Group Co., Ltd., a company incorporated in the PRC, which represents the State to hold 27.1% (2004: 31.6%) of the Company s share capital as of 31 December 2005, and has a G -426 K5 AR EN.doc 122

228 2005 Chapter 11 Accounts and Auditors' Reports International Auditors' Report (All amounts in Rmb thousands unless otherwise stated) majority vote on the board of directors. (a) Transactions with related parties During the years ended 31 December 2005 and 2004, the Group had the following significant transactions with related parties Sales of goods: - Sales of finished goods to related parties in which the controlling shareholder has significant equity interests (note (i)) 814 3,357 - Sales of finished goods to other related parties (note (i)) 37, Sales of finished goods to state-controlled entities (note (i)) 640, , , ,559 Purchases of goods and services: - Management fee payable to the controlling shareholder (note (ii)) 4,800 4,800 - Consulting fee payable to a company related to a shareholder (note (iii)) 2,421 2,483 - Construction fee charged by state-controlled entities (note (iv)) 108, ,386 - Purchase of materials from state-controlled entities(note (i)) 370, , , ,794 Key management compensation - Wages and salaries 3,982 3,563 - Pension costs defined contribution plan Other social security costs ,099 3,669 Notes: i) Sales and purchases of goods to/from related parties were carried out in accordance with the terms of the underlying agreements which, in the opinion of the directors of the Company, were determined with reference to the market prices in the prescribed years. ii) The management fee was charged based on the service rendered by the controlling shareholder of the Company to the Group and in accordance with the terms of the underlying agreement G -426 K5 AR EN.doc 123

229 2005 Chapter 11 Accounts and Auditors' Reports International Auditors' Report (All amounts in Rmb thousands unless otherwise stated) iii) iv) The consulting fee was charged based on the service rendered by the related party to the Group and in accordance with the terms of the underlying agreement. Construction fees charged by state-controlled entities were based on the underlying agreements which, in the opinion of the directors of the Company, were determined with reference to the market prices in the prescribed years. v) The Group has transactions with government agencies for the provision of basic heat, electricity etc, all of which are carried out at standardised terms that are available to the general public. vi) The controlling shareholder of the Company and its subsidiaries have provided corporate guarantees for the Group s borrowings to the extent of RMB47,000,000 (2004: RMB59,500,000) in respect of loans made to the Company. Such loans are due in b) Balances with related parties Other than as disclosed in note 25, as at 31 December 2005 and 2004, the Group had the following significant balances with related parties Trade receivables: - State-controlled entities 70,507 23,484 - Other related parties 2,539 3,354 73,046 26,838 Other receivables, prepayments and deposits: - Controlling shareholders of the Company State-controlled entities 23,963 40,615 - Other related parties 3, ,615 40,945 Trade payables: - State-controlled entities 52,243 28,547 Construction costs payable: - State-controlled entities 19,549 36,786 - Other related parties 15,729 10,408 35,278 47,194 Advances from customers: - State-controlled entities 10,557 21, G -426 K5 AR EN.doc 124

230 2005 Chapter 11 Accounts and Auditors' Reports International Auditors' Report (All amounts in Rmb thousands unless otherwise stated) - Other related parties 40,377-50,934 21,374 Other payables: - Controlling shareholders of the Company 72 1,873 - State-controlled entities 7,945 28,679 - Other related parties - 3,194 8,017 33,746 The above amounts due from/to related parties are unsecured, interest-free and without fixed terms of repayments. 30. Subsidiary companies As of the balance sheet date, the Company directly and indirectly held equity interests in the following subsidiaries all of which were established in the PRC: Name Attributable interest equity Principal activities 2005 % 2004 % Huaxin Cement (Enshi) Co., Ltd. (formerly known as Huaxin Enshi Cement Co., Ltd.) Production and sale of cement Huangshi Huaxin Packaging Co., Ltd Production and sale of packaging materials Huaxin Cement Scientific Research and Design Co., Ltd Designing of cement project and technical service for cement Huaxin Yidu Packaging Co., Ltd Production and sale of packaging materials Wuhan Wugang (note (a)) Production and sale of cement Huaxin Cement (Xiantao) Co., Ltd. (formerly known as Huaxin Xiantao Production and sale of cement G -426 K5 AR EN.doc 125

231 2005 Chapter 11 Accounts and Auditors' Reports International Auditors' Report (All amounts in Rmb thousands unless otherwise stated) Cement Co., Ltd.) Huaxin Cement (Yichang) Co., Ltd. (formerly Known as Huaxin Yichang Cement Co., Ltd.) Production and sale of cement Huaxin Golden Cat Cement (Suzhou) Co., Ltd Production and sale of cement Huaxin Cement (Tibet) Co., Ltd. (formerly known as Tibet Huaxin Cement Co., Ltd.) Production and sale of cement Huaxin Cement (Zhaotong) Co., Ltd. (formerly known as Huaxin Zhaotong Cement Co., Ltd.) Production and sale of cement Huaxin Cement (Yueyang) Co., Ltd. (formerly known as Huaxin Yueyang Cement Co., Ltd.) Production and sale of cement Huaxin Cement (Yangxin) Co., Ltd. (formerly known as Huaxin Yangxin Cement Co., Ltd.) (note (b)) 80 - Production and sale of cement Huaxin Cement (Wuhan) Co., Ltd. ( Wuhan Cement ) (note (c)) 94 - Production and sale of cement Huaxin Concrete (Wuhan) Co., Ltd. (formerly known as Huaxin Wuhan Cement Co., Ltd., Wuhan Concrete ) (note (d)) 94 - Production and sale of concrete Huaxin Nantong Cement Co., Ltd. ( Nantong Cement ) (note (e)) Production and sale of cement * The names of the above subsidiary companies represent management s best efforts at translating the Chinese names of these companies as no English names have been registered or available. (a) (b) The Company has operational control of Wuhan Wugang which is therefore considered as a subsidiary company for consolidation purposes. Pursuant to an agreement on 16 December 2004, the Company and Huangshi Yiruida Investment Co., Ltd. ( Yiruida ) jointly established an equity joint venture namely Huaxin Cement (Yangxin) Co., Ltd. The Company contributed fixed assets of RMB400,000, G -426 K5 AR EN.doc 126

232 2005 Chapter 11 Accounts and Auditors' Reports International Auditors' Report (All amounts in Rmb thousands unless otherwise stated) and Yiruida contributed land use rights of RMB100,000,000, which accounted for 80% and 20% equity interests in Yangxin Cement, respectively. Yangxin Cement was established on 22 February 2005 and has commenced its full commercial operations in the year. (c) (d) (e) The Company entered into an agreement with Yangxin Cement on 23 March 2005 to jointly establish an equity joint venture namely Huaxin Cement (Wuhan) Co., Ltd. The Company contributed fixed assets of RMB42,000,000 and Yangxin Cement contributed fixed assets of RMB18,000,000, which accounted for 70% and 30% equity interests in Wuhan Cement Co., Ltd., respectively. Wuhan Cement was established on 29 September 2005 and was in its pre-operating stage up to 31 December The Company entered into an agreement with Yangxin Cement on 23 March 2005 to jointly establish an equity joint venture namely Huaxin Concrete (Wuhan) Co., Ltd. The Company contributed cash of RMB7,000,000 and Yangxin Cement contributed cash of RMB3,000,000, which accounted for 70% and 30% equity interests in Wuhan Concrete respectively. Wuhan Concrete was established on 13 April 2005 and has commenced its full commercial operations in the year. According to the agreement entered into by the Company and RDC International Pte Ltd. ("RDC") on 21 March 2002, RDC entrusted the Company to hold on its behalf of its 26% equity interest in Nantong Cement, RDC committed to sell and the Company committed to acquire the above said equity interest at the expiration date of the agreement if no other entity agree to take up the equity interest at that time. The Company was required to pay a deposit to RDC of RMB27,224,000. On 8 June 2005, the Company entered into an agreement with RDC to formally acquire the RDC s equity interest in Nantong Cement The total consideration is RMB28,263,000, among which RMB27,224,000 will be deducted by paid deposit and the remaining RMB1,039,000 should be settled within 3 days after the agreement takes effect. The agreement will take effect after it is approved by other shareholders and board of directors of Nantong Cement and local authorities. At the date of this report, the approval from other shareholders of Nantong Cement and local authorities were not yet obtained. 31. Capital commitments Capital expenditure contracted for at the balance sheet date but not yet incurred is as follows: Property, plant and equipment 316, , Approval of financial statements The financial statements were approved by the board of directors of the Company on 3 March G -426 K5 AR EN.doc 127

233 2005 Chapter 11 Accounts and Auditors' Reports International Auditors' Report HUAXIN CEMENT CO., LTD. SUPPLEMENTARY INFORMATION IFRS ADJUSTMENTS ON THE STATUTORY ACCOUNTS FOR THE YEAR ENDED 31 DECEMBER 2005 Profit attributable to equity holders of the Company Rmb 000 Net assets attributable to equity holders of the Company As per the statutory financial statements 62,073 1,213,617 Impact of IFRS adjustments: Reversal of amortisation of goodwill having been written off in prior years 261 (1,861) Recognition of pre-operating expenses in income statement when they are incurred 101 (1,192) Government grants recognised as deferred income and subsidy income 1,447 (9,125) Reversal of amortisation of positive goodwill 1,060 1,060 Interest capitalised in property, plant and equipment 6,296 6,296 Difference arising from restatement of long-term payables to their current value (349) (349) Deferred income tax 8,269 28,106 As restated after IFRS adjustments 79,158 1,236, G -426 K5 AR EN.doc 128

234 2005 Chapter 12 Documents for Inspection Chapter 12 Documents for Inspection Financial Statements carrying the signatures of the legal representative, administrative leader of accounting and chief of accounting department. Original Auditors Report of Year 2005, audited and signed by ShineWing CPAs to domestic accounting standard, audited and signed by PriceWaterHouseCoopers Certified Public Accountants pursuant to international accounting standard. All original copies of the public notice and documents that were published on presses designated by China Securities Supervisory Committee. Chairman: Chen Musen March 3, G -426 K5 AR EN.doc 129

235 2005 Chapter 12 Documents for Inspection Declaration of Directors and Senior Management in Respect of Annual Report 2005 We, members of the board and senior management of, believe that the Annual Report for 2005 of the Company truly and accurately reflects the operation results and financial position of the Company, hereby further guarantee that there is no false or misleading statement or material omission in this report, and shall be severally and jointly liable for the truthfulness, accuracy and completeness of its contents. Signature Chen Musen, Li Yeqing, Ji Changhua, Tom Clough, Daniel Bach, Paul Thaler, Zhang Tianwu, Xie Huobao, Lin Zongshou, Wang Ximing, Peng Qingyu, Kong Lingling, Ke Youliang, Feng Dongguang March 3, G -426 K5 AR EN.doc 130